[Senate Hearing 109-984]
[From the U.S. Government Publishing Office]
S. Hrg. 109-984
PATENT LAW REFORM: INJUNCTIONS AND DAMAGES
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HEARING
before the
SUBCOMMITTEE ON INTELLECTUAL PROPERTY
of the
COMMITTEE ON THE JUDICIARY
UNITED STATES SENATE
ONE HUNDRED NINTH CONGRESS
FIRST SESSION
__________
JUNE 14, 2005
__________
Serial No. J-109-27
__________
Printed for the use of the Committee on the Judiciary
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COMMITTEE ON THE JUDICIARY
ARLEN SPECTER, Pennsylvania, Chairman
ORRIN G. HATCH, Utah PATRICK J. LEAHY, Vermont
CHARLES E. GRASSLEY, Iowa EDWARD M. KENNEDY, Massachusetts
JON KYL, Arizona JOSEPH R. BIDEN, Jr., Delaware
MIKE DeWINE, Ohio HERBERT KOHL, Wisconsin
JEFF SESSIONS, Alabama DIANNE FEINSTEIN, California
LINDSEY O. GRAHAM, South Carolina RUSSELL D. FEINGOLD, Wisconsin
JOHN CORNYN, Texas CHARLES E. SCHUMER, New York
SAM BROWNBACK, Kansas RICHARD J. DURBIN, Illinois
TOM COBURN, Oklahoma
David Brog, Staff Director
Michael O'Neill, Chief Counsel
Bruce A. Cohen, Democratic Chief Counsel and Staff Director
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Subcommittee on Intellectual Property
ORRIN G. HATCH, Utah, Chairman
JON KYL, Arizona PATRICK J. LEAHY, Vermont
MIKE DeWINE, Ohio EDWARD M. KENNEDY, Massachusetts
LINDSEY O. GRAHAM, South Carolina JOSEPH R. BIDEN, Jr., Delaware
JOHN CORNYN, Texas DIANNE FEINSTEIN, California
SAM BROWNBACK, Kansas HERBERT KOHL, Wisconsin
TOM COBURN, Oklahoma RICHARD J. DURBIN, Illinois
Bruce Artim, Majority Chief Counsel
Bruce A. Cohen, Democratic Chief Counsel
C O N T E N T S
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STATEMENTS OF COMMITTEE MEMBERS
Page
Hatch, Hon. Orrin G., a U.S. Senator from the State of Utah...... 1
prepared statement........................................... 106
Kennedy, Hon. Edward M., a U.S. Senator from the State of
Massachusetts.................................................. 6
Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont. 4
prepared statement........................................... 154
WITNESSES
Band, Jonathan, Attorney at Law, on behalf of Visa U.S.A. and the
Financial Services Roundtable, Washington, D.C................. 9
Fish, Chuck, Vice President and Chief Patent Counsel, Time
Warner, Inc., New York, New York............................... 15
Gulbrandsen, Carl E., Managing Director, Wisconsin Alumni
Research Foundation, Madison, Wisconsin........................ 7
Hawley, J. Jeffrey, President, Intellectual Property Owners
Association, and Vice President and Director, Patent Legal
Staff, Eastman Kodak Company, Rochester, New York.............. 17
Kushan, Jeffrey P., Sidley Austin Brown and Wood, LLP,
Washington, D.C................................................ 13
Lemley, Mark A., Professor of Law, Stanford Law School, Stanford,
California..................................................... 11
QUESTIONS AND ANSWERS
Responses of Jonathan Band to questions submitted by Senator
Leahy.......................................................... 30
Responses of Chuck Fish to questions submitted by Senator Leahy.. 34
Responses of Carl E. Gulbrandsen to questions submitted by
Senator Leahy.................................................. 37
Responses of J. Jeffrey Hawley to questions submitted by Senator
Leahy.......................................................... 44
Responses of Jeffrey P. Kushan to questions submitted by Senator
Leahy.......................................................... 48
Responses of Mark A. Lemley to questions submitted by Senator
Leahy.......................................................... 59
SUBMISSIONS FOR THE RECORD
Band, Jonathan, Attorney at Law, on behalf of Visa U.S.A. and the
Financial Services Roundtable, Washington, D.C., prepared
statement...................................................... 68
Fish, Chuck, Vice President and Chief Patent Counsel, Time
Warner, Inc., New York, New York, prepared statement........... 79
Gulbrandsen, Carl E., Managing Director, Wisconsin Alumni
Research Foundation, Madison, Wisconsin, prepared statement.... 89
Hawley, J. Jeffrey, President, Intellectual Property Owners
Association, and Vice President and Director, Patent Legal
Staff, Eastman Kodak Company, Rochester, New York, prepared
statement...................................................... 111
Kushan, Jeffrey P., Sidley Austin Brown and Wood, LLP,
Washington, D.C., prepared statement........................... 132
Lemley, Mark A., Professor of Law, Stanford Law School, Stanford,
California, prepared statement................................. 157
PATENT LAW REFORM: INJUNCTIONS AND DAMAGES
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TUESDAY, JUNE 14, 2005
United States Senate,
Subcommittee on Intellectual Property,
Committee on the Judiciary,
Washington, DC.
The Subcommittee met, pursuant to notice, at 2:35 p.m., in
room SD-226, Dirksen Senate Office Building, Hon. Orrin G.
Hatch, Chairman of the Subcommittee, presiding.
Present: Senators Hatch, Leahy and Kennedy.
OPENING STATEMENT OF HON. ORRIN G. HATCH, A U.S. SENATOR FROM
THE STATE OF UTAH
Chairman Hatch. We will call the meeting to order. We want
to welcome you all to the Subcommittee's second hearing on
patent law reform. Today, we are going to focus our attention
on problems that have arisen under current law with respect to
the circumstances under which injunctions are granted and
damages are awarded in connection with patent litigation.
Senator Leahy and I are interested in and prepared to work
with all interested parties in identifying issues and
formulating possible solutions to problems with the Patent
Code. Like our colleagues in the House, Chairman Lamar Smith
and ranking Democratic member Howard Berman, we are prepared to
develop legislation remedies if such legislation is found to be
necessary and if a sufficient consensus emerges.
We are mindful that it is often difficult to fashion
intellectual property legislation, but this is a high priority
for the Subcommittee and I would appreciate any help that you
can all give and that others who are watching or are concerned
can give.
The art of developing legislation involves making sure that
all the legitimate points of view have been heard and
considered before legislation is developed and moved through
the Congress. This entails considerable discussion and, I might
add, compromise by all affected parties.
Those who would change current law have the burden of
persuading those of us in Congress that their proposals respond
to significant problems, and they have the duty of persuading
us that the legislation they propose actually resolves the
problems that have been identified. Ideally, any new
legislative solutions would not create bigger problems than
they solve, and this is a difficult but a doable challenge.
Today, we will examine some of the key problems related to
patent litigation. By all accounts, patent litigation has
become a significant problem in some industries and for some
types of parties. There are a number of factors in patent law
that drive up the cost and uncertainty of litigation in ways
that appear to many to be largely unjustified.
However, some of the principal problems and costs
associated with patent litigation are not uniform across
industrial sectors, and this has led to substantial and
sometimes vociferous disagreements about the nature of the
underlying problems, and thus what the appropriate solutions
might be.
The most contentious and controversial of the proposals to
decrease excessive patent litigation are based on the assertion
that current law imposes disproportionate liability and
business risk on legitimate enterprises. The argument is
advanced by some patent-holders that some patent-holders who
some less than affectionately characterize as patent ``trolls''
attempt to secure disproportionately high settlements from
defendants that cannot afford to take an intolerably high risk
of treble damage awards or massive lost profits if an
injunction keeps their product off the market during and after
litigation.
We will hear from representatives of some of those in the
high-tech, software and financial services industries that
currently are targets of a significant number of lawsuits or
threatened lawsuits that they say are of questionable validity.
