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that these decisions are not defensible as a matter of legal theory, but I think they are unsound as a matter of policy. An application should, it seems to me, be able to combine related discoveries to add up to a single claimed invention regardless of the precise informational relationship between the inventors.

The present requirement, which is unique to the United States, as far as I can tell has no significant advantage to anyone and has a disadvantage that it requires in many cases that the U.S. patent application be significantly narrower in scope than the equivalent foreign patent. This can frequently prove to be a very severe handicap to domestic business entities. In other words, your foreign application discloses or covers far more than the U.S. application, so that infringement of the U.S. patent-strike infringementcircumvention of the U.S. patent is facilitated by being within the scope of the foreign claims but yet being without the scope of the U.S. claim. And, to the best of my knowledge, it doesn't have any benefit to anybody; it is an anomaly of the U.S. law. I would strongly suggest that that be changed.

[The statement follows:)


CORP. In connection with this Subcommittee's hearings on Bill S. 1215 and more particularly the patent system as it affects technological innovation by U.S. industry, Mr. Merrill asked me to address three questions:

I. Is the U.S. patent system meaningfully useful considering the attrition rate suffered by litigated patents?

II. What influences a patentee's decision to sue an infringer?

III. What changes would I recommend in our patent system to increase its usefulness to U.S. industry from the standpoint of encouraging the industrial innovation process?

I am Patent Counsel for Raychem Corporation of Menlo Park, California, which in 22 years has grown to sales of well over $300 million per year. I am therefore speaking from the standpoint of experience with a fast growing presently medium sized domestic corporation. We like to think of ourselves as innovative and technologically oriented.

Raychem's success springs largely from an ability to provide novel products which solve existing problems. Often they are products which, once on the market, can be copied quite easily by competitors, and which have world-wide application. So we rely heavily on the patent system, both in the United States and elewhere, to protect our investment in research and development. An important factor in Raychem's continuing growth is (and has always been) the quality and enforceability of its patent portfolio, which is a good deal larger than that of most companies of comparable size. Thus, we currently hold well over 200 U.S. patents and almost 1000 foreign patents, with similar numbers of pending applications. We have been (and are) involved in patent litigation, both as plaintiff and defendant, in the United States and in Europe.

I have given the information above as background to the remarks that follow, but the views I express below are my own and certainly not any expression of an official corporate position.

Abe Lincoln's famous remark “The patent system added the fuel of interest to the fire of genius” is still true today. The cost of innovation in the sense of product development and introduction is unfortunately increasing even faster than inflation and the market place is ever more competitive. Without the limited right of exclusivity offered by a patent, most companies could not risk undertaking extensive research programs. While certain processes or formulations can be maintained as a trade secret, this is not a generally available alternative. Slugging it out in the market place with competitors, especially lower production cost foreign competitiors who have not incurred significant research and development costs, is bad business. In such an environment I feel innovation must inevitably suffer.

Given the failure rate of patentees in court, why does a company such as Raychem expend so much time, money and effort on its patent portfolio? First of all, the statistics are almost surely misleading. A variety of numbers has been bandied about but rates in excess of 50% are generally cited. The quoted failure rate is, of course, for patents litigated to final decision. Many patents are never challenged because there is no reasonable basis to doubt their validity. Conversely, many patentees are unwilling to bring suit either because they themselves seriously doubt validity or simply because the results could not be cost effective. Other patent suits are settled on the courthouse steps which doubtless also skews the quoted rate. In short, it seems probable that the patents fully litigated are in general those about which some reasonable doubt exists. Thus the 50% or more failure rate cited is dramatic but possibly not that terrifying or even surprising.

I think most corporations analyze their patents on an individual basis in the context of a particular potential litigation and therefore are probably not meaningfully influenced by general averages. This is certainly true of Raychem's management.

