[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]

IMPLEMENTATION OF THE LEAHY-SMITH
AMERICA INVENTS ACT

=======================================================================

HEARING

BEFORE THE

COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES

ONE HUNDRED TWELFTH CONGRESS

SECOND SESSION

__________

MAY 16, 2012

__________

Serial No. 112-128

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Printed for the use of the Committee on the Judiciary

Available via the World Wide Web: http://judiciary.house.gov

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COMMITTEE ON THE JUDICIARY

LAMAR SMITH, Texas, Chairman
F. JAMES SENSENBRENNER, Jr., JOHN CONYERS, Jr., Michigan
Wisconsin HOWARD L. BERMAN, California
HOWARD COBLE, North Carolina JERROLD NADLER, New York
ELTON GALLEGLY, California ROBERT C. ``BOBBY'' SCOTT,
BOB GOODLATTE, Virginia Virginia
DANIEL E. LUNGREN, California MELVIN L. WATT, North Carolina
STEVE CHABOT, Ohio ZOE LOFGREN, California
DARRELL E. ISSA, California SHEILA JACKSON LEE, Texas
MIKE PENCE, Indiana MAXINE WATERS, California
J. RANDY FORBES, Virginia STEVE COHEN, Tennessee
STEVE KING, Iowa HENRY C. ``HANK'' JOHNSON, Jr.,
TRENT FRANKS, Arizona Georgia
LOUIE GOHMERT, Texas PEDRO R. PIERLUISI, Puerto Rico
JIM JORDAN, Ohio MIKE QUIGLEY, Illinois
TED POE, Texas JUDY CHU, California
JASON CHAFFETZ, Utah TED DEUTCH, Florida
TIM GRIFFIN, Arkansas LINDA T. SANCHEZ, California
TOM MARINO, Pennsylvania JARED POLIS, Colorado
TREY GOWDY, South Carolina
DENNIS ROSS, Florida
SANDY ADAMS, Florida
BEN QUAYLE, Arizona
MARK AMODEI, Nevada

Richard Hertling, Staff Director and Chief Counsel
Perry Apelbaum, Minority Staff Director and Chief Counsel

C O N T E N T S

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MAY 16, 2012

Page

OPENING STATEMENTS

The Honorable Lamar Smith, a Representative in Congress from the
State of Texas, and Chairman, Committee on the Judiciary....... 1

The Honorable John Conyers, Jr., a Representative in Congress
from the State of Michigan, and Ranking Member, Committee on
the Judiciary.................................................. 2

The Honorable Bob Goodlatte, a Representative in Congress from
the State of Virginia, and Member, Committee on the Judiciary.. 5

The Honorable Melvin L. Watt, a Representative in Congress from
the State of North Carolina, and Member, Committee on the
Judiciary...................................................... 6

WITNESSES

The Honorable David J. Kappos, Under Secretary of Commerce for
Intellectual Property, Director of the United States Patent and
Trademark Office, United States Department of Commerce
Oral Testimony................................................. 10
Prepared Statement............................................. 13
Response to Questions for the Record........................... 187

Robert A. Armitage, Senior Vice President and General Counsel,
Eli Lilly and Company
Oral Testimony................................................. 34
Prepared Statement............................................. 36
Response to Questions for the Record........................... 193

Eliot D. Williams, Partner, Baker Botts L.L.P., on behalf of the
Financial Services Roundtable (FSR), the American Bankers
Association (ABA), the American Insurance Association (AIA),
the Independent Community Bankers of America (ICBA), the
National Association of Federal Credit Unions (NAFCU), and the
Credit Union National Association (CUNA)
Oral Testimony................................................. 92
Prepared Statement............................................. 95
Response to Questions for the Record........................... 200

Carl Horton, Chief Intellectual Property Counsel, General
Electric, on behalf of the Coalition for 21st Century Patent
Reform
Oral Testimony................................................. 103
Prepared Statement............................................. 105
Response to Questions for the Record........................... 204

Kevin H. Rhodes, President and Chief Intellectual Property
Counsel, 3M Innovative Properties Company, on behalf of the
Intellectual Property Owners Association (IPO)
Oral Testimony................................................. 121
Prepared Statement............................................. 123
Response to Questions for the Record........................... 208

Richard Brandon, Associate General Counsel, University of
Michigan, on behalf of the Association of American Universities
(AAU)
Oral Testimony................................................. 144
Prepared Statement............................................. 146
Response to Questions for the Record........................... 213

Timothy A. Molino, Director of Government Relations, Business
Software Alliance (BSA)
Oral Testimony................................................. 153
Prepared Statement............................................. 174

LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING

Prepared Statement of the Honorable John Conyers, Jr., a
Representative in Congress from the State of Michigan, and
Ranking Member, Committee on the Judiciary..................... 4

Material submitted by the Honorable Melvin L. Watt, a
Representative in Congress from the State of North Carolina,
and Member, Committee on the Judiciary......................... 7

Material Submitted by Timothy A. Molino, Director of Government
Relations, Business Software Alliance (BSA).................... 154

APPENDIX
Material Submitted for the Hearing Record

Prepared Statement of the Honorable Bob Goodlatte, a
Representative in Congress from the State of Virginia, and
Member, Committee on the Judiciary............................. 185

Prepared Statement of the Honorable Melvin L. Watt, a
Representative in Congress from the State of North Carolina,
and Member, Committee on the Judiciary......................... 186

Financial Services Roundtable Submissions........................ 215

List of companies affected by H.R. 1249, the ``America Invents
Act''.......................................................... 241

Joint Prepared Statement of IEEE-USA and NSBA.................... 242

IMPLEMENTATION OF THE LEAHY-SMITH AMERICA INVENTS ACT

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WEDNESDAY, MAY 16, 2012

House of Representatives,
Committee on the Judiciary,
Washington, DC.

The Committee met, pursuant to call, at 10:09 a.m., in room
2141, Rayburn House Office Building, the Honorable Lamar Smith
(Chairman of the Committee) presiding.
Present: Representatives Smith, Sensenbrenner, Coble,
Gallegly, Goodlatte, Issa, Franks, Griffin, Gowdy, Conyers,
Scott, Watt, Lofgren, Waters, Quigley, and Deutch.
Staff Present: (Majority) Blaine Merritt, Counsel; Travis
Norton, Counsel; (Minority) Jason Everett, Counsel; and
Norberto Salinas, Counsel.
Mr. Smith. The Judiciary Committee will come to order.
Without objection, the Chair is authorized to declare
recesses of the Committee at any time.
And we welcome everyone here today. I am going to recognize
myself for an opening statement, then the Ranking Member, and
then the Chairman and Ranking Member of the Intellectual
Property Subcommittee as well.
The America Invents Act took 6 years to negotiate and
represents the most comprehensive change to American patent law
in 175 years. The new law improves our patent system and
demonstrates that Congress can successfully work on a
bipartisan and bicameral basis.
While the America Invents Act is a noteworthy achievement,
it is a complex statute that the Patent and Trademark Office
labors to implement. Today's hearing allows us to receive
updates from PTO Director Kappos and representatives of a broad
cross-section of patent owners and users affected by the law.
The America Invents Act directs the PTO to initiate a
number of rulemakings on a variety of subjects and to publish
studies on other important patent issues. Is PTO making
satisfactory progress on these projects? Is the agency
complying with congressional intent? And does the law need some
tweaks?
The America Invents Act matters because technological
innovation from our intellectual property is linked to three-
quarters of America's economic growth, and American IP
industries account for over one-half of all U.S. exports and
more than a third of our GDP. These industries also provide
millions of Americans with well-paying jobs. Our patent laws,
which provide a time-limited monopoly to inventors in exchange
for their creative talent, helps create this prosperity.
The Commerce Department released a report in April that
further documents the importance of IP to the American economy.
The report focuses on those industries that produce or use
significant amounts of IP and rely most intensively on these
rights. The updated figures are stunning. There are 75
industries that qualify as being ``IP-intensive.'' Direct
employment in these industries exceeds 27 million jobs, with
indirect activities associated with these industries providing
another 13 million jobs. This means that 40 million jobs in the
American economy, about 28 percent of all jobs, are linked to
our IP system. So you don't have to be Thomas Edison to
understand why Congress should be concerned about maintaining
the health of our IP sector.
Senator Leahy and I decided to pursue patent reform 6 years
ago because our system hadn't been comprehensively updated for
60 years. During this time, we have seen tremendous
technological advancements, with the transition from computers
the size of a closet to the use of wireless technology in the
palm of your hand. But we cannot protect the technologies of
today with the tools of the past.
The old patent system was outdated and was dragged down by
frivolous lawsuits and uncertainty regarding patent ownership.
Unwarranted lawsuits that typically cost millions of dollars to
defend prevent legitimate inventors and companies from creating
products and generating jobs. And while America's innovators
are forced to spend time and resources to defend their patents,
our competitors are busy developing new products that expand
their businesses and grow their economies. The more time we
waste on frivolous litigation, the less time we have for
innovation.
American inventors have led the world in innovation and new
technologies for centuries, from Benjamin Franklin to the
Wright brothers to Steve Jobs. But if we want to foster future
creativity, we must do more to encourage today's inventors.
That is what the patent reform bill is all about. It fixes
modern-day patent problems and liberates modern-day inventors.
While we didn't succeed in making every stakeholder 100
percent happy, the goal was more realistic: to make most of the
stakeholders content most of the time. And I hope that is the
case with the members of our two witness panels today.
That concludes my opening statement, and the gentleman from
Michigan, the Ranking Member of the Judiciary Committee, Mr.
Conyers, is recognized for his.
Mr. Conyers. Thank you, Chairman Smith. I can safely say I
agree with everything you said.
Mr. Smith. Good to hear that.
Mr. Conyers. But it still makes my opening statement
important because I want to create a few distinctions and add
to--I hope that you can say the same thing about mine when I
finish.
Mr. Smith. I am sure I will.
Mr. Conyers. Well, this is an unusual hearing because the
law that we are having a hearing on was signed by the President
last September. And so the hearing is about how we implement
the provisions in a law that we have already agreed on.
We have had at least four hearings. Chief Kappos has been
before us about three times. We have been working on patent
reform for 6 years. And we are required to come here again this
morning because of the different times that the implementation
of particular provisions go into effect. And, of course, my
principal concerns have been the fee diversion elimination and
the ending of a 700,000 backlog of applications that already
exist.
So I begin by congratulating the Director for selecting
Detroit as the first branch PTO office. I plan to be there in
July in Detroit. And a great name, for one of the first major
African American inventors, Elijah McCoy. I hope it is going to
be on the 19th, but I am not sure if that is definite yet. But
whenever it is going to open, the office is eagerly awaiting
our opening and a considerable number of employment
opportunities that go along with it.
Now, the concerns are these: Would the benefit go to large
multinationals at the expense of independent inventors and
thereby diminish job creation in the country? The provisions in
the bill regarding retroactivity with regard to business method
patents and false marking cases are all my concern. And it
seemed that stripping the legal rights of private parties
involved in pending litigation was not good.
And now that the bill is law, our focus should be on how it
can be improved. Twenty provisions that require implementation;
seven are in effect. Notices of rulemaking have been issued for
nine others. And so there is a lot of work left for the Patent
and Trademark Office. In particular, the proposed rules for an
inventor's oath and declaration, pre-issuance submissions,
supplemental examination, and inter-parties review are all to
be considered, with other things, in the hearing that we have
this morning.
Another area is how we deal with the universities, who
provide immeasurable, if not one of the most important,
contributions to the patent system. And one of the most
important things that we can do is clarify the intent of the
grace period. I want to find out how we can ensure that
universities receive proper protection under the law, as well
as why the grace period is so important to them.
And so I have shared this concern, that such a provision
can be--some definitions can be overinclusive and allows
covered business method patents to include anything used in the
provision of financial services. So I am very nervous about the
retroactive discussion that we will hear this morning. But I
remind you that the section 18 has been referenced by our
recognized constitutional experts, Epstein and Massey, and have
observed that this provision really boils down to special
interest legislation.
And so I am happy to be here. Critical that any revisions
to the act must consider the interests of all the parties and
not harm the small inventors.
Thank you, Mr. Chairman. I will put my statement in the
record, what remains of it.
Mr. Smith. Without objection. Thank you, Mr. Conyers.
[The prepared statement of Mr. Conyers follows:]

Prepared Statement of the Honorable John Conyers, Jr., a Representative
in Congress from the State of Michigan, and Ranking Member, Committee
on the Judiciary