Additionally, the costs of allegedly abusive litigation
tactics do not seem to be evenly spread across industries or
parties. At the risk of oversimplifying a complex situation,
some argue that the most significant costs are focused on
industries and parties that have a combination of the following
attributes: short product cycles, high patent density and
inventions that are less susceptible to clear and discrete
descriptions in patent claims. Additionally, the current
remedial scheme seems to provide greater relative leverage
against defendants in these types of industries.
On the other side of the spectrum are industries that do
not suffer as significantly from this type of litigation.
Generally speaking, these industries are characterized by
longer product cycles with fewer alterations in each cycle, a
lower patent-per-product ratio and inventions susceptible to
discrete description. The biotech and pharmaceutical industries
are two of the best examples of industries on this end of the
continuum.
Some of the high-tech industries most affected by abusive
litigation seek reforms that others such as the biotech sector
argue would weaken the current remedies available to patent
plaintiffs under current law. Thus, while the weaker would help
defendants in some industries to fend off illegitimate suits,
if not carefully crafted they could materially disadvantage
legitimate plaintiffs in other industries who argue that the
weaker remedies devalue their patent rights.
Trying to achieve the right balance in this situation means
wrestling with many devilish details. Two critical challenges
we face revolve around the advisability of, one, altering the
standard for obtaining injunctions and, number two, codifying a
rule for the apportionment of damages.
Altering the standard for determining whether injunctive
relief should be granted in a patent infringement case has
emerged as perhaps the most contentious issue in the patent
reform debate. Large tech companies, many of which have
products covered by thousands of patents, believe that some
change in current law is necessary to prevent what they
consider as something akin to legalized extortion by plaintiffs
who use the threat of an injunction to obtain settlements that
are allegedly disproportionate to the value of the patent that
is infringed.
Because the profitable life of many high-tech products is
relatively short, an injunction that keeps these products off
the market for a year or two can threaten the profitability or
even the viability of a small or mid-size tech company, which
arguably forces these companies to settle cases for much more
than the claims are actually worth.
To add to the difficulties, some believe there appear to be
quite a few over-broad patents in these areas, resulting in a
situation where an infringement suit might be successful even
though it would have failed if the patent claims were written
properly. The tech industry has dealt with this problem in part
through cross-licensing to avoid the mutually-assured
destruction that would accompany aggressive enforcement of all
relevant patent rights.
Cross-licensing only works as a solution if the other
potential litigants face a comparable threat from the available
remedies. Many tech companies argue that the main threat is not
from other legitimate companies. It is from overly aggressive
patent-holders and their attorneys who use the disproportionate
threat of an injunction to extort large settlements based on
nearly worthless patents.
It is alleged that these types of patent-holders, commonly
referred to patent trolls or licensing shops, have no interest
in cross-licensing because, in the most extreme examples, they
don't make or sell anything and therefore have no business risk
from an injunction. They allegedly exist predominantly for the
purpose of threatening litigation to obtain settlements.
Interestingly, among the most vocal critics of the high-
tech sector's desire to amend the injunctive relief provisions
in current law are the pharmaceutical and biotech industries,
independent inventors and some business interests. Generally,
the products patented by the drug companies and small inventors
are discrete inventions covered by relatively few patents. They
rely on the absolute exclusivity of their patent rights, often
enforced by injunctions to ensure that they are able to
commercialize their inventions and enjoy the fruits of their
innovation.
The small inventors, in particular, rely on injunctive
relief to equalize the playing field when competing against
larger, better-funded enterprises. We heard both Dean Kamen and
William Parker, a constituent of Senator Leahy's, at our last
Subcommittee hearing express their concerns about changing the
current injunction law.
This same type of debate is playing out with respect to the
damage provisions of the Patent Code. I understand that this
issue is most important to the software industry. They claim
that under current law, a patent-holder who successfully sues a
software company for infringement may be rewarded well beyond
the actual value that the invention contributes to the product.
The argument is that under some damages theories, the
plaintiff can receive damages based on the value of the market
for an entire product when the patented invention is only a
small part of the actual product. For example, suppose damages
were based on the market value for an entire car when the
patent only covered the windshield wiper motor or some other
component out of hundreds. Crafting language that
satisfactorily codifies a proportional contribution measure of
damages is just one of the many challenges that we legislators
face.
Our witnesses today will give their views on the adequacy
of the current Patent Code with respect to injunctions and
damages and other matters. While we may ask for their views of
the pros and cons on certain language that has been proposed, I
do not intend for this to be a public negotiating session. I do
suspect, however, that Senator Leahy and I will join our
colleagues in the House, including Chairman Smith and Ranking
Member Berman, in encouraging the affected parties to continue
to discuss these matters and negotiate solutions.
I hope that the introduction of H.R. 2795 and a planned
House IP Subcommittee markup will help move this process along
in a constructive fashion. If there is to be legislation, it is
imperative that we get it done right. This will take hard work
and good faith among many interested parties.
We are grateful to have all of you here today who are
willing to testify and help us to understand these issues that
are very complex and difficult to begin with. Today, we will
learn more about the matters of concern from expert
representatives of many key actors in the intellectual property
community, and we welcome your testimony and are very grateful
to you.
[The prepared statement of Senator Hatch appears as a
submission for the record.]
With that, we will turn to Senator Leahy.
STATEMENT OF HON. PATRICK J. LEAHY, A U.S. SENATOR FROM THE
STATE OF VERMONT
Senator Leahy. Thank you, Mr. Chairman, and I agree in
welcoming the folks here today. Many of you, whether on the
panel or in the audience, are not strangers to this Committee
room. In fact, some of you, I think, have your mail forwarded
here; you spend enough time here. We consider that a compliment
to the Judiciary Committee.
We have a very complex case ahead of us. We are trying to
retain the best aspects of a system that has really brought
about the innovative spirit of our country. At the same time,
we have to make some changes and try not to inadvertently
hamper those entrepreneurial accomplishments. So I have been
working with Senator Hatch, and I will continue to, on this
important initiative.
I am grateful for all the work that our friends in the
other body have done. I hope we will have a day soon when we
can introduce related legislation in the Senate. If past
experience is a useful predictor, then I think Senator Hatch
and I can come up with legislation that will reach the
President's desk and can be signed by him.
At this Subcommittee in April, as the Chairman mentioned,
we heard a great deal about patent quality and about reforms
that may be necessary to ensure that the Patent and Trademark
Office issues patents for work that is truly innovative. Now,
we have got to focus from the work rooms of the PTO to the
courtrooms across America.
We found three possible areas of reform: one, the use of
injunctive relief and damages in patent infringement cases;
secondly, the possibility of administrative processes rather
than litigation to resolve certain issues; and, finally, the
role of subjective elements in patent litigation. We have to be
thorough in considering all of these issues, but I am
particularly interested today in hearing about injunctions and
damages. Those seem to be the kind of hot buttons as we try to
draft legislation.
I would like to thank our witnesses for taking time. I am
particularly interested in hearing from you all on the subject
of injunctive relief. In issuing injunctions, courts are
instructed to balance the equities in a given case, evaluating
the harm to one party if an injunction is issued versus the
harm to the other party if it is not issued. At the same time,
they have to consider the public interest.
Some argue that under the current legal standards,
plaintiffs are granted injunctions in nearly all cases. In such
cases where a defendant is faced with a virtual certainty that
production and marketing will grind to a halt, weak cases end
up being leveraged into lucrative licensing agreements. On the
other hand, we are all aware of the fact that there are cases
where injunctive relief has to be available. Otherwise, you are
going to have irreparable harm. Now, there is not consensus, I
must say, on how to solve this. I think everybody agrees it has
to be solved. They just don't know how to do it.
We have to talk about apportionment damages. I have heard
from some that a verdict of infringement can result in an award
of damages out of proportion to the actual role the infringed
item plays. I think damages awarded should relate to the value
of the infringement. That is a lot easier to say up here than
if you are a judge or a jury making that determination. So I
would like to hear some discussion on that.