In my discussions with Mr. Merrill I indicated that a few years ago Raychem had been successful as a patentee Plaintiff against ITT in Boston. The patent in suit involved a high performance, light weight aircraft wire called “44" wire which at the time suit was brought had achieved outstanding worldwide acceptance in both the commercial and military context.

Although details of the suit are probably not appropriate for discussion Raychem's success in enforcing its patent is, I believe, significant in connection with three aspects of your present considerations.

First, on balance the patent system has a vigorous procompetitive impact. Had there not existed the opportunity for exclusivity in the commercial market Raychem could not have afforded to expend at an early stage in its existence (Raychem was only 7 years old when the patent application was filed) the sums necessary to develop 44 wire. “What if" speculation is probably fruitless but certainly even today 44 wire shows significant weight and performance advantages when compared to alternative wire constructions and is widely sold.

Second, disparity of size between litigants is clearly not an insurmountable barrier. At the time suit was commenced Raychem's sales were about 70 MM/year. I don't know ITT's size then or now but on a comparative or indeed an absolute basis it was certainly enormous.

Third, I would like to strongly urge that the present court system be maintained as opposed to a special patent court at either the trial or appellate level. The patent in suit was of a basically chemical nature. Our trial was held before Mr. Justice Tauro who characterzed himself as knowing no chemistry. That may or may not have been true but there is absolutely no doubt whatsoever on my part that by the end of the trial he had a comprehensive understanding of the complex legal and technical issues involved. I think few patent trial lawyers believe that they win or lose cases because the trial judge didn't understand the issues.

Although frequently complex, patent litigation is no more so than many other types for which specialized courts are not being seriously considered. The major disadvantage of specialized courts at either the trial or appellant level is that they tend to stultify new approaches, or adaption and development of the law to meet changed conditions. Such development and adaptability is one of the most significant advantages of the American legal system. The only arguments which seem to me cogent favoring such a single court system are possibly greater technical expertise on the part of the judges and greater uniformity of applied legal standards. As I have already indicated, I feel the former point is a solution to a non-existent problem and certainly could never be more than marginally significant give the great scope of technology encompassed by patents. The second supposed benefit is certainly a two edged sword and in any event is probably illusory since I believe that at the appellate level approximately three-fourths of the lower court decisions are affirmed regardless of whether the patent is upheld or not.

The decision to bring (or not) suit for infringement ordinarily follows a reasonably logical sequence of determinations, or at least educated guesses. The patentee must:

1. Determine with as much certainty as possible if the patent is infringed. In some cases mere examination of the competitive product provides the definitive answer. In other cases, e.g. a process patent, even sophisticated chemical analysis does not provide a conclusive answer, which must await pre-trail discovery.

2. Decide if some compromise satisfactory to the patentee, e.g. a license agreement, is possible. In many cases the infringer will not take a license or the licensor may not wish to license at a rate the infringer is willing to pay. Delay in enforcement can cause problems such as laches, statute of limitations or lead other potential infringers to conclude that the patent can safely be ignored.

3. Estimate if the cost of suit, which is always higher than expected, is likely to exceed the reasonably anticipated benefits of a favorable decision from the standpoint of an exclusive position for the patentee, past damages, higher license fees, and/or the deterrence of other would be infringers. In general, patent litigation costs are higher than those of other civil litigation because of the extensive documentation, frequent geographical separation of litigants e.g. our suit was in Boston, and great variety of available defenses.

4. Decide if the patent is valid, i.e. does it meet the 35 USC statutory requirements of patentability: to wit, is it new, useful, and unobvious and is the invention properly disclosed and claimed. These requirements are, I'm sure, familiar to all of you and certainly an exhaustive validity analysis is, or always should be, a condition precedent to bringing suit.

5. Decide is the patent enforceable? i.e. even if statutorily valid has the patentee estopped himself by inequitable conduct either during prosecution or after issuance. Pre-issuance misconduct can, of course, be either affirmative such as misrepresentation to the Examiner or negative in the sense of withholding information relevant to patentability. Post-issuance misconduct (patent misuse) includes a variety of unfair trade practices such as tying, block booking, price or territorial fixing with other licensees or the like. Although misuse can be purged, the existence of such behavior can frequently make suit inadvisable.