Today's hearing gives us an opportunity to study the implementation
of the America Invents Act--the most significant reform to the Patent
Act since 1952--which was signed into law by President Obama on
September 16, 2011.
The Judiciary Committee has been working on patent reform for more
than over six years, under both parties.
Over the course of these efforts, my principal priorities have been
to prohibit patent ``fee diversion'' and eliminate the Patent and
Trademark Office's 700,000 plus application backlog.
I have concerns about whether sufficient progress has been made and
whether the America Invents Act adequately addresses my concerns.
To begin with, I want to congratulate Director Kappos for running
the PTO in a transparent and open manner and for his leadership in
implementing the Act, which I understand has been going smoothly.
In addition, Director Kappos has made an excellent choice in
opening the first PTO satellite office in the Detroit business
district. His decision has sent a strong signal to businesses,
innovators, and educators all over the Nation and the world that
Detroit is a top notch technology destination.
The Elijah J. McCoy Detroit Satellite office, which is scheduled to
open in July, will create more than 100 high technology jobs, according
to the PTO.
Equally important, the opening of this satellite office will help
facilitate patent filings by thousands of Detroit area businesses.
I look forward to working with the PTO and the Commerce Department
to ensure that the opening of this office becomes a model for others to
emulate.
Second, when we debated the Act on the floor, I had serious
concerns as to whether it would benefit large multinationals at the
expense of independent inventors and innovation, and thereby harm job
creation in our Nation. For this reason, I opposed the bill.
But, now that the bill is law, our focus should be on how it can be
improved and whether further action is needed.
Of the 20 provisions requiring implementation, only 7 provisions
are in effect. Notices of Proposed Rulemaking have been issued for 9
provisions and regulations for the remaining 4 provisions are under
development. That leaves a lot of work to be done by the PTO.
In particular, the PTO's proposed rules for an inventor's oath and
declaration, pre-issuance submissions, supplemental examination, inter
partes review, post-grant review, covered business method review, and
derivation should be considered as part of today's hearing.
A third area that we should examine today is how the Act's
implementation affects various constituencies.
For example, we must make sure universities are adequately
protected during implementation. Universities provide immeasurable
value to the patent system and deserve to be protected.
Accordingly, I will be particularly interested to hear from the
representative from the University of Michigan today about how we can
ensure that universities will receive proper protection under the law.
And, with respect to section 18 of the bill, which deals with
transitional business method patents, I want to know how this provision
is being implemented.
We have received reports from several entities about ways to
improve this section under the proposed rules.
Specifically, they cite the definition of technological invention
for the transition program for covered business method patents.
I understand their concern to be that the definition is over-
inclusive because it allows covered business method patents to include
anything used in the provision of financial services.
I have shared similar concerns in that this provision could provide
large banks a special, new bailout at the expense of small inventors
and the American taxpayer. Even worse, this provision would do so on a
retroactive basis.
Several constitutional law experts, including Richard Epstein and
Jonathan Massey, have observed that this provision ``is special
interest legislation, pure and simple.''
They concluded that the provision would constitute an
unconstitutional taking of property, which would force the federal
government--that is, you and me and American taxpayers--to pay just
compensation to the patent holders.
It is critical that any revisions to the Act must consider the
interest of all parties and not harm small inventors.
It is also important to keep in mind that the Act has been in
effect less than a year and that, therefore, it is premature to make
any changes at this time.
The PTO's America Invents Act Implementation Team has been reaching
out to interested parties across the United States in order to generate
a dialogue about the PTO's proposed rules recently released for public
comment.
Yet, the most important goal, as the Act is implemented, must be to
protect small inventors, which was my fundamental concern with the bill
when it was considered in Congress last year.
__________

Mr. Smith. I am going to introduce the Chairman and Ranking
Member of the Intellectual Property Subcommittee, but I first
want to say, in the case of Mr. Goodlatte and Mr. Watt, that
both played very, very influential roles in the development of
the bill and its enactment. And all of us were at the signing
ceremony, as well, very appropriately.
The gentleman from Virginia, Mr. Goodlatte, the Chairman of
the Intellectual Property Subcommittee, is recognized for an
opening statement.
Mr. Goodlatte. Well, thank you, Mr. Chairman. And I
appreciate your holding this hearing on the implementation of
the--I prefer to call it the Smith-Leahy America Invents Act.
The AIA was the first patent reform bill in over 60 years
and the most substantial reform of U.S. Patent law since the
1836 Patent Act. But as the Members who drafted and worked to
enact this law, our primary purpose today is to ensure that the
hard-fought reforms in the AIA are implemented by the PTO in
keeping with congressional intent.
It needs to be made crystal-clear that the rulemakings and
the regulations promulgated by the PTO should move us forward
toward greater certainty and not be allowed to maintain the
status quo. As we implement these changes in the patent system,
we need to ensure that the new post-grant review and other
proceedings provide simple, cost-effective methods for raising
challenges to potential PTO prosecution mistakes and that they
provide less expensive alternatives to Federal court
litigation. If implemented correctly, these proceedings will
increase certainty with regard to patent rights and thus spur
more investment in new ideas.
The PTO also needs to continue working to ensure that our
patent system not only expeditiously reviews patent
applications but issues high-quality patents that obviate the
need for subsequent challenges and that can be enforced through
the courts and administrative proceedings. This means we need
to focus simultaneously on patent quality and patent quantity.
A significant focus of the AIA was to reduce the problem of
overpatenting, particularly by so-called patent trolls--the
situation where weak or frivolous applications have been
developed through creative or predictive lawyering, rather
than, as Abraham Lincoln put it, through the fire of genius.
The strength of our system relies on granting strong patents
that are truly novel and are nonobvious inventions, those that
are the result of true innovations and not the product of legal
gamesmanship.
As the PTO reviews the volume of applications and works
through the backlog, the bar needs to be set higher and quality
controls need to start on the front end rather than relying
with the courts.
A positive example from the AIA is the work being done to
implement a transitional program to correct the egregious
errors made in the granting of a wide range of business method
patents. This program will provide the PTO with a fast, precise
vehicle to review low-quality business method patents, which
the Supreme Court has acknowledged are often abstract and
overly broad. This program has the potential of making our
Nation's patent portfolio stronger, and if it is successfully
implemented, we may want to consider making it permanent in the
future and expanding its applicability to other
nontechnological patents.
One area I plan to continue to watch is PTO fees. The fee
authority Congress gave the PTO is finite for a reason. We
sunset this authority so that the PTO would be mindful that it
would need to come back to Congress to make the case that they
have exercised this authority wisely. We will continue to
monitor fees and make sure the PTO is enacting reforms to
achieve maximum agency efficiency before it resorts to fee
increases in the future.
The issues that we discuss in today's hearing will require
ongoing vigilance as we work to implement the AIA. We look
forward to working with the PTO, American innovators and
industry to help identify specific concerns and issues so that
we can ensure that the bill is implemented in line with
congressional intent and promotes U.S. economic growth and job
creation.
I look forward to hearing from all of our witnesses on the
implementation of the AIA and ensuring that the U.S. patent
system helps to promote U.S. manufacturing, technology, and
innovation. And I particularly look forward to hearing from and
continuing to work with our Director, Mr. Kappos.
Thank you, Mr. Chairman.
Mr. Smith. All right. Thank you, Mr. Goodlatte.
Mr. Smith. The gentleman from North Carolina, Mr. Watt, is
recognized.
Mr. Watt. Thank you, Mr. Chairman.
And this is not part of my opening statement, but Ranking
Member Conyers made reference to the fact that they are opening
an office in Detroit that is going to be named in honor of
Elijah McCoy, an African American inventor. And it triggered my
recollection that during Black History Month I had done a
presentation on the floor of the House about African American
inventors. And they have a long, elaborate history that is
given very little attention to. So I thought it might be a good
time for me to ask unanimous consent to insert a copy of the
comments that I made on the floor of the House into the
Judiciary Committee's record so that they will be memorialized
here in our Committee also.
Mr. Smith. Without objection, so ordered.
[The information referred to follows:]

__________

Mr. Watt. Thank you.
The Leahy-Smith America Invents Act was a monumental
achievement and the first significant legislative overhaul of
the patent system in over 50 years. After several cycles of
congressional consideration, the patent reform bill was made
possible in large part by the sheer doggedness of many of
today's witnesses and the industries they represent, as well as
the leadership of the Administration and Director Kappos and
Members of this Committee and our Senate counterpart.
The key reforms incorporated in the America Invents Act, as
part of Obama administration's commitment to promote
innovation, stimulate job growth, and enhance America's global
competitiveness, are far too numerous to recite in the time I
have. However, I do want to acknowledge one that unified
virtually all Members of this Committee, and that is full
funding for the Patent and Trademark Office.
Earlier this month, the House passed the CJS appropriations
bill, which included $2.93 billion for the Patent and Trademark
Office for fiscal year 2013. That represents a 9.5 percent
increase over the 2012 appropriation. This amount reflects a
spending level equal to the estimated fees the Patent and
Trademark Office will collect and is consistent with the
gentlemen's agreement in the America Invents Act.
Despite the unfortunately large number of negative things
in the CJS appropriations bill that made it impossible for me
to vote for it, the record should be clear that I have never
deviated from my views that the PTO should and must have access
to all the fees it collects to provide the efficient and
quality services our innovators deserve.
The increasingly uncertain plight of most annual
appropriations bills highlights the uncertainty, if not the
folly, of the deal that was struck on the anti-fee diversion
provision in the America Invents Act. I can only hope that we
will not allow rank politics to hijack or hold hostage the
policy objectives we all agree are in the best interests of our
country. This is an ongoing concern and leads me to wonder to
what extent the PTO or its users' fears about the
precariousness of full funding has or will influence or
negatively impact implementation of the vision and provisions
of the America Invents Act.
But we are not here to reiterate the shortcomings of the
America Invents Act. Rather, we are here to obtain an update on
its implementation. Of the 20 provisions in the law requiring
the PTO to establish new procedures or adjust current ones, the
agency has fully implemented 7. Of the remaining provisions
that require PTO action, nine have been addressed in recent
notices of proposed rulemaking and await public comment, while
only four remain under development.
The PTO is on schedule with each of these provisions and,
by all accounts, has conducted a fair, inclusive, and
transparent process. Unless we hear something compelling to the
contrary from our second panel today, I believe Director Kappos
and his staff are clearly to be commended for their
accomplishments to date.
While the development, evaluation, and implementation of
the procedures and processes to carry out the mandate of the
America Invents Act ultimately rests with the PTO, I look
forward to hearing from the witnesses today on the various
approaches they recommend to the agency to meet its challenges
and about any legislative recommendations they may have.
Mr. Chairman, I thank you for calling this hearing and
assembling an impressive panel of witnesses. And I yield back
the balance of my time.
Mr. Smith. Thank you, Mr. Watt.
We have two distinguished panels of witnesses today. And I
will first introduce Director Kappos, and he will proceed with
his testimony. After Members have an opportunity to ask him
questions, we will proceed to our second panel of witnesses.
The Honorable David Kappos is the Under Secretary of
Commerce for Intellectual Property and Director of the United
States Patent and Trademark Office. In this role, he advises
the President, the Secretary of Commerce, and the
Administration on intellectual property matters.
Before joining the PTO, Mr. Kappos led the intellectual
property law department at IBM. He has served on the Board of
Directors at the American Intellectual Property Law
Association, the American Intellectual Property Owners
Association, and the International Intellectual Property
Society. He has held various other leadership positions in
intellectual property law associations in Asia and the United
States and has spoken on intellectual property topics around
the world.
Mr. Kappos received his Bachelor of Science Degree in
electrical and computer engineering from the University of
California--Davis in 1983, and his law degree from the
University of California--Berkeley in 1990.
Without Director Kappos' steady hand, expertise, and
support, we would not have enacted the America Invents Act. He
and his staff did an outstanding job of providing us with
advice, briefings, and drafting assistance. We can all thank
him for his work at PTO.
Director Kappos, we look forward to your testimony, and if
you will please proceed.

TESTIMONY OF THE HONORABLE DAVID J. KAPPOS, UNDER SECRETARY OF
COMMERCE FOR INTELLECTUAL PROPERTY, DIRECTOR OF THE UNITED
STATES PATENT AND TRADEMARK OFFICE, UNITED STATES DEPARTMENT OF
COMMERCE

Mr. Kappos. Well, thank you. Good morning, Chairman Smith,
Ranking Member----
Mr. Smith. Make sure your mic is on. And maybe move it a
little bit closer.
Mr. Kappos. Chairman Smith, Ranking Member Conyers, and
Members of the Committee, thank you for this opportunity to
discuss the USPTO's ongoing efforts to implement the Smith-
Leahy America Invents Act.
Mr. Chairman, before I do, I would like to again thank you
and your colleagues on this Committee for your efforts over
several Congresses that led to enactment of this historic
legislation. We would not be here today but for your tireless
efforts on behalf of America's innovators. Thank you, thank
you, thank you.
Mr. Chairman, I am pleased to report that the AIA
implementation efforts are indeed proceeding on schedule. We
have implemented seven provisions of the AIA, all within the
time frames prescribed by the act. We have published proposed
rules for nine additional provisions, and we are on schedule to
implement all of them on time. While our stakeholders have
differing views on some of our proposals, most all of them have
commented quite favorably on our transparent, thorough
implementation process and the extent of our public outreach.
Our AIA implementation team continues to review hundreds of
comments received from individuals and IP organizations and IP
practitioners and other government entities and academic
institutions. And our ultimate goal, of course, remains to
produce rules consistent with the language and intent of the
AIA that will best serve the needs of America's entire
innovation community.
We will respond to the comments in our final rules, to be
issued on or before August 16th of this year. The rules will
then become effective on September 16, 2012, providing us with
a window of time of a month or more to educate our patent
examiners and the public regarding the final rules in advance
of their implementation.
In early February of this year, we published proposed fees
as authorized by the AIA for our patent services and received
substantial feedback and recommendations from the public. We
also look forward to receiving a report from our Patent Public
Advisory Committee before we begin the rulemaking process
relative to our fees.
Our stakeholders are already benefiting from the AIA. We
launched the accelerated examination program known as Track One
that provides for patent application processing in less than 12
months and offers small businesses a discount. Since its
inception, we have received more than 3,500 Track One
applications already, completed first examinations on them in
an average of less than 90 days.
Needless to say, Mr. Chairman, our satellite office program
has drawn quite a bit of interest. We are on schedule to open
the first satellite office, the Elijah J. McCoy Satellite
Office in Detroit, Michigan, in July. And we are in the process
of reviewing and analyzing the more than 600 comments and
suggestions we received in response to our Federal Register
notice. We expect to announce the locations of additional
offices this summer.
While we are pleased with the progress we are making to
implement the AIA, we are also concurrently working to improve
the patent examination process and move important innovations
more quickly into the marketplace. And my written statement
details a number of those efforts.
With adoption of the AIA, Congress has enabled the USPTO to
promote a new vision of an IP world in which national and
regional patent systems are coordinated to create an optimal
environment for technological innovation globally. Passage of
the AIA has provided an opportunity to restart long-stalled
discussions with our foreign counterparts toward substantive
harmonization that will help U.S. businesses succeed in the
global business environment.
And a critical part of these discussions is adoption by
other countries of a modern grace period. The grace period has
been adopted in many patent systems throughout the world, and
it is recognized as a global best practice. We look forward to
continuing these discussions.
It is clear that policies supporting a high-quality IP
system are making a difference in our Nation's economic
recovery now. The recent IP jobs report, ``Industries in
Focus,'' shows that America's core strength continues to lie in
our ability to innovate. Sensible government policies
encouraging that spirit of innovation can demonstrably
contribute to job creation and economic wellbeing. The end
result: 40 million jobs in IP-intensive industries,
representing 35 percent of U.S. GDP.
Mr. Chairman, we look forward to working with you and the
entire Committee to ensure that the innovation-advancing, job-
creating, deficit-neutral work conducted by the USPTO continues
to best serve America's innovators. We appreciate your
continued support for the employees and operations of the
USPTO.
Mr. Smith. Thank you, Director Kappos.
[The prepared statement of Mr. Kappos follows:]