Another reform we heard mentioned touched on at this
panel's last hearing is the use of administrative procedures to
reduce the quantity of litigation, yet also improves patent
quality. Now, on that one, there seems to be general support
for the idea. Several have spoken of the desirability of
creating a post-grant review that would allow a third party to
challenge a patent's validity within the PTO without having to
go into the courtroom.
Finally, I have heard considerable support for some
proposals to modify the subjective elements of patent
litigation, the finding of willfulness to infringe by the
determination of inequitable conduct and whatever that entails.
Now, if you want to investigate those elements, it could be
very costly. It would require the determination of a party's
state of mind at the time a patent application was filed.
For example, the willful infringement standard. You can get
treble damages for this if a defendant was aware of a
plaintiff's patent. That may have the unintended effect of
discouraging companies from making a comprehensive search for
prior art so they are not going to be penalized later on. We
have to look at those issues.
We have to remember that we are ultimately talking about
the products that would be available to consumers. The ongoing
Blackberry dispute--everybody is checking their pockets--that
drives this home in a powerful way. I don't know who is right
in it. I do know that I breathed a sigh of relief when I heard
they had an agreement. Now, we understand the agreement may be
unraveling. So a lot of us are going to be watching this case,
particularly with a nervous tick in our thumbs. Some people,
probably our spouses, our staff and others, wish that we
wouldn't watch it so closely, but it could affect millions of
people.
I hope the ruling in Merck v. Integra Lifesciences is going
to provide a much needed boost to scientific research. I would
like to see greater sharing of drug patents. I would like to
see an end to the practices by which some companies delay
competition through anti-competitive conduct.
A few years ago, I authored and we passed legislation to
force companies signing non-compete agreements to disclose
those agreements to the FTC. But I think the FTC now and the
Department of Justice have to do a lot more to encourage
competition. I hope that we will be able to soon turn to the
Stem Cell Research Enhancement Act. It was passed by the House
overwhelmingly, H.R. 810, with 200 House cosponsors. It passed
with 238 votes. It is critically important to certainly those
whose family members who are suffering from debilitating
diseases--Parkinson's Alzheimer's, diabetes, spinal cord
injuries. They are watching this. It has been shunted aside and
many of us here want to move forward. Many in both parties want
to move forward and I hope that the Republican leadership will
allow us to.
So, Mr. Chairman, you and I have tackled complex issues
like these before. Somehow, we have worked them out. We have
worked together on them and we have gotten them on the
President's desk and we have gotten them signed, and I think we
can do it again.
Chairman Hatch. I do, too.
Senator Leahy. I will put my whole statement in the record.
[The prepared statement of Senator Leahy appears as a
submission for the record.]
Chairman Hatch. Well, thank you, Senator.
Senator Kennedy would like to make a brief statement.
STATEMENT OF HON. EDWARD M. KENNEDY, A U.S. SENATOR FROM THE
STATE OF MASSACHUSETTS
Senator Kennedy. Thank you very much, Mr. Chairman. We want
to hear from our witnesses and I appreciate your courtesy.
I represent a State that prides itself on innovation and
creativity not only in the sciences, but also in the arts.
Patents are enormously important in the biotech industry and
the pharmaceutical industry and the life sciences industry,
important in terms of our universities. Software is enormously
important in my State. We want to make sure that the patent
system is going to work for those who are creative and are
innovative. About 50 percent of all the health patents are in
my home State of Massachusetts, so this is enormously
important.
There is also an appropriate role in terms of the software
industry in terms of these issues in terms of injunctions, and
I want to hear from our very distinguished panel today. I am
certainly open to see that we make what changes and
modifications might be useful and helpful, and be valuable in
terms of advancing the common interest, which is progress in
terms of the economy and progress in terms of innovation.
Mr. Solo of MIT recently pointed out that 50 percent of
our growth as a Nation over the last 40 years has been
innovation. And what we are talking about here is how we are
going to recognize innovation and how we are going to give that
protection and reward, but also as innovation is moving so
rapidly in the software area how we are going to be sensitive
to some of those issues as well.
This is an enormously complex issue which we don't visit
very, very often, so we need a lot of help. We have got a very
distinguished panel and I look forward to hearing from them.
I thank the Chair.
Chairman Hatch. Thank you, Senator Kennedy.
We are very pleased to have with us today a number of very
important witnesses: Carl Gulbrandsen, Managing Director of the
Wisconsin Alumni Research Foundation, or WARF, from Madison,
Wisconsin; Jonathan Band, on behalf of Visa and the Financial
Services Roundtable; Mark A. Lemley, a professor at the
Stanford Law School, in Stanford, California; Jeffrey P.
Kushan, who is a partner at Sidley Austin Brown and Wood here
in Washington; Chuck Fish, Vice President and Chief Patent
Counsel for Time Warner, Inc.; and J. Jeffrey Hawley, President
of the Intellectual Property Owners Association, and Legal
Division Vice President of Eastman Kodak Company.
We feel very honored to have you quality people here to
help guide us and help us to try and find some solutions here.
We will begin with you, Mr. Gulbrandsen.
STATEMENT OF CARL E. GULBRANDSEN, MANAGING DIRECTOR, WISCONSIN
ALUMNI RESEARCH FOUNDATION, MADISON, WISCONSIN
Mr. Gulbrandsen. Mr. Chairman, thank you for the
opportunity to testify before your Subcommittee on the
important topic of patent law reform, injunctions and damages.
My name is Carl E. Gulbrandsen. I am the Managing Director of
the Wisconsin Alumni Research Foundation, known as WARF. I am
making my statement today on behalf of WARF. I am also
authorized to state that Research Corporation Technologies of
Tucson, Arizona, also known as RCT, supports the stances that
are taken in my written and oral statements. RCT Corporation
focuses on technology investments with origins from
universities and research institutes.
WARF was founded in 1925 and was one of the first
organizations to engage in university technology transfer. In
March of this year, WARF received the National Medal of
Technology, the highest award that can be conferred by the
President of the United States on individuals and organizations
making lasting contributions to the country's well-being. This
award recognized the importance of technology transfer.
The Senate Judiciary Committee played an instrumental role
in the drafting of the Bayh-Dole Act and its cardinal principle
that the American public benefits from public policy that
permits universities and small businesses to elect ownership in
innovations made using Federal funds.
For the Bayh-Dole Act to continue to be successful in
stimulating further innovations, patents must provide
significant disincentives to would-be infringers. If patent law
is strong, then technology transfer can flourish, resulting in
profound and positive impact on the health, safety and welfare
of our country and worldwide. If patent law is weakened, then
technology transfer suffers, as do U.S. universities, companies
that depend on university research, and the public.
In 1980 when the Bayh-Dole Act passed, approximately 25
U.S. universities had technology transfer offices. No uniform
Federal patent policy existed and federally-funded discoveries
were rarely patented and commercialized. Today, more than 230
U.S. universities have technology transfer offices, and
universities are recipients of approximately 4 percent of U.S.
patents issued.
Today's list of university inventions is indeed impressive.
The list includes Leustatin, a chemotherapy drug from the
Brigham Young University; a lithography system to enable the
manufacturing of nano devices from the University of Texas-
Austin; and an effective aneurysm treatment from the University
of California at Los Angeles.
In the past two decades, intellectual property assets have
become vital to the performance of the U.S. economy. Since
1992, the volume of patent applications in the PTO has more
than doubled to 400,000 applications annually. In 2005, the PTO
issued more patents than it did during the first four decades
of American history, although because of recent administrative
and fiscal strains, the backlog of patent applications has
grown to 500,000 and continues to grow.
In the eyes of many, patent quality has suffered. As a
member of Patent Public Advisory Council, I believe that poor-
quality patents are the exception rather than the rule, but
even the exception should not be tolerated. The first line of
defense against poor-quality patents and slow decisionmaking is
to provide the PTO with the fiscal resources that it needs to
hire and train skilled examiners and implement effective
electronic processing capabilities. There is nothing in the
current proposals that assist the PTO with these critical
steps.
