Accordingly, our Subcommittee has pursued a number of initiatives over the past decade to improve the operations of the PTO and the patent system. But concern over patent quality and its effect on the economy at large has not been confined to Congress and the PTO.

Comprehensive studies recently issued by the Federal Trade Commission and the National Academies generated much discussion within inventor, industry, and Government circles about the present patent system and how it could be improved.

Critics of the U.S. patent system became more vocal as their ranks swelled. They maintained that the gains of the previous decade were too incremental or otherwise insufficient.

The Subcommittee responded in the last Congress by conducting oversight hearings on seven reform proposals.

While we did not move an omnibus reform bill in 2004, the hearings contributed to the growing sentiment that favors enactment of such legislation in this Congress.

The committee print is a first step in that process. It contains most of the leading recommendations developed by the PTO and a broad cross-section of industry and trade associations that are involved in the formulation of patent policy.

It is expected that small businesses, independent inventors, and other interested parties also will participate in this dialogue and the eventual drafting of a bill based on the print that I expect to move this spring.

I realize many competing interests are affected by our work on this broad topic, With so much on our plate, ours is an ambitious undertaking, at least by my account, but we still expect to succeed. With that, I'll recognize the Ranking Member for his opening comments as well.

Mr. BERMAN. Thank you, Mr. Chairman. Perhaps we can talk about patent protection in the new Iraq, and merge the briefing with the subject of this hearing.

I want to thank you for scheduling this hearing and in the past my colleague from Virginia, Mr. Boucher, and I have introduced legislation on patent quality reforms a number of times. I think the general discussion of the need to look at many of these questions has attempted-has fostered a discussions among diverse industry groups, all of which now recognize the need for changes to the patent law.

While there are many differing views about how to amend the law, we all share a common goal, which is improving the quality of the patent system. Our patent system was designed to promote continual innovation by providing strong protection for intellectual property.

However, if we protect invalid patents, the system will have the opposite effect: that of hindering creative output. And the introduction of poor quality patents into the marketplace actually increases the amount of litigation and has a negative effect on the economy. The problem of low-quality patents cuts across the entire spectrum of art units that the Patent Office examines. But the chief culprit seems to be patents in the business methods and software

area.

The Patent Office has initiated what it calls a second set of eyes review in an effort to address the problem. But this is merely a stop gap measure. Without an assurance of sufficient funding every year, the PTO can't maintain the staff it needs to administer the reviews or implement new quality initiatives.

So funding for the PTO and an end to diversion I think should remain as top priorities in any reform effort.

Any legislative solution to the problem of patent quality must address deficiencies both at the front end of the process-that is, the examination stage, which takes place in the PTO—and at the back end, which takes place in the courtroom.

The quality of patents system should be addressed both from— from both perspectives. Inventors should have confidence about the quality of the patents they receive before investing further in research and development, and equally secure in the knowledge they can properly enforce that patent.

I have a couple of concerns in this vein relating to the committee print. The print primarily describes reforms to litigation and remedy provisions. While I think many of the suggestions are worthwhile and worthy of support, I'm concerned that we are merely treating the symptoms without enough emphasis on curbing the underlying curing the underlying disease. Patent quality needs to remain a focus, with an objective of minimizing litigation on numerous invalidity claims.

For example, including a provision on allowing submissions of additional prior art to an examiner may be helpful in addressing this poor quality problem.

Furthermore, much of the print speaks to harmonization of U.S. patent law with patent law in the rest of the world. For example, shifting from a first to invent paradigm to one of first inventor to file. While this is a very important and necessary discussion, having experienced the opposition that can be generated on patent reform issues in certain areas in the past, in the late 1990's, I'm concerned that opposition to those provisions at this point will affect the ability to achieve other essential patent reform.

So I'm looking forward to today's hearings-hearing from today's witnesses to identify potential solutions to the problems created by questionable patent quality. Just to note, some of the suggestions for change, such as the injunction provision, may not be palatable to some of the witnesses. But I throw out a challenge to those witnesses: if you don't like that provision, help us craft a resolution to the problem the injunction provision was designed to address, that of the patent's role. While the structure of the discussion may be centered around the committee print, I hope that the witnesses here and in the future hearings will identify additional possibilities for resolving patent quality problems. I look forward to working with you, Mr. Chairman, in drafting effective patent legislation. Mr. SMITH. Thank you, Mr. Berman.