__________

Mr. Smith. As you know, the goal of the act was to enable
the Patent and Trademark Office to approve better patents more
quickly. And it sounds like you are well on your way to helping
us accomplish that goal. You have mentioned, as we all know,
the backlog, 3-year wait, and you have some of those patents
speeded up to the process of 90 days, it sounds like. So all I
can do is thank you for the progress you have made, and I hope
we can continue to make that progress.
My first question goes to the patent fees, and I know you
have proposed some increases. I think they have generally been
well accepted and are appreciated because they know what the
money is going to be spent for. But if you could tell us a
little bit more of what you have in mind with the patent fees
and also specifically how you might use that additional
revenue.
Mr. Kappos. Sure. Thank you for the question.
Yes, we have proposed in our initial February document
substantial increases in fees. We have received great input
relative to some of those fees that could be recalibrated in
the lower direction, and we are inclined to do that. In fact,
we are working on approaches that will take some of those fees
that the American innovation community was concerned about down
somewhat. We believe we can do that and still stay on track to
meet our strategic plan goals by 2015, getting our backlog and
pendency under control in that time frame.
Now, we are also very cognizant of what we need to spend
that money for, and that is to improve our IT system--continue
improving our IT system, to continue hiring patent examiners
and board judges so that we can keep increasing the quality of
our output. As you said, Mr. Chairman, higher-quality patents
issued more quickly, we have to do both of those. And that is
what the fee increases are aimed at.
We inherited a large backlog. When we started, we had over
750,000 patent applications awaiting examination and no money
in the agency with which to conduct that work. We are going to
get that backlog under control, and we are making some
progress. We have it down to 640,000 now. We are headed toward
about 600,000 by the end of this financial year, and we will
just keep it going down.
So in order to do all that work, it requires more
examiners. And in order to hire those additional examiners, it
requires funds. So, in effect, we are putting fees together
that enable us to get the resources in place to overcome an
unfunded mandate, a backlog that just did not have any money
matched against it. You have to get that money to do that work.
Mr. Smith. Do you have any specific goals as far as the
backlog goes or as far as the average time to secure a patent
goes? I mean, do you have a goal of trying to get to 1 year or
2 years and reduce the average of 3 years by any certain period
of time?
Mr. Kappos. Yes, absolutely, we have extremely specific
goals. We will take the backlog down to an appropriate
inventory level of about 330,000 applications. That represents
the right workload so every examiner has a good docket but not
too much. We can do that by about the end of 2015. All of this
is in our strategic plan.
And when we hit that level, it will mean that, on average,
we will be processing a first office action, so we will be
doing the first substantive review of every application about
10 months after filing, and we will be completing review on
every application about 20 months after filing. And our
community informs us that those are optimal processing times,
balancing the need to have adequate information against the
need to go as fast as possible.
Mr. Smith. Okay. That is great news.
Another question is this. We live in a world economy.
Information is transmitted literally at the speed of light. Are
we doing everything we can, and in what ways does the act
enable us, to protect American patents overseas?
Mr. Kappos. Yes, well, thanks.
The AIA, as I mentioned somewhat in my statement, has
proven to be transformative, in terms of repositioning America
at the forefront of the global patent system and enabling us
to, again, take leadership and work with our overseas trading
parties for them to put in place 21st-century patent systems
that are much more similar to what we have done under the AIA.
So U.S. patent protection, as important as it is, is no
longer completely adequate for many innovators, many American
innovators. They need global protection. They need protection
in Europe, they need protection in China, they need protection
in Korea and Japan and other parts of Asia. And to do that,
they are incredibly hampered by patent systems that are totally
misaligned.
The AIA creates a new gold standard for patent systems that
has been the U.S. system. We now are in a position to work with
our trading parties overseas, and we are doing that
aggressively, to get them to update and improve their patent
systems to make it easier for American innovators and
innovators everywhere to take an idea, file a patent
application here, essentially file about the same application
and get the same level of protection where they need it
overseas.
Mr. Smith. Okay. Thank you, Director Kappos.
The gentleman from Michigan, Mr. Conyers, is recognized.
Mr. Conyers. Thank you, Chairman Smith.
Under Secretary David Kappos, you have been in your office
since August 2009. At the present time, it takes almost 3
years, 2 months short of 3 years--if a person filed an
application today, they would be waiting 33.9 months before a
final resolution.
Now, I am here to help you about what can you do. How about
some new technology in applying this? And what if we were to
give you lots more patent examiners and anything you might have
to add to how we speed this time up? It is too long. An
independent inventor can't hang in here for 3 years waiting for
the office to do what it should be doing much, much sooner.
Mr. Kappos. Well, thank you, Ranking Member Conyers. I
appreciate the question.
Indeed, the numbers have gone down slightly from 34 months.
We are now in the 32-month range for final pendency, so we have
made a little more progress. I fully agree with you that 32
months remains too long. We do have some additional, however,
good news coming on the horizon, which is that our forward-
looking pendency numbers for our first action--this is first
time we look at an application--are now down to about the 16-
month range, which means that for applications being filed
today, the review time is getting much, much shorter.
That is a byproduct of the fact that, as you say, we are
doing a lot of work on our IT, we are doing a lot of work with
hiring examiners, including in Detroit, where we have already
hired examiners, and we are easily going to meet and surpass
our hiring goals of extremely qualified people, experienced IT
professionals, who we will be able to put to work within a few
weeks of joining the USPTO, have them examining applications
right there in Detroit, in addition to several panels of board
judges, extremely highly qualified folks, already hired,
already being trained, ready to go as we open that office in
just less than a couple of months.
So I fully agree, we have more work to do. Putting more
examiners in place is clearly part of the equation. We are
working on it. Thank you so much for your focus on funding and
stewarding this agency, which has enabled us to engineer this
transformation. We keep running our play with hiring more
people and working on IT and working on efficiencies, all of
which we are doing. But you are right, we can get this under
control, and we can take these numbers down further.
Mr. Conyers. I feel a little better. And that is the only
question I am going to ask you, because this is where we have
to put our focus and direct attention as much as we can.
Thank you, Chairman Smith.
Mr. Smith. All right. Thank you, Mr. Conyers.
The gentleman from Wisconsin, Mr. Sensenbrenner, is
recognized for his questions.
Mr. Sensenbrenner. Thank you, Mr. Chairman.
Director Kappos, let me say that the Congress unloaded upon
you one very, very big job when the AIA was passed. And I think
that you have done an extremely good job in meeting the
mandates and changing the procedures in your office as directed
by Congress.
I opposed the AIA. I made no secret of that. And what we
are talking about in part here is legislation that seems to be
kind of secret, in terms of making technical corrections to the
AIA. And the fact that we have a roomful of witnesses in
something that is supposed to be technical and nonsubstantive
in nature, to me, raises a very red flag.
So I am directing these comments less to you, Mr. Director,
and more to the two senior Members that are seated to my left.
First of all, don't play ``I have a secret'' with the changes
that you are proposing. Bring the bill draft around, seek input
from people who opposed your law rather than supported it.
Second, keep it technical and only keep it technical.
Otherwise, we are going to go through the same fight that we
had for 6 years in getting the AIA passed, where some people
will be winners and exceedingly happy and some people will be
losers and even more mad than they were before. We have to
bridge that gap. And how this technical corrections bill is
done will go a long way to determining whether the gap gets
bridged or whether the gap gets wider. You know, the fact that
we are talking about technical corrections I think should be an
admission that the bill was not properly drafted in the
beginning, because now we are going to have to fix a few parts
of it.
Now, in terms of substantive and nontechnical issues that
are being considered, let me talk about a couple of things.
First of all, changes in the language that could have raised
estoppel from the post-grant review process isn't technical.
That is very substantive. And I think that this should be
considered separately and not in something that is supposed to
be noncontroversial.
Also, I think substantive issues would be the expansion of
the prior-use rights to create a new right that extends to
commercial products and changes to the first-to-file provisions
to address concerns about unanticipated limitations of the
university grace period. These are substantive issues as well.
So let's keep it technical. It does have a chance to get
through this Congress and will help make Director Kappos' job
of implementing this big assignment that we have given him much
easier. Let's debate the substantive things in separate
legislation. Some may pass, some may not pass, some will be
modified.
But, in sum, don't play ``I have a secret'' with this, as
happened in the past with this and other types of legislation.
Because when you don't expose massive legislation to the full
light of day and have a full debate on it, there will be
mistakes that will require technical corrections.
Strike one on you folks. Let's not have strike two or
strike three. Thank you.
Mr. Smith. Thank you, Mr. Sensenbrenner.
The gentleman from North Carolina, Mr. Watt, is recognized.
Mr. Watt. Thank you, Mr. Chairman.
Since Mr. Sensenbrenner spoke about the people to his left
and the only Member of his side of the House who is left at the
present is the Chairman, I hope he is not talking about the
other people to his left down here. Because if there is a bill
that is either substantive or technical, we haven't seen it
either. So I would join him in requesting that it be a
transparent discussion of all of these issues if we are talking
about making changes.
But I just wanted to make sure, since he was talking about
people to his left, and the only person I saw to his left that
was on his side of the aisle who might have some of control
over this would be his own Chairman----
Mr. Smith. Would the gentleman yield?
Mr. Watt. He is putting up his thumb to suggest that it
might be----
Mr. Smith. Before we make this too personal and before you
act too quickly to join the gentleman from Wisconsin, let me
assure you that there is no technical bill and everybody will
be----
Mr. Watt. That is what I thought, too, but----
Mr. Smith [continuing]. Made aware of it when there is.
Mr. Watt.--I thought maybe Mr. Sensenbrenner knew something
that we didn't know. But I wasn't aware of a bill either. So,
anyway, let me get on to the questions I wanted to ask.
Director Kappos, the PTO published a notice on April 20
seeking public comment on whether the procedures it employs to
screen patent applications for national security implications
should also be used to consider, quote, ``economic security
implications.'' The request, which the notice indicates
emanated from the Appropriations Committee, is based on the
concern that a loss of competitive advantage during the time
between required publication of a patent application and the
time the patent is granted--that is the time that the Ranking
Member was expressing concern about--undermines domestic
development, future innovations, and contingent economic
expansion because of worldwide access to the applications.
I wonder if you could comment conceptually on whether the
notion of an economic security evaluation is compatible with
the goals of the AIA or our various treaty obligations. What
are your thoughts about that?
Mr. Kappos. Well, thank you for the question, Congressman
Watt.
And the answer is that an economic security test would be a
new kind of a test. We don't have anything like that that we
currently employ. We have national security tests that are
actually executed by the various national security-related
agencies, DOD and others. USPTO does not, itself, conduct those
kinds of tests.
There would indeed be challenges relative to the AIA. An
economic security test is not, on its face, compatible with the
AIA, so something would need to be done about that. There would
be challenges relative to treaty obligations that we have, and
those would have to be worked out if we did decide to go down
the road.
But the USPTO felt it was important to act on the concerns
of the CJS Appropriations Committee that also oversees us. And
we were asked to seek input, and so we are trying to do that in
as balanced a way as we can.
Mr. Watt. All right.
Director, based on recent press accounts, technology
companies seem to be engaged in a so-called patent arms race.
Tech companies are spending a lot of money to buy patent
portfolios and suing to block technologies in every conceivable
venue. And on Monday a Federal appeals court ruled that Apple
can move ahead with its case to block some Samsung tablets over
patent infringement claims. That is according to Reuters.
Over the course of this Congress, we frequently heard
representatives of the tech community argue that copyright
infringement suits brought against tech companies by content
owners stifle innovation. By that logic, it would seem the rash
of patent cases brought by tech companies against tech
companies might stifle technological innovation.
Can you give us your take on this? And does litigation to
protect intellectual property rights stifle innovation? Is
there any reason to think that copyright litigation against
tech companies stifles technological innovation any more or
less than patent litigation?
Mr. Kappos. Well, the answer is, no, I don't think there is
any reason to believe that either copyright or patent lawsuits
of the kind that we are seeing in the so-called smartphone wars
are a sign of stifling technological innovation. In fact, much
to the contrary.
First of all, we have seen this movie before. We have seen
this movie many times before. We saw it when Boulton and Watt
got in their fights in the 18th century in England over the
patents that started out----
Mr. Watt. That is W-A-T-T?
Mr. Kappos. Well, we saw it again with them too. We saw it
when the sewing machine was invented. Then we saw it when the
telegraph was invented. And we are seeing the same dichotomy,
we are seeing the same series of events play out.
It starts with fundamental technological innovation that is
transformative in nature. Then others come along and want to do
incremental innovation on top of it. The original innovators--
let's say, the Apples of the world as an example, companies
that everyone would say have made transformative changes in our
lives--have intellectual property positions resulting from
massive investments. They seek to enforce those positions,
level the playing field in some way, and you have a dustup like
we are seeing right now.
I do not believe that it is a sign that there is anything
at all wrong with the innovation environment in the U.S. In
fact, I think it is a byproduct of a very healthy overall
innovation environment. These things happen. They sort
themselves out over time. It is a strength of our system that
we have strong and balanced intellectual property rights that
let folks play their hands out the way that they are.
And the last thing I will say is, I don't think that it is
in any way a sign that there is some fundamental problem with
patents at all across the board. It would be one thing if we
were talking about noninnovators involved in these patent wars,
but we are talking about some of the most innovative companies
on the planet that have done tremendous research, have sought
to protect their research, and are now protecting their rights
that go along with it.
So I actually just see this as a, you know, market reaction
to a market development in a very competitive space, by the
way. The smartphone space is characterized by extremely sharp
drops in costs over time, extremely strong increases in
performance, multiple changes in market leads, with different
companies leading at different points in time. It is a
tremendously competitive marketplace. And so I think what is
going on here is just the natural ebb and flow of technology
development.
Mr. Watt. Thank you, Mr. Chairman. I yield back.
Mr. Smith. Thank you, Mr. Watt.
The other gentleman from North Carolina, Mr. Coble, is
recognized.
Mr. Coble. Thank you, Mr. Chairman.
Director Kappos, refresh my memory. First to file was to
take effect 18 months after enactment?
Mr. Kappos. Correct.
Mr. Coble. Which would be, I guess, March.
Mr. Kappos. March next year.
Mr. Coble. Do you anticipate any transition problems?
Mr. Kappos. No, we don't. We are in the middle of the
transition actually already. We are in the period where
applicants need to decide whether they file under the old grace
period and the old first-to-invent rules or under the new grace
period and the new first-inventor-to-file rules.
We are preparing our NPRM, our notice of proposed
rulemaking, right now. We intend to conduct roundtable
discussions and get great public input on it. We will be right
on time with implementing it.
There has been speculation about whether there will be a
big bubble of patent applications filed before or after. I
really don't think there will be. There will be several things
that will be interacting, including fee changes, including just
the needs of the marketplace. And I think that the transition
will be quite manageable.
Mr. Coble. Thank you, sir.
Mr. Kappos, a recent hearing was conducted regarding
international patent issues. And in the wake of the passage of
the AIA, how are your talks going with our European and
Japanese allies and others toward patent harmonization,
including adoption of the 1-year grace period, A? And, B, what
have been the most obvious stumbling blocks that you
encountered?
Mr. Kappos. Well, Mr. Coble, thank you very much for that
question.
The answer is that we are making actually quite
considerable progress with our trading parties overseas on
harmonization. The Japanese already have a good grace period.
It is not exactly the same as ours, but it doesn't need to be
exactly the same as ours. They need to extend theirs to 1 year,
but I believe that we can work with them on that. The Republic
of Korea, South Korea, recently put in place an excellent grace
period based on our free trade agreement with them. And that
has been implemented, so they are clearly in good condition.
Other countries have good grace periods also.
The main issue is working with the Europeans on that point.
And, indeed, we are working hard with them. They are, I think,
taking a very honest and appropriate look. We now have study
groups consisting of USPTO employees working with employees of
various European offices--the German office, the U.K. Office,
the Dutch office, the French office. The European Patent Office
is involved also. And we are working through the details of
what would be an approach to the grace period that I would hope
will inspire the European movement.
Mr. Coble. Thank you, sir.
One final question, Mr. Kappos. Can you provide us with an
update on the selection process for further PTO satellite
offices?
Mr. Kappos. Right. So, sure. We are working on that. As I
mentioned, we open the Elijah J. McCoy office just in a couple
months, I think probably even a little less than that now, in
July.
We are mandated by the legislation to identify two
additional offices. We plan to do that by this summer. We are
working through a process that I think Congress did a good job
of outlining for us. It is very objective. It looks at factors,
including the ability to attract and retain examiners in the
area; the ability to interact with an applicant community, with
an IP community in the area; and the ability, importantly, to
increase the economic vitality of the area generally.
So we have criteria under those basic requirements. They
are very objective in nature--how many patent practitioners
there are, how many university graduates there are in the
technological fields, cost of living, cost of housing, other
objective factors. We have a gigantic matrix of all of that
information, and we are sifting through it now on a very
objective basis to try and identify good candidates.
Mr. Coble. Thank you. Thank you for being with us, Mr.
Kappos.
I yield back, Mr. Chairman.
Mr. Smith. Thank you, Mr. Coble.
The gentleman from Virginia, Mr. Scott, is recognized.
Mr. Scott. Thank you, Mr. Chairman.
Mr. Kappos, are there any provisions of the law that you