The critical factor to bear in mind is that with respect to points 4 and 5 all of these defenses are at least analytically available to the defendant and the patentee must prevail on all of them. Given the fact of in rem invalidity it is clear that suit for infringement should never be undertaken without the most detailed and carefully considered analysis.


In patents, as in may other areas, a major problem for industry is uncertainty. Businessmen want, and it is in the public interest for patent lawyers to be able to give, definitive answers. The changes I am proposing in our patent law will in general facilitate such definitive answers. While these changes are significant from a procedural patent law standpoint they certainly do not amount to a change in the fundamental theory of our patent system. I think our present system is a good one and the proposed changes are basically designed to enhance the value of our patent system of U.S. industry. Parenthetically, I should note that the proposed changes would tend to bring the U.S. system more closely into line with that of virtually all other major industrial nations.

1. Opposition and Reexamination. To increase the certainity of validity of a patent and reduce the court burden, I favor an opposition/reexamination system. An opposition system entails the publication by the Patent Office of an application together with the claims the Patent Office is prepared to allow. Any interested party is given a brief period, say 90 days, to cite to the Patent Office reasons why the claims are over broad or invalide either as they stand or in toto. The applicant and opposer(s) then argue their case before the Patent Office until a final decision is reached. An opposed patent which nontheless issues should enjoy a far greater presumption of validity than one which has issued unopposed. This is certainly true in existing opposition system countries e.g. Germany, Japan and Holland. In effect the searching facilities of the Patent Office have been augmented by a substantial number of people, many of whom are intimately familiar with the subject matter of an application.

By reexamination I mean a modification of the present reissue practice where an outside party as well as the inventor could cite prior art or other grounds of invalidity (not including those of the anti-trust or misuse type) to the Patent Office and request a reexamination by it of an issued patent. The applicant would of course be allowed to argue in return as in the case of an opposition. What would be the effect of this change?

(a) Clearly it would increase the burden on the Patent Office. Conversely, it would reduce the court burden and the Patent Office can in general more easily consider many of the technical issues which consume so much court time.

(b) The vast majority of patents are today held invalid on grounds never considered by the Patent Office in the initial prosecution. Either new references, undisclosed public use or some fraud or misuse type misconduct knocks the patent out at trial. An opposition and reexamination procedure would enable a potential infringer to get his best non-antitrust shot(s) considered by the Patent Office which should certainly result in less full scale litigation of surviving patents.

(c) There are undeniably certain potential disadvantages to this proposal. First, there is the possibility for bullying the little patentee. I think this possibility exists but certainly no more so and possibly less so than under the present system where elaborate pre-trial discovery etc. can prove very arduous for the small patentee. The same avenues of redress are available. Conversely, the small party confronted with a patent he believes invalid on prior art or prior use grounds could get a determination on the merits of his position relatively expeditiously and inexpensively without having to take the risk of infringing and then waiting to be sued.

2. The First Applicant To File Claiming A Given Invention Gets The Patent.—The U.S. and Canada are now virtually unique in having a so-called interference practice-in effect a trial by the patent office of who conceived of the invention first, who first actually carried out the invention and whether there was “due diligence" during the intervening period. Under this procedure the first inventor can in some cases knock out an existing earlier filed application or issued patent and get a patent in his name for the same invention. The interference procedure is long and horribly complex in many cases. While as a lawyer I greatly enjoyed interference practice I think the disadvantages of the system far outweigh the advantages. Abolition would:

(a) encourage prompt filing and presumably earlier issuance-a benefit to the public, and

(b) preclude situations such as the polypropylene multiparty interference where foreign patents had actually expired while the equivalent U.S. were applications still pending. Many companies were reluctant to invest in further developing the technology because of uncertainty as to who would ultimately prevail.

