The Patent System and the New Economy

March 10, 2005

Unedited transcript prepared from a tape recording

9:45 a.m.	Registration
10:00	Presentation:	Bradford L. Smith, Microsoft Corporation
	Discussants:	Q. Todd Dickinson, General Electric Company
		John F. Duffy, George Washington University Law School
		James V. DeLong, Progress and Freedom Foundation
		Andre Carter, Irimi Incorporated
	Moderator:	Christopher DeMuth, AEI
Noon	Adjournment

Proceedings:
MR. DEMUTH:  My name is Chris DeMuth.  I'm head of AEI, and I will be moderating today's session on the Patent System and the New Economy.

Patents, copyrights, trade secrets, trademarks are not static autonomous areas of law and policy.  More than most, their proper architecture depends upon changes in science and technology and economic organization.

Keeping these systems up to date is a challenge, but it has become more than a challenge in the recent--the past two decades where the highly dynamic character of information technology and bio technology especially have presented daunting challenges and where many close observers feel that reforms of a more or less fundamental character are in order.  These are not uncontroversial matters, of course.

In all areas of intellectual property, one needs to strike a balance between ownership and use, between incentives for invention and the availability of the fruits of invention to other inventors and to consumers.

There have been a variety of recent studies, most notably by the National Research Council last year and the year before that by the Federal Trade Commission, attempting to assess these matters with particular respect to patent questions that we will be looking at today.  And a growing number of trade groups and industrial organizations and a growing number of academics at leading research universities, law schools, and economics departments have thrown themselves into the fray.

This is a growing area for AEI as well.  I have passed out little flyers on a book that we published--a monograph we published recently by Bill Landis and Richard Posner, and another on a book Intellectual Property Rights in Frontier Industries, Software and Bio Technology that our Joint Center for Regulatory Studies, with Brookings, is bringing out next month.

This morning we have five leading thinkers and doers in the area of patent rights, and I believe that the focus will be primarily on software and information technology applications, which in the early days of the computer revolution were largely a matter of trade secrets that evolved to copyrights and the main focus of attention these days is on patent issues.

We will begin with a presentation by Bradford Smith, who is Senior Vice President, General Counsel, and Corporate Secretary of Microsoft.  He has been there for 11 years.  Brad is a summa cum laude graduate of Princeton.  He was Fisk Scholar at Columbia Law School and practiced here in town and in Europe for Covington and Burling before joining Microsoft.

After his talk, we are going to turn to a panel where four individuals will be making presentations.  They may respond in on or another to Brad Smith's remarks, but I know that they have presentations that they would like to make themselves.

We will begin with Todd Dickinson, from Pittsburgh, a graduate of Allegheny College and Pitt Law School.  He has practiced in intellectual property fields at Howry Simon and elsewhere for a long period of time.  He is not Vice President and Chief Intellectual Property Counsel at GE, and he is, as many of you know, in the Administration of Bill Clinton was Undersecretary of Commerce for Intellectual Property, and head of the U.S. Patent and Trademark Office.

John Duffy, a graduate of Harvard College and the University of Chicago Law School, is one of the preeminent academic students of patent law, the author of several leading articles and a leading case book on patent law.  He is currently on leave at NYU.  He has taught at many universities, many law schools, and is a professor at George Washington University Law School.

My friend Jim DeLong has been active for many years.  For a time here in the Washington think tank community, he practiced law for a time, but has primarily been a student of various forms of economic and regulatory policy.

A graduate of Harvard College and Harvard Law School, where he was book editor of the law review, he is currently well known to people concerned with these issues as director of the Center for the Study of Digital Property at the Progress and Freedom Foundation.

Finally, another Washingtonian, Andre Carter is an expert in small business intellectual property issues, and will be going up against these two representatives of huge industrial behemoths batting clean up on our panel.  He is a graduate of Georgetown.  He got his MBA at American University.

He founded a succession of small business high technology start ups before leaving to found the firm Irimi, which he is currently CEO of, a consulting firm that works for small businesses in particularly information technology issues.

We have a very distinguished crowd here, and I was remarking that we could take any five people from the audience and put them on the panel and probably have just as interesting a conversation.  We will start with Brad's talk.  We will have the panel presentations, and we'll mix it up here at the panel for a while, but I will move to a general conversation with everybody who has come this morning as quickly as I can.

Please give a warm welcome to Brad Smith.

[Applause.]

MR. SMITH:  Thank you.  Well, thank you.  It is nice to join the members of this panel and all of you here this morning.  I was--I've been on the road recently and three weeks ago, I was in Latin America talking about patents and intellectual property issues, among other topics, and actually during that trip, I also was in Mexico City and spoke to the Microsoft employees in our Mexican subsidiary.

And as we got together that morning, I was struck.  There were a lot more people who showed up to listen than I had expected.  They kept bringing in more chairs.  I looked and was thinking this is great.  Our employees are so interested in these issues today.  I surveyed the audience and I thought it's great to see all the strides we're making in our diversity efforts.  We have many more women working here in Mexico than I remembered in the past.