Based on our initial analysis of a plethora of patent
reform proposals on the table, WARF is able to express support
for some. However, several of the reform proposals represent a
step backwards for university patenting and commercialization
efforts. Candidly, these proposals can be described as anti-
patent under the label of litigation reform. Many of them fall
into the category of diminishing enforcement rights and
remedies of patent-holders and have little bearing on improving
patent quality. I believe that their passage would thwart the
tremendous success that universities have experienced in
innovation. Economic development, small businesses and jobs
could be jeopardized in every State in the Union.
WARF therefore objects to four provisions currently being
discussed. First, with respect to injunctive relief, current
proposals tilt the playing field in favor of infringers.
Currently, a presumption in favor of injunctive relief is built
into our patent process. This is for good reason. Injunctions
respect the constitutional right of patent owners to exclude
others from using his or her patented invention.
Second, WARF opposes the expansion of prior user rights.
Expanded prior user rights would encourage innovations to be
kept as trade secrets, a practice which is contrary to the
fundamental premise of the U.S. patent system which rewards and
encourages disclosures.
Third, WARF opposes limiting continuation practice and
believes such a change in the law would negatively impact
universities unless changes were specifically tailored to
address abusive practices.
Fourth, the adoption of a first to file system that is
intended to bring us closer to the rest of the world
disadvantages the vast majority of universities and independent
inventors. If we must harmonize to the world's patent laws, my
written statement makes suggestions that should be incorporated
in any harmonizing patent legislation in order to protect
universities and independent inventors.
Mr. Chairman, thank you for your leadership, time and
attention. If there are any questions, I would be pleased to
answer them.
[The prepared statement of Mr. Gulbrandsen appears as a
submission for the record.]
Chairman Hatch. Thank you, Mr. Gulbrandsen.
Mr. Band.
STATEMENT OF JONATHAN BAND ON BEHALF OF VISA U.S.A. AND THE
FINANCIAL SERVICES ROUNDTABLE, WASHINGTON, D.C.
Mr. Band. Chairman Hatch, Ranking Member Leahy and Senator
Kennedy, I am pleased to testify today on behalf of Visa U.S.A.
and the Financial Services Roundtable.
The financial services community is intensely interested in
patent quality and litigation issues, and is grateful that you
are considering these matters. Since the subject of today's
hearing is injunctions and damages, I will focus my testimony
on these topics. However, our views on remedies can be
understood only against the background of the serious patent
quality problem.
Regardless of which features contribute to a lack of patent
quality, businesses of all shapes and sizes, including
financial institutions, are threatened by a large and growing
number of frivolous claims of patent infringement. Claims of
infringement are a serious problem already, but they are only
the tip of the iceberg because of the time lag and the issuance
of patents related to business methods.
Since the State Street Bank decision in 1998, the number of
patent applications involving financial services has surged.
Because it typically takes more than 3 years to obtain a
business method patent, the risk of increased litigation for
financial services has now arrived.
While the Patent Act's provisions concerning remedies would
need adjustment even if the Patent Office granted only valid
patents, the patent quality problem makes the need for
litigation reform all the more compelling. The possibility of a
broad injunction and treble damages means that a financial
services institution must take even the most frivolous patent
infringement claim seriously.
The current rules regarding injunctions and damages place
all the leverage in the hands of the patent owner even if the
patent is extremely weak. Because the systems for processing
credit cards or checks are large, complex and undifferentiated,
an injunction on one small part of the system can shut down the
entire system. If Congress does not correct the remedies under
the patent law, the surge in the number of patents relating to
financial services will lead to financial services institutions
paying out ever larger license fees to holders of suspect
patents, to the detriment of our customers.
There are steps Congress can and should take to provide
financial firms and other businesses with safeguards against
these frivolous claims without impairing the important
protections afforded under the patent law. Specifically,
Congress should modify the standards for injunctive relief and
clarify the damage rules with respect to willfulness and
apportionment.
In most cases, the prevailing plaintiff bears the burden of
showing that it is entitled to injunctive relief because money
damages are insufficient. In patent cases, however, if the
patent owner shows that the patent is valid and infringed, the
court presumes that the patent owner is irreparably harmed by
the infringement. In theory, the defendant has the opportunity
to rebut this presumption, but as a practical matter courts
treat the presumption as virtually irrebuttable.
The threat of a permanent injunction, even in the absence
of any real irreparable harm, significantly increases the risk
to the defendant of going to trial to prove invalidity or non-
infringement. Accordingly, this presumption forces defendants
to settle prematurely even in cases with weak patents held by
patent trolls.
The Patent Act should be amended to provide that a court
can grant an injunction only if the patentee demonstrates that
it is likely to suffer immediate and irreparable harm that
cannot be remedied by the payment of money damages alone. The
House IP Subcommittee's Committee print contains such language.
Unfortunately, the bill actually introduced, H.R. 2795, does
not go as far as the Committee print in this respect. It
implies that the defendant bears the burden concerning
irreparable harm, rather than the plaintiff. Still, the
language in H.R. 2795 is an improvement over the status quo
because it makes clear that the presumption of irreparable harm
is rebuttable.
The patent law should also be modified to provide that a
court can treble the damages only if the infringer engaged in
egregious conduct, such as deliberately copying the patented
subject matter with knowledge that it was patented. The Patent
Act should make clear that treble damages should not be
available if the infringer had a good-faith belief that the
patent was invalid or unenforceable. H.R. 2795 contains
provisions along these lines concerning willful infringement.
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 always 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.]
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. In 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 patients 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 non-starters 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 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 business litigation and it ought to
be returned back to that mainstream.
So a few highlights, if I might. First, Time Warner
believes that Congress should require meaningful proof before
awarding increased damages in patent suits. This is basically
the willfulness area that a lot of people have talked to you
about. Problems with willfulness include, as you mentioned,
Senator Hatch, that it is a subjective standard. But there are
also worse than that. As Professor Lemley mentioned, the
proportion of patent cases in which willfulness is pled is
truly outrageous and it leads to a distortion of the litigation
system. Indeed, as Judge Dyk noted in his partial concurrence
in the Knorr-Bremse case, the current standard is quite frankly
inappropriate in view of the settled law of punitive damages.
So for these reasons, Time Warner believes the Patent Act
should be amended so that the purpose behind increased damages,
which is a valid purpose to punish those who have acted with
disregard for the law, is actually the predicate for the
finding of willful damages.
Secondly, Time Warner believes that patent damages should
be conformed to the reality in the marketplace today that there
are multiple, or indeed sometimes hundreds of patents covering
products. This is the issue that people have been calling the
apportionment issue.
Essentially, Time Warner supports reforming damages law by
explicitly directing courts to begin their damages inquiry for
combination inventions by focusing on the incremental value
attributed to the patentable invention. You will realize that
today that is not the case at all. In fact, the leading way of
determining what patent damages ought to be today goes back to
a district court case in 1970 which was compiling a number of
factors from the years before that.
Essentially, it is our position that the patent law is
mired in a 19th century view of the world in which there are
only one or two or three patents covering an invention, and in
which it is perfectly okay to take 15 or 20 factors and look at
them and decide what should be going on here; that that is an
appropriate amount of discretion.
But that is not an appropriate amount of discretion. It is
not an appropriate starting place. Rather, it is a ticket for
the creativity of aggressive lawyers to look at any potentially
relevant revenue as being part of a damages base. That is what
we see happening in the damages area. That is why we think that
apportionment is important.
The third area that we would highlight is that Congress
should fix the patent injunction imbalance. I know there will
be disagreement and hopefully some heated discussion about that
topic today. But Time Warner's view is that essentially the
problem here isn't the availability of injunctions. The problem
is the way that the rules determining what should happen for
injunctions have been applied by the Federal Circuit. The basic
question, we believe, should be why has discretion been removed
from the Federal courts, not why is it people who are proposing
change are proposing that change.
