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Mr. SIMON. Santa Clara, California.
Mr. KELLER. Those are California rates.

Mr. SIMON. No. We use lawyers all around the country. Texas, New York, Chicago, West Coast, wherever we can find somebody who is going to be good at litigating a technology case.

Mr. KELLER. Let's say you have a case like the one you just mentioned, and you pay all of this money, you thought it was frivolous, and sure enough the judge ultimately ruled there are no factual issues here, it is crystal clear here you guys are going to win. Do you ever have any success with rule 11, or do you find that the judges are reluctant to grant those type of sanctions?

Mr. SIMON. You have to have a particularly egregious case under rule 11 where it was—where it would be apparent to the judge just looking at the patent. Since very few of our judges have technical qualifications, that is very rare.

Mr. KELLER. I found that too. I haven't done those kind of cases, but I have seen cases in the employment area where someone, you know, sued for racial discrimination and yet we hired someone of the same race, or they sued for age discrimination, and we hired someone who was older, and even then you don't get rule 11 sanctions.

So, Mr. Kesslen, what is your analysis of these same issues? Is rule 11 tough? Do you see a lot of frivolous suits?

Mr. KESSLEN. Well, the answer is yes and yes. I think-rule 11, no. I think one of the issues with patent litigation is it is notice pleading. It is basically we have a patent, you have a product, therefore you infringe, the case starts. And so you really don't have that many opportunities.

With frivolous claims, yes, we see them, and I think the fundamental reason is pre-State Street financial firms historically relied on trade secrets and copyrights to protect their innovations. So what happened was, when people starting filing patents during the Internet boom, let's say on-line banking, okay, they don't know what banks had been doing for decades. So they filed a patent application in the Patent Office. The Patent Office wasn't aware what the industry had been doing for a number of years. The patent comes out of the Patent Office issued, on line banking product. I am using hypotheticals here, comes back and sues us. What we now have to do is establish that we need to go back 10 years in time to demonstrate to the court that what this patent covers we have been doing for generations. And so it is—that is why these types of cases are so expensive.

Mr. KELLER. Let me stop you there. If we were focused on this sole issue of preventing frivolous suits in this arena, do you have any further suggestions of some additional step we should take beyond this draft legislation?

Mr. Simon.

Mr. SIMON. Yes. I think one thing would be to consider taking the rules from the Northern District of California on patent litigation which require that the claims be interpreted first, and maybe even considering have a special judicial panel to do that, given the high reversal rate of the district courts. Most patent infringement cases really hinge on getting the claim interpretation right, and that should be done early rather than late, as many judges tend to do, in my review. And it should be done by people who really understand how to do it. Lots of judges get it wrong, unfortunately.

Mr. KELLER. Mr. Chairman, can I just have a second and have Mr. Kesslen answer that same question?

Mr. SMITH. Without objection, the gentleman is recognized for an additional minute.

Mr. KELLER. Mr. Kesslen, would you answer that? Do you have any suggestions of something we could do further to prevent frivolous claims?

Mr. KESSLEN. In my written testimony, in addition to dealing with the permanent junction issue, the treble damages issue, I think the declaratory issue, I think what we need is the attorneys very often who are representing these plaintiffs are contingency fee attorneys, and they are very aggressive and they play games. So the more that we can do to make them realize that we can bring an action against them because the mere letter doesn't do it, that we could bring a DJ action that the industry could go after them is helpful. I think limiting treble damages, cutting off actual damages under—for certain paper patents would be helpful. To make sure that the inventor can be rewarded, but the pot of gold isn't quite as big as they think it is going in, will be helpful.

Mr. KELLER. Thank you.
Mr. Chairman, I yield back.
Mr. SMITH. Thank you, Mr. Keller.
And the gentleman from California, Mr. Berman.

Mr. BERMAN. Yes. Mr. Van Horn, by and large, the association you speak for here, like the inter partes reexamination process, do you think it's useful?