3. Patent Term Runs From Date Of Filing.-U.S. practice presently provides for a patent term running from the date of issue. This encourages or at least does not prejudice delay in prosecution. I recommend a patent term of the greater of 10 years from issue or 20 years from filing. This should certainly permit adequate time to commercially exploit an invention but yet not encourage undue delay.

4. Combination Of Inventors Should Be Permitted. We must recognize that the vast majority of inventing is done in a corporate or similar environment where a number of research and development groups work in interrelated areas although they may not directly interface. U.S. Law provides that an application must name the inventor(s) of the entire invention only and can claim only what a single inventive entity has invented. A recent series of casers have held that the claimed invention must be patentable over purely internal corporate prior art known to the inventor. While legally defensible these decision seem unsound as a matter of policy. Any application should be allowed to combine all related discoveries to add up to single claimed invention regardless of the precise informational relationship between the inventors. The present requirement, which is unique to the U.S., appears to have no significant advantages to anyone and in many cases results in a U.S. patent being narrower in scope than the equivalent foreign patent. This can prove a severe handicap to domestic business entities.

Senator SCHMITT. Thank you very much.
Mr. Lodge.

CAPITAL CORP. Mr. LODGE. Senator, I also wish to apologize in that I don't have 13-inch paper. I don't have any paper. I was invited only recently and I did not have the time to prepare a written statement, for which I apologize.

Senator SCHMITT. We will see how good you are at dictation.

Mr. LODGE. I also must confess that having listened to the testimony this morning that I feel a little bit like the lamb among the wolves in that I am far from an expert on the specific subjects that are being discussed today.

My background is really as a businessman and that is the perspective that I bring to this testimony. Perhaps it would be useful for you to hear about my background and how it might apply, and therefore you might be able to put my testimony in perspective.

I spent about 15 years in the investment banking business, primarily in investment research and corporate finance, financing typically smaller or medium size companies. Since 1972, I've been the chief executive officer of an entity called the Innoven Capital Corp. This is a venture capital investment firm with assets of approximately $20 million. The business of my firm is to provide growth capital for small emerging companies. Since formation, we have made 14 such investments. Thirteen of the fourteen companies have significant technological content in their product line. Some examples are large scientific computers, radiation processing equipment, pollution control equipment, telecommunication equipment, medical therapeutics and recombinant DNA.

The ownership interest that my organization has in these companies ranges from 4 percent to 85 percent. Therefore, as I said earlier my testimony is based on my experience as a director and owner and investor/entrepreneur. I represent Innoven as an owner; I sit on four boards of directors of our portfolio companies; additionally I sit on two other boards of public companies, one having revenues of approximately $80 million, another one having revenues of approximately $2.4 billion.

In my letter of invitation you asked for my opinion or comments on a series of questions and what I would like to do is attempt to give you my thoughts. Other people have commented much more eloquently on the specifics of these than I could, but perhaps it might be useful for me to reinforce some of their ideas from my persective.

The question of the utility of patents to someone in our position: in other words, a sponsor of a small technological company, we, as

arrives in our office with an issued patent that would be one factor that we might consider out of many, but we certainly would not want to bet everything that we have on the value of the patent. It turns out that every single company we have invested in has either a pending or issued patent so that the managements of the companies seem to have some faith in the patent system.

on the management time and the dollar costs, the question is do you get the equivalent amount of protection or is there an economic utility balance there? We tend to counsel our managements to not patent their devices, where possible, but rather to rely on keeping the process or the product or the elements of the product a proprietary secret and then to attempt to exploit it very rapidly and gain a timely market posture-rather than to go spend the

There was another question relating to the circumstances where a patent might be essential in the commercialization of innovative technologies. In reviewing our portfolio, I would say that 3 of the 14 companies would not be in existence without the benefit of a strong patent portfolio.

I make no judgment on the other ones, but clearly those three would not have survived. It is difficult to articulate the exact circumstances that what makes a product or a market product

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