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useful acts, by securing for limited times to inventors the (exclusive right to their

discoveries” (emphasis added). This Constitutional power does not limit the exclusive right only to discoveries and inventions which are worked.

There is good reason for this. Many of the greatest inventions in our Nation's history have been made and continue to be made today—by the lone individual. Such independent inventors often do not have the financial resources to develop and bring to market their inventions. It took Chester Carlson, the inventor of electrostatic copying (which we now know as xerography) over twenty years from the date of his first patent application to produce a successful commercial product. Such struggling entrepreneurs must approach venture capitalists and established manufacturing firms for assistance. To adopt a provision which could limit the rewards for such pioneers to reasonable royalties until they are in a position to market their patented inventions would seriously erode the incentives of the patent system for them. Not only would their opportunities to seek licenses and manufacturing partners be jeopardized, but it could lead to a greater reliance on trade secrets, undercutting the Constitutional purpose of promoting the progress of the useful arts through the publication of patented inventions.

Placing too heavy an emphasis on determining whether to grant a preliminary injunction on whether a patent was being marketed would also set an unfortunate precedent globally. For years U.S. Government representatives worked tirelessly to urge other countries to eliminate provisions in their laws that authorized the grant of compulsory licenses on the ground that a patent was not being worked in their territory. To suggest that the failure to work a patent in a country is an acceptable reason for withholding the grant of a preliminary injunction undermines years of effort and could have serious adverse consequences for U.S. interests abroad.

Finally, such an explicit requirement that a patentee must be marketing or engaged in activities to market an invention as a condition for obtaining a preliminary injunction could raise questions of compliance with obligations under Articles 28 and 50 of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs). Under Article 28 of TRIPs, member nations must have patent laws that grant exclusive rights to make, use and sell inventions protected by patents:

Article 28
“1. A patent shall confer on its owner the following exclusive rights:

“(a) where the subject matter of a patent is a product, to prevent third par-
ties not having the owner's consent from the acts of: making, using, offering
for sale, selling, or importing for these purposes that product;
"(b) where the subject matter of a patent is a process, to prevent third par-
ties not having the owner's consent from the act of using the process, and
from the acts of: using, offering for sale, selling, or importing for these pur-
poses at least the product obtained directly by that process."

Article 28 does not condition the grant of such exclusive rights on whether the patentee is marketing his or her invention.

Similarly, Article 50 obligates member states to ensure that courts shall have the authority to order prompt and effective provisional measures (preliminary injunctions):

Article 50 “1. The judicial authorities shall have the authority to order prompt and effec

tive provisional measures:
"(a) to prevent an infringement of any intellectual property right from occur-
ring, and in particular to prevent the entry into the channels of commerce
in their jurisdiction of goods, including imported goods immediately after
customs clearance;

"(b) to preserve relevant evidence in regard to the alleged infringement. "2. The judicial authorities shall have the authority to adopt provisional meas

ures inaudita altera parte where appropriate, in particular where any delay is likely to cause irreparable harm to the right holder, or where there is a demonstrable risk of evidence being destroyed.”

Nowhere is this obligation conditioned on a patent holder marketing his or her invention.

For all of the foregoing reasons, AIPLA strongly opposes adding to section 283 of title 35 the factors contained in Section 5 of the draft legislation.

Declaratory relief

Section 6 of the draft legislation states that any communication by a patent holder that is sufficient to subject the recipient to liability for willful infringement shall be sufficient to confer standing on the recipient to maintain an action for declaratory relief. The section further provides that, for a notice of infringement to be sufficient to subject its recipient to liability for willful infringement, it must identify the specific patent, identify the allegedly infringed claims in the patent, and set forth the alleged infringing product, process, or service.

Section 2201 of title 28 guides the filing of declaratory judgment actions in federal courts:

“8 2201. Creation of Remedy "(a) In a case of actual controversy within its jurisdiction . . . any court of the United States, upon filing of an appropriate pleading, may declare the rights and other legal relations of any interested party seeking such declaration, whether or not further relief is or could be sought. Any such declaration shall have the force and effect of a final judgment or decree and shall be reviewable as such."

AIPLA is concerned that Section 6 of the draft legislation could have an unsettling effect on the law of declaratory relief in relation to patents. Currently, an individual has standing to seek declaratory relief if there is an “actual controversy," that is, if there is (1) an explicit or actual threat of a suit which creates a reasonable apprehension of suit, and (2) present activity which could constitute infringement or concrete steps taken with the intent to conduct such activity. Fina Research, S.A. v. Baroid Ltd., 141 F.3d 1479 (Fed Cir. 1998); Cargill, Inc. v. Sears Petroleum & Transport Corp., 2002 U.S. Dist. LEXIS 20714 (Fed Cir. 2002). Even if there is actual controversy, the court retains discretion to decline jurisdiction. EMC Corp. v. Norand Corp., 98 F.3d 807, 39 USPQ2d 1451 (Fed. Cir. 1996). By providing that any communication sufficient to impose liability for willful infringement is sufficient to confer standing to bring a declaratory judgment action, the proposed language could be interpreted to eliminate any communication not satisfying such stringent requirements for a willful infringement notice from conferring standing to bring a declaratory judgment action. This could eviscerate the existing standards, thereby severely limiting the availability of declaratory relief.

