Senator Orrin G. Hatch
Senator Patrick Leahy
July 15, 2005
Page 8

Second, because legitimate inventors need as much certainty as the law can give
them, we would give applicants the option of earning a presumption by paying for
a thorough examination of their inventions. Put differently, applicants should be
allowed to "gold plate" their patents by paying for the kind of searching review
that would in turn merit a presumption of validity. An applicant who chooses not
to pay could still get a patent. That patent, however, would be subject to serious—
maybe even de novo-review in the event of litigation. Most likely, applicants
would pay for serious review with respect to their most important patents but
conserve resources on their more speculative entries. That would allow the Patent
Office to focus its resources, too, benefiting from the signal given by the
applicant's own self-interested choice.

Third, because competitors also have useful information about which patents
worry them and which do not, we support instituting a post-grant opposition
system, a process by which parties other than the applicant would have the
opportunity to request and fund a thorough examination of a recently issued
patent. A patent that survives collateral attack would earn a presumption of
validity similar to the one available through gold-plating. The core difference is
that the post-grant opposition would be triggered by competitors presumably
competitors looking to invalidate a patent that threatens their industry. Like gold-
plating, post-grant opposition is attractive because it harnesses private
information; this time, information in the hands of competitors. It thus helps the
Patent Office to identify patents that warrant serious review, and it also makes
that review less expensive by creating a mechanism by which competitors can
share critical prior art directly with the Patent Office.

Admittedly, there are administrative and strategic issues to work out in this
proposal. Post-grant opposition, for example, introduces some risk of collusion: if
an applicant can get a buddy to raise a strawman challenge to his patent and,
through that, walk away with a stronger presumption of validity, the whole
process will collapse. But any legal system can be gamed, and thus the question
here is not whether a two-tiered patent system is perfect-it's not-but whether it
is better than what we have now. We think that is almost self-evident. By
subjecting important patents to greater scrutiny, a two-tiered patent system would
dramatically improve the quality of economically significant patents. At the same
time, the vast majority of patents would undergo the current level of review, at no
additional cost to the Patent Office or to society. Moreover, lowering the
presumption of validity for most patents would reduce the volume of purely
speculative filings, freeing up Patent Office resources for more important
inquiries.

Senator Orrin G. Hatch
Senator Patrick Leahy
July 15, 2005

Page 9

Our approach would not completely eliminate bad patents. Indeed, no matter how
the patent system is configured, the occasional peanut butter and jelly sandwich
will slip through. The two-tiered approach, however, would arm the Patent Office
with one key weapon it today lacks: information about which patents matter. That
would help the Patent Office focus its resources, giving its most careful review to
the economically significant patents that should be its bread and butter.

Thank you for the opportunity to discuss these issues further. If you have any further questions, of if I can be of assistance on this or any other matter, please don't hesitate to contact me at mlemley@law.stanford.edu or by phone at (650) 723-4605.

MAL:ps

Very truly yours,

Mark A. Lemley

Introduction

Chairman Hatch, Ranking Member Leahy, and members of the

Subcommittee, my name is Jonathan Band. I am an attorney in private practice specializing in intellectual property. I am pleased to testify today on behalf of Visa U.S.A. and The Financial Services Roundtable.

The Visa Payment System is the largest consumer payment system in the U.S. and in the world, with more volume than all other major payment cards combined. In the U.S., there are about 14,000 financial institutions in the Visa system. They issue approximately 450 million Visa cards, consisting of almost 280 million Visa credit cards and over 150 million Visa debit cards. Visa U.S.A. member institutions have signed up approximately 5.5 million U.S. merchants to accept Visa payment card products. Annual volume in the U.S. is $1.3 trillion, of which almost $1 trillion is in card sales. Last year, Visa cardholders used their cards for over 18 billion transactions in the U.S.

I am also pleased to testify on behalf of The Financial Services Roundtable's Patent and Intellectual Property Working Group, to which Visa U.S.A. belongs. The FSR represents 100 of the largest diversified financial services companies providing banking, insurance, and investment products and services to American businesses and consumers. The Working Group has closely followed and participated in the discussions in different fora in Washington concerning patent quality and patent litigation reform. FSR representatives have testified twice before the House Intellectual Property Subcommittee on patent issues.

The financial services community is intensely interested in patent quality and litigation issues, and is grateful that you are considering these

matters. The subject of today's hearings is injunctions and damages, and I will focus my oral testimony on these topics. However, our views on the

need for reforming the laws relating to injunctions and damages in patent litigation can be understood only against the background of the serious patent quality problem.

Today, over 800,000 applications' are pending in the PTO and Examiners are unable to spend enough time to provide a meaningful

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examination on complex applications. Regardless of which factors contribute to a lack of patent quality, businesses of all shapes and sizes, including banks, broker-dealers, insurers and finance companies are threatened by a large and growing number of frivolous claims of patent infringement. Currently pending claims of infringement are a serious problem, but they are only the tip of the iceberg because of the lag in allowance of patent applications related to business methods and financial services. After the landmark decision in State St. Bank & Trust Co. v. Signature Fin. Group, Inc., 149 F.3d 1368 (Fed. Cir. 1998), the number of pending patent applications that involve financial services have surged generally. Because it typically takes more than three years to procure allowance of applications for business methods (e.g., Class 705), the risk of increased litigation for the financial services industry is now present.

While the Patent Act's provisions concerning injunctions and

damages would need adjustment even if the Patent Office granted only valid

'U.S. PATENT AND TRADEMARK OFFICE, PERFORMANCE AND ACCOUNTABILITY REPORT FISCAL YEAR 2004, available at www.uspto.gov/web/offices/com/annual/2004/060405_table5.html (last visited April 27, 2005).

2 FEDERAL TRADE COMMISSION, TO PROMOTE INNOVATION: THE PROPER BALANCE OF COMPETITION AND PATENT LAW AND POLICY, A REPORT BY THE FEDERAL TRADE COMMISSION, October 2003, at 5.

3 See, e.g., STEPHEN A. MERRILL, RICHARD C. LEVIN, and Mark B. MYERS, NATIONAL RESEARCH

COUNCIL, A PATENT SYSTEM FOR THE 21ST CENTURY, 2004 at 86 (prepublication copy).
Id. at 90.

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