In conclusion, thank you very much for the opportunity to
talk to you today.
Chairman Hatch. Thank you. We miss Sean Bentley up here
arguing with us on these matters. We hope he is doing well.
Mr. Fish. Yes. Actually, I spoke to him today, Senator, and
he is doing well, I hope.
Chairman Hatch. Well, give him our regards, will you? He
worked a long time on this Committee and helped a lot of us on
both sides of the table.
[The prepared statement of Mr. Fish appears as a submission
for the record.]
Chairman Hatch. Mr. Hawley, we will conclude with you.
STATEMENT OF J. JEFFREY HAWLEY, PRESIDENT, INTELLECTUAL
PROPERTY OWNERS ASSOCIATION, AND VICE PRESIDENT AND DIRECTOR,
PATENT LEGAL STAFF, EASTMAN KODAK COMPANY, ROCHESTER, NEW YORK
Mr. Hawley. Yes, thank you, Mr. Chairman. It is probably
appropriate for a broad-based organization like IPO to speak
last today because you have already heard from all my
constituencies on all sides of the issue.
Chairman Hatch. It kind of puts you in a tough position,
doesn't it?
Mr. Hawley. Well, no. I am used to it.
We really deeply appreciate the opportunity today to
testify and we hope to be able to articulate the perspective of
a broad-based organization whose focus is on that of the
intellectual property owner.
I think it is worth emphasizing, as several of the
witnesses have already, that the patent system of the United
States has served the country extremely well over 200 years.
The outcome of the Federal Trade Commission and the National
Academy of Sciences and other studies could have come out
differently, but they didn't. They validated the extreme value
of the patent system for our country, but did recommend some
changes.
IPO was one of the first organizations to point out, for
example, that the U.S. Patent Office was in crisis. More and
more often, we are seeing articles in the popular press
criticizing some aspect of our intellectual property system.
And as a result of a wide variety of issues, many of which you
articulated yourself and you have heard again here today,
including the emergence of a cottage industry that has sprung
up to take advantage of uncertainties in the system, litigation
costs are increasing rapidly.
IPO strongly supports the vast majority of the current
proposals that improve the PTO processing efficiency, improve
the quality of issued patents and reduce litigation costs. In
particular, we clearly support first inventor to file, assignee
filing, 18-month publication for all applications; a post-grant
opposition system, as well as many other reforms.
In the context of this hearing which is focused on
litigation, I think it is important to realize that if you are
able to increase particularly the quality of the patents coming
out of the Patent Office, that will go a long way toward
alleviating the litigation burden. But that all pre-supposes
adequate funding for the Patent Office, and down the road that
again would mean less abusive litigation as patent quality
increases. For example, when we are all satisfied with the
post-grant opposition language and we breathe a sigh of relief,
let's not forget that the Patent Office needs the resources to
do the job correctly.
Reducing the abuse of the patent system is very important
to our members, and you have heard from several of them today
already. Every hour that is spent by patent litigators
defending against questionable patents being asserted by patent
system abusers means that $500 is not being spent on new
innovation and new product development.
We have been specifically asked today to speak about
damages, so I want to talk about willful infringement. The
concept of treble damages was put into our law in 1793, at a
time when many infringers took a cavalier attitude toward
patents. The same is not true today. Patents are frequently
held valid and infringed, and large damage awards are common,
particularly in comparison to damage awards typically granted
in other countries.
In the current environment, the threat of treble damages
tips the balance too far in favor of those patent owners who
seek to game the system. As you have heard probably several
times, some companies are actually instructing their engineers
not to read patents and the cottage industry that I referred to
uses the threat of willful infringement to extract an amount in
settlement disproportionate to any contribution they have made.
Mr. Chairman, imagine yourself as the patent counsel for a
large company and a form letter arrives in your in-basket
accusing you of infringement of xyz patent. The cost to
investigate will be $50,000. If there is a hint of doubt, you
will have to buy another $50,000 legal opinion. Lo and behold,
the form letter contains an offer. For a mere $75,000, you can
buy a license. In this situation, if the patent owner can
collect $75,000 from 100 companies, he has netted $7.5 million.
The law with respect to willful infringement needs to be
rebalanced. IPO strongly supports the language in the bill
recently introduced in the House.
Mr. Chairman, a little anecdote. When I was growing up, my
father was a property law professor at New York University Law
School. After practicing chemical engineering for a number of
years, Kodak gave me the opportunity to become a patent
attorney. So not knowing what I was getting into, I called my
father and I said, dad, what is patent law? And in retrospect,
the answer should have been predictable. He said to me--and I
remember the conversation vividly to this day--patent law is
just a special form of property law.
The right to prevent trespass is fundamental to property
concepts. It is not surprising that proposals to tinker with
the right to injunction in patent cases has evoked vigorous
debate. Any language altering an injunction needs to be
thoroughly justified.
Again, Mr. Chairman, IPO is grateful for the opportunity to
express our views. Our members are optimistic that much of the
needed reform will come out of the 109th Congress.
Thank you.
[The prepared statement of Mr. Hawley appears as a
submission for the record.]
Chairman Hatch. Well, thank you. We appreciate all of your
testimony.
We have four charts that can help us in our discussion here
today. We might want to get those put up there, but let me
start by helping us to get to the nub of the injunction
question, with the proviso that I am not asking any of you to
negotiate in public or to reveal any bottom lines here. We want
you to just help us.
I would like to ask each of you--and we will start with Mr.
Gulbrandsen and just go across the table--to give your general
views of the current law with respect to injunctions and to
tell us from your perspective what the pros and cons are of
current law and what are the pros and cons of some of the
proposals that exist to change current law. We would like to
have the best you can give.
We will start with current law, the House Subcommittee
discussion draft, the injunction proposals supported by the
high-tech industry and, of course, the injunction language of
H.R. 2795. So these may be of some help to you, we hope, but
let's see if you can be of some help to us.
Mr. Gulbrandsen.
Mr. Gulbrandsen. Mr. Chairman, I speak from the perspective
of the independent patent owners and university patent owners,
individuals that start companies with technology out of
universities, individuals that depend on investor dollars to
start those companies. The current patent law is well-suited to
our ability to start companies out of universities. Investors
who are putting the money at risk in those companies are
assured that if the technology is patented, they will have the
power of staying for the long term with that investment and
enforcing it against others that might trespass on it and
hopefully recover their investment with a nice return. If you
start tinkering with that law, those investors are going to be
less anxious to take the risk on university technology and our
start-up programs are going to suffer.
Chairman Hatch. Mr. Band.
Mr. Band. Well, the wording of the existing law, the
current law, is fine as far as it goes. The question is how has
it been interpreted. And you could say, well, the principles of
equity--I mean, what else should govern the issuance of
injunctions? But the problem is the way that has been
interpreted by the courts is that there is a presumption in
favor of an injunction and there is a presumption of
irreparable injury, and, second, that that presumption is as a
practical matter irrebuttable. So the words are fine, but the
problem is how the Federal Circuit, in particular, has been
interpreting these words. That is why we feel there needs to be
something more specific.
Now, of all these alternatives, I suppose the preferred
alternative for the financial services industry would be the
House Subcommittee draft because that makes clear two things.
First of all, it makes clear that you can only have an
injunction if the patent-holder bears the burden of showing
that there would be irreparable harm if there isn't an
injunction issued. So that is why that is the best language
from our point of view.
It does two things. First, it says that there is no
presumption in favor of the plaintiff. And second of all, it
makes it clear that you have to look at all the factors and
determine that, in fact, money damages alone would not be
sufficient to take care of the problem.
The language proposed by the high-tech industry is very
similar to the language included ultimately in H.R. 2795. It is
better than the existing law in terms of giving some guidance,
but it isn't quite as good as the Committee print language in
that it doesn't clearly eliminate the presumption that exists
now under current law.
Chairman Hatch. Mr. Lemley.
