May 18, 2007

The Honorable Patrick J. Leahy The Honorable Arlen Specter

Chairman, Ranking Member,

Committee on the Judiciary Committee on the Judiciary

United States Senate United States Senate

Washington, D.C. 20510 Washington, D.C. 20510

Dear Mr. Chairman and Senator Specter:

This letter provides the views of the Department of Commerce (DOC) and,
in particular, its component the U.S. Patent and Trademark Office
(USPTO) on the provisions of S. 1145, the \"Patent Reform Act of 2007,\"
as introduced.

This new patent bill is a revised version of legislation considered in
the last Congress to modernize the U.S. patent system through changes
designed to improve patent quality, reduce patent litigation costs and
further international harmonization of patent laws. We support these
goals.

[INTRODUCTION]{.underline}

The bill includes reform proposals that would directly impact the USPTO.
These include provisions on first-inventor-to-file, third-party
submissions of prior art and post-grant review of patents. There are
also litigation-management provisions relating to assessment of damages,
willfulness determinations and venue considerations that do not directly
impact USPTO operations, but rather patent policy in general.

There are also certain provisions that, while not currently in the bill
as introduced, could usefully modernize the U.S. patent system. In the
interests of providing as complete a picture as possible, we are
including suggestions that are consistent with the goal of
modernization.

In analyzing the provisions of S. 1145, and in suggesting additional
items, we consider what will benefit U.S. inventors and the American
public. It is from this perspective -- benefit to Americans -- that we
approach our review and make recommendations.

[QUALITY IS A SHARED RESPONSIBILITY]{.underline}

The U.S. patent system is predicated on disclosure. It cannot be
emphasized enough that the grant of a patent right presumes an exchange
of complete openness by the inventor for various rights of exclusivity.
Thus, U.S. patent law requires inventors to disclose the "best mode" for
reproducing their invention, and to explain their proposal in a manner
clear to one skilled in a particular art. We believe that emphasis on
full disclosure -- as is required for fair exchanges in all fields of
enterprise -- will ensure a vibrant, modern patent system.

A corollary of full disclosure must be intolerance for willful
suppression or hiding of information. While, of course, fraud cannot be
accepted, we also need a system that permits good-faith efforts to
provide high quality and complete applications. The challenge for
policymaking is to ensure modernization that both eliminates incentives
for fraud and promotes full and complete applications.

1.  **Applicant Quality Submissions (AQSs)**

Perhaps the most important element of ensuring that patent examinations
are of the highest quality and processed as efficiently as possible is
what the applicant files. The patent applicant has the most knowledge,
the most opportunity, and the most to gain by providing the USPTO with
the best possible information about his or her invention.

In the USPTO's new Accelerated Examination Program -- ­ where the first
patent was issued in less than six months -- applicants participate in
an interview and provide the USPTO with a search and a support document.
The USPTO's experience with this initiative is that both applicants and
examiners realize that more written and oral information from applicants
improves quality and timeliness.

The USPTO looks forward to taking the success of this model -- captioned
\"applicant quality submissions\" -- to lower pendency, raise
productivity and increase quality, and apply it to all patent
examinations. To that end, the USPTO believes that applicants should be
given every opportunity and the responsibility to provide more and
better information to examiners about their inventions. For such a
program to be successful, the USPTO will ensure that requirements for
more and better information do not become overly burdensome in general
and in particular to independent inventors and small entities.

We recognize that, in many cases, applicants have expressed strong
concerns about providing the USPTO with complete information about their
applications. In some cases, applicants simply do not want to provide
important information for fear that it will limit the scope of the
patent they may receive (though such a limitation would be proper under
the facts and the law). Unfortunately, an additional percentage of
applicants do not make the effort to fully define their inventions
because there is currently no procedural or other deterrent to
submitting an ill-defined application.

