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PATENT LAW REFORM: INJUNCTIONS AND

DAMAGES

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 patentholders 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 hightech, 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 crosslicensing 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, betterfunded 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 compa

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