Mr. Lemley. Thank you, Mr. Chairman. Just so the record is
absolutely clear, I think actually that the language of H.R.
2795 is somewhat different than the one that is in the poster.
In particular, the language takes the last sentence of the
injunction proposal supported by high-tech and uses it in place
of any of the discussion of irreparable harm.
Now, let's be clear in terms of what is desirable. If you
look at section 283, section 283 actually grants by its literal
terms pretty broad power to courts to consider whether or not
an injunction is appropriate. The courts may grant injunctions
in accordance with the principles of equity on such terms as
the court deems reasonable. The problem, as Mr. Band says, is
that the Federal Circuit has essentially forbidden to the
district courts the exercise of that equitable power that the
statute gave them.
I think the goal of 2795 and the fairness language is
basically to reiterate what section 283 already says to say we
meant it when we said you have got to use principles of equity
here and consider all of the relevant factors. My only concern
with that language is not actually what will happen in the
district courts in the United States. I think it is quite
reasonable to think that district court judges will do a good
job, will understand the importance of injunctive relief as the
baseline in the patent system.
My fear with the fairness language is more what might
happen abroad, and in particular the risk that some developing
countries might use the existence of this particular term
``fairness'' as invitation to deny patent protection to
pharmaceutical companies in drug patents. That is a worry.
So I would prefer language somewhat more tailored actually
to the problem of abuse of the patent system, somewhat tailored
to the problem of a patent owner who asserts a patent and
demands an injunction not just covering the particular
component that they have invented, but covering the larger
product. In my written testimony, there is language that would
accomplish that end. So I think the idea behind the high-tech
proposal, the fairness proposal, is the right one, but we may
need to work on the language to make sure we don't create a
problem.
Chairman Hatch. Thank you.
Mr. Kushan, if you would care to comment.
Mr. Kushan. Sure. Thank you, Mr. Chairman. Depending on my
comments, I may be your favorite or most hated witness. The
standard that is articulated and embedded in the jurisprudence
as it exists today is the standard that virtually every--
Senator Leahy. Some people find it possible to be both at
the same hearing, so here is your opportunity.
[Laughter.]
Mr. Kushan. I may achieve that, too.
The one topic that I have heard unanimous perspectives on
from every company in the life sciences sector is that
disturbing the jurisprudence in the area of permanent
injunctions is to be not pursued. This is an unequivocal
message that comes about from the effect that patent
exclusivity has on the financial thought process of this
industry.
One of the things that should be emphasized is that there
is a lot of sympathy for the concerns of unpredictable patent
litigation and the consequences of patent infringement. But
when you look at the patent jurisprudence, what you see
embedded consistently in many, many years or jurisprudence is
the understanding that because of the nature of the patent
right--it is an exclusive right; there is no physical
property--you have to take an extraordinarily sensitive
perspective on preserving the ability of the patent owner to
prevent the unauthorized use of the patented technology.
The discussions that have been going on about recalibrating
the standard are terrifying in the sense that you are going to
create more jurisprudence and there is going to be a period of
uncertainty during which people who invest very early on in the
drug development process will not know what the standards will
be 10 years from now. If you change the standards in that
fashion, you are going to force the capital that comes in and
is so critical to early-stage development of a company away
from the sector. That is the risk that is of concern in most of
the discussions I have been part of.
One of the other things I would like to emphasize is that
this type of change does not give clear, unequivocal relief to
those people who are concerned with the environment of the
litigation today. The uncertainty will continue. The
uncertainty is going to be more pronounced as you go forward,
and I don't think any of these proposals is going to be able to
give any patent defendant comfort in knowing that they are not
going to be shut down with a patent at the end of the
litigation.
The emphasis that I think needs to be put on patent reform
is in changing the equation of patent litigation, and the
comments that have been made so far reiterate this point. There
is a lot of gaming in the system that is available today. There
are immense costs. There is a lot of opportunity for abuse. If
you but down on a number of these different areas of abuse and
risk, then you will see a great sigh of relief in the business
community of the U.S. because the risks become less unclear.
I just will end by noting that things like the change to
willful infringement standards--that is a very good thing to
pursue and will address some of the concerns that people have.
But going down the path of recalibrating what the entitlement
to injunctive relief is or should be will just create more
confusion and we think should be avoided.
Chairman Hatch. Well, thank you.
Mr. Fish.
Mr. Fish. Well, Senator, if it was an option, what Time
Warner suggest that you do is just get out a highlighter or an
underliner, and if you started with the current statute and you
underlined ``may grant injunctions'' and you underlined ``in
accordance with the principles of equity'' and you underlined
``as the court deems reasonable,'' we would be fine with the
law.
The problem is, as we see it, that the Federal Circuit has
done just the opposite of that. They have turned that ``may''
into a ``shall.'' They have turned that ``in accordance with
the principles of equity'' into a meaningless shell. I mean,
they have taken the Supreme Court law and just gutted it. The
Federal Circuit now in this area, for whatever reason, has
decided that all the things that courts of equity traditionally
did district courts shall not do. So they have changed the
statute that way.
And then, finally, there is not to be any discussion of
what is or isn't reasonable. Obviously, courts usually believe
that they are reasonable, so perhaps that is not a real
protection. But the historic protections of equity showing that
money damages are actually inadequate, showing that irreparable
harm will, in fact, occur, showing that the balance of the
private interest versus the public interest favors the granting
of an injunction--that is the cornerstone of our law, I mean,
for hundreds of years, and before it was in the United States
in the United Kingdom. That is the way that equitable remedies
operated.
Now, it is interesting to hear people say, for example,
that university programs will fall apart if strong injunctions
such as now exist under the Federal Circuit are not granted. I
mean, go back and look. When WARF lost the case in 1945, the
Ninth Circuit said we know you have a valid patent on a method
of making margarine that increases vitamin D and keeps people
who have rickets from getting vitamin D. It is not an
appropriate injunction in this case. It is about health, it is
about the public is at war, it is about poor people who can't
get it. It doesn't cut it that way. You know what? WARF has
gotten a lot more competitive and come up with great inventions
since 1945, and so what they are predicting will happen, I
think, history gives the lie to.
So of these choices, Time Warner would say that a change
that brings the law back to where it was before the Federal
Circuit went too far would be an appropriate change. Any change
that went further than that would be inappropriate because
injunctions are an important piece of relief, and we agree with
our friends, for example, in the pharmaceutical industry about
that. But it is just that it has gotten a little bit too far.
Chairman Hatch. Well, thank you.
Mr. Hawley.
Mr. Hawley. Yes, thank you, Mr. Chairman. I am a little
confused here. As another witness pointed out, the actual
proposed language in the bill--and I will read it because there
are several parts of it that are important--is it adds to the
current statute by adding, in determining equity the court
shall consider the fairness of the remedy in light of all the
facts and the relevant interests of the party associated with
the invention. So that is the language that is currently being
considered in the other chamber.
But I would like to comment on what is labeled here as the
House Subcommittee discussion draft of April 14. This is
language that dates back probably to around 2000, 2001, and it
has been debated in a number of different forums since then and
it was actually the language that was found in the Committee
print before H.R. 2795 was introduced last week.
We testified with regard to that in our written statement
that the problem that IPO had with that in a board debate in
2001 was, first of all, it changed the burden of proof. Under
current law, if you have been found to have infringed a valid
patent, you have to establish why an injunction should not
issue. If you read the language here, the court shall not grant
an injunction unless the patentee proves irreparable harm. So
it changes the burden of proof.
Secondly--and this is important and you have heard this
train of thought throughout this testimony here today--it finds
that the patentee is likely to suffer irreparable harm that
cannot be remedied by money damages. Most of our members find
that to be similar to, if not identical to, the preliminary
injunction standard. So you are applying a preliminary
injunction standard to a situation where the defendant has been
found to infringe a valid patent.
