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Judiciary Testimony Hearing
June 14, 2005

as they either pay the price of the litigation through increases in retail prices, or, in many cases,

are never offered the new service.

We have been following proposals for revision of the patent system that have been

circulating in Congress with great interest, and continue to evaluate new ideas to improve the

patent system. Like many others, we believe that there are three groups of issues that need to be

addressed in order to improve the functioning of the patent system.

First, the PTO needs to be adequately and consistently funded. Many criticisms are

unfairly directed against the PTO. In the recent past, the PTO has been given an enormous task

but highly inadequate funding to do its job. We appreciate the work done to make sure the PTO

has the resources it needs in this fiscal year, and urge that adequate funding continue so that the

laudable programs of Assistant Secretary Dudas and the professionals at the PTO can bear fruit.

Second, to insure the long term viability of the patent system, and the continuation of the

benefits it has historically brought to our nation, patent quality needs to be addressed. In this

area, improvements we support include limits on abuse of continuation practice, meaningful post

grant opposition procedures, publication of all patent applications, and improved ability of the

public to submit prior art during prosecution. We recognize that many who support improving

the quality of issued patents have concerns about some of the proposals in this area, and agree

with them that it is important to retain both substantive and procedural fairness for patentees

while fixing the problems.

Third, with respect to patent injunctions and damages, the subject matter of today's

hearing, we believe the following changes would address substantial problems in current patent

law. We also believe these changes are fair to all and achievable.

Judiciary Testimony Hearing
June 14, 2005

Require Meaningful Proof Before Awarding Increased Damages in Patent Suits.

Under current law, a finding of willfulness entitles the patent plaintiff to multiply its damages up

to treble damages. As Judge Dyk's partial concurrence in Knorr Bremse v. Dana' noted, the

current standard is inappropriate in view of the settled law of punitive damages. Willfulness has

a very different meaning in patent law than in traditional tort law, and increased damages are

routinely awarded in patent cases. In contrast, in other litigation, increased damages are awarded

only where parties have clearly acted reprehensibly or egregiously. Moreover, to fend off

possible willfulness allegations, companies must go to the expense of hiring patent counsel to

produce exculpatory opinion letters. As courts have noted, such letters are only useful when they

are wrong - after a defendant has been found to infringe - despite the letter's stated belief that he

did not infringe. Willfulness accusations arise in almost every patent case, and inject great

uncertainty as to the ultimate outcome. Allegations of willful infringement lead to substantial

increases in discovery and trial costs, because they are difficult to dismiss at the summary

judgment stage, and appear to produce very little benefit to the system.

Moreover, as the FTC noted in its 2003 report, To Promote Innovation, the overbreath of

the willfulness standard in current law introduces unnecessary uncertainty, raises risks, and

reduces efficiency because it discourages parties from reading others' patents and from planning

non-infringing business models.

For all these reasons, the Patent Act should be amended so that the purpose behind

increased damages, to punish those who have acted with disregard for the law, is actually the

predicate for willfulness damages being imposed.

Knorr-Bremse Systeme Fuer Nutzfahrzeuge Gmbh v. Dana Corp., 383 F.3d 1337, 1348-52 (Fed. Cir. 2004).

Judiciary Testimony Hearing
June 14, 2005

There are many proposals that attempt to amend the willfulness standard. We support all

proposals that bring patent law into compliance with other litigation standards, and increase

damages only in cases where parties have acted egregiously. In particular, we support requiring

that willfulness be established through clear and convincing proof of actual, substantive, written

notice to the defendant, deliberate copying of a patented product knowing it to be patented, or

continued infringement not colorably distinguishable from activities previously judged to

infringe.

Conform Patent Damages to the Reality of Multiple Patents Covering Products.