The gentleman from Virginia, Mr. Goodlatte is recognized.

Mr. GOODLATTE. Mr. Chairman, thank you for holding this important hearing to examine the committee print on improving patent quality. As we all know, article I, section 8 of our Constitution lays the framework for our Nation's patent laws. It grants Con

gress the power to award inventors for limited amounts of time exclusive rights to their inventions.

The framers had the incredible foresight to realize that this type of incentive was crucial to ensure that America would become the world's leader in innovation and creativity.

These incentives as just as important today as they were at the founding of country, if not more so. We must make sure the incentives our framers put into our Constitution remain meaningful and effective. The U.S. patent system must work efficiently if America is to remain the world leader in innovation.

It is only right that as more and more inventions with increasing complexity emerge that we should examine our Nation's patent laws to ensure that they still work efficiently and that they still encourage and do not discourage innovation.

One industry sector which is beginning to showcase the potential problems inherent in our Nation's patent system is the high tech industry.

In today's economy, many high tech products involve hundreds and even thousands of patented ideas. Technological innovators must work to ensure that they obtain the lawful rights to use the patents of others through licenses and other lawful mechanisms.

However, it appears that a cottage industry is emerging that seeks to take advantage of the complexity of these products, combined with loopholes in our patent laws, to extort money from high tech companies, both large and small.

To be sure, these problems are not limited to the high

tech industry. Inventors in all industries are increasingly facing these types of problems. The solution to these problems involves both ensuring that quality patents are issued in the first place and ensuring that we take a hard look at patent litigation and enforcement laws to make sure that they do not create incentives for opportunists with invalid claims to exploit.

All inventors will reap the rewards of a streamlined patent system that ensures that good quality patents are issued and that opportunists cannot take advantage of loopholes in our enforcement laws.

I look forward to exploring the details of the committee print with the witnesses.

Again, Mr. Chairman, I thank you for holding this important hearing, and I'd ask that my full opening statement be made a part of the record.

Mr. SMITH. And without objection, they will be.

[The prepared statement of Mr. Goodlatte follows:]

PREPARED STATEMENT OF THE HONORABLE BOB GOODLATTE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF VIRGINIA

Thank you, Mr. Chairman, for holding this important hearing to examine the committee print on improving patent quality.

Article I Section 8 of our Constitution lays the framework for our nation's patent laws. It grants Congress the power to award inventors, for limited amounts of time, exclusive rights to their inventions. The Framers had the incredible foresight to realize that this type of incentive was crucial to ensure that America would become the world's leader in innovation and creativity.

These incentives are just as important today as they were at the founding of our country. As we continue our journey into the digital age, we must make sure that the incentives our Framers put into our Constitution remain meaningful and effec

tive. The U.S. Patent system must work efficiently if America is to remain the world leader in innovation.

It is only right that as more and more inventions with increasing complexity emerge, that we should examine our nation's patent laws to ensure that they still work efficiently and that they still encourage, and not discourage, innovation.

One industry sector which is beginning to showcase the potential problems inherent in our nation's patent system is the high tech industry. In today's economy, many high tech products involve hundreds, and even thousands, of patented ideas. Technological innovators must work to ensure that they obtain the lawful rights to use the patents of others, through licenses and other lawful mechanisms. However, it appears that a cottage industry is emerging that seeks to take advantage of the complexity of these products, combined with loopholes in our patent laws to extort money from high tech companies, both large and small. To be sure, these problems are not limited to the high-tech industry-inventors in all industries are increasingly facing these types of problems.

The solution to these problems involves both ensuring that quality patents are issued in the first place, and ensuring that we take a good hard look at patent litigation and enforcement laws to make sure that they do not create incentives for opportunists with invalid claims to exploit.

The Committee Print addresses both of these concerns. It would create a new post-grant opposition system in which any member of the public could request the USPTO to review the scope and validity of a patent within nine months from the date of its issuance. While this provision would help to ensure that quality patents are issued, the nine month limit is intended to prevent third parties from harassing a patent owner. In addition, the Committee Print eliminates the provision in current law that prohibits a party from raising an issue on appeal that could have been raised during a reexamination proceeding. This provision is meant to encourage more participation in the reexamination process to ensure that only quality patents are issued.

