to the tune of about three-quarters of a billion dollars in the last 10 years.

We are optimistic that the situation in the U.S. PTO is turning around. We recommend that the highest priorities for the patent system going forward, should be improving the patent quality, as everyone has mentioned so far, reducing the cost of patent litigation and international patenting, and also reducing the uncertainty over the scope of patent rights.

Turning now to the committee print, we support establishing a new post-grant opposition proceeding, which will allow the public to request an opposition during a period of 9 months after the grant of a patent.

We favor nearly all of the features of the post-grant proceeding that are in the committee print. We have attached to the appendix of our written statement a listing of the features that we recommend for a post-grant opposition system.

We also support enthusiastically the proposed limitations on the award of treble damages for patent infringement. We believe these limitations will reduce litigation costs and discourage unwarranted suits. The proposal will correct the situation that some companies have said causes them to be wary of even reading patents of their competitors for fear that the company will, thereby, be on notice of patent infringement for the purposes of willful infringement.

A significant improvement over current law is the very welcomed clarification of the notice requirements that are also found in the committee print, and we applaud you for that.

We support the awarding of the patent to the first inventor to file. This change from first to invent procedure will provide more certainty for patent rights. The first inventor to file system is the best system for the United States and IPO believes that it should be done even outside the context of international harmonization. But its adoption is important for our participation in the international harmonization efforts.

Recent studies by former PTO Commissioner Mossinghoff have shown that the benefits of the first to invent system do not justify its costs, and this very same conclusion was reached by the National Academy of Sciences.

With regard to injunctions, while it may be possible to change the balance slightly in favor of the infringer to reduce abuses, the proposal in the committee print represents a radical change and goes too far.

Compared to current law, this proposal shifts the burden from the to the patentee from the infringer. It requires that an injunction be denied unless there is a reason to grant it; whereas, under current law it's granted unless there is a reason to deny it. It imports preliminary injunction concepts into permanent injunction determinations and it encourages courts to give substantial weight to whether or not the patentee works the invention.

Our written statement explains why we believe the injunctions proposal would diminish the incentive for innovation provided by American patent system. We believe exclusive rights should continue to be available to the same extent for patented inventions as they are for a copyrighted book—work, such as books, motion pictures, sound recoding, and software.

We again want to thank you for the opportunity for being here today. I see I made it under 5 minutes comfortably and I would be pleased to answer any questions.

[The prepared statement of Mr. Hawley follows:]

PREPARED STATEMENT OF J. JEFFREY HAWLEY

Mr. Chairman and Members of the Subcommittee:

My name is J. Jeffrey Hawley. I am Legal Division Vice President and Director, Patent Legal Staff, for Eastman Kodak Co. in Rochester, New York. I am speaking today on behalf of Intellectual Property Owners Association (IPO), of which I am the current elected President.

IPO is a trade association representing companies and individuals in all industries and fields of technology who own or are interested in intellectual property rights. IPO's membership overlaps with the membership of many organizations, including BIO and BSA who are here today. IPO members include more than 100 large and medium-size corporate members and a number of small business and individual inventor members. Our members file about 30 percent of the patent applications that are filed in the United States Patent and Trademark Office (PTO) by U.S. nationals. In addition to our legislative interests, we comment frequently and in detail on PTO rules changes and file amicus briefs in cases of interest to us. We have more than 850 people volunteering in 34 standing committees studying trends in IP law.

We appreciate the opportunity to discuss the April 14 Committee Print, which contains more than a dozen significant proposals for improving the patent system. We compliment the Subcommittee on assembling so many promising ideas. IPO enthusiastically endorses a majority of the proposals in the Committee Print. I will give an overview and then summarize our reaction to each proposal.

OVERVIEW OF PTO AND PATENT LITIGATION ISSUES

Our members almost universally believe the patent system needs improvemen. IPO was one of the first organizations to say that the PTO was in a "crisis," when we testified before this Subcommittee in 2001. We expressed concerns about the quality of patents granted by the PTO and the growing length of time required to grant or deny a patent. Since that time, reports from the Federal Trade Commission (FTC) and from the National Academy of Sciences (NAS) have recommended a number of changes to the patent system to improve its effectiveness in encouraging innovation in U.S. industry. In 2002 we endorsed the PTO's 21st Century Strategic Plan, which is directed at improving PTO operations and is now being implemented.