will not be able to implement on time?
Mr. Kappos. No. We will succeed in implementing all of them
on time.
Mr. Scott. And are there any other initiatives that the PTO
has implemented to improve the patent process?
Mr. Kappos. Yes, Congressman Scott. Thank you for that
question. It could be a very long answer, so I will give just a
few examples.
We are very intent on improving--continuing to improve the
quality of our work while also improving the efficiency of our
work so we can get more workflow through the agency. To do
that, you have to have get examiners who have the time and the
tools and the processes available to them to do a great job.
So we have given examiners more time, right? Quality more
important than quantity, at the end of the day. We have
actually given our examiners across the board more time. And,
not surprisingly, quality went up when we did that.
We have given our examiners much better training and much
better performance systems to incent them to engage with
applicants to understand applications deeply the first time
through and to get them done, whether ``done'' means granting a
patent or finally rejecting an application. And it is showing
progress. We are going to hit somewhere in the neighborhood of
170,000 hours of examiner interviews this year, which is an
all-time world record for our agency. It compares with under
100,000 hours just a couple of years ago. So we are increasing
the amount of time examiners spend understanding applications
by wide, wide margins.
Our IT tools are finally starting to come on line and
relieve some of the burdens of examiners. We have our universal
laptops almost completely deployed, and I think 99 percent of
the agency is done. So our examiners finally have a good
platform to work on. Not surprisingly, it is causing our IT
systems to have less down time than they did, so examiners are
becoming more productive.
Our new Patents End-to-End system is coming up. Our CRU,
Central Examination Unit, is already using PE2E. It is
transformative for the examiners who use it. They are just
blown away by the quality. We are gradually bringing function
on. We are going to get the whole CRU over here in the next
several months. Then we are going to start bringing the corps
of over 7,000 examiners on. That is another step to function up
in efficiency of the agency.
And the last thing I will mention is, at the same time you
are doing all of that, you have to give examiners the
substantive tools, in terms of the guidelines and procedures
internally, so that they can do a great job. So we are
responding very quickly to case law that is coming out of the
Supreme Court, the Federal circuit, and the accumulation of
everything those courts are doing. We put out new rules within
24 hours after the Supreme Court's Prometheus decision to keep
our examiners going but to keep them very current.
We put out for the first time in the history of the agency
guidelines to improve the quality of our examiners' work
relative especially to software-related patent applications,
applications that use broad functional language. We have had
that in place for nearly a year now. We have tested it. It has
indeed increased our examiners' use of what is called 112
rejections and objections, which is exactly what we wanted to
have happen. Very pleased with the ability of our agency now to
put in place these new tools, IT, new processes, substance, new
management systems, getting examiners to work with applicants.
So at the same time then increasing the quality and the
effectiveness of the work we are doing.
Mr. Smith. Thank you, Mr. Watt--Sorry, Mr. Scott, excuse
me.
The gentlewoman from California, Ms. Lofgren, is
recognized.
Ms. Lofgren. Thank you, Mr. Chairman; and thank you,
Director, for being here.
Just a comment. Something like a quarter of the patents in
the United States come from the Silicon Valley. And I know that
there has been a strong interest in the Valley for a next
office, and I am hoping that you will consider that
overwhelming fact as you consider these various offices.
A small comment on the patent thicket and kind of the
patent wars that are developing. I understand your point that
you made to Mr. Watt, but it is certainly not just the cell
phone wars. It is also the social network wars. And recently an
independent analysis suggested that in the infringement
litigation currently under way, for example, between Yahoo and
Facebook that there were over 30,000 patents implicated in that
litigation. And it seems to me if you are a software engineer
and there is potentially 30,000 patents implicated, I mean,
there is no point in even looking in terms of infringement.
I think there is a problem, and I think we are not going to
solve it here today, but I think it bears examination, and
especially for the engineers involved in the Valley. And I am
hoping to have some discussion among the parties. Because that
kind of litigation--everybody has to do it, both as a sword and
a shield. But from a 30,000-foot level it is draining a lot of
money from innovation that I think is a problem.
I want to talk about the inter partes situation. Some have
suggested that the PTO will be accepting too many re-exams,
even though the AIA raised the acceptance threshold; and some
have suggested that you should have voluminous initial
disclosures, which I have some questions about. And I am
wondering what your thoughts would be, what the Office would do
and what would the costs be for the Office if the patent claims
scope were similar to a Markman hearing, as opposed to what I
think most of us envisioned when the bill was crafted. You
know, I just don't know how we would pay for that, but maybe
that is a misconcern on my part.
I am also interested in the costs for a company defending
itself against an invalid patent in district court. How would
that compare if we were to go to a more voluminous filing as
some have suggested? And your comments on that would be very
welcome, as well as any other in that as the process is
developed.
Mr. Kappos. Well, thanks for the questions and comments,
Congresswoman Lofgren. And I will tell you I am concerned about
patent wars, also, despite my previous comments. While I think
they are a reflection of marketplace reality, they involve
creative companies on both sides. You mentioned the Yahoo-
Facebook suit.
Ms. Lofgren. Yes, and I am not taking one side over the
other. I am just noting that, for business reasons, companies
are buying up and using as a sword and a shield these gigantic
portfolios that are weighing down the sites.
Mr. Kappos. But I think the AIA provides us with an
opportunity to help sort those things out much more cost-
effectively.
The second part of your question, in a suit that involves
however many patents between litigants, if we can reassess the
patentability of those inventions quickly and cost-effectively
through post-grant opposition and inter partes review at the
PTO, that is where the action is and that is where parties can
then quickly and effectively assess their relative positions
and resolve those suits without having to spend extreme amounts
of money.
So that is the first part of the question.
Now I will be out in your home State and my home State,
California, later this week--no, actually, first of next week
talking about these various issues with judges and with members
of the IP community there specifically to learn more about this
and to make sure we are doing everything we can at the PTO as
we implement the AIA.
So relative to the second part of your question and
voluminous disclosures in these post-grant processes, I am
concerned, also. One thing I will tell you is I do not believe
that the USPTO will be living up to the mandate of the AIA if
we implement it just like a district court process. That is it
not what you intended. I do not believe that is what the
Congress intended. I do not believe that is what is reflected
in either the statute or the legislative history, and I do not
believe we can proceed that way.
Parties who want to spend millions of dollars on voluminous
extensive document discovery with lawyers fighting with each
other inexorably and then dumping millions of documents on
dispute resolvers need to go to district courts to do that.
That is what district court discovery looks like.
You put in a process for us that you want us to get done in
a year. That is going to require a lot more oversight and a lot
more proactive involvement and a lot less voluminous
disclosures by parties.
One of the smartphone lawsuits--there was a report just
last week on one of the parties that filed a document that was
over a thousand pages and the judge looked at the document and
reactively said, I am not even going to read this thing. The
situation's out of control.
What we are trying to create in the PTO is a system that
proactively prevents those kinds of abuses and wastes from
happening by having our ALJs reasonably involved all along the
way, just like the district courts are starting to do with
magistrates who are getting more involved in litigation all
along the way. It is a best practice being recognized in the
district court. We want to do the same thing with our
procedures so that our folks are involved helping to guide the
parties in a streamlined, cost-effective, fast way and not get
into this situation with voluminous uncontrolled disclosures
that will run up costs just like in district courts, waste
millions of dollars, not behave in a manner that is consistent
with your statute, and create a process that we will never be
able to administer at the PTO.
So I am very alert to your concern. We are trying to
balance all of these issues with parties on the one hand who
want wide-open, district-court-like processes in the USPTO and,
on the other hand, get these processes completed in a
reasonable amount of time.
Ms. Lofgren. If I could, Mr. Chairman, I am wondering if
you could tell us what percentage of accepted inter partes
exams today result in a change to the claims?
Mr. Kappos. Well, I am doing this from memory, but today my
recollection is that a high percentage of the cases that are
accepted actually do result in a change of claims. A number
like 85 percent is sticking in my mind. But it may be slightly
more or less. But it is a high number. I believe that actually
is a testament to the strength of the process that when we
accept one of these into review it is one that we really do
need to look at.
Ms. Lofgren. I yield back, Mr. Chairman. Thank you very
much.
Mr. Smith. Thank you, Ms. Lofgren.
The gentlewoman from California, Ms. Waters, is recognized.
Ms. Waters. Thank you very much, Mr. Chairman.
I would like to thank Mr. Kappos for his presence here
today.
There is one part of the bill that I continue to have
concerns about. Mr. Kappos, as you may recall, I sponsored an
amendment on the floor to the America Invents Act with
Congressman Schock to extract Section 18 from the bill. This
section created an additional review process for financial
services related business method patents. According to an April
13th, 2011, article published in the Huffington Post entitled:
One observer claimed the banks were using patent reform to seek
special consideration exemptions.
Many of the major banks have been using patented business
methods without permission of the patent owners or payment to
them. The financial industry has persuaded this Administration
and the Senate and the House Judiciary leaders to retroactively
change patent office rules in a way that makes it impossible
for patent owners to enforce their constitutional rights
against the banks' infringement. In effect, the Congress is
voiding issued patents on behalf of the banks.
I was struck by the information that we were presented
with, particularly a case by a man named Mr. Claudio Ballard. I
never met this gentleman, but he explained to us that he had
founded something called Data Treasury Corporation and that he
had really created the technology that removed paper checks
from the payment process and replaced them with electronic
digital images. And he explained that the financial services
industry took extraordinary steps to try and invalidate his
inventions.
They took him to court, and he won in court. They came to
the Congress in 2008. The Congress did not see fit at that
point to do anything to invalidate these inventions. They even
went to the Federal Court, and the Federal Court supported
them, and I think your office supported them. But they were
able to use the power and influence of the financial services
industry to insert this Section 18.
And so now you have the responsibility, I suppose, for
determining whether or not these inventions are valid, this
transitional review proceeding that you have the responsibility
for. And you could literally invalidate patents retroactively.
Have you taken a look at Section 18 and determined how you
will be implementing this? And what input have you had coming
to you, comments in this process, the regulatory process? Could
you help me with that?
Mr. Kappos. Sure. Yes, we have looked at that section
carefully; and indeed we put out proposed rules on it. We have
gotten comments from the intellectual property community on the
proposed rules, and we are currently in the process of drafting
the final rules to implement the covered business method
procedure.
Now we benefit from the fact, relative to the transitional
CBM, that there is a lot of legislative history. A lot was said
on the floor of both Chambers. And so our job is to implement
the legislation that Congress passed. We are implementing it
right along the lines of the law and the legislative history
that explained the intent.
Ms. Waters. So I guess what I am asking is, do you have the
authority and the flexibility to make a determination about
whether or not these patents in the financial services industry
that are being challenged are legitimate challenges? And do you
have the authority to retroactively invalidate patents in this
area?
Mr. Kappos. Well, yes, I think we do in the sense of
retroactivity. The CBM provision 18 is no different from inter
partes re-examination nor post-grant opposition or even
supplemental examination or ex parte reexamination that we
already have and have been executing for years in the sense
that it charges the PTO with taking a second look at a patent
that we have granted and potentially determining that some or
all of the claims were unpatentable. So it is retroactive in
the sense that we are always looking at patents that we
previously granted. Congress has given us the authority and the
obligation to do all of that.
Ms. Waters. Well, I recognize that in Section 18. And let
me just say that what draws my interest to all of this is we
encourage innovation, we encourage creativity, and we have
encouraged the average American citizen with an idea to pursue
it. It seems to me that there is gross unfairness in the way
that this gentleman and others have been treated by the
financial services industry. They have a lot of power, they
have a lot of money, and they have a lot of clout. And it seems
to me this issue is costing these companies a lot of money
going into court, winning; coming into your office, winning;
and all of a sudden, because they were able to get this in this
legislation, this Section 18, they have to continue to pay
lawyer's fees and use their precious resources to try and fight
against basic unfairness.
And I just want to put that on your mind and let you know
that some of us would encourage you: Just do the right thing.
Mr. Smith. Thank you, Ms. Waters.
The gentleman from Illinois, Mr. Quigley, is recognized.
Mr. Quigley. Thank you, Mr. Chairman.
Welcome.
The enhanced transitional review program, as you know, is
tasked with reviewing business method patents that have been
characterized as being of poor quality, specifically patents
that were issued during a time period when the patent office
lacked access to the most relevant prior art to assist
examiners as they reviewed business methods.
You know, on one hand, these smaller institutions that
support something like this, they struggle to defend themselves
against lawsuits. Some of these are pretty small, community
bankers and so forth. So a lot of them settle to avoid an
extraordinary cost of litigation.
On the other hand, while this new process will help, these
institutions would have a difficult time paying large fees to
get a patent reviewed under the business method patent review
program unless the fees were scaled, I guess. Is that your
intention? Is that your understanding, the intention of PTO to
scale the fees to help smaller institutions?
Mr. Kappos. Well, if I recall right, we are permitted by
Congress to scale fees in a lot of areas, and we are. We are
going to be for the first time offering micro-entity fee
discounts of 75 percent in addition to small-entity discounts
of 50 percent.
But if I recall right, Congress did not give us the
authority to scale the fees to a micro level for those post-
grant processes. Well, my understanding was that the overall
view was that as you get into processes like that, like the
covered business method review process, you are really almost
always in a position where the PTO is by far the least-cost
alternative, because your other alternative is going into
district court. So the cost in USPTO our fees are going to be
circa a few tens of thousands of dollars. You have got the
lawyers' fees on top of that. But compared with going into
district court and spending millions of dollars to get the same
thing done.
Mr. Quigley. And I appreciate that you say that is your
understanding.
Mr. Chairman, can I ask you if you know or someone else
knows what your understanding was of whether Congress was
giving the PTO the authority to micro target?
I see by the shaking heads it appears no.
Mr. Smith. I think the answer is no, having consulted with
staff, but we can look into it further for you.
Mr. Quigley. I would appreciate it, sir, if you and your
staff could, Mr. Chairman.
Thank you, and I yield back.
Mr. Smith. The gentleman yields back.
There are no other Members here for questions so, Director
Kappos, thank you for your testimony today, very much
appreciated.
We will now go to our second panel of witnesses, and as
soon as they are seated I will introduce them.
Our first witness is Bob Armitage, Senior Vice President
and General Counsel for Eli Lilly and Company. Before joining
Lilly in 1999, Mr. Armitage worked as Upjohn's Chief IP counsel
and practiced law for Vinson & Elkins in Washington, D.C. He is
also an Adjunct Professor of Law at George Washington
University.
Mr. Armitage earned a degree in physics and mathematics
from Albion College as well as a Master's degree in physics and
a law degree from the University of Michigan. He was a major
stakeholder participant in the negotiations of the American
Invents Act and is the author of an article on the new patent
law that was recently published in the AIPLA Quarterly Journal.
I have a copy here, and the article I think is 110 pages long.
So--and I have heard it is well written and look forward to
reading it.
Our next witness is Eliot Williams, a Partner in Baker
Botts' New York office, who will testify on behalf of the
Financial Services Roundtable, the American Bankers
Association, the American Insurance Association, the
Independent Community Bankers of America, and the National
Association of Federal Credit Unions.
Mr. Williams practices in all areas of intellectual
property law, with a focus on patent and trade secret
litigation. Mr. Williams frequently speaks on IP issues and is
an Adjunct Assistant Professor at Brooklyn Law School where he
teaches patent litigation. He earned a B.S. in electrical
engineering from Texas A&M University and his law degree from
New York University.
Our next witness is Carl Horton, Chief IP Counsel for
General Electric, who will testify on behalf of the Coalition
for 21st Century Patent Reform. He also served as an IP counsel
for GE's Healthcare and Distribution and Control Businesses.
Before joining GE, Mr. Horton practiced IP law for 4 years
in Alexandria, Virginia, for Burns, Doane, Swecker & Mathis. He
received a chemical engineering degree from the University of
Utah and a law degree from George Washington University.
Our next witness is Kevin Rhodes, President and Chief IP
Counsel at 3M Innovative Properties Company in St. Paul,
Minnesota, who will testify on behalf of the Intellectual
Properties Owners Association. Mr. Rhodes manages the IP assets
of 3M and its worldwide affiliates.
Before joining 3M in 2001, Mr. Rhodes was a partner at
Kirkland & Ellis in Chicago, where he specialized in IP
litigation. He earned his undergraduate degree in chemistry
from Grinnell College and his law degree from Northwestern.
Our next witness is Richard Brandon, Associate General
Counsel for the University of Michigan. His practice focuses on
patent, technology transfer, and research legal issues. Prior
to joining the university, Mr. Brandon practiced IP law in
Chicago for a number of years. He has experience in domestic
and foreign patent prosecution, licensing, and other technology
and IP-related issues.
Mr. Brandon received concurrent bachelor degrees in
Chemistry and Spanish from Wayne State University and his law
degree from the University of Michigan.
Our final witness is Timothy Molino, Director of Government
Relations for the Business Software Alliance. Prior to joining
BSA, Mr. Molino served as Chief Counsel for Senator Amy
Klobuchar and worked for the Antitrust, Competition Policy, and
Consumer Rights Subcommittee. He was responsible for advising
the Senator on a variety of tech and IP issues.
Mr. Molino also practiced IP law in Washington with two
firms: Bingham McCutchen and Burns, Doane, Swecker & Mathis. He
earned his undergraduate degree from the University of Mary
Washington and his law degree from Washington and Lee
University.
We welcome our witnesses today. Please limit your testimony
to 5 minutes. And, Mr. Armitage, we will start with you.