In some other cases, applicants or their attorneys fear that the legal
doctrines of inequitable conduct and unenforceability may unfairly
punish them with Draconian penalties for innocently omitting
information. The theory is that if one provides information, he or she
must do so perfectly or potentially lose the patent or face disciplinary
action; whereas, a failure to share any information carries no
consequences.

Under existing case law, a court that finds that an applicant has
committed inequitable conduct in prosecuting a patent application must
find unenforceable all claims of the patent and related patents, even if
they are otherwise valid. Thus, the only remedy available is a complete
loss of the patent. Inequitable conduct can be found if the applicant
deliberately withholds or inaccurately represents information material
to patent prosecution. Anything the court deems that a reasonable
examiner would find important can be material and the evidence necessary
to show intent varies according to the nature of the omission.
Accordingly, the inequitable conduct standard is uncertain and the
potential penalties severe. For example, any misstatement in an
affidavit, or even a failure to disclose a possible source of bias, has
been held to be capable of rendering all claims of the patent
unenforceable.

While the risk of an inequitable conduct finding is low, it is alleged
relatively frequently and, when alleged, adds substantially to
litigation costs and malpractice claims. The "all or nothing" result of
an inequitable conduct finding understandably has a perverse effect on
the actions of applicants and their attorneys with respect to "risking"
a proper search in the first place. As a result, the doctrine drives
counterproductive behavior before the USPTO. It discourages many
applicants from conducting a search and leading others to be
indiscriminate in the information they submit. In a review two years
ago, we found that in over one-half of applications either no
information disclosure statement was submitted or submissions included
more than 20 references.

As we review and evaluate the elements of a successful and efficient
AQSs program, we believe there are two related issues that would require
legislative action, namely inequitable conduct and the ability of
micro-entities to meet new information requirements.

**(a) Inequitable Conduct**

Consistent with the discussion above, DOC recommends that the bill be
amended to address the doctrine of inequitable conduct and
unenforceability to ensure that patent applicants are not discouraged
from fully and fairly sharing relevant information with the USPTO.

Current uncertainties associated with the doctrine would be
significantly reduced by clarifying the appropriate standards. First,
the standard for finding intent could be explicitly separated from the
materiality of the withholding, requiring proof that the
misrepresentation was knowing, with intent to deceive. Second, the
doctrine could be changed to a standard requiring a finding that the
information would have been relevant to a reasonable examiner. The
"relevance" standard could usefully be framed in terms of whether a
reasonable examiner would have allowed the patent, without more, but for
the misrepresentation or omission.

With respect to materiality, Congress may wish to consider requiring the
USPTO to define the term (as it does now) and limit the courts to
finding inequitable conduct only in circumstances in which information
that the USPTO has defined as material is misrepresented or withheld.

DOC and the USPTO look forward to working with the Committee and
stakeholders to develop provisions that would be more effective than the
current doctrine in facilitating the targeting of fraud that actually
affects the examination process and in improving the quality of
applicant submissions.

**(b) Micro-Entity Status**

We recognize that any AQSs program with requirements for more and better
information must not become overly burdensome in general and in
particular to independent inventors and small entities.

Accordingly, with respect to truly independent inventors and truly small
entities, DOC recommends that the bill be amended to define a
\"micro-entity\" status. The definition could be based on a number of
factors including: income level; number of patent applications filed;
lack of representation by a registered practitioner; and lack of
assignment activity. The status would exempt an applicant from some or
all of the requirements of an AQSs program.

That status also could be used to identify inventors eligible for
reduced fees and other preferred treatment and assistance.

2.  **Prior Art Submissions**

Section 9(b) of the bill expands the ability of third parties to submit
information they believe is pertinent to a pending application.
Specifically, the proposal would permit the submission of patents,
published applications or other printed publications before the earlier
of: (1) the mailing date of a notice of allowance, or (2) either six
months after pre-grant publication, or the date of the first rejection
of any claim by the examiner, whichever occurs later.