The diversion of more than three-quarters of a billion dollars in PTO user fees since 1992 has been a major factor in the PTO crisis. If the PTO had had the opportunity to spend the diverted funds, which were paid by our members and other PTO users for services they expected to receive, today's picture would be very different. We are optimistic that the situation at the PTO can be improved. Director Jon W. Dudas is acting aggressively with the aid of more than $200 million annually in additional funding provided by last December's patent fee increase to address the office's problems. We understand that the PTO is hiring more patent examiners and making efforts to improve employee recruiting and training, recertify examiner skills, and improve patent procedures. We are cautiously optimistic that no more user fees will be diverted in the short term. The threat of fee diversion remains, however, and IPO will therefore continue to support this Subcommittee's work to enact legislation to permanently end fee diversion.

No silver bullet exists, of course, that can turn the PTO around overnight. The patent quality problem is complex and not amenable to any single solution. The time required to grant or deny a patent will continue to increase for some years despite stepped-up patent examiner hiring, because new examiners must undergo an extensive training program to become productive and because training large numbers of new examiners takes experienced examiners off the production line. We are in an environment in which confidence in the validity of patents will continue to be lower than desirable for the foreseeable future and the time required to grant or deny a patent will be far longer than the traditional goal that IPO continues to support an average of 18 months after filing the initial application until patent grant or denial.

The problems with patent quality and long PTO delays create uncertainty about legal rights in technology. Uncertainty discourages investment by patent owners and their competitors in research, development, and commercialization of new products needed to maintain the country's technological and economic strength.

Our members have experienced a sharp rise in patent litigation costs. Hildebrandt International's 2004 Law Department Survey reported that the companies surveyed spent 32 percent more on outside counsel for intellectual property litigation in 2003 than in the previous year. They spent only one percent more for outside counsel on non-IP litigation. Some IPO members believe a substantial portion of the rise in litigation costs can be attributed to organizations that have engaged in abusive practices including threatening frivolous lawsuits.1 A number of suggestions have been made by companies in the information technology industry and others for legislation to reform patent litigation. IPO believes some of these ideas have merit.

Our members are also faced with high patent costs for protecting their technology internationally. Under the existing system U.S. applicants must file separate patent applications in separate countries and regions that require different application content and format. This process is costly and inefficient. In addition, patent offices around the world are wasting large sums by duplicating each others' efforts in patent searching.

A worldwide patent law harmonization treaty is needed. We also believe international patent expenses can be reduced through administrative and other changes by the U.S., Japanese, and European patent offices, which receive the bulk of applications from U.S. industry. Last week IPO, the American Intellectual Property Law Association (AIPLA), the Japanese Intellectual Property Association (JIPA), and the European industry association UNICE held the fourth in a series of meetings to develop recommendations to enable the same patent application to be filed, searched, and processed in the three largest offices without the need for amendment during the granting process. We hope to publish our final recommendations before the end of the year. Many of the changes required to harmonize the world's patent laws will require legislation, and we support the harmonization-related legislative proposals in the Committee Print.

POST-GRANT OPPOSITION PROCEDURES AND

INTER PARTES REEXAMINATION PROCEDURES

Section 9 of the Committee Print establishes a new post-grant opposition procedure. Establishment of a post-grant opposition feature was recommended in both the FTC and NAS reports. Under Section 9, post-grant opposition would enable any competitor of a patent owner or other member of the public to make a request not more than nine months after the grant of a patent for the PTO to reconsider whether the patent should be granted.2 The party requesting an opposition could raise any of the statutory requirements for patentability as an issue for invalidity of the patent. The PTO Director could dismiss a request lacking substantial merit and would be required to complete the opposition procedure within one year. Limited discovery would be available and appeals could be taken to the U.S. Court of Appeals for the Federal Circuit.

