ness litigation and it ought to be returned back to that main

stream.

So a few highlights, if I might. First, Time Warner believes that Congress should require meaningful proof before awarding increased damages in patent suits. This is basically the willfulness area that a lot of people have talked to you about. Problems with willfulness include, as you mentioned, Senator Hatch, that it is a subjective standard. But there are also worse than that. As Professor Lemley mentioned, the proportion of patent cases in which willfulness is pled is truly outrageous and it leads to a distortion of the litigation system. Indeed, as Judge Dyk noted in his partial concurrence in the Knorr-Bremse case, the current standard is quite frankly inappropriate in view of the settled law of punitive damages.

So for these reasons, Time Warner believes the Patent Act should be amended so that the purpose behind increased damages, which is a valid purpose to punish those who have acted with disregard for the law, is actually the predicate for the finding of willful damages.

Secondly, Time Warner believes that patent damages should be conformed to the reality in the marketplace today that there are multiple, or indeed sometimes hundreds of patents covering products. This is the issue that people have been calling the apportionment issue.

Essentially, Time Warner supports reforming damages law by explicitly directing courts to begin their damages inquiry for combination inventions by focusing on the incremental value attributed to the patentable invention. You will realize that today that is not the case at all. In fact, the leading way of determining what patent damages ought to be today goes back to a district court case in 1970 which was compiling a number of factors from the years before that.

Essentially, it is our position that the patent law is mired in a 19th century view of the world in which there are only one or two or three patents covering an invention, and in which it is perfectly okay to take 15 or 20 factors and look at them and decide what should be going on here; that that is an appropriate amount of discretion.

But that is not an appropriate amount of discretion. It is not an appropriate starting place. Rather, it is a ticket for the creativity of aggressive lawyers to look at any potentially relevant revenue as being part of a damages base. That is what we see happening in the damages area. That is why we think that apportionment is important.

The third area that we would highlight is that Congress should fix the patent injunction imbalance. I know there will be disagreement and hopefully some heated discussion about that topic today. But Time Warner's view is that essentially the problem here isn't the availability of injunctions. The problem is the way that the rules determining what should happen for injunctions have been applied by the Federal Circuit. The basic question, we believe, should be why has discretion been removed from the Federal courts, not why is it people who are proposing change are proposing that change.

In conclusion, thank you very much for the opportunity to talk to you today.

Chairman HATCH. Thank you. We miss Sean Bentley up here arguing with us on these matters. We hope he is doing well.

Mr. FISH. Yes. Actually, I spoke to him today, Senator, and he is doing well, I hope.

Chairman HATCH. Well, give him our regards, will you? He worked a long time on this Committee and helped a lot of us on both sides of the table.

[The prepared statement of Mr. Fish appears as a submission for the record.]

Chairman HATCH. Mr. Hawley, we will conclude with you. STATEMENT OF J. JEFFREY HAWLEY, PRESIDENT, INTELLECTUAL PROPERTY OWNERS ASSOCIATION, AND VICE PRESIDENT AND DIRECTOR, PATENT LEGAL STAFF, EASTMAN KODAK COMPANY, ROCHESTER, NEW YORK

Mr. HAWLEY. Yes, thank you, Mr. Chairman. It is probably appropriate for a broad-based organization like IPO to speak last today because you have already heard from all my constituencies on all sides of the issue.

it?

Chairman HATCH. It kind of puts you in a tough position, doesn't

Mr. HAWLEY. Well, no. I am used to it.

We really deeply appreciate the opportunity today to testify and we hope to be able to articulate the perspective of a broad-based organization whose focus is on that of the intellectual property

owner.

I think it is worth emphasizing, as several of the witnesses have already, that the patent system of the United States has served the country extremely well over 200 years. The outcome of the Federal Trade Commission and the National Academy of Sciences and other studies could have come out differently, but they didn't. They validated the extreme value of the patent system for our country, but did recommend some changes.