This proposal is consistent with the discussion above regarding AQSs and
overall efforts to encourage a highly participatory examination process
with more engagement by applicants as well as by other interested
parties with information relevant to that examination.

Current USPTO rules permit submission of patents or printed publications
within two months of publication or before the mailing of a notice of
allowance, whichever occurs first.

In contrast to current USPTO rules, the bill would require that the
submission include a \"concise description of the asserted relevance of
each submitted document.\" Current USPTO rules do not permit inclusion
of comments or explanations concerning the submitted patents or printed
publications.

DOC supports enactment of this section, with minor revisions, and
anticipates that the provisions will serve to provide our examiners with
information they may not otherwise obtain and should result in a more
efficient examination process and a higher quality, more reliable
patent. We have identified a few technical revisions that should be made
prior to enactment and recommend that the provision be accompanied by
regulatory authority for the Director of the USPTO to implement
procedural requirements to make the submission process as efficient as
possible.

Consistent with the provisions and rationale of this section, the USPTO
is cooperating in a pilot program involving peer review of patent
applications. Up to 250 applications, assigned to Technology Center
2100, which examines computer-related technologies, will voluntarily be
placed, by the applicants, on a non-USPTO web site for an expanded and
public review by a peer group of patent users, attorneys and academics.
The pilot group of applications will include applications filed by small
entity filers. The public group will determine and submit to the USPTO
what they consider the best available and relevant prior art. The pilot
program will test whether this peer review can effectively identify
prior art that might not otherwise be found by our examiners during the
typical examination process. We will also make an evaluation as to
whether this process results in measurable examination timesavings and
quality improvements.

[LITIGATION MANAGEMENT ITEMS]{.underline}

The disclosure philosophy has even more relevance to litigation than to
examination, as it exposes the economic repercussions of a failure to
fully disclose. One of the purposes of the patent system authorized by
the Constitution of the United States is to promote the dissemination of
knowledge to the public through disclosure of inventions. Requirements
for more and better information to support a patentability determination
are comparable to current requirements in virtually every judicial and
administrative proceeding for parties to bring the most relevant,
reliable and complete information before the decision-making body.

We fully appreciate that not all industries are similarly situated, that
market conditions change over time, and that practical matters -- such
as channels of trade -- may be legitimate factors for consideration in a
patent-infringement case. Therefore, we believe it is critical that
litigation-management modernization efforts preserve discretion for
courts that enables them to account for differences across industries,
markets, and time.

3.  **Apportionment of Damages**

Section 5(a) of the bill, in part, directs the court to ensure that a
reasonable royalty is applied only to the economic value attributed to
the patented invention as distinguished from the economic value
attributable to other features added by the infringer. More
specifically, the bill also provides that in order for the entire market
rule to apply, the patentee must establish that the patent's specific
improvement is the predominant basis for market demand.

Current patent law provides that a patentee is entitled to damages
adequate to compensate for infringement, but in no event less than a
reasonable royalty. The question of what is the value of a relatively
small piece of patented technology when it is integrated as a component
of a larger article has attracted substantial attention by the high-tech
industry.

Under the entire market rule, the value of the entire apparatus, which
includes both patented and other inventions not covered by the patent at
issue, is used as the royalty base for computing reasonable royalty.

Concerns have been expressed that patent awards based on the entire
market value are overly generous. Legislative proposals have attempted
to solve this problem by directing courts to consider the contribution
of other elements of the entire product added by the infringer. This is
one of several factors, commonly referred to as the *Georgia-Pacific*
factors, typically considered by courts in determining royalty rates.

While the appropriateness of damages awards in a number of patent cases
may be subject to debate, DOC does not believe that a sufficient case
has been made for a legislative provision to codify or emphasize any one
or more factors that a court must apply when determining reasonable
royalty rates. Further evaluation or research is necessary to determine
whether a statutory \"entire market rule\" may not be readily or
appropriately applicable to technology that involves something other
than a physical component of a product.