IPO strongly endorses establishing this type of post-grant opposition proceeding. We believe the opportunity to request an opposition should be available only for nine months after the grant of the patent. The alternative view is that oppositions should be available at any time after the grant of the patent throughout its life or at least for a period of time at any time after the patent owner receives a notice of alleged infringement or an offer to license. Those favoring a short window of time after patent grant for requesting opposition, including IPO, tend to view the opposition procedure as an additional review of the patent examination process in the PTO and an opportunity for members of the public to submit information and present arguments that may not have been available to the Office. Those favoring making oppositions available throughout the life of the patent tend to view the procedure as an alternative to patent validity litigation in U.S. District Courts. This would be similar to the "revocation" process that is found in the procedure of many foreign countries. Although an opposition procedure should not be viewed as a substitute for the Office performing a thorough initial examination, the existence of an opposition procedure will reduce uncertainty and increase confidence by patent owners and the public in the quality of patents that have survived an opposition or have not been opposed. Limiting the time for oppositions will help avoid possible harassment of patent owners and avoid large numbers of opposition proceedings that would overtax the Office's ability to handle the proceedings. Importantly, an indefinite period of opposition exposure would hinder the ability of startup companies to receive prompt funding through the venture capital system.

1 See generally materials from March 14, 2005 IPO conference "Patent Trolls and Patent Property Rights" (materials available from IPO).

2 Committee Print, pp. 36-49.

Any opposition proceeding must be carefully balanced to protect the interests of patent owners and competitors and to maintain the value of patents as an encouragement for invention, research, development, and commercialization. Changing one feature of a proceeding may require changing other features in order to maintain the desired balance. IPO has studied opposition procedures and developed a list of 16 inter-related attributes that we believe would provide a balanced proceeding and improve patent quality. Our list is attached to this statement as an Appendix.

Only a few of our suggested attributes differ from those in the Committee Print We recommend that: (1) the standard of proof applied during an opposition proceeding should be the clear and convincing evidence standard; (2) the requester of an opposition proceeding should be required to publicly disclose its identity in every case; and (3) an opposition proceeding requested by an accused infringer should be stayed if an infringement suit is filed against the accused infringer in a district court before the opposition is requested.

Section 9 of the Committee Print modifies the existing "inter partes reexamination" proceeding that was established in 1999 by the American Inventors Protection Act.3 Inter partes reexamination proceedings differ from the proposed post-grant opposition proceedings in that inter partes reexaminations are available at any time during the life of the patent and are limited to patentability issues based on earlier patents or publications describing the invention at issue-documentary prior art. The Committee Print expands inter partes reexaminations by (1) removing the limitation that a requester is estopped from asserting at a later time patent invalidity on any ground that the requester "could have raised" during the reexamination proceeding; and (2) making inter partes reexamination available for any patent granted on any date. The American Inventors Protection Act limited inter partes reexamination proceedings to patents granted on applications filed after November 29, 1999. The two limitations on inter partes reexamination addressed by the Committee Print have prevented significant use of inter partes reexamination to date. Only about 75 inter partes patent reexaminations have been requested. IPO supports the changes in inter partes reexamination in the Committee Print. We believe that with these changes, inter partes reexamination will be used more often. It will serve as a useful complement to the proposed post-grant opposition proceedings by providing a relatively simple and inexpensive proceeding for challenging a patent at any time during its life on the limited grounds-documentary prior art-on which the PTO has the most experience. With emphasis on prompt reexamination announced by Director Dudas recently, inter partes reexamination will also be a relatively rapid proceeding for obtaining determinations of patentability. Availability of an improved inter partes reexamination proceeding bolsters the case for limiting post-grant opposition proceedings to a nine-month period after grant.

WILLFUL INFRINGEMENT AS BASIS FOR TREBLE DAMAGE LIABILITY

IPO supports the amendment in Section 6 of the Committee Print that clarifies and limits the law on awards of treble damages for patent infringement.4 The section implements recommendations of the FTC, the NAS and others including IPO that treble damages should be assessed against infringers only in limited situations. Some companies have stated that existing judicial interpretations on treble damages have caused them to be wary of even permitting their employees to read competitors' patent documents for fear the company will be found to be on notice of infringement for purposes of treble damages liability. Some feel that treble damages are too readily available and encourage owners of questionable patents to file law suits and obtain settlements in cases in which defendants have not knowingly infringed a valid patent.