Only that evening did I learn that there had been a little confusion in the building that morning, and instead of hearing that there was going to be a presentation from Brad Smith, people had heard that there was going to be a presentation by the actor Brad Pitt.

[Laughter.]

MR. SMITH:  I was completely sympathetic to the two women in the front row, when one of them I think turned to the other and said, you know, he looks so much better on the screen than he does in real life.

[Laughter.]

MR. SMITH:  So I will say if you came this morning expecting Brad Pitt to speak on patent law, disappointment is probably not your biggest challenge.

I do have one thing in common with Brad Pitt, however, neither of us is a patent lawyer.  I am not a patent lawyer, and so I will provide that caveat right up front.  In fact, one of my goals in life is someday to know half as much as Marshall Phelps, our Vice President for Intellectual Property and Licensing, who's here with us, has probably forgotten over the course of his career.  But there's also I think something that is both noteworthy and appropriate about having the general counsel of a company like Microsoft, who is not a patent lawyer, talk about patent reform.

Patent issues have, of course, been important for many, many years.  But we are at a point in time where patent reform is a front burner issue politically for the American technology community.  It is a front burner issue for the American business community.

So while it retains all of the nuances it has long held from an intellectual property perspective, I think people throughout the business community and certainly the technology industry are recognizing it today as a broad business and economic and innovation issue as well.

We very much appreciate that lot's of good thinking has been going on, perhaps especially here in Washington, D.C., about the future of the U.S. patent system.  There are a number of important groups--AIPLA, IPO, BSA.  Others have all been focusing on this.  We've seen increasing attention on Capital Hill, as Representatives Berman and Boucher have moved forward with a pieced of legislation.  All of these are important steps, and they provide a lot of the context, the raw material, for us to think and talk about here this morning.

Certainly we at Microsoft believe that important improvements should be made in the U.S. patent system.  You know, we have benefitted substantially as a company and as an industry and as a country from patent protection.  But the combination of technological change in a globalizing economy is creating new challenges for the U.S. patent system. Our patent system is today being flooded--I think it's fair to say--with new patent applications, and an explosion of sometimes abusive litigation.

So although the roots of our patent system remain strong, its long-term health is threatened unless we take the opportunity to reform it.  And we have reached the point--I think it's fair to say--where the time to act is now.

So what I'd like to do this morning is talk about the opportunity for patent reform really in four areas.

The first is ensuring that patent quality keeps pace with the increase in patent quantity.

The second is curbing excessive litigation and litigation abuse.

The third is promoting international patent harmonization.

And the fourth is increasing accessibility for individual inventors in small companies around the world.

In our view, this is the foundation for a good patent reform plan here in the United States, a plan that will take the strengths that have been built up over the two centuries of patent law in this country and keep the system healthy as we move into the future.

Before I turn to those four topics, let me just give you a few broader perspectives briefly.  The first is sort of where we're coming from as a company.

You might ask well, what is Microsoft's experience--you know, are we a plaintiff?  Are we a defendant?  You know, what is our agenda?

I actually think that the most interesting thing about our position as a company is that we are forced to look at literally every issue from both sides of the fence.

We are one of the largest investors in this country in research and development.  We spend $7 billion a year on R&D, and as a result that, not surprisingly, makes us one of the largest users of the patent system.

This year, we'll file over 3,000 patent applications with the PTO.  Each week we're typically number four or five on the list when the PTO puts out the list of new patent applications that have been published.

We have a major interest in ensuring that we and the rest of our industry benefits from good patent protection for our inventions.

But we also sit squarely on the other side of the fence as well.  We, for the last three years, every week had to deal with 35 to 40 patent lawsuits pending against us.  We win some.  We settle some, and new suits are filed.

We spend roughly $100 million a year defending against patent litigation.  I'm not aware of another company that has more patent lawsuits against it.

I think that's a natural reflection of the dynamic state of patent issues in the information technology field.  It's also a reflection of the fact that we have two very popular products, Windows and Office, and a very strong balance sheet that, put together, tend to attract the attention of potential patent plaintiffs.

So we really are forced to think about every issue from both sides, to be thorough going.  It makes it literally impossible I think to simply come to easy solutions or pithy slogans that would advance one side of the ledger while ignoring the needs of the other.

So that, in a sense, is or starting point for trying to think about this.  Certainly, as we think about the prospects for improvement in our patent system, we're grounded in two chief tenets.

The first is this:  that the patent system, born of our Constitution, really has worked extremely well.  In a sense, it's really quite remarkable when we think that we have--of the fact that our patent system today is 215 years old.  If you think about the fact that it was 1790 when the first three patent applications were filed, one of which was for the manufacturing of candles.

And so we have had a system that has literally enabled us as a country and as an economy to move from candlelight in the 1700s to electricity in the 1800s to the railroad and then to the telephone and to the automobile and the airplane, and, of course, today to some of the inventions that attract a lot of attention, including in our industry computer hardware, software, and Internet activity and communications.