TESTIMONY OF ROBERT A. ARMITAGE, SENIOR VICE PRESIDENT AND
GENERAL COUNSEL, ELI LILLY AND COMPANY

Mr. Armitage. Thank you, Chairman Smith and Ranking Member
Conyers.
It was exactly 8 months ago today that the Leahy-Smith
America Invents Act became law. This achievement was largely
attributable to the bipartisan persistence of this Committee
and its Senate counterpart over what seemed like a short 6-year
period to see a comprehensive patent reform bill through to
enactment.
The new law positions the United States as the global
leader in efforts to improve the world's patent systems through
greater international cooperation and harmonization. On a host
of issues the AIA implements what the U.S. patent communities
agreed would be the best patent practices for a globally
harmonized patent system. This was done so that our law might
serve as the mold and model for the rest of the world.
As the United States Patent and Trademark Office moves to
implement our new law, the devil in such an implementation
sometimes lies in its most obscure details. This makes today's
hearing, with the aim of focusing on several of those details,
of the utmost importance to the country. Thus, I am pleased to
be able to offer the views of Eli Lilly and Company on the AIA
implementation efforts thus far. Let me begin by offering a few
words on the process that the USPTO has followed in bringing
the AIA to life.
If there were a single word for that process, it would be
transparency. If you were to grant me two words to describe the
Office's efforts, they would be transparency and candor. The
USPTO has reached out to the patent community to understand
both the ``what'' and the ``why'' of the sometimes quite
diverse viewpoints being expressed on these implementation
issues. Let me therefore publicly thank those in the Office who
are leading this effort. They have shown an uncommon dedication
and focus on seeing their mission to a successful conclusion.
The Nation could hardly be better served by those now leading
this effort, beginning with Director Kappos.
With the limited time available for my opening remarks, let
me highlight just a few points from a written statement.
First, the USPTO efforts to implement the new fee-setting
authority indicate that Congress was fully justified in giving
to the Office this fee-setting responsibility. Lilly wants the
Office to be run frugally and efficiently and for the Office to
use its financial resources to invest for the long term in ways
that will make it more efficient and more effective and that
hold the promise that the fees of the future might indeed even
be lower.
In the aggregate, we see the plan to invest $2.93 billion
of user fee collections next year as a well-justified target,
set at the right level for the investments the Office is making
in the future of this country's patent system. That, of course,
assumes, as we have heard today, that those fees are not just
collected but also available to the Office for their use.
Second, with respect to the new supplemental examination
procedure, the Office, at least in Lilly's view, has not fully
embraced this procedure, nor has it sought to optimize its
potential for increasing the reliability and quality of issued
patents. The Office could indeed improve the quality and
usefulness of the information coming before patent examiners
during the original examination of a patent by facilitating
more ready access to supplemental examination, and to do so it
must greatly simplify the requirements that now appear in its
proposed rules.
Third, I would like to commend the Office for its response
to the criticism of its proposed rules implementing assignee
filing and the so-called inventor's oath provision of the AIA.
It is clear from recent actions of the Office that the final
rules will proceed to fully implement the assignee filing
provisions of the AIA, and hopefully this augurs well for the
Office's final rules as they relate to the inventor's oath.
Fourth, Kevin Rhodes, appearing today on behalf of IPO, has
submitted testimony for the record that provides a detailed
road map for crafting rules on the new post-issuance procedures
in the AIA. This road map was created on a cooperative basis by
the ABA, IPO, and AIPLA.
Lilly's hope is that the views in Kevin's submission will
become the detailed blueprint for the Office's final rules. And
indeed, just to underscore what Director Kappos has said, it is
very important that those rules be crafted so that the post-
grant review procedures are efficient and economical, providing
discovery that is fair and needed but not trying to duplicate
district court litigation.
Let me end with just one final observation. Congress in
passing patent reform of the U.S. laws undertook a task that
hadn't been successfully undertaken since 1836. It is a
remarkable achievement. It deserves implementation efforts
commensurate with that achievement.
To date, I would contend that the Office has shown itself
to be up to the task of securing a remarkable implementation of
this remarkable new law. The proof, however, of my contention
will come in the pudding of the final rules and examination
guidelines, rules yet to be finalized and examining guidelines
yet to be proposed.
Thank you.
[The prepared statement of Mr. Armitage follows:]