The current law requires that patentees who succeed in litigation receive damages fully adequate

to compensate for the infringement. We support this standard for all owners of intellectual

property, but note that in the patent area the elements of damages have been expanded by the

courts far beyond the patented contribution to the public. Especially in the areas of complex

computer and communication systems there can be many hundreds of patents covering a product

or service. For example, there are more than 400 patents that are essential to produce a DVD.

And others have commented on the hundreds of patents typically related to a computer operating

system or a PC. Yet the patent law remains mired in a nineteenth century paradigm of

essentially “one patent, one product.” As a result, the courts have been required to create and

modify complicated patent specific damage rules to give effect to the statutory purpose and

underlying policy. Thus, in litigation and negotiation, legitimate patentees, as well as those who

would twist the patent litigation system for private advantage despite potential harm to the

public, routinely urge that the measure of their damages must encompass any remotely relevant

revenue of the defendant.

2

See, e.g., Rite-Hite Corp. v. Kelley Co., 56 F.3d 1538 (Fed. Cir), cert denied, 516 U.S. 867 (1995).

Judiciary Testimony Hearing
June 14, 2005

Time Warner supports reforming patent damages law by explicitly directing the courts to

begin their damages analysis for combination inventions by focusing on the incremental value

attributable to the patented invention.

When the accused product or service involves a

complicated system incorporating many public domain and patented contributions, full

compensation to the patentee should not usually involve apportioning value unrelated to his or

her invention.

Fix the Patent Injunction Imbalance. Today, as a matter of course in patent litigation,

the prevailing plaintiff is entitled to an injunction and the availability of such an equitable

remedy is a key part of being able to protect our nation's intellectual property. The problem with

today's system comes not in the availability of injunctions but in the application of that remedy

over the last fifteen years. Due to changes in the way that courts consider irreparable harm,

individuals and companies who do not innovate or put products into the market, but rather buy

up paper patents and try to extract large license fees, have been able to shift the equities in the

patent environment in a way that makes little sense.

Thus, any patent owner can hold a company hostage by seeking an injunction and

threatening to stop the company from operating part of its business. Instead of following

traditional principles of equity and requiring a weighing of the equities in patent cases, the

Federal Circuit has required district courts to presume irreparable harm in all cases. To make

matters worse, this presumption is essentially an irrebutable one because the Federal Circuit has

rejected nearly all attempts to rebut that presumption and discounted hardship to the defendant or

the public.

As a result, a patent owner can obtain an injunction, regardless of whether he or she is in

fact irreparably injured, regardless of whether the patent owner makes a competing product, and

Judiciary Testimony Hearing
June 14, 2005

regardless of whether his or her invention is a major or a minor part of the defendant's product or

service that is enjoined. Therefore, patent lawsuits frequently place core aspects of a defendant's

business in jeopardy of being shut down if the plaintiff prevails. While large companies like

Time Warner may be able to absorb some of these costs, one only need to look at patent cases

over the last several years to see that small companies simply cannot.

This recent judicially-created patent injunction doctrine has a number of harmful effects.

First, it creates a litigation imbalance between plaintiffs and defendants that distorts the purpose

of the Patent Act. The mere threat of an injunction produces a disproportionate in terrorem

effect. Plaintiffs are able to assert far-fetched claims and extract settlements with the threat of

stopping a company that is already in the marketplace from using a technology that is part of its

product or service offering. In the vast majority of cases (most which never go to trial),

companies that have not infringed pay what amounts to protection money to avoid the draconian

threat of disruption of their businesses.

Second, the doctrine permits a patent-holder to obtain (or to threaten to obtain) an

injunction against an entire business model even when the patented item is a small element of the

defendant's product or service offering.

Third, the doctrine disproportionately rewards entities that own but do not practice

patents because they can pursue litigation, threatening to shut down another company, without

risk that the same strategy will be applied to them.

Fourth, the doctrine is highly problematic in areas where, due to constraints on its

resources, the PTO has been unable to maintain patent quality because plaintiffs with improperly

issued patents can stop companies who have legitimately brought products and services to

market from providing them to consumers.

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