Finally, there was other language in here that caught a lot
of fire, and that was including the extent to which the
patentee makes use of the invention. And you have heard
discussion about that. So those were the criticisms that were
leveled against the House Subcommittee discussion draft and
have been leveled against this language since about 2001.
The language that is, in fact, in 2795 avoids those three
problems. It does not shift the balance of proof, it does not
establish a preliminary injunction standard, and it does not
specifically mention the patentee's use of the invention. But I
would also point out--and this builds on something Senator
Leahy said--2795 also does not have any public interest aspect
to it yet.
I note that the words for the chart labeled ``Injunction
Proposal,'' supported by high-tech, does have the public
interest in it, and I would say that many of our members feel
that that is a very important aspect that needs to be
reflected.
Chairman Hatch. Thank you.
Senator Leahy.
Senator Leahy. Thank you, Mr. Chairman.
Mr. Band--and actually it was referred to by others--was
talking about the 37-cent notice, where a patent holder can go
fishing for infringers by sending a letter to large companies
alleging patent infringement. Notice doesn't need to be
specific--Mr. Fish, you talked about this, too, and others--but
it can subject a defendant to enhanced damages.
Several of you said that we ought to include a requirement
that a plaintiff initially supply a defendant with a notice of
infringement sufficiently detailed so as to allow the defendant
to seek declaratory judgment.
Does anybody disagree with that? Mr. Gulbrandsen, do you
disagree with that, that the plaintiff initially supply a
defendant with a notice of infringement sufficiently detailed
so that the defendant could seek a declaratory judgment?
Mr. Gulbrandsen. Senator Leahy, I think that, first of all,
encourages litigation. It doesn't encourage settlement.
Frankly, WARF would not a send a letter like that because we
don't want to be subjected to a lawsuit in California or New
York, and we would like to sit down at the table--
Senator Leahy. Do you think it would be better to have a
non-specific notice?
Mr. Gulbrandsen. I think that it is fair to provide a
notice, but I don't think it should be a notice that is
sufficient to require a default.
Senator Leahy. Mr. Band.
Mr. Band. I agree with you completely. I mean, I think we
need to have very specific notice because otherwise you are
dealing with a situation that Mr. Fish described. You really
don't know what to do. Do you investigate? Do you not
investigate? Do you spend a lot of money? Do you just settle?
Senator Leahy. Professor Lemley.
Mr. Lemley. Absolutely, the change is warranted. It just
seems unreasonable to think that you can put someone on notice
for willfulness purposes, put them to the $75,000 or $100,000
expense of getting an opinion letter with a threat that is
sufficiently vague that it is not even sufficient to create
declaratory judgment jurisdiction.
Senator Leahy. Mr. Kushan.
Mr. Kushan. I think the standard would enhance the
environment significantly. I think you also have to address the
concern a lot of companies have about just perpetuating the
patent opinion industry, and one of the things that isn't
addressed in legislation is the idea that if an infringer makes
a good-faith effort to avoid infringement, not going to an
attorney, but actually trying to modify their product to avoid
infringement, that should be a defense, as well as and as
legitimate as the attorney opinion.
Senator Leahy. Mr. Fish.
Mr. Fish. Senator, I think that sort of notice would be one
situation in which it would be reasonable to conclude that
somebody who had ignored that ought to risk increased damages.
So, yes, I think that sort of notice would be good for that
reason.
Senator Leahy. Mr. Hawley.
Mr. Hawley. I am delighted to hear the support for all of
that.
Senator Leahy. It is not uniform, but go ahead.
Mr. Hawley. Well, it is closer than most times.
Senator Leahy. I don't want to leave Mr. Gulbrandsen out on
this.
Mr. Hawley. I understand. I didn't say unanimous support. I
am delighted to hear the amount of support.
The scheme that you mentioned is something that was debated
over several IPO board meetings about 2 years ago, and the
characteristics that are now in the proposal reflect a careful
balancing during those debates. We would strongly support
particularly the notice requirement so that--we just put the
Chairman in the seat of a patent counsel and we placed him in
limbo and that is just not a fair thing to do, and so by giving
adequate notice and by giving a parallel ability for the
defendant to defend themselves, we think that is a good
balance.
Senator Leahy. We have also heard a lot about apportionment
of damages. That complaint seems straightforward enough. When
the infringed patent is just part of a larger product, the
damages awarded should be proportional to the role that
infringed patent plays in the larger product.
Mr. Gulbrandsen, correct me if I am misstating your
position. You say that requiring judges to calibrate damages by
weighing the portion of a product or process infringed as
against the whole unnecessarily ties the hands of Federal
judges.
Is that your position, basically?
Mr. Gulbrandsen. What I mean is that--
Senator Leahy. That is a quote from your statement.
Mr. Gulbrandsen. What I mean is that I think the present
standards in the common law with respect to determining damages
allow the court to weigh all of the factors. And in some
instances, the improvement may be a small improvement, but it
may be a critical improvement that really built the whole
market for that particular product. So I think it would be
unfair to prohibit the judges from weighing what value it
really brought and look at the whole market condition.
Senator Leahy. I am trying to figure out how damages should
be calculated in a case where there is a single contested
patent, but it is within a more complex product.
Mr. Gulbrandsen has been very clear in his feelings. Mr.
Band, do you have a feeling?
Mr. Band. Absolutely. I think apportionment is essential.
For example, the credit card system is a very complicated,
integrated system which has many, many different components,
lots of software, lots of hardware, lots of business methods,
all wrapped into one integrated system.
If you have, let's say, a patent ultimately reading on one
little piece of this entire system, what is the right measure
of damages? It should be that little system. It shouldn't be a
royalty based on the entire system. You can also see the
problem with an injunction that goes--even though what is
enjoined is just that one little piece, because it is an
integrated system, it causes the whole system to fail. So that
is why these issues are very, very closely linked with one
another.
Senator Leahy. Professor Lemley.
Mr. Lemley. Yes, I agree that this is a very important
reform. The problem is quite simple. In theory, we take care of
this by adjusting the royalty percentage. But in practice,
never happens. No jury gets to hear about all the other 4,999
patents that went into this micro processor. I think it is
perfectly appropriate, as Mr. Gulbrandsen says, that in
circumstances where your component, even though it is only one
component, is the critical one that you get substantial damages
that result from that.
But H.R. 2795 would permit that. All it says is that the
court shall consider, if relevant and among other factors,
whether there are a bunch of other components contributing to
the success of the product. And if we are trying to get damages
right, if we are trying to say what you are entitled to is a
function of your contribution to this product, that is the
logical thing to do.
Senator Leahy. Mr. Kushan.
Mr. Kushan. This standard is lifted pretty much out of the
prevailing law and it is not necessarily a revolution to
incorporate it into the statute. I think as we have already
heard from Mr. Gulbrandsen and from Mark here, as long as you
have access to address other damages scenarios that allow you
to put your invention and your patent in the right setting for
a proper calculation other than as cast in this standard, you
are not going to disrupt the law and you are going to protect
the interests of patent owners.
It is just making sure that we don't create more confusion
in the standards that govern damages determinations.
Senator Leahy. Mr. Fish.
Mr. Fish. Senator, I think I would answer you this way.
There are two ways that the problem can arise. One is the one
that we have been talking about. You have a patent to a narrow
feature or a narrow piece of a much more complicated system,
and then the question becomes what portion of the total revenue
should be attributed to that one thing. That is an
apportionment problem, and I would agree that there are cases
that can be proved that that one little thing is the majority
of the driver for the demand. That is what the entire market
value rule attempts to do. What it unfortunately does in
practice is that it says open the flood gates and look at all
the revenue; patent plaintiffs, your lawyers should be used for
malpractice if they can't think of creative ways to get at
everything.
The second way that the problem comes up, Senator--and it
is the reason that Time Warner says we should look at the
damages calculation as starting with what is the value and then
moving on--the second way that it comes up is just by claiming
the invention differently, so that instead of claiming the
motor on the intermittent windshield wiper, you claim a car
that as a motor that has an intermittent windshield wiper. Then
there is no problem of entire market value rule. There is
direct infringement, and your argue is, look, the car is worth
this many thousand dollars and that is what the claim covers.