Mr. VAN HORN. Well, as you know, this is a fairly recent player in this particular field. It was introduced only for patents that were issued on applications filed after November 1999. So we are in the very early stages of the implementation of this practice. It clearly gives a third party some advantages that they do not have in ex parte reexamination. And I don't think we have given the system a fair opportunity, particularly since the law was amended in November 2002, to provide an opportunity for third parties, for example, to appeal a favorable decision to the Federal circuit. So I don't think the law has had an adequate opportunity to actually be implemented at this point in time.

Mr. BERMAN. So are you saying you are not ready yet to make any suggested alternatives to the one that is proposed here for encouraging the use of this procedure?

Mr. VAN HORN. I think we do support the addition of the section 112, first paragraph, except for best mode and second paragraph issues to reexamination.

Mr. BERMAN. Expanding the scope of what can be looked at in the reexamination?

Mr. VAN HORN. Correct. We do not support the removal of this estoppel provision, primarily because there is a balance that must be weighed between the rights of the patent owner and the rights of third parties and the public. And the concern in putting in that particular provision was that particularly well-to-do third parties would use this as a basis to harass patent owners by invoking reexamination and sometimes tying up this procedure in the Patent and Trademark Office for many, many years.

I was personally involved on behalf of a patent owner who had filed suit in a district court, I believe in Texas, in 1995 on 4 patents. In 2003 the reexamination certificates in 13 separate reexaminations on these 4 patents were finally concluded. And so it certainly can be used to delay a final decision by the PTO in these matters.

Mr. BERMAN. The flip side of that, however, of course is, with the estoppel provisions, you are going to have lots of challengers not using reexamination and going to the far more costly litigation route. And does that bother you?

Mr. VAN HORN. I think if they have that option, certainly small businesses, simply complex litigation or even a simple litigation is simply out of the question financially. So they need some type of system where they have the opportunity to present this issue to someone to make a decision on this reexamination. So it is a balancing between the rights of these two interests, no question.

Mr. BERMAN. On the prior art search, concerns have been raised about the extent to which, if you put that obligation on the applicant, will that become the basis of litigation later on? They didn't do it. adequately. So I guess, the notion of throw in everything to try and minimize that. Do you think there are some ways we could define the parameters and scope of the search so that an applicant could feel confident that he could engage at a reasonable expense in a search that would be thorough enough to not make him vulnerable to litigation for his efforts?

Mr. VAN HORN. Personally, I think it would be very difficult to define that particular scope. And I believe, personally, that it would create many more problems than the possible benefits from such a requirement.

Mr. BERMAN. Do you have any thoughts on this, Professor Thomas?

Mr. THOMAS. Well, with respect to my colleague at the bar, I believe some of these concerns are overstated.

Mr. BERMAN. Because—and I guess you cited the foreign model.

Mr. THOMAS. Yes, that is correct. Well, that had to do with oppositions. But in general, I think it is fair to require patent applicants to perform due diligence. You recall that when an applicant files an application with the PTO, she is presumptively entitled to receive the grant. The PTO has to affirmatively reject the application for her not to. Once the patent is granted, that patent is presumed valid not by preponderance of the evidence, which is the PTO standard, but by the higher civil standard of clear and convincing. The system somewhat favors the patent applicant and eventually the patentee.

I think again it is fair, given the powerful commercial tool that a patentee is awarded, that she should have to do due diligence to be entitled to that grant. It may prevent some applications from being filed because art will be discovered that would cause the claim to be narrowed or discourage that filing at all. And I believe it would help the examiner.

Mr. BERMAN. Thank you, Mr. Chairman.
Mr. SMITH. Thank you, Mr. Berman.

If there are no further questions, let me thank the witnesses for their contributions today. It has all been very helpful. And we probably will take some of these ideas to legislation, and look forward to your support and input in the future as well. Thank you all. And the Subcommittee stands adjourned.

[Whereupon, at 11:02 a.m., the Subcommittee was adjourned.]

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