__________
Mr. Smith. Thank you, Mr. Armitage.
Mr. Williams.

TESTIMONY OF ELIOT D. WILLIAMS, PARTNER, BAKER BOTTS L.L.P., ON
BEHALF OF THE FINANCIAL SERVICES ROUNDTABLE (FSR), THE AMERICAN
BANKERS ASSOCIATION (ABA), THE AMERICAN INSURANCE ASSOCIATION
(AIA), THE INDEPENDENT COMMUNITY BANKERS OF AMERICA (ICBA), THE
NATIONAL ASSOCIATION OF FEDERAL CREDIT UNIONS (NAFCU), AND THE
CREDIT UNION NATIONAL ASSOCIATION (CUNA)

Mr. Williams. Thank you, Mr. Chairman. Thank you for the
opportunity to testify today regarding implementation of the
newly renamed Smith-Leahy America Invents Act.
I am going to focus my comments on Section 18, which relate
to the transitional program for review of business method
patents, which attracted some interest from Members of the
Committee, today.
We would first like to begin by thanking the Chairman and
the other Members of the Committee and the Members of the
Intellectual Property Subcommittee for their leadership on this
important program, and we would like to thank Director Kappos
and his as team at the Patent Office for the commendable job
they have done in their initial rounds of rulemaking.
While we are largely supportive of those proposed rules, we
do have some suggestions for slight alterations that will
properly carry out the congressional intent of the underlying
program. I will touch on a few of those recommendations in my
oral testimony today and refer the Members of the Committee to
my written statement for some further discussions of additional
recommendations.
Let me preface the recommendations with a few words about
the importance of the transitional business method review
program.
The program offers a less costly and more efficient
administrative alternative to patent litigation so that
companies acting in good faith do not have to spend the
millions of dollars it can often cost to litigate a business
method patent of questionable validity in Federal court.
Unlike the traditional patent application process where the
patent office hears only from the patent applicant, the
transitional business method review program permits full
participation by a party charged with infringement. This allows
the patent office to obtain the most pertinent prior art known
to that accused infringer, which can be especially important in
the case of business method patents, because the most pertinent
prior art is most often found in nontraditional locations, such
as marketing literature, prior sales, et cetera, and therefore
may be difficult for the patent office to uncover without the
assistance and involvement of industry participants.
Notably, the business method review program is only
available after the patent office determines, after reviewing
the materials and arguments submitted by the accused infringer
in the request, that it is more likely than not that at least
one claim of the challenged patent is invalid. This relatively
high threshold provides ample protection to patentees against
improper use of the program, and the program should therefore
be implemented so that there are no technical loopholes that
would permit a questionable patent to escape review.
With these guideposts in mind, we offer the following more
specific comments:
First, we believe the burden should be on the patentee to
show that the technological invention exception applies. In
close cases, the Office should err in favor of permitting
review of a patent under challenge. Proposed rules should
therefore be clarified to put the ultimate burden of persuasion
on the patentee to show that the patent escapes review under
the program because it qualifies as a technological invention.
We believe the economy will be benefited by erring on the
side of including patents within the program so that these
potentially invalid patents do not escape review. Notably
during the House's legislative hearing on impending H.R. 1249,
Director Kappos testified that it is more costly to the U.S.
Economy when the threshold for determining whether to
reevaluate a patent is set too high, because this can cause
invalid patents to escape review in the Patent Office.
Moreover, the legislative history of the AIA shows that the
Act's authors, including the Chairman, intended the
implementing regulations to be drafted so that the business
method program would apply as broadly as possible. Similarly,
Senator Schumer, one of the sponsors of the provision in the
Senate in his comments to the PTO has cautioned that the term
``technological invention'' should not provide a haven for
clever lawyers to draft patent claims that would escape review
under the program.
The regulations that implement the review program should be
simple and should err in favor of permitting review. The use of
overly complicated or inflexible standards risks the exact kind
of damage to the economy that Director Kappos previously
testified about when he cautioned against setting thresholds
for review too high. And in particular the complex test for
eligibility under the program will risk keeping improperly
granted patents on the books, which is contrary to the intent
of this important program.
The second point we would like to address has to do with
the definition of ``charged with infringement.'' In particular,
we believe there should be no requirement that a patentee use
any magic words in its correspondence with potential targets,
such as ``litigation'' or ``infringement'', before an accused
infringer can invoke the program to test the patent's validity.
Instead, we believe the Patent Office should apply a test
similar to that used in the District courts to decide if
declaratory judgment is present. And we believe this will make
it most likely that patents that are of particularly
questionable validity will make it into the program without
clever lawyering avoiding such a review.
Finally, we note that the business method proposed rules
seem to prevent the use of the business method program for the
first 9 months of first-to-invent patents--in other words, the
patents which are currently on the books--which we believe is
an incorrect reading of the statute. The proposed rule
effectively insulates these first-to-invent business method
programs from review during the first 9 months of their term,
which is again inconsistent with the exact text of the AIA. So
we encourage the PTO to look at that proposed rule again.
In conclusion, we do want to thank the Chairman and the
Members of the Committee again for the opportunity to testify.
We are very excited about the transitional business method
review program and look forward to working with the Patent
Office and Members of the Committee to ensure it is implemented
properly.
Thank you.
[The prepared statement of Mr. Williams follows:]

__________
Mr. Smith. Thank you, Mr. Williams.
Mr. Horton.

TESTIMONY OF CARL HORTON, CHIEF INTELLECTUAL PROPERTY COUNSEL,
GENERAL ELECTRIC, ON BEHALF OF THE COALITION FOR 21st CENTURY
PATENT REFORM

Mr. Horton. Mr. Chairman, Members of the Committee, I
appreciate the opportunity to testify today in my capacity as
chair of the Coalition for 21st Century Patent Reform, or the
21C as we are known, a diverse group of nearly 50 innovative
companies in 18 different industry sectors that employ millions
of Americans in well-paying jobs.
Let me begin by expressing my sincere gratitude and
appreciation to all Members of Congress, and especially Members
of this Committee, for your leadership in passing the Leahy-
Smith/Smith-Leahy America Invents Act. It represents a
tremendous step forward for the patent laws of the United
States that will continue to pay dividends for years to come.
Let me also thank the staff of the Office, and particularly
Director Kappos, for all their efforts to implement provisions
of the AIA in a manner that is timely, transparent, and
collaborative with the user community.
The 21C was intimately involved in the discussions leading
up to the passage of the AIA. Armed with this knowledge and
experience, we have critically reviewed each of the various
rules issued by the Office to ensure that they faithfully
adhere to congressional intent. For the most part, such rules
have remained true to the provisions of the AIA. Consequently,
I will address only those provisions where additional changes
would yield the greatest benefits or where the rules have
strayed farthest from what was intended when the AIA was
passed.
Collectively the new post-grant review, PGR, and inter
partes review, IPR, proceedings work to form the key
cornerstone of the AIA. The PGR and IPR proceedings were to
provide a fast, fair, and cost-effective manner to challenge
patents of excessive scope or questionable validity. However,
as currently drafted, these proceedings are not nearly as
streamlined as they might be, and they also lack procedural
safeguards that would better balance the proceedings between
patent owners and patent challengers.
Both PGR and IPR proceedings could be dramatically improved
if requests were comprehensive at the outset, containing all
information on which petitioners intend to rely, and patentees
were permitted to respond with all information explaining why a
petition should be denied, thereby providing the Office with a
full and complete record on which to base its decision to
institute such proceedings.
Once instituted, IPR and PGR proceedings should be further
streamlined by using proven best practices such as automatic
protective orders, clearly articulating the appropriate scope
and limitations on discovery, restricting the length and
breadth of witness questioning, and eliminating any and all
unnecessary motion practice that would do little more than
inflate legal fees.
Finally, claims should be interpreted consistently with
other adjudicative proceedings, lest patentees face one claim
scope for validity and a conflicting claim scope for purposes
of infringement.
Despite the global economic uncertainties and cost
pressures facing our companies, the 21C supported the Office
and the goals in its strategic plan by approving the 15 percent
surcharge levied in conjunction with the AIA. However, the 15
percent surcharge is already having a significant adverse
impact on the number of patent applications that applicants can
afford to file, issue, and maintain. Further fee increases
could have even greater detrimental consequences on applicants.
The AIA should in no way act as a deterrent to R&D, nor
should it inhibit a company's ability to protect the fruits of
such innovation. We are committed to working with the Office to
simplify processes to eliminate fee increases so that
applicants can secure rights to all innovations that have the
potential to fuel future U.S. economic growth and recovery.
One such opportunity for cost savings is the arcane
practice of signing an oath or declaration when inventors have
already assigned such rights to their employer. The current
U.S. practice and, unfortunately, the draft rules proposed by
the Office are tedious and time consuming. By requiring only an
express statement by applicants that they have obtained the
requisite right to file the patent application, the U.S. could
dramatically simplify current practices to coincide with global
best practices, as was intended.
Section 18 of the AIA likewise has the potential to divert
precious resources within the Office if the proceedings are
made overly complex or unduly ambiguous. In its attempt to
define technological inventions that do not qualify for
business method challenges, the Office has conflated the issues
of both novelty and nonobviousness together with the definition
of technological feature, as well as requiring the
technological feature to solve a technological problem with a
technological solution.
Finally, the supplemental examination provisions permit
patentees an opportunity to ask the Office to consider or
correct information possibly relevant to patentability before
seeking to enforce their patents. The draft supplemental
examination rules impose overly burdensome and unnecessary
requirements such as detailed statements from applicants for
each item of information submitted. The Office's draft rules
would also deny applicants access to the benefits of this
procedure if it determines the request did not comply with all
of the formal requirements set forth, including the formal of
the papers filed. We believe some relaxation of these
requirements is in order.
Thank you for the opportunity to present our Coalition's
views on the implementation of the AIA. I would be pleased to
answer any questions.
[The prepared statement of Mr. Horton follows:]

__________
Mr. Smith. Thank you, Mr. Horton.
Mr. Rhodes.

TESTIMONY OF KEVIN H. RHODES, PRESIDENT AND CHIEF INTELLECTUAL
PROPERTY COUNSEL, 3M INNOVATIVE PROPERTIES COMPANY, ON BEHALF
OF THE INTELLECTUAL PROPERTY OWNERS ASSOCIATION (IPO)

Mr. Rhodes. Chairman Smith and Members of the Committee,
thank you for the opportunity to testify today. I am speaking
on behalf of IPO, the Intellectual Property Owners Association,
which is a trade association of more than 200 companies and
more than 12,000 individuals representing all industries and
all fields of technology.
I will echo what the previous panelists have said, thanking
the Committee for its work in guiding through the enactment of
the Smith-Leahy America Invents Act and for all the efforts
that went into that. And, also, I will join in commending
Director Kappos and the patent office for their excellent
progress to date in promulgating and implementing regulations
for the Act.
I offer my testimony today in a constructive and not
critical spirit. I will focus my remarks on the proposed rules
to implement the new post-grant review and inter partes review
proceedings.
IPO is concerned that the proposed rules for these reviews
do not yet fully implement the full intent and the promise of
the Act, and IPO is not alone in those views. A cross-
organization committee of experienced practitioners that was
appointed by IPO, APLA, and the IP law section of the American
Bar Association joined together and submitted detailed comments
asking for specific changes to the proposed rules.
My written testimony that I have submitted lays out nine of
those recommendations that all three of these leading IP
organizations have endorsed and that they believe are the most
critical to effective implementation of the new review
proceedings. I will summarize a few of those recommendations
today.
Before I get into specifics, however, I would like to
respond to a point that was made during the prior testimony. I
do not believe that it is accurate to characterize the rules
that all three of the IP organizations have recommended as
being a version of litigation-type discovery. The discovery
that we have proposed and the initial disclosures that go along
with those are much more limited, restricted only to the issues
on which review has been granted. They are not simultaneous
discovery as in district court litigation. They are sequential.
So no party to a review will need to take and defend discovery
at the same time. And they really do implement some of the best
practices in district courts around the country as how to make
sure there is a full and complete disclosure of information at
the outset of proceedings.
District courts around the country, including the Eastern
District of Texas and the Northern District of California, have
adopted patent disclosure rules that really do promote the
streamlined, efficient, and fair adjudication of patent
infringement lawsuits, and that is what we are trying to
replicate in our proposed rules that the three organizations
have endorsed.
As far as a summary of a few of the specifics, first, the
rules should ensure that that the PTO bases its decision
whether to institute a review on as complete a record as
possible. The petition seeking review should disclose all of
the petitioner's invalidity arguments and supporting
information, and the patent owner should be permitted in its
preliminary response to provide any evidence showing why the
review should not be instituted.
A review should be ordered only when the PTO determines,
after considering all of the evidence presented, that the
statutory evidentiary threshold has been met as well as the
other factors that the Act allows the director and the board to
consider in deciding whether to institute a review.
Second, the reviews need to proceed without the extensive
motion practice that the current proposed rules contemplate.
Clear default rules mandating and limiting what must be
disclosed and filed and when that must be done and what can be
discovered are needed to ensure the rules can operate with
minimal oversight from administrative patent judges and with
minimal burdens on participants in terms of preparing for and
participating in motion practice and other interactions with
the board.
Third, with respect to discovery, as mentioned, the rules
should clearly set forth the scope and procedures of discovery
to promote predictability, consistency, fairness, and due
process for all parties. Both petitioners and patent owners
alike should make initial disclosures so that the case is
presented at the outset and the discovery can be narrowed from
there, and that should take place without having to continually
seek motions from the board on items of discovery that should
be routine in nearly every review.
Finally, with respect to claim construction, I will echo
what Mr. Horton said. In IPR and PGR proceedings, claims should
be construed using the same procedures as used in litigation.
These are by nature, and as indicated in the House report on
the bill, adjudicatory in nature; and if we apply a different
claim construction in these proceedings as in litigation, the
patent holder is not only going to face dual standards but it
is going to operate to the disadvantage of the patent holder in
each setting.
In the PTO review, the claim would be given its broadest
reasonable construction, a broad claim making it easier to
invalidate with prior art. To turn around in litigation that
might be occurring at the same time, the patent holder will
face a claim construed under the Markman procedures, presumably
narrower, thereby more difficult to prove infringement. I don't
think it was the intent of the Act to tip the scales against
patent owners in that manner.
Thank you. I will be happy to answer questions.
[The prepared statement of Mr. Rhodes follows:]