It appears that the courts have adequate guidance through
*Georgia-Pacific* and, as a general matter, do in fact consider numerous
factors in determining royalty rates, including: rates paid by other
licensees; nature and scope of the license; profitability of the
product; commercial relationship between the licensee and licensor; as
well as the portion of the realized profit attributable to the
invention. The amount of a reasonable royalty should turn on the facts
of each particular case, as best as those facts can be determined.

4.  **Willful Infringement**

 

Section 5(a) of the bill, in part, limits a court's ability to award
enhanced damages in the following ways: (1) codifies that increased
damages are limited to instances of willful infringement; (2) requires a
showing that the infringer intentionally copied the patented invention;
(3) requires notice of infringement to be sufficiently specific so as to
reduce the use of form letters; (4) establishes a good faith belief
defense; (5) requires that determinations of willfulness can only be
made after a finding of infringement; and (6) requires that
determinations of willfulness be made by the judge, not the jury.

Willful patent infringement can certainly have significant
consequences.  The court may treble the damages and award attorney fees.
With escalating patent litigation costs, the threat of treble damages
can be quite substantial.  Some have expressed concerns that willfulness
is frequently alleged as a matter of course and alleged infringers have
to bear the expense of defending such actions.

While there is some evidence to support the claim that willfulness is
frequently alleged, the evidence also suggests that willfulness is
currently difficult to establish. The additional requirements,
limitations, and conditions set forth in the bill may significantly
reduce the ability of a patentee to obtain treble damages.

Modernization efforts should avoid perverse incentives that might make
infringement simply \"a cost of doing business." While not the only
deterrent to patent infringement, the possibility of treble damages
provides an important and substantial obstacle -- more than might be
seriously considered in a practical business calculus.

** **

For lack of a clear and substantiated case for major statutory reform in
this area, DOC is unable to support all the provisions of section 5(a)
of the bill as currently drafted. However, DOC can support a number of
the narrowly drawn provisions of the section that we believe are
appropriate, reasonable and fair to most interested parties.

Accordingly, the Department supports enactment of the amendments
contained in section 5(a) that statutorily limit enhanced damages to
determinations of willful infringement; require sufficiently specific
notices of infringement; and provide that an inference of willfulness
can not be drawn from the decision of an infringer not to present
evidence of advice of counsel.

5.  **Prior User Defense**

Section 5(b) of the bill expands the prior use defense, created by the
American Inventors Protection Act of 1999, by eliminating the limitation
that the subject claim be directed to a "method of doing or conducting
business." It also enhances the safe harbor for non-patentees in that
they would only have to show commercial use, or substantial preparations
for commercial use, at any point before the effective filing date of the
patent application (rather than that date plus one year).

The benefit of a prior use defense is clearly directed toward the
non-patentee. Proponents argue that this is reasonable in a competitive
economy and strikes a balance between trade secret and patent
protection.

Critics argue that prior user rights undermine the purpose of a patent
system by creating a strong incentive to protect innovations as trade
secrets. Under a prior use defense regime, if inventors are able to
protect their innovations as trade secrets, they are able to use them
indefinitely, even if someone else obtains a patent on the invention.

Absent a change to a first-to-file system, DOC does not support the
bill\'s expansion of the prior user defense at this time. The existing
defense has rarely been invoked and there is insufficient information to
gauge the potential impact of substantially expanding it.

6.  **Venue**

Section 10(a) of the bill limits the places where corporations may be
sued by amending 28 U.S.C. § 1400(b) to provide that a corporation
\"resides\" only where it has its principal place of business or in the
State in which the corporation is incorporated.

This provision is clearly more restrictive than the current \"personal
jurisdiction\" standard that requires \"minimum contacts\" for venue
purposes and represents a substantial departure from established
practice. While this proposal addresses forum shopping concerns
expressed by many patent owners, it may not result in the most
appropriate and convenient venue for litigation.