The Committee Print also includes provisions to ensure that patent litigation benefits those with valid claims, but not those opportunists who seek to abuse the litigation process. Specifically, the bill creates a clear standard for "willful infringement," ensures that injunctions are issued only when the patentee is likely to suffer irreparable harm that cannot be remedied by the payment of money damages, and ensures that damages awarded to a party are proportional to the value that the party's invention contributes to the total value of the defendant's product.

All inventors will reap the rewards of a streamlined patent system that ensures that good quality patents are issued, and that opportunists cannot take advantage of loopholes in our enforcement laws.

Thank you again, Mr. Chairman for holding this hearing. I look forward to hearing today from our witnesses.

Mr. SMITH. Thank you, Mr. Goodlatte.

Before I introduce the witnesses, I'd like to invite you to stand and be sworn in.

[Witnesses sworn.]

Mr. SMITH. Thank you. Please be seated. Let's see our first witness if Jeff Hawley, President of the Intellectual Property Owners Association. Mr. Hawley also serves as Legal Division Vice President and Director of the Patent Legal Staff for Eastman Kodak in Rochester, New York. He earned a bachelor's degree in electricalexcuse me chemical engineering from the New York University School of Engineering, and a law degree from George Washington University.

The next witness is Richard Lutton, Chief Patent Counsel for Apple Computer, where he oversees patent development, licensing, and litigation for Apple's computer hardware and software business. He will testify on behalf of the Business Software Alliance. Mr. Lutton earned a bachelor's degree in electrical engineering from Rice and a law degree from Columbia.

Our next witness is Jeffrey Kushan, a Partner and Patent Attorney at Sidley, Austin Brown and Wood's Washington, D.C. office. He is testifying on behalf of Genentech, a biotechnology company

based in San Francisco. Mr. Kushan is a graduate of the George Washington University Law School. He also earned a master's in chemistry from the University of North Carolina at Chapel Hill, and a bachelor's in chemistry from the College of William and Mary.

Our final witness is William LaFuze, a Partner in the Houston Office of Vinson and Elkins, where he specializes in intellectual property law, with an emphasis on electronics, oil field equipment and computer-related litigation.

Mr. LaFuze chairs the Intellectual Property Law Section of the American Bar Association and will testify on their behalf. He earned his undergraduate degree in physics from the University of Texas, a master's in applied science from Southern Methodist University, and a law degree from Texas as well.

Welcome to you all. We have your written statements, and without objection they'll be made a part of the record.

Let me wish you well as you try to summarize those testimonies, and I read every one, in 5 minutes. But do the best you can, and then we'll look forward to asking you questions about the rest of your testimony as well. Mr. Hawley, we'll begin with you.

TESTIMONY OF J. JEFFREY HAWLEY, LEGAL DIVISION VICE PRESIDENT AND DIRECTOR, PATENT LEGAL STAFF, EASTMAN KODAK COMPANY, ON BEHALF OF INTELLECTUAL PROPERTY OWNERS ASSOCIATION (IPO)

Mr. HAWLEY. Thank you, Mr. Chairman and Members of the Committee, and I'll do my best to stick to the 5 minutes.

As you noted, I'm speaking today on behalf of the Intellectual Property Owners Association. IPO is a trade association that represents companies and individuals in all industries and fields of technology who are interested in intellectual property rights.

We would like to compliment the Subcommittee on putting together more than a dozen specific proposals for improving the patent system in the committee print, and IPO enthusiastically endorses the majority of the proposals; is concerned about one of them; and is studying others.

You mentioned in your opening statement that this is indeed an ambitious undertaking and with so many individual provisions I think that's a bit of an understatement. This is going to be a challenging time.

We believe that the principles underlying the U.S. patent system are sound and that the system has served the country well for over 200 years.

This is confirmed by the recent in-depth studies that, Mr. Chairman, you mentioned the FTC study, the National Academy of Sciences study-and also a recent publication by the economists Jaffey and Lerner. In spite of some popular press criticisms to the contrary, the patent system provides important incentives for our members and other innovators to create and commercialize new technology.

However, as you have also noted, the U.S. Patent and Trademark Office is in a bit of a crisis, caused by underfunding, in turn caused by the diversion of user fees to non-related Government programs,