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Another area of concern is the apportionment of damages when a patent covers a small component of a larger product. The Act should direct the court to award damages only to the portion of the product covered by the patent and not the entire product. We are pleased that H.R. 2795 has appropriate language concerning apportionment.

In conclusion, both Visa U.S.A. and the Financial Services Roundtable believe that the U.S. patent process is fundamental to a healthy U.S. economy. At the same time, if the problems with patent quality and remedies are not addressed, legitimate U.S. businesses will be flooded by a tidal wave of frivolous litigation.

We appreciate the process you have started, and I would be happy to answer any questions you may have.

[The prepared statement of Mr. Band appears as a submission for the record.]

Chairman HATCH. Well, thank you very much.
Mr. Lemley, we will turn to you.

STATEMENT OF MARK A. LEMLEY, PROFESSOR OF LAW,
STANFORD LAW SCHOOL, STANFORD, CALIFORNIA

Mr. LEMLEY. Thank you, Mr. Chairman. You have started to hear and will continue to hear very different things about various proposals in patent reform. That is not because one side is right and the other side is wrong. It is not because somebody is telling the truth and somebody else is lying. It is because different industries experience the patent system very differently, and I think you are going to hear that here today.

That is not a reason to avoid patent reform. Patent reform is extremely important and I think, done right, is going to substantially improve innovation in this country. Rather, it is a reason to make sure that the patent reform is measured and is tailored to the particular problems that were identified.

Now, there are two basic prongs to patent reform that people seem to be talking about and that H.R. 2795 discusses. One is a set that involves what I would call simplification, including harmonization with the rest of the world, changes like first to file, removing best mode and things of that nature. Consensus is too strong a word to use in anything related to patent law, I have discovered, but there seems actually to be widespread agreement that most of these proposals are, in fact, a good thing.

The second set of proposals has to do with ending the problem of litigation abuse, and it is there I want to focus my remarks. Litigation abuse is a problem. It is a problem primarily in industries whose products aggregate large numbers of potentially patentable components together. It is not a problem particularly in the pharmaceutical industry or the biotechnology industry. It is very much a problem in the software and the hardware and the Internet and the telecommunications and the semiconductor industries.

The problem is that it is actually relatively easy to get a patent in the United States and you can use various systems in the Patent Office to obtain patents that cover more than, in fact, you invented. One of the most problematic is the rather remarkable_fact that under U.S. continuation practice, it is impossible for the Patent Office ever to finally reject a patent application. The applicant can al

ways come back an unlimited number of times and tailor their patent coverage to what it is that their competitors are doing in the marketplace.

They can then use that patent to obtain substantially greater revenues than are warranted by the invention that they actually contributed to society. That results from the damages rules that we have established today and the injunctive relief rules we have established today.

Because of the entire market value rule, you get to go to a jury and say all I want is a percentage of the sales of Intel's micro processor. And Intel does not currently have the opportunity to defend by pointing out that there are 5,000 or 10,000 other inventions aggregated into that micro processor.

There has been reference to the presumptive entitlement to injunctive relief, but as it has been applied by the courts, it is not presumptive; it is automatic. As a general matter, that is a good thing, but in certain circumstances, in certain cases, people can use the threat of an injunction against a large product that incorporates thousands of different inventions based on ownership of one single invention to extort money from legitimate innovators to get not just the reward they ought to be entitled to, the value they added to the patent system, but to get much greater reward.

So it is quite common in my litigation experience in the IT industry to see cases settle for more money than the patentee could have won had they won the case at trial. That is a rather remarkable phenomenon, but I think it is driven by the fact that the company is at risk not just of having to change one small component of its product, but of being enjoined from making that product at all until it can go back and retool its factory. Finally, the possibility of willful infringement, which is asserted in 92 percent of all cases, allows the possibility of trebling these damages.