Currently, a party may bring a declaratory judgment action to clarify his or her rights where that party has a reasonable apprehension of suit for patent infringement. The party can obtain a determination of whether a technology of interest or planned activity is covered by a patent or is in the public domain. Under the legislation, a party could have no standing to bring a declaratory judgment action unless the individual received a notice sufficient to create liability for willful infringement. A patentee could cast a cloud over an area of technology, and those subject to that cloud could do nothing to resolve the issue short of engaging in potentially infringing acts as long as the patentee did not send a qualifying communication.

We see no justification to modify the law regarding when declaratory judgment actions can be brought, especially where the modifications might make it more difficult to bring such actions. On the other hand, we do believe some useful changes can be made in the present state of the law regarding willful infringement. A Proposal to Improve the Law Regarding Willful Infringement

AIPLA is concerned about the current state of the law regarding willful infringement, and especially the disruptive effect that claims of willful infringement have on the functioning of the patent system. It not only adds unnecessarily to the cost of litigation, but it produces a drag on innovation as companies are wary to improve upon or invent around patented inventions for fear of being subjected to claims of willful infringement and the possibility of treble damages. More importantly, the current state of the law regarding willful infringement may be affecting the Constitutional scheme of exclusivity in exchange for public disclosure.

During the 2002 Federal Trade Commission Department of Justice Hearings on the patent system, the role of patents as an effective means for disseminating information efficiently was repeatedly called into question. It was clear from the statements of various witnesses, and from the give-and-take in the discussions at the hearings, that the frequency with which willful infringement has been alleged has led some companies to forbid their employees from reading patents.

Numerous problems have arisen with the enhanced damages provision of the patent statute, particularly as that provision has been interpreted by the Federal Circuit. Under Federal Circuit precedent, a party who has knowledge of a patent is under a duty of care to reasonably avoid infringement of the patent. The Federal Circuit has said that this usually entails the obtaining of a competent legal opinion. Underwater Devices Inc. v. Morrison-Knudsen Co., 717 F. 2d 1380 (Fed Cir. 1983). Subsequent cases have held that the non-disclosure of the opinion during the course of the trial can lead to a negative inference that the opinion obtained was adverse to the infringer. Kloster Speedsteel AB v. Crucible, Inc., 793 F. 2d 1565 (Fed. Cir.1986). These cases have driven alleged infringers to obtain an opinion of counsel in virtually every instance of alleged infringement, and to produce such opinions during the course of litigation. M. Powers and S. Carlson, The Evolution and Impact of the Doctrine of Willful Patent Infringement, 51 Syracuse L. Rev. 53, (2001) (hereinafter “M. Powers and S. Carlson”).

The widely-shared perception that an alleged infringer must obtain a competent legal opinion in patent cases also leads to problems with attorney disqualification. Some states, such as the state of Virginia, do not even allow the attorney trying the patent infringement case to be in the same law firm as the attorney who drafted the opinion for purposes of willfulness. As a result, a company's chosen counsel cannot act as both its counselor and its trial attorney. Long-term relationships between attorneys and clients can be lost because the law firm is not able to assume this dual role, and the costs of defending oneself against a charge of willful infringement is escalated.

The requirement of the need for a legal opinion in every patent infringement case can also lead to problems in larger companies. Larger companies have numerous employees, many facilities, and many operational units. Knowledge of a patent by only a single individual in that company may be imputed to the company at large for purposes of willfulness. Yet, the actual decision maker, who should decide whether to obtain a legal opinion, may never be aware of the patent. A company can “know” of a patent for purposes of willfulness and yet not realize that it should obtain a legal opinion to absolve itself of willfulness allegations.

Any exposure to or knowledge of the infringed patent may be held to be sufficient to meet the notice requirement for willfulness. In Great Northern Corp. v. Davis Core and PadCo, 782 F. 2d 159, 167 (Fed. Cir. 1986), a patentee was found to have notice of a patent sufficient to trigger its affirmative duty to obtain an opinion of

nsel when the infringer's president learned of the patent at a social gathering from a third party who, at the same time he mentioned the patent, also stated it was invalid. The Federal Circuit found that the infringer's “failure to fulfill that duty is clearly an adequate basis for the district court, in its discretion, to assess treble damages .Id at p. 167.

The cost to alleged infringers is immense. Because of the low knowledge threshold that can give rise to a duty of due care to avoid willful infringement and because of the negative inference that attaches to the nondisclosure of an opinion of counsel, infringers must inevitably err on the side of caution and obtain opinions of counsel when there is even the smallest possibility that they may be sued for infringement of the patent. For companies that may receive hundreds of allegations of patent infringement annually, the total costs for such opinions can be especially costly given the rigid and comprehensive requirements for such opinions enunciated by the Federal Circuit.