So you can get to the problem either way, and the way that
we would suggest to fix it is to get courts to start the
damages analysis at the right place, which is if it is a
combination invention, what is the value. And then there are
all sorts of models and there are all sorts of smart economists
and there are all sorts of smart lawyers. And we believe that
with their discretion properly guided, the district courts will
probably do it right, and the Federal Circuit probably will,
too.
Senator Leahy. Mr. Hawley.
Mr. Hawley. We went into this in our written statement, and
just to review that, this is a very recent proposal, by the
way. It came out of some discussions over the past few months.
Senator Leahy. I know. That is why we are asking.
Mr. Hawley. Yes, I know, I know. We have not yet taken a
position on this one, but it clearly needs--
Senator Leahy. Do you want to go out on a limb?
Mr. Hawley. I have learned not to do that, Senator.
Senator Leahy. Most of us in elective office wish we had
learned that a long, long time ago.
Mr. Hawley. I am also in elective office, not nearly like
yours, but I still feel the heat from time to time.
I would just point out, as I think Mr. Kushan mentioned,
and others, this is one factor that is lifted out of Georgia-
Pacific v. U.S. Plywood Corporation, a 1970 district court
case, admittedly, but it is factor number 13 out of 15 of the
factors that the court considered. So we are a little concerned
that focusing on just that factor is going to have unintended
consequences.
We need to better understand what the cases are that give
rise to the need for this above and beyond the Georgia-Pacific
considerations. Unfortunately, I can't help much today in
taking a strong position.
Senator Leahy. I understand, but I wanted to throw it out
because it is obviously going to be one of the things we are
going to be discussing when we go forward on legislation.
Certainly, if you and your organization come to a very specific
recommendation, I would like to have it.
I have some other questions which I will submit. I will
pare them down based on some of the answers to Chairman Hatch
and some of the answers to me, but I will be sending each of
you some questions. I wish you could take time to respond. I
will try not to make them overly onerous, but this is an
important subject. It is a dry subject.
I mean, tomorrow morning we will have a hearing in this
same room on detainees at Guantanamo and there will be all
kinds of people watching. That is a very important thing, but
this is also extremely, extremely important. Neither Senator
Hatch nor I have approached it in a partisan way. We are trying
to work out the best way. Nobody likes to make changes in the
patent law willy-nilly, because you want to have a degree of
continuity there, and predictability.
But I find some alarming situations in this area; one, I
think an overworked PTO, and then I think some of the things
that go through there and it is simply because the people are
overworked. We had a hearing on that and talked to them about
ways we might change that, ways we might make it better.
I am also, though, concerned by a growing industry in this
country that doesn't invent anything, but simply tries to get
involved in litigation on patents. The more complex inventions
are, of course, the more potential patents there are. I don't
want to interfere with people's rights, but also when you see
an inventor has a great idea and wants to go forward--and as we
know, in this country a lot of our best inventions have come
from small inventors, and they are suddenly forced out by the
threat of litigation which really doesn't have a great deal to
do with the ultimate product. So we are trying to find out way
through that.
Senator Hatch, I am delighted you had this hearing and I
appreciate it.
Chairman Hatch. Well, thank you, and thank you for your
good questions.
I will submit questions for the record, too, but let me
just ask one last question. Some have suggested a venue
limitation as a partial solution to the current patent
litigation problems.
Would a limitation on venue be effective to prevent forum-
shopping, and if so, what would be a reasonable limitation? If
you could just answer it real quickly, if it is possible, we
will finish with that question.
Mr. Gulbrandsen. Are you suggesting a specialized district
court for patents?
Chairman Hatch. Well, not necessarily, but rather than just
have venue broad-based across the country, limit it to certain
particulars.
Mr. Gulbrandsen. I would favor a venue as long as it could
be done as fast as we can do it in Madison, Wisconsin, which is
less than a year.
Chairman Hatch. I think we would all favor that.
Yes, Mr. Band.
Mr. Band. Yes, we think that doing something with venue
would be helpful. The venue would be limited to the
jurisdiction where the company is headquartered or is
incorporated, something like that, to prevent forum-shopping.
But another way of solving this venue problem could even be
achieved through allowing interlocutory appeals after Markman
hearings. That could have the same effect of reducing the
adverse problems of having cases litigated all around the
country because you could get the claim construction into the
Federal Circuit at an early stage and thereby keep some of the
issues out of the jury's hands later on.
Chairman Hatch. Okay, thanks.
Professor Lemley.
Mr. Lemley. I think it would probably be a desirable
change. The current favored district is the Eastern District of
Texas where patent plaintiffs like to bring their lawsuits
because no jury so far has ever invalidated a patent in the
Eastern District of Texas. There is obviously forum-shopping
that is going on.
I think it would be attractive to limit it to something on
the order of where the plaintiff or the defendant reside or
have their principal place of business or are incorporated if
they are corporations. It is not a complete solution. It is not
going to make the ``troll'' problem go away, but it may reduce
one component of it.
Chairman Hatch. Make it more fair.
Mr. Lemley. Absolutely.
Chairman Hatch. Well, give us some ideas on that. We would
love to have them.
Mr. Kushan.
Mr. Kushan. On this one, I don't have much to say. I think
there is a lot of concern about the Eastern District of Texas
scenario, as Mr. Lemley has pointed out. But on a proposal like
this, it is not so clearly a plus or minus on the overall
equation in patent litigation reform that you can say it will
be good or bad. Obviously, we will have to look and see what
kind of proposals come forward on it.
Chairman Hatch. Thank you.
Mr. Fish.
Mr. Fish. Senator, there are certainly people who say it
would be helpful. I think Time Warner's position would be we
are not clear why it is another area where there has to be a
patent-specific rule, especially since there has been forum-
shopping for venues in patent cases since we have had them. So
although it might be helpful, I think some of the other areas
might be more helpful.
Chairman Hatch. Mr. Hawley.
Mr. Hawley. Yes. Mr. Chairman, I am happy to report that we
have had a few days to discuss this one, certainly not with our
full board and so it is not possible for us to give you a
strong indication. But in informal discussions with the
leadership, they haven't dismissed it out of hand, which is a
good sign. So we will be definitely working on this proposal
with all of our litigator friends and our organization, and we
are going to be vigorously looking at alternatives that might
help with the abusers of the system.
Chairman Hatch. Without asking you to answer it today, I am
intrigued by the idea of allowing an interlocutory appeal with
Markman claim construction determinations combined with the
bifurcation of the trial process that delays the determination
of willfulness. It seems to me that an interlocutory appeal of
the claim construction might provide some efficiencies in
litigation, and I would like you to write to us and tell us
what are the benefits to this and are there any significant
downsides. We are looking at that fairly carefully as well.
This has been a particularly prescient panel. I really
appreciate all the efforts that you have made to be here and it
has been very helpful to us here today. I am very grateful to
all of you. Just help us to get it right, because we don't want
to hurt anybody, but we would like to have something that would
get rid of some of the inefficiencies, inadequacies, wrongful
things that occur in these areas, and help us to find some ways
of doing justice, which is, after all, what we are all about.
We don't have any desire to pick one side or the other, or
any one of the multiplicity of sides, but we do have a desire
to get the very best possible legislation we can to be able to
resolve at least a maximum number of problems. So we would
appreciate any advice you could give us on this beyond this
hearing and we will keep the record open for any further advice
that you care to send us. We will keep the record open for a
week for anybody who wants to ask additional questions in
writing.
We are grateful to you all. We know it has been a pain to
be here, but you are doing the work of the Lord and we
appreciate you being here. Thanks so much.
With that, we will recess until further notice.
[Whereupon, at 4:07 p.m., the Subcommittee was adjourned.]
[Questions and answers and submissions for the record
follow.]
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