__________

Mr. Smith. Thank you, Mr. Rhodes.
Mr. Brandon.

TESTIMONY OF RICHARD BRANDON, ASSOCIATE GENERAL COUNSEL,
UNIVERSITY OF MICHIGAN, ON BEHALF OF THE ASSOCIATION OF
AMERICAN UNIVERSITIES (AAU)

Mr. Brandon. Thank you for the opportunity to speak today
about the America Invents Act.
I am Rick Brandon, associate general counsel for the
University of Michigan. I am here today to speak on behalf of
the Association of American Universities, which includes 59 of
the Nation's leading public and private research universities.
AAU was the lead negotiator on behalf of the universities
for a consortium of six higher education associations to ensure
that universities----
Mr. Watt. Mr. Chairman, I am still having a little trouble
hearing. Could you pull the mic a little bit closer?
Mr. Brandon. Is that better?
Mr. Watt. That is much better.
Mr. Brandon. We wanted to make sure that universities'
voices were heard during debate on the AIA. We very much
appreciate how both the majority and minority Members of this
group worked with us to craft the ultimate legislation.
Let me begin by commending the U.S. Patent and Trademark
Office for its work to implement the new patent law. As
indicated by Director Kappos, the USPTO has provided ample
opportunity for input from the public. Indeed, the Office has
been conducting major outreach across the Nation, as you
already heard about today, appearing at a variety of forums and
answering the myriad of questions the new law has generated, in
many cases involving universities.
Let me also acknowledge how excited we are in the State of
Michigan about the opening of the new Detroit satellite office,
which you heard a bunch about today already.
Universities play a key role in the U.S. Patent system, and
the discoveries made on my campus and others throughout the
country will lead to new cures for diseases, new technologies,
and ultimately to the creation of new jobs and industries to
keep our Nation competitive and our national security strong.
Thanks to the effective work of this Committee, the USPTO,
and their staffs, the product of the patent reform effort will
hopefully be an improved system that is more harmonious with
that of other countries and will stimulate the economy and
simplify the patent process to the benefit of all sectors,
including universities.
As USPTO moves through its numerous rulemakings and
proceeding, it is important that the carefully crafted promises
that enabled passage of the AIA remain intact, allowing the
USPTO to implement the bill as passed. We believe that any
deviations from the compact embodied in the AIA be considered
only with the agreement of all the affected parties.
Two possible amendments to the AIA have arisen since its
passage that are not strictly technical, one clarifying the
grace period for inventors, which is a particularly important
issue for university researchers, and the other calling for a
proposed further expansion of prior user rights, which in our
view is even more substantive.
Universities view these two issues differently. Let me
start by clarifying the intent of the grace period.
We believed that the grace period language in the AIA as
passed would preclude obvious variants of a published invention
from being considered as prior art during the 1-year grace
period following an inventor's disclosure. We now understand
that this interpretation is being called into question, and we
are discussing possibly amending language that would establish
unequivocally that such obvious variants would not constitute
patent-defeating prior art.
Simply put, we are seeking a grace period amendment that
would accomplish no more or less to implement the original
intent of the grace period language that was introduced in
2005, which we believe was the intent of this Committee when it
passed the Act last year. Indeed, a widely stated goal of this
legislation was maintaining a strong grace period that would
permit university researchers to continue to discuss and
publish their research results in advance of actually filing a
patent application.
In contrast, some groups are now seeking further expansion
of prior user rights, calling for adding provisions that were
explicitly discussed at the end of the patent reform process
and omitted from the compromise agreement that was a major
factor in passage of the Act. That agreement involved
universities reversing their long-standing opposition to any
expansion of prior user rights. We understood at the time of
the compromise that all parties had entered into a binding
agreement, and we concur with the recent USPTO report that
itself concludes that further expansion of prior user rights is
not warranted at this time and that this issue can be revisited
when the PTO conducts a mandated study of prior user rights and
other issues in 2015.
Nevertheless, in the interest of sound public policy, we
have been negotiating with other groups to see if it is
possible to reach agreement on language that would expand the
prior user rights while effectively addressing the concerns of
universities. To date, we have not found such language, and we
would be strongly opposed to any effort to amend the AIA to
expand prior user rights without broader agreement by
universities and all affected parties.
In conclusion, universities wish to thank the Members of
this Committee for their effective work and diligence in
helping to negotiate this landmark legislation. We believe that
the PTO has done an excellent job of implementing the new law.
We urge that, absent broad agreement, any technical corrections
being considered be just that, technical in nature and not
designed to make major changes to the Act that was just signed
8 months ago today.
Thank you for your attention. I look forward to any
questions.
[The prepared statement of Mr. Brandon follows:]

__________
Mr. Smith. Thank you, Mr. Brandon.
Mr. Molino.

TESTIMONY OF TIMOTHY A. MOLINO, DIRECTOR OF GOVERNMENT
RELATIONS, BUSINESS SOFTWARE ALLIANCE (BSA)

Mr. Molino. Chairman Smith and other distinguished Members
of the Committee, thank you for the opportunity to testify at
this very important hearing.
Intellectual property rights are the cornerstone of
innovation, giving innovators confidence that it is worth the
risk to invest and developing and commercializing new ideas.
Patents are an indispensable part of these protections.
The Business Software Alliance is the leading advocate for
the software industry. BSA members have worked closely with
this Committee for many years to modernize the patent system.
Because of this Committee's leadership, patent reform became a
reality last year. The Business Software Alliance believes the
America Invents Act is a substantial step forward in bringing
our patent system into the 21st century.
Current efforts by the Patent and Trademark Office to
implement the American Invents Act follows this Committee's
goal of making the U.S. patent regime the best and most
efficient patent system in the world. We support the PTO's
proposed rules with some clarifying changes, because they will
enhance the patent system and promote innovation in computers
and software.
The PTO is being very open and transparent during the
drafting of the proposed rules under Secretary Kappos, and the
entire PTO team deserve a great deal of credit for their hard
work in implementing this ground breaking law. BSA submitted
comments to the PTO on the Office's proposed rules. Our
suggestions aim to strike a balance between intellectual
property owners and those seeking to challenge an application
of issued patent, and I ask that BSA's comments be made a part
of the record in this hearing.
[The information referred to follows:]

__________

Mr. Molino. BSA believes there are three areas in which the
proposed rules can be improved. These are the transitional
program for covered business method patents, inter partes
review, and post-grant review. The purpose of these programs is
to remove low-quality patents. Removing low-quality patents
from the system will instill greater certainty and confidence.
With respect to the transitional program for covered
business method patents, which focuses on patents in the
financial services sector, BSA believes that the PTO should
better define which patents will potentially be subject for
review under this program. The PTO's proposed definition of the
technological invention exception provides that eligibility for
review will be determined on a case-by-case basis using two
criteria: where the claimed subject matter as a whole recites a
technological feature that is novel and whether it is unobvious
over the prior art and solves a technological problem using a
technological solution.
We believe that using only these criteria will potentially
allow the definition of covered business method patents to
include anything used in the provision of financial services,
including patents covering general purpose servers, email
clients, and basic spreadsheet applications. As a result, it
could be interpreted to cover a significant number of general
software and computing technology patents that have little or
nothing to do with business methods.
The availability of method patents benefits a vast variety
of industries. Broad inclusion of these patents in the
transitional program would be an unfortunate and unintended
consequence of the proposed definition. This could produce
effects beyond financial services and create unwelcome
uncertainty, chill innovation, and reduce investment in
bringing new technologies to American consumers and creating
jobs here in America.
At the same time, we recognize the financial industry's
strong interest in this area. Thus, it is important that the
PTO strike the right balance in determining which patents fall
under this program and which do not.
BSA has suggested a four-factor balancing test to determine
whether a patent should be reviewed under this program. It
provides safeguards against the inclusion of general software
and technology patents, while providing context so the patents
directed to financial services or products are not excluded,
looking at their technological contributions in isolation. By
adopting this test, the PTO would provide clarity as to which
patents fall under this program and which do not.
BSA's other suggestions relate to the procedures for inter
parte review and post-grant review. We support the direction of
the proposed rules, but we believe minor changes to the time
line, scope of discovery, page limits, and process for
resolving claim disputes can be made to more properly apportion
respective burdens on the petitioner and patent owner. Our
suggestions would also allow for more efficient administration
by the PTO.
Finally, BSA supports the PTO's fee changes with a few
considerations. Some of the fee increases, especially in
traditional preparation and prosecution categories, may cause
BSA members to reassess their patent strategies. Therefore, BSA
believes the PTO should continue to review the fee increases to
ensure that the prices that are charged are appropriate. On
that note, we believe the fees set by the PTO for inter parte
review and post-grant review, while high, are reasonable in
view of the substantial work required from the Patent Trial and
Appeals Board.
Again, the Business Software Alliance appreciates this
opportunity to testify. I look forward to answering your
questions.
[The prepared statement of Mr. Molino follows:]

__________

Mr. Smith. Thank you, Mr. Molino.
Let me recognize myself for questions and begin with Mr.
Armitage, if I may.
Mr. Armitage, my question for you is what technical fixes
would you recommend that we consider for the American Invents
Act?
Mr. Armitage. Let me start with what I consider to be the
most obvious, and I will call it a technical fix, although I
realize there may be some controversy on that issue.
During the legislative process, in effect almost through
the last day of the 6-year process, the estoppel and post-grant
review against later judicial proceedings was ``issues raised''
in one form or another, not ``issues raised or could have been
raised.'' Due to what I think everyone would acknowledge was an
error in the legislative process, that estoppel includes issues
that could have reasonably been raised, which may have the
effect of essentially nullifying the provision unless that
error can be corrected. So, to the exclusion of anything else
that needs to be done, I would urge that correction to be done.
Mr. Smith. Thank you, Mr. Armitage.
Mr. Williams, what else can we do either with the America
Invents Act or what else can the Patent and Trademark Office do
to discourage patent trolls?
Mr. Williams. Wow.
Mr. Smith. That is a softball over home plate.
Mr. Williams. Yes, well, I think, obviously, the business
method review program is an excellent start. As you know, Mr.
Chairman, those patents are ones that are sort of special in
the sense they are seem to be litigated far more frequently
than patents in general. And so to the extent there is a single
classification of patents where the patent troll or non
practicing entity companies become more involved, it seems to
be those are the ones.
So having an effective and cost-effective way to review
those patents again, to give them a closer look using the best
prior art is a good step in the right direction. And to do that
in a way where companies who are acting in good faith don't
have to spend millions of dollars in District court litigation
going through discovery that may or may not be relevant to the
ultimate issues in the case on validity I think is definitely a
step in the right direction. So I think that is the main point
that I would say.
And the second point in terms of technical amendments or
changes to the Act--and I think this goes to a question from
Mr. Quigley earlier during the discussion with Director
Kappos--the fee structure is one that we do think is important
to look at closely. We are supportive of, obviously, the patent
office charging fees necessary to make these review programs
work effectively and so that those are funded. But we would
encourage the Committee and the members of the staff as well as
the PTO to look closely at whether those fees could be staged
or maybe reduced for small entities if they want to bring these
types of reviews.
Mr. Smith. Thank you, Mr. Williams.
Mr. Horton, actually that has led to my next question to
you. How do you think the increase in fees are being received
or will be received from what you heard Mr. Kappos say?
Mr. Horton. You know, as I indicated in my oral testimony,
I think it is a mixed blessing. I think we all generally
support the patent office, particularly given their heroic
efforts with the AIA, to try to get their hands around patent
quality and just to do a stellar job of doing what we hoped
they were always able to do but were lacking the funds to do
so. That is why we supported the 15 percent fee increase
associated with the bill.
However, that being said, my employer forces me daily to be
cognizant of the realities of the economy that we are facing,
and we are starting feel the impact of the fee increase
already. I fear subsequent increases could cause even more
pressure points to come to bear.
We took a quick look at some of the fees. If I look at just
the filing and issue fees associated with our portfolio, if I
say 3,000 patents is roughly what we file on an annual basis,
we would be looking at about a $3.5 million increase on our
filings and search fees at the PTO.*
It gets even worse if we try to maintain a portfolio over
the life of those patents, which for us being a long-cycle
business can be the full 20 years. The maintenance fees go up
to about around $5 million at the first maintenance fee payment
for 10,000 patents, another $5 million at the second
maintenance fee payment for only 7,000 patents, and about $16
million at the third maintenance fee payment of 5-6,000
patents. That is $26 million in aggregate cost on a budget,
granted the size of GE, which is north of $100 million, but
still is no small fee increase for us to swallow to try to
maintain our protection.*
---------------------------------------------------------------------------
*Mr. Horton amended this portion of his response to read as
follows:

We took a quick look at some of the fees. If I look at just the
filing and issue fees associated with our portfolio, if I say 3,000
patents is roughly what we file on an annual basis, we would be looking
at about a $1.8 million annual increase on our filing and exam fees at
the PTO.
It gets even worse if we try to maintain a portfolio over the life of
those patents, which for us, being a long-cycle business, can be a full
20 years. The maintenance fees go up by about around $2 million at the
first maintenance fee payment for 10,000 patents, another $3 million at
the second maintenance fee payment for about 4,000 patents, and about
$12 million at the third maintenance fee payment for 4,300 patents.
That is $17 million in aggregate cost on a budget, granted the size of
GE, which is north of $100 million, but still is no small fee increase
for GE to absorb in order to maintain our protection.
Mr. Smith. Thank you, Mr. Horton.
Mr. Rhodes, last question is for you. The America Invents
Act permits the PTO, in fact, encourages the PTO to establish
regulations that prioritize examination for products,
processes, or technologies. Do you think that IPO member
companies will take advantage of some of these provisions?
Mr. Rhodes. Thank you for the question, Mr. Chairman.
I think that certainly with as diverse a membership as IPO
we have companies that will be interested in various aspects of
those programs. The green program that was announced, I know
that we at 3M had some patent applications that we submitted
into those.
I think, more generally speaking, though, with such a
diverse membership we are concerned when certain technologies
or certain patent holders are put to the front of the line and
prioritized among others who would have equally beneficial
inventions. There is no denying that we want to encourage some
of the subject matter of the inventions that are being
prioritized, but we just don't know what is in some of the rest
of the backlog as well. So that does create some concern.
I distinguish that, however, from the accelerated
examination that we certainly support. If you are willing to
pay more to accelerate examination, I think that program is a
tremendous success.
Mr. Smith. Thank you, Mr. Rhodes.
That concludes my questions; and the gentleman from North
Carolina, Mr. Watt, is recognized for his.
Mr. Watt. Thank you, Mr. Chairman.
I thank the witnesses for being here.
I think all of you were here when I asked Director Kappos
about this economic impact analysis that the Appropriations
Committee suggested that he try to incorporate in the analysis.
And I don't want to leave the impression that I am not
sensitive to the domestic economic impact. I am sensitive to
that. I just do not know how, consistent with what we have
tried to achieve in the patent reform bill and consistent with
our treaty obligations internationally, how you can put that
together and into the same analysis.
So I am wondering if you all have any ideas about how,
consistent with our treaty obligations, we can address the
foreign economic impact that patent publication may facilitate
and how all of this may be made more compatible. Any of you
have any ideas on that?
That is a softball question again, I thought.
Mr. Armitage. Could I speak to that question?
Mr. Watt. Yes, sir.
Mr. Armitage. Because I think the gist of the proposal here
was that if you did the economic impact analysis you could
elect not to have your patent application published at 18
months, or in fact it just simply may not be published at 18
months. It seems like that is simply taking the patent law in
the wrong direction. There was some justification perhaps for
not publishing all patent applications promptly under our old
regime. But our new regime basically guarantees someone once
they file an application, and once that application is
published, that no one can come later and get a patent that is
either the same as what was originally filed or obvious in view
of what was originally filed. It is a categorical guarantee
that if anyone gets a patent, you do. It worked different with
a first-to-invent system.
So with the burdensome nature actually having to do the
analysis and then with the fact that if you do it you are just
perpetuating secrecy when sunshine would be a far better
policy, I would strongly urge the Office as they move forward
with this analysis to look at this as not only something we
want to do but something we would not want our trading partners
to do. That is, keep things secret, where we would also be
better off globally knowing who was going to get patent rights
and who wasn't.
Mr. Watt. Any other comments on that?
I mean, as sensitive as I am to the economic impact of
this, I don't know you give it the same level of credibility, I
guess, as national security, which might justify some level of
secrecy. But I am open to any other discussion about that you
might have.
Mr. Horton. I might add to what Mr. Armitage has said. The
fact is that now, for the first time in a long time, the U.S.
has regained its leadership position on patent harmonization
and IP protection discussions globally. That is huge. Because
where we really struggle I think for adequate protection for
all the intellectual property that is generated in the U.S. is
in other countries where those laws we find to be--and the
enforcement of those laws is inadequate. By regaining that
leadership position, by harmonizing with some of our major
trading partners, I think it puts us in a much better position
to try and advocate for broader, better, stronger protection
internationally that will give us the kind of rights that we
benefit from here in the U.S. in many of the areas where our
growth is also happening pretty quickly. So I think they have
done a great job, by the way, of taking this and making it work
internationally.
Mr. Watt. Now, I shouldn't lose sight of the fact that this
is being done at the request of the Appropriations Committee,
and there is a connection to the second question that I want to
ask. They have got to do what the Appropriations Committee ask
them to do, which is put out a rule and evaluate the
implications of this economic impact. Otherwise, there is a
fear that the appropriators will take the money that they are
collecting and not give it back to them.
I raised the question in my opening statement about the
impact that this kind of gentleman's agreement could
potentially have going forward with the appropriators. I guess
the question is, if the money is collected--you talked about
your concerns about fees, but if the money is being collected
and applied to something other than the workings of the PTO
office, I assume you all would be even more concerned about the
increase in fees.
So I am raising this kind of to put it on the record so
that maybe the appropriators will understand that these two
things are connected to each other. And in this area our
objective is to get an appropriate Patent and Trademark Office
operation, not to collect more fees for the benefit of solving
our budget deficit, I suppose.
I won't ask you all to comment about that. I mean, I assume
everybody on the panel basically agrees with the general notion
that I have expressed without alienating the appropriators.
Mr. Armitage. Billions for the Office, not one cent for
diversion.
Mr. Watt. That is probably a good summary in capsule.
With that, Mr. Chairman, I will yield back.
Mr. Smith. Thank you, Mr. Watt.
Let me thank our witnesses for their testimony today. We do
have a number of questions in writing to submit to you all. A
number of Members have to be on the House floor--have had to be
on the House floor for the last hour or so, so we have a number
of questions from them we would like you to respond to them in
the next week or 10 days, if you could.
So thank you again for your testimony, very, very helpful.
And we do expect to proceed with a bill that will make some
tweaks, and we look forward to your continuing input in that
regard.
Without objection, all Members will have 5 legislative days
to submit additional written questions for the witnesses or
additional materials for the record, and this hearing is
adjourned.
[Whereupon, at 12:15 p.m., the Committee was adjourned.]

A P P E N D I X

----------

Material Submitted for the Hearing Record

Prepared Statement of the Honorable Bob Goodlatte, a Representative in
Congress from the State of Virginia, and Member, Committee on the
Judiciary

Today we are holding a hearing on the implementation of the Leahy-
Smith America Invents Act. The AIA was the first patent reform bill in
over 60 years and the most substantial reform of U.S. patent law since
the 1836 patent act.
But as the Members who drafted and worked to enact this law, our
primary purpose today is to ensure that the hard fought reforms in the
AIA are implemented by the PTO in keeping with Congressional intent. It
needs to be made crystal clear that the rulemakings and regulations
promulgated by the PTO should move us forward toward greater certainty
and not be allowed to maintain the status quo.
As we implement these changes in the patent system, we need to
ensure that the new post grant review and other proceedings provide
simple, cost-effective methods for raising challenges to potential PTO
prosecution mistakes and that they provide less expensive alternatives
to federal court litigation. If implemented correctly, these
proceedings will increase certainty with regard to patent rights and
thus spur more investment in new ideas.
The PTO also needs to continue working to ensure that our patent
system not only expeditiously reviews patent applications, but issues
high quality patents that obviate the need for subsequent challenges
and that can be enforced through the courts and administrative
proceedings. This means we need to focus simultaneously on patent
quality and patent quantity.
A significant focus of the AIA was to reduce the problem of
overpatenting, particularly by so-called ``patent trolls,'' the
situation where weak or frivolous applications have been developed
through creative or predictive lawyering, rather than as President
Abraham Lincoln put it, through the ``fire of genius.'' The strength of
our system relies on granting strong patents that are truly novel and
non-obvious inventions--those that are the result of true innovations
and not the product of legal gamesmanship.
As the PTO reviews the volume of applications and works through the
backlog, the bar needs to be set higher, and quality control needs to
start on the front end rather than relying with the courts.
A positive example from the AIA is the work being done to implement
a transitional program to correct the egregious errors made in the
granting of a wide range of business method patents. This program will
provide the PTO with a fast, precise vehicle to review low-quality
business method patents, which the Supreme Court has acknowledged are
often abstract and overly broad. This program has the potential of
making our nation's patent portfolio stronger and if it is successfully
implemented, we may want to consider making it permanent in the future
and expanding its applicability to other non-technological patents.
One area I plan to continue to watch is PTO fees. The fee authority
Congress gave the PTO is finite for a reason. We sunset this authority
so that the PTO would be mindful that it would need to come back to
Congress to make the case that they have exercised this authority
wisely. We will continue to monitor fees and make sure the PTO is
enacting reforms to achieve maximum agency efficiency before it resorts
to fee increases in the future.
The issues that we discuss in today's hearing will require ongoing
vigilance as we work to implement the AIA. We look forward to working
with the USPTO, American innovators and industry to help identify
specific concerns and issues, so that we can ensure that the bill is
implemented in line with Congressional intent and promotes U.S.
economic growth and job creation.
I look forward to hearing from all of our witnesses on the
implementation of the AIA and ensuring that the U.S. patent system
helps to promote U.S. manufacturing, technology and innovation.

Prepared Statement of the Honorable Melvin L. Watt, a Representative in
Congress from the State of North Carolina, and Member, Committee on the
Judiciary

The Leahy-Smith America Invents Act was a monumental achievement
and the first significant legislative overhaul of the patent system in
over 50 years. After several cycles of congressional consideration, the
patent reform bill was made possible in large part by the sheer
doggedness of many of today's witnesses and the industries they
represent, as well as the leadership of the Administration and Director
Kappos and members of this Committee and our Senate counterparts.
The key reforms incorporated in the America Invents Act as part of
the Obama Administration's commitment to promote innovation, stimulate
job growth and enhance America's global competitiveness, are far too
numerous to recite in the time I have. However, I want to acknowledge
one that unified virtually all members of this committee--full funding
for the PTO.
Earlier this month the House passed the CJS appropriations bill
which included $2.93 billion for the PTO for fiscal year 2013, a 9.5
percent increase over 2012. This amount reflects a spending level equal
to the estimated fees the PTO will collect and is consistent with the
``gentleman's agreement'' in the AIA. Despite the unfortunately large
number of negative provisions in the CJS appropriations bill that made
it impossible for me to support, the record should be clear that have
never deviated from my view that the PTO should and must have access to
all of the fees its collects to provide the efficient and quality
services our innovators deserve. The increasingly indeterminate plight
of most annual appropriations bills highlights the uncertainty, if not
the folly, of the deal that was struck on the anti-fee diversion
provision in the AIA. I can only hope that we will not allow rank
politics to highjack or hold hostage the policy objectives we all agree
are the best for our country.
This is an ongoing concern and leads me to wonder to what extent
the PTO or its users fears about the precariousness of full funding has
or will influence or negatively affect implementation of the vision and
provisions of the America Invents Act.
But we are not here to re-litigate the shortcomings of the America
Invents Act. Rather we are here to obtain an update on its
implementation. Of the 20 provisions in the law requiring the PTO to
establish new procedures or adjust current ones, the agency has fully
implemented 7. Of the remaining provisions that require PTO action, 9
have been addressed in recent Notices of Proposed Rulemaking and await
public comment, while only 4 remain under development. The PTO is on
schedule with each of these provisions and, by all accounts, has
conducted a fair, inclusive and transparent process. Unless we hear
something compelling to the contrary from our second panel today,
Director Kappos and his staff are clearly to be commended for their
accomplishments to date.
While the development, evaluation and implementation of the
procedures and processes to carry out the mandate of the America
Invents Act ultimately rests with the PTO, I look forward to hearing
from the witnesses today on the various approaches they recommend to
the agency to meet its challenge.
Mr. Chairman, I thank you for calling this hearing and assembling
an impressive panel of witnesses and yield back.

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