Now, we shouldn't get rid of any of these doctrines. They are legitimate reasons to use continuation applications. There are legitimate reasons why we presume entitlement to injunctive relief in most cases, and there are legitimate reasons for the entire market value rule. But I think what we need to do is to try to focus legislative reform on the specific sectors that present the problem and the specific issues that present the problem.

So in damages, for example, and also in injunctive relief it is possible to target legislation so that it is the act of asserting a damages claim or seeking injunctive relief for a product much larger than the small invention that you created that is the problem. That relieves pharmaceutical or biotechnology companies from having to worry about losing their entitlement to injunctive relief in the ordinary case or not getting adequate damages.

Similarly, while we shouldn't abolish continuation applications, it is important that we try to prohibit their abuse. I think that the solution here is not say no one can agree and therefore we go home. It is possible with a group this diverse that people aren't going to agree on everything, but reasonable compromises and tailored or measured solutions, I think, will improve the patent system in a significant way.

[The prepared statement of Mr. Lemley appears as a submission for the record.]

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Chairman HATCH. Well, thank you very much, Mr. Lemley.
Mr. Kushan.

STATEMENT OF JEFFREY P. KUSHAN, SIDLEY AUSTIN BROWN AND WOOD, LLP, WASHINGTON, D.C.

Mr. KUSHAN. Thank you, Mr. Chairman. My name is Jeff Kushan. I am a partner with the law firm of Sidley Austin Brown and Wood. I represent clients in the pharmaceutical and biotech sectors in patent procurement litigation and policy matters. I have been asked to testify today to provide the perspectives of companies in these sectors on patent reform. However, the views I am offering today are my own and not necessarily shared by my clients.

Your hearing today is focused on questions that are at the heart of the movement for patent law reform. The primary motivating factor for reform is the inability of companies to predict outcomes when they become involved in patent litigation. În simple terms, they can't predict if the patent in litigation will be held valid, enforceable and infringed, and what the consequences of that infringement will be.

The concerns are not simply those of patent defendants. Patent owners have concerns about the lack of predictability in the patent system. Any company that has spent millions of dollars on drug development and bringing that product to market is going to experience great stress if they can't predict that that patent is going to be effective when it is enforced. One reason there is uncertainty is that subjective criteria are embedded in the patent standards. Reforms that eliminate or constrain these subjective criteria will increase clarity and certainty in the patent law.

A second significant source of the problem is the environment in which patent disputes are resolved-district court litigation. Plain construction findings of infringement and the consequences of infringement have all become unpredictable with variables in litigation. Reforms that make those determinations less unpredictable will significantly improve the patent system.

I think a significant motivation for patent reform has already been touched on by a couple of the witnesses, and that is the scenario of the non-manufacturing patent owner. I think when you look at the task of enacting patent reform, you have to be very careful because it is very difficult to differentiate in the statute a good patent owner from a bad patent owner.

For example, most biotech companies and nearly all universities fit the definition of a patent owner that is not manufacturing a product, yet is aggressively enforcing its patent rights. These patent owners have a legitimate right to enforce their valid patents. They often seek injunctive relief and significant damages to protect the future commercial value of their patent rights.

That future value depends on their ability to exclusively license the patent to a commercial partner that can take an early-stage invention and develop it into a useful new product or service. If these early-stage patent owners cannot ensure market exclusivity, the value of their patents will be severely reduced. More importantly, the interest in developing an invention and a new drug will be severely reduced. This has extremely negative consequences for pa

tients hoping for new cures. Certainly, one cannot uniformly label these patent owners bad actors.

The path forward on reform must be one that creates a patent system in which the validity and scope of patent rights can be clearly appreciated and in which disputes can be resolved in a more transparent and predictable manner. This should be your ultimate litmus test when you go to evaluate different individual elements of patent reform.

In the House, Chairman Smith has introduced a bill that reflects a good balance of reform measures, but which includes several nonstarters to the life sciences sector. I would like to briefly address some of these elements.

One proposal would change the standard that courts use to evaluate requests for permanent injunctions once a patent owner has proven its patent valid and infringed. The House bill would amend the patent statute to provide that courts should consider the fairness of the injunction in light of all the facts and relevant interests of the parties associated with the invention.