IPO was one of the first organizations to point out, for example, that the U.S. Patent Office was in crisis. More and more often, we are seeing articles in the popular press criticizing some aspect of our intellectual property system. And as a result of a wide variety of issues, many of which you articulated yourself and you have heard again here today, including the emergence of a cottage industry that has sprung up to take advantage of uncertainties in the system, litigation costs are increasing rapidly.

IPO strongly supports the vast majority of the current proposals that improve the PTO processing efficiency, improve the quality of issued patents and reduce litigation costs. In particular, we clearly support first inventor to file, assignee filing, 18-month publication for all applications; a post-grant opposition system, as well as many other reforms.

In the context of this hearing which is focused on litigation, I think it is important to realize that if you are able to increase particularly the quality of the patents coming out of the Patent Office, that will go a long way toward alleviating the litigation burden. But that all pre-supposes adequate funding for the Patent Office,

and down the road that again would mean less abusive litigation as patent quality increases. For example, when we are all satisfied with the post-grant opposition language and we breathe a sigh of relief, let's not forget that the Patent Office needs the resources to do the job correctly.

Reducing the abuse of the patent system is very important to our members, and you have heard from several of them today already. Every hour that is spent by patent litigators defending against questionable patents being asserted by patent system abusers means that $500 is not being spent on new innovation and new product development.

We have been specifically asked today to speak about damages, so I want to talk about willful infringement. The concept of treble damages was put into our law in 1793, at a time when many infringers took a cavalier attitude toward patents. The same is not true today. Patents are frequently held valid and infringed, and large damage awards are common, particularly in comparison to damage awards typically granted in other countries.

In the current environment, the threat of treble damages tips the balance too far in favor of those patent owners who seek to game the system. As you have heard probably several times, some companies are actually instructing their engineers not to read patents and the cottage industry that I referred to uses the threat of willful infringement to extract an amount in settlement disproportionate to any contribution they have made.

Mr. Chairman, imagine yourself as the patent counsel for a large company and a form letter arrives in your in-basket accusing you of infringement of xyz patent. The cost to investigate will be $50,000. If there is a hint of doubt, you will have to buy another $50,000 legal opinion. Lo and behold, the form letter contains an offer. For a mere $75,000, you can buy a license. In this situation, if the patent owner can collect $75,000 from 100 companies, he has netted $7.5 million. The law with respect to willful infringement needs to be rebalanced. IPO strongly supports the language in the bill recently introduced in the House.

Mr. Chairman, a little anecdote. When I was growing up, my father was a property law professor at New York University Law School. After practicing chemical engineering for a number of years, Kodak gave me the opportunity to become a patent attorney. So not knowing what I was getting into, I called my father and I said, dad, what is patent law? And in retrospect, the answer should have been predictable. He said to me and I remember the conversation vividly to this day-patent law is just a special form of property law.

The right to prevent trespass is fundamental to property concepts. It is not surprising that proposals to tinker with the right to injunction in patent cases has evoked vigorous debate. Any language altering an injunction needs to be thoroughly justified.

Again, Mr. Chairman, IPO is grateful for the opportunity to express our views. Our members are optimistic that much of the needed reform will come out of the 109th Congress.

Thank you.

[The prepared statement of Mr. Hawley appears as a submission. for the record.]

Chairman HATCH. Well, thank you. We appreciate all of your testimony.

We have four charts that can help us in our discussion here today. We might want to get those put up there, but let me start by helping us to get to the nub of the injunction question, with the proviso that I am not asking any of you to negotiate in public or to reveal any bottom lines here. We want you to just help us.

I would like to ask each of you-and we will start with Mr. Gulbrandsen and just go across the table-to give your general views of the current law with respect to injunctions and to tell us from your perspective what the pros and cons are of current law and what are the pros and cons of some of the proposals that exist to change current law. We would like to have the best you can give. We will start with current law, the House Subcommittee discussion draft, the injunction proposals supported by the high-tech industry and, of course, the injunction language of H.R. 2795. So these may be of some help to you, we hope, but let's see if you can be of some help to us.

Mr. Gulbrandsen.