Also, the proposal expands the types of actions subject to 28 U.S.C. §
1400(b) which currently is limited to patent infringement actions. The
proposal would cover any civil action arising under any federal law
relating to patents, other than declaratory judgment and Patent Board
decisions.

DOC has not taken a position on the provisions of this section. We will
review and evaluate the proposal, along with possible alternatives, in
consultation with the Department of Justice.

[APPEALS]{.underline}

7.  **Interlocutory Appeals**

Section 10(b) of the bill provides that parties in a patent infringement
suit are permitted to have an interlocutory appeal to the Court of
Appeals for the Federal Circuit after a *Markman* hearing on claim
construction, rather than waiting for a final judgment to be rendered by
a district court.

While proponents of this provision maintain that these appeals would
reduce the length and cost of litigation, others believe that the
appeals may have the opposite effect and would in fact offer \"another
bite at the apple\" because the reversal rate for claim construction is
fairly high.

DOC is unable to support this provision at this time. We will consider
the merits in consultation with the Department of Justice.

[PROPOSALS DIRECTLY AFFECTING THE USPTO]{.underline}

8.  **Post-Grant Review**

Section 6 of the bill establishes post-grant review procedures under
which any person may request the USPTO to cancel as unpatentable any
claim of a patent: within 12 months after issue or reissue; when the
petitioner establishes a substantial reason to believe that the
continued existence of the challenged claim causes or is likely to cause
the petitioner significant economic harm; or when the petitioner has
received notice from the patent holder alleging infringement by the
petitioner.

Post-grant review procedures would be more expansive than existing
reexamination procedures and would include consideration of evidence
gleaned through depositions and interrogatories as well as patents and
other documents. A newly designated Patent Trial and Appeal Board would
be responsible for conducting the post-grant reviews.

The USPTO Director would prescribe regulations establishing and
governing the proceedings including standards for showings of
\"substantial reason to believe\" and \"significant economic harm\" and
procedures for the submission of supplemental information and discovery
of relevant evidence. The Director would also establish by regulation
reasonable fees to be paid by the person requesting the proceeding.

Final determinations would be issued within one-year with a six-month
extension available for good cause shown. Regulations would address
sanctions for abuses of the proceedings.

Many aspects of the post-grant review section are similar to those
contained in the draft bill prepared by the USPTO in 2005. A primary
difference is the scope of the \"second window.\" While the USPTO\'s
proposal would also provide for a one-year first window, it would limit
the second window to a six-month period after receipt of a notice from
the patent holder alleging infringement. Additionally, the USPTO
proposal would authorize the Director to promulgate regulations that
would also require a petitioner to show substantial economic harm. That
authority would enable the USPTO to control or limit an influx of
potential cases.

A second significant difference is that the bill\'s applicability
reaches back to patents issued before the effective date of the
legislation. The USPTO\'s procedures would be available only on a
prospective basis.

The broad scope of the bill\'s second window coupled with the
substantial number of patents subject to the proposed review procedures
create very legitimate concerns about the USPTO\'s ability to
effectively handle the potential workload. Accordingly, while the
Department supports the establishment of post-grant review procedures,
we suggest revision of the bill\'s provisions to more closely align with
those in the USPTO\'s draft bill. We would be pleased to work with the
Committee in that regard.

9.  **USPTO Regulatory Authority**

Section 11 of the bill would specifically authorize the USPTO to
promulgate such rules, regulations and orders that the Director
determines appropriate to carry out the provisions of Title 35 or any
other applicable law or that the Director determines necessary to govern
the operation and organization of the USPTO.

We thank Congress for suggesting appropriate authority for the USPTO.
The USPTO has long believed that rulemaking authority is beneficial to
the patent system, and welcomes authority that is necessary to
promulgate regulations to ensure an efficient and quality-based patent
examination process. We have concerns about unbounded discretion, and
therefore want to be certain that any grant is not overbroad.