The Committee Print prohibits an inference of willful infringement based on the absence of an opinion of counsel and prohibits treble damages based merely on knowledge of a patent or its contents by the defendant. The Committee Print limits treble damages to specific situations including instances where the defendant has received a detailed written notice from the patent owner charging infringement and identifying the specific patents, claims, and allegedly infringing products or processes. A significant feature of this provision in the Committee Print is that the notice from the patentee must be sufficient to give declaratory judgment jurisdiction to the receiver of the notice. This prevents the current tactic used by abusers of placing the receiver of the notice in legal limbo-subject to the possibility of treble damages but with no legal remedy to resolve the situation. Other circumstances in which the Committee Print approves treble damages are those in which (1) the de

3 Committee Print, p. 35.

4 Committee Print, pp.29-31.

fendant intentionally copied the patent subject matter and (2) the patent was asserted against the defendant in a previous judicial proceeding.

We believe these reforms on willfulness and treble damages will reduce litigation costs and discourage unwarranted suits. These reforms together with limited postgrant opposition proceedings and improvements in inter partes reexamination proceedings would constitute significant reform of the patent litigation system.

RIGHT OF FIRST-INVENTOR-TO-FILE

Section 3 of the Committee Print awards the patent to the first-inventor-to-file when two inventors file patent applications, changing the traditional U.S. first-toinvent procedure. IPO supports this change.5

Awarding the patent to the first-inventor-to-file eliminates interference proceedings in the USPTO. Fewer than one-tenth of one percent of patent applications become involved in interference proceedings, but proceedings are costly and the possibility of another party proving a date of invention earlier that the invention date of the first party to file causes uncertainty for patent rights. Data compiled recently by Gerald J. Mossinghoff, a former head of the PTO, indicates that small inventors fare no better under the first to invent system than they would under a first to file system and perhaps not as well.6 The Committee Print correctly uses the term "first-inventor-to-file" to avoid any suggestion that a person who is not an inventor can obtain a patent by filing an application earlier than the inventor.

IPO supports first-inventor-to-file because it is the best system for the U.S. While its adoption would have a less immediate effect on the U.S. patent system than many of the other proposals in the Committee Print because of the small number of cases involved, adoption of first-inventor-to-file system would have important ramifications for the current talks on a possible substantive patent law harmonization treaty. The U.S. is the only country in the world with a first-to-invent system. In past harmonization talks the unwillingness of the U.S. to change its system has been an emotional issue with other countries. Additional visible support for a first-inventor-to-file system in the U.S. has come recently in the form of endorsements by the American Bar Association and the NAS report. Introduction of a bill in Congress would be a positive sign that the U.S. may be prepared to eliminate one of the obstacles to substantive patent law harmonization.

INJUNCTIONS

Section 7 of the Committee Print makes it more difficult for patent owners to obtain injunctions to stop infringement of patents.7 Reducing the availability of injunctions was not a feature of either the FTC or the NAS report. The IPO position will have to be updated, but when this specific proposal was reviewed by the Board of Directors in 2001, exactly as worded in Section 7, most members of the board were unwilling to support it. I will explain the case against the proposal, which contains concepts that IPO has strongly rejected over the years-compulsory licensing and a requirement for the patent owner to use the patented invention.8

A fundamental distinguishing feature of American intellectual property rights for more than 200 years, embodied in Article I, Section 8, Clause 8 of the U.S. Constitution, is that patent and copyrights rights are EXCLUSIVE rights. Exclusivity comes from the availability of permanent injunctions. Many believe the principle of exclusivity has contributed mightily to America's leadership in technology, in the case of patent rights, and to literary and artistic creativity, in the case of copyright. Exclusive rights should be available to the same extent for patented inventions and for copyrighted works such as books, motion pictures, sound recordings, and software. We expect that because of the way it is written, this particular proposal would come under constitutional attack.

We understand the proposal to be directed to permanent injunctions. It is sometimes said permanent injunctions issue at as a matter of course at the conclusion of patent or copyright litigation. Professor William C. Robinson of Yale University explained the distinction between preliminary and permanent injunctions in his classic 1890 treatise The Law of Patents:

A preliminary injunction is not, like a perpetual injunction, a matter of course, nor can its issue be governed by any formulated and established rules. . . . A permanent injunction issues as a matter of course, at the conclusion of a suit

5 Committee Print, p. 7, amending 35 U.S.C. 135.

6 Washington Legal Foundation Civil Legal Issues No. 129, April 15, 2005.

7 Committee Print, pp.31-32.

8 The U.S. Government has also been consistently critical of compulsory licensing and working requirements in international negotiations.