The motivation for this amendment seems to be the belief that this change will create more jurisprudence in the field of patent injunctions, and that this new patent jurisprudence will identify more instances where injunctions will not be awarded by district courts. I believe this type of change will prove extremely harmful to the life sciences sector and should not be pursued.

Companies in this sector count on patent exclusivity to make critical business decisions, and those decisions are made very early in the product development process that routinely exceeds a decade. The upstream impact of this type of change will be severe and longstanding. Decisions on funding early-stage development ventures are based on the very simple belief that if a product actually reaches the market, the venture that brought that product to market will be able to use the patent to prevent copies of that product from being marketed for some period of time. If that assurance of market exclusivity is put into question, capital will move elsewhere.

I also believe this type of reform measure will not deliver the predictability and certainty its proponents seek. The current patent injunction standards are grounded on the same injunctive relief principles used by courts in other legal disputes. It is true that patent injunctions are routinely granted once the patent owner has proven its patent valid and infringed, but this is simply the application of the general injunctive relief principles to patent infringement situations.

Courts for more than a century have recognized that patent infringement causes a unique type of harm to the patent property. In the injunction context, this means that the patent owner can usually prove irreparable harm that cannot be adequately compensated by money damages. In my view, changes to these types of standards will simply create more uncertainty and undermine the efforts of all parties to get effective patent reform passed.

A number of other variables in the patent reform package do merit careful consideration. The one area that I would like to touch on very briefly is the post-grant opposition procedure. One of the things that needs to be addressed in that proposal is to articulate

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a better standard to start those proceedings and to make sure that there is only a single window provided for reviewing patentability after the patent is granted.

If you will permit me ten more seconds, I will just confirm that one of the concerns that people have expressed about opening up a second window is that the post-grant procedure is inherently designed to be a limited procedure, with limited discovery and a very constrained proceeding. Having that proceeding adjudicate patents that people have spent a lot of money on creates a significant risk for the life sciences sector.

I encourage you to look carefully at these proposals and create a balanced package that a lot of industries can move forward on and support.

Thank you, Mr. Chairman.

[The prepared statement of Mr. Kushan appears as a submission for the record.]

Chairman HATCH. Thank you, Mr. Kushan.
Mr. Fish.

STATEMENT OF CHUCK FISH, VICE PRESIDENT AND CHIEF PATENT COUNSEL, TIME WARNER, INC., NEW YORK, NEW YORK

Mr. FISH. Thank you, Mr. Chairman, Senator Leahy. My name is Chuck Fish. I am Vice President and Chief Patent Counsel at Time Warner. I am happy to be able to come and talk to you today.

As a large and diverse media company, Time Warner has an enormous interest in the maintenance of strong intellectual property protections in all contexts in the country. We believe that creators and innovators must have the fruits of their intellectual endeavors protected, lest this country lose its edge in exporting valuable products like, for example, Time Warner's entertainment products.

But our commitment to intellectual property protection, and in particular today to a strong and enforceable patent system, is wholly compatible with repairing a remedy system that has begun to reward not innovation, but the hiring of aggressive and tenacious lawyers. Indeed, it is critical today that the remedial aspects of patent law and their judicial application strike the right balance in dealing with the marketplaces we face.

Like most of the people sitting in front of you, I don't think that you can solve the problem just in the area of litigation reforms, and so my written testimony talks about other things that Time Warner thinks are important. But if you do focus on the areas of litigation reform and what we say are litigation abuses, or rising indications of litigation abuse, we think there is a group of actions which the Congress could take which would actually improve the laws and would actually be fair for everyone who is involved. My written testimony gives you some details.

In general, Time Warner sees that abuse of patent litigation appears to be on the rise. We see the establishment of business models that essentially insist on investing in patents that no one had any intent in using just as a ticket to litigation. We believe that patent litigation has truly left the mainstream of American busi

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