10. **First Inventor to File**

Section 3 of the bill converts the U.S. patent system from a
first-to-invent to a first-inventor-to-file system and makes various
conforming amendments. A grace period is provided to promote an
inventor\'s disclosure of the subject matter of the claimed invention
without loss of priority. Interference proceedings are replaced with a
derivation proceeding to determine whether the applicant with an
earlier-filed application is the proper applicant for the claimed
invention.

While the rest of the world uses a first-to-file system, the United
States continues to award a patent to the first to conceive an
invention, provided that all patentability criteria are satisfied.
Proponents of first-to-file maintain that it would simplify the patent
process, reduce legal costs, improve fairness and enhance the
opportunity to make progress toward a more harmonized international
patent system.

Opponents of first-to-file are concerned that adoption of first-to-file
could promote a rush to the USPTO with hastily prepared disclosure
information resulting in a decline in quality. Also, because many
independent inventors and small entities lack sufficient resources and
expertise, they feel that they would be unlikely to prevail in a \"race
to the patent office\" against large, well-endowed entities.

Conversion to a first-to-file system has been advocated by various
interest groups in the United States for decades. It is still the
subject of continuing controversy. While DOC recognizes the potential
benefits of a first-to-file system, we do not support immediate
conversion to first-to-file via this legislation.

It should be noted that U.S. conversion to first-to-file is an
overriding consideration in ongoing substantive patent law harmonization
discussions with foreign patent offices. We hope those discussions will
lead to significant benefits for patent applicants and promote work
sharing among worldwide patent offices. In this regard, we believe that
any U.S. commitment to convert to first-to-file should be contingent on
significant progress and international agreement in those harmonization
discussions. In particular, the United States seeks a standardized
one-year international grace period to protect American inventors who
might disclose their invention prior to filing for a patent.

Additionally, with respect to the specific text of section 3 of the
bill, DOC has identified a number of concerns regarding the scope and
application of provisions relating to prior art and grace period that
may require revision and clarification.

11. **Assignee Filing**

Section 4 of the bill proposes several changes to current practice
regarding who must or may file an oath or declaration in a patent
application and the application itself. A person to whom an inventor has
assigned or is under an obligation to assign the invention would be able
to make an application for a patent. Current practice requires that, as
a general matter, applications must be filed by the inventor(s).

DOC and most members of the patent community generally favor simplifying
and streamlining patent application procedures and reducing any
unnecessary formalities. The proposal is an appropriate step in that
direction. While the Department supports adoption of these provisions,
we have identified a number of technical issues in the text of section 4
that should be addressed and clarified as the legislative process
continues. Those issues relate to specific entitlement to the grace
period and national security and transparency considerations.

12. **18-Month Publication**

Section 9(a) of the bill eliminates the current opt-out provision for
publication of patent applications. Current law permits an applicant to
request upon filing that his or her application not be published at
18-months if a certification is made that the invention disclosed in the
application has not and will not be the subject of an application filed
in another country that requires such publication.

DOC is hesitant to support this provision at this time considering that
the current opt-out provision is a result of the careful balancing and
sensitive negotiations that took place during the legislative process
that led to the enactment of the American Inventors Protection Act of
1999. It addresses the serious concerns expressed then and now by
independent inventors and small entities that large entities and foreign
interests may misappropriate their inventions upon disclosure and prior
to issuance of a patent.

[CONCLUSION]{.underline}

Thank you for this opportunity to share our views on this important
piece of legislation. DOC looks forward to working with the Committee
and the Congress to develop legislation that improves our patent system,
while maintaining the balance among the interests of patent applicants,
relevant third parties, the general public, and the information needs of
the USPTO to serve all three. The Office of Management and Budget has
advised that there is no objection to the transmittal of these views
from the standpoint of the Administration's program. If you have any
questions, please contact me or Nat Wienecke, Assistant Secretary for
Legislative and Intergovernmental Affairs, at 202-482-3663.

Sincerely,

> John J. Sullivan

cc: All Members of the Senate Judiciary Committee