Apart from the costs of all of these preventative steps forced on accused infringers, claims of willful infringement are made in almost every patent infringement lawsuit. A great deal of discovery is taken on the willfulness issue. Many motions are typically filed including a motion to compel the opinion, motions to compel withheld documents under the attorney-client privilege, motions to bifurcate the trial and reconsiderations of these motions, etc. All of these motions add additional unnecessary costs to patent infringement litigation.

AIPLA has undertaken the task of developing a proposal to reform the practices in this area that would both promote the Constitutional role of the patent system to efficiently disseminate knowledge, while retaining the ability to obtain enhanced damages from an abject copyist. We elicited input from our membership and from an FTC representative at a Forum at our Spring Meeting this year and learned much that informed the further debate. We are working with our sister organizations to launch a multi-year program to implement the changes needed and hope to be able to share our ideas with the Subcommittee in the very near future.

CONCLUSION AIPLA appreciates the efforts of the Subcommittee to examine ways in which patent quality might be enhanced. We encourage you to continue your efforts. You have made an excellent start by proposing legislation that would fully fund the USPTO and we will do everything in our power to support this initiative. We look forward to receiving the proposal of the USPTO to establish a post-grant opposition system and commit to work with you on this proposal.

Mr. SMITH. Thank you, Mr. Van Horn.
Mr. Kesslen.



Mr. KESSLEN. Thank you, Mr. Chairman. I was pleased to accept your invitation to testify today on behalf of the Financial Services Roundtable and BITS. We are grateful for the opportunity to comment on the steps that should be taken to modernize the patent laws.

Mr. Chairman, patent attorneys and financial institutions are a well kept secret. We work quietly behind the scenes to protect our companies'intellectual capital from assault. In recent years we have been busy fighting frivolous patent claims, often at a significant expense to our companies. And we are concerned that this is a problem that is not going away unless Congress does something about it.

Pending claims of infringement against financial service companies are serious problems, but they are only the tip of the iceberg. Patent applications involving financial services have been filed in large numbers since 1997. Because it takes at least 4 years to get these applications processed through the Patent Office, the number of these patents now issued are growing, which will lead to an increase in the number of claims.

We believe that there are steps that Congress can and should take to provide the safeguards without impairing the important protections afforded to intellectual property. We recommend four initial measures.

Under the first measure, we propose modifying the prior user rights defense. We believe that this defense is an important protection, especially due to the recent growth in patent litigation and our historical reliance on copyrights and trade secrets.

But in its current form this defense does not go far enough. It is too easy for a patent owner to circumvent it. The defense should be modified to apply equally to any product or process covered by a patent. We believe that the level of proof required to assert this defense should be reduced.

Under the second measure we propose modifying the standard for injunctive relief. In many 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 it 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 innovators by ensuring they receive the fruits of their efforts.

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 is not the case, then for the good of society, they should not be allowed to stand in the way of the utilization of their invention. Of course, the inventor should be entitled to monetary awards and thus be rewarded for their efforts.

Under the third measure, we seek to clarify some of the current damages laws. More specifically, we believe that the patent law relating to damages is subject to abuse by patent holders who go fishing for infringers. 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 that letter has to undertake an investigation, incurring substantial cost, personnel and legal time. 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 that stamp.

We believe that the patent law should be modified to provide that enhanced damages may not be awarded unless the alleged infringer has received an objectively reasonable apprehension of suit by the patentee, which includes an identification of the patent, the patent claims at issue, and the particular product at suit.

We have also proposed similar standards for limiting actual damages in our written testimony.

Under the fourth measure, we recommend developing an opposition proceeding. The Patent Office has proposed a post grant review of patent claims in their 21st century plan. We strongly support this concept.

However, 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 the patentees. The procedure would enable companies to manage the risk claims against them based upon bad patents without incurring the high cost of litigation or facing the need to settle to avoid that cost.

In conclusion, the Roundtable and BITS are strong believers in the U.S. Patent process as fundamental to a healthy U.S. Economy and robust free enterprise systen.. Given the importance of the patent process, the Patent Office should be fully funded and given adequate resources to perform its duties. Current efforts to craft legislation are to be commended. However, with increases in both the requests received by the Patent Office and the claims of infringement, there is a need for Congressional debate and frank discussion regarding expanded defenses and other tools for litigation risk management with members of the financial services industry and the patent community at large.

Again, thank you for the opportunity to speak today. [The prepared statement of Mr. Kesslen follows:)

PREPARED STATEMENT OF MARK KESSLEN Chairman Smith, Ranking Member Berman and members of the Subcommittee, my name is Mark Kesslen and I am the lead intellectual property and technology attorney at J.P. Morgan Chase in New York. I am pleased to testify today on behalf of The Financial Services Roundtable and BITS, which are affiliated financial services trade associations.

The Financial Services Roundtable ( represents 100 of the largest diversified financial services companies providing banking, insurance, and investment products and services to American businesses and consumers. Member

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