Mr. GULBRANDSEN. Mr. Chairman, I speak from the perspective of the independent patent owners and university patent owners, individuals that start companies with technology out of universities, individuals that depend on investor dollars to start those companies. The current patent law is well-suited to our ability to start companies out of universities. Investors who are putting the money at risk in those companies are assured that if the technology is patented, they will have the power of staying for the long term with that investment and enforcing it against others that might trespass on it and hopefully recover their investment with a nice return. If you start tinkering with that law, those investors are going to be less anxious to take the risk on university technology and our start-up programs are going to suffer.

Chairman HATCH. Mr. Band.

Mr. BAND. Well, the wording of the existing law, the current law, is fine as far as it goes. The question is how has it been interpreted. And you could say, well, the principles of equity-I mean, what else should govern the issuance of injunctions? But the problem is the way that has been interpreted by the courts is that there is a presumption in favor of an injunction and there is a presumption of irreparable injury, and, second, that that presumption is as a practical matter irrebuttable. So the words are fine, but the problem is how the Federal Circuit, in particular, has been interpreting these words. That is why we feel there needs to be something more specific.

Now, of all these alternatives, I suppose the preferred alternative for the financial services industry would be the House Subcommittee draft because that makes clear two things. First of all, it makes clear that you can only have an injunction if the patentholder bears the burden of showing that there would be irreparable harm if there isn't an injunction issued. So that is why that is the best language from our point of view.

It does two things. First, it says that there is no presumption in favor of the plaintiff. And second of all, it makes it clear that you

have to look at all the factors and determine that, in fact, money damages alone would not be sufficient to take care of the problem.

The language proposed by the high-tech industry is very similar to the language included ultimately in H.R. 2795. It is better than the existing law in terms of giving some guidance, but it isn't quite as good as the Committee print language in that it doesn't clearly eliminate the presumption that exists now under current law. Chairman HATCH. Mr. Lemley.

Mr. LEMLEY. Thank you, Mr. Chairman. Just so the record is absolutely clear, I think actually that the language of H.R. 2795 is somewhat different than the one that is in the poster. In particular, the language takes the last sentence of the injunction proposal supported by high-tech and uses it in place of any of the discussion of irreparable harm.

Now, let's be clear in terms of what is desirable. If you look at section 283, section 283 actually grants by its literal terms pretty broad power to courts to consider whether or not an injunction is appropriate. The courts may grant injunctions in accordance with the principles of equity on such terms as the court deems reasonable. The problem, as Mr. Band says, is that the Federal Circuit has essentially forbidden to the district courts the exercise of that equitable power that the statute gave them.

I think the goal of 2795 and the fairness language is basically to reiterate what section 283 already says to say we meant it when we said you have got to use principles of equity here and consider all of the relevant factors. My only concern with that language is not actually what will happen in the district courts in the United States. I think it is quite reasonable to think that district court judges will do a good job, will understand the importance of injunctive relief as the baseline in the patent system.

My fear with the fairness language is more what might happen abroad, and in particular the risk that some developing countries might use the existence of this particular term "fairness" as invitation to deny patent protection to pharmaceutical companies in drug patents. That is a worry.

So I would prefer language somewhat more tailored actually to the problem of abuse of the patent system, somewhat tailored to the problem of a patent owner who asserts a patent and demands an injunction not just covering the particular component that they have invented, but covering the larger product. In my written testimony, there is language that would accomplish that end. So I think the idea behind the high-tech proposal, the fairness proposal, is the right one, but we may need to work on the language to make sure we don't create a problem.

Chairman HATCH. Thank you.

Mr. Kushan, if you would care to comment.

Mr. KUSHAN. Sure. Thank you, Mr. Chairman. Depending on my comments, I may be your favorite or most hated witness. The standard that is articulated and embedded in the jurisprudence as it exists today is the standard that virtually every

Senator LEAHY. Some people find it possible to be both at the same hearing, so here is your opportunity.

[Laughter.]

Mr. KUSHAN. I may achieve that, too.