I don't think that one could give even Thomas Jefferson and his creative mind credit for being able to imagine all of the inventions that would come from the six million patent applications that have followed those first three.

Today, we have a system that is enormously broad.  I mean last year the PTO approved 187,000 patent applications.  We have 1.9 inventions in this country protected by patents.

It is a system that has worked extremely well and that has served this country and our economy in an enormously important way.  And so that is the first tenet that I think it's worth thinking about.

In fact, if there's one story that to me underscores the long-term value and importance of our system it is this:  it was basically when the system was about 100 years old, in 1886, that the Patent Office was housed in what is today the Building Museum here in D.C.  I find it often interesting when I'm in town, because you go to events at the Building Museum, and I actually think there are relatively few people here in D.C. that know or remember that that was once the Patent Office.

And, of course, at that time, in the latter 1800s, that building was one of the grandest in Washington.  Just looking at the size of the columns today, you can get a feel for that.

And it was in 1886, when a Japanese individual, Korekiyo Takahashi, came from Japan because he was going to become the first commissioner or head of the Japanese Patent Office.  He happened to be one of the few individuals in Japan at that time who was fluent in English.

And so he came, and he literally spent months talking to people at the Patent Office, interviewing them, learning about what they did and how they did it.

And on his last week, one of the design examiners at the Patent Office, said look I've been working with you.  I've been really happy to answer all your questions, could you answer one for me.  Why did you come here?

And he said well, it's a very good question.  You know, in Japan, we're opening up our economy to the world and we looked around at the world and we looked at the economic miracle of the United States.  We looked at the fact that in a century the U.S. went from an agrarian economy to one of the world's industrial leaders.

And we asked ourselves in Japan what is it that enabled the United States to do that.  And we in the Japanese government concluded that it was patents; and, therefore, we are going to put a patent system in place in our country as well.

And of course, as we all know, Japan did.  And the Japanese economic miracle unfolded in the century that followed.  We truly have something that is worthy of preserving in terms of all of its important benefits.

But there's also a second tenet, as we've thought about this, and that is the fact that as strong as the system is, broad discussion and patent reform is also an important and periodic part of our patent system.

Indeed, I think one could say that one reason the system has been strong for over two centuries is because it has changed over time.  There have been periodic efforts, successful efforts, to reform the patent system.  And it's also interesting to think about the fact that for many different periods of history, patent law is principally the focus of the nation's patent lawyers and patent examiners.  But periodically, in history, we see patent issues become issues that suddenly become front-page newspaper headlines.

And we might ask why is that?  Well, again, to me, there's a fascinating lesson from the experience of the 1800s.  Indeed, just about the same time that Mr. Takahashi was visiting the Patent Office from Japan, patent reform became an issue of huge political importance in this country.

The Granger Movement in the Midwest was literally organizing farmers and farm protests across the country, arguing in some cases that the patent system not only needed to be changed, it needed to be abandoned or at least new technologies needed to be excluded from its protection.

The lightning rod for this was the new technology--were the new technologies that were changing life on the frontier in our country.  Part of it was the railroad.  Part of it was new inventions for how farmers were literally getting water out of the ground through wells.  One of the hottest issues concerned Isaac Singer's sewing machine.

Singer patented his sewing machine, and, of course, it brought these enormous new benefits to people across the country, but then Montgomery Ward, in basically a precursor to what we think about as Internet e-commerce today, decided to take consumer goods directly to the nation's farmers and sold these goods directly through its catalogs, one of which was its own sewing machine.  And Montgomery Ward refused to pay Isaac Singer his royalty, and offered a cheaper sewing machine as well.

Well, there an issue of tremendous political importance as the farm states organized and then politicians in the northeastern states, where so much of the innovation was taking place, organized as well, and Congress was forced to grapple with these issues front and center.

And ultimately the Congress decided that the wave of new technology was creating new challenges and new demands on the Patent Office; that there was not enough prior art; that there were not enough patent examiners, and in some cases the legal standards themselves needed to be adjusted to take account of these new technologies.

I find that very interesting in part because as we get together 130 years later, it's often easy for people to think that everything we're talking about is entirely novel.

And yet it is so striking to see so many parallels between the issues being discussed today and the issues that have been discussed for so long in many different instances in our past.

But I think there should be no mistake about it.  The time has come for a broader discussion and political attention on the patent reform issue.  We do need to improve the U.S. patent system.  We need patent reform that's based on simple and clear goals, including maintaining high quality standards, eliminating litigation abuse, reducing barriers for small companies, and promoting great international harmonization.

And so let me just talk briefly about each of the key areas.  The first is the issue of quality.

Whenever in life, one sees a big increase in the quantity of anything, I think it tends to raise an issue or a challenge for quality.  How do you maintain a quality standard when quantity is growing so rapidly.

And clearly the quantity at the PTO has grown enormously.  We've seen basically a tripling of patent applications in the last 20 years to the rate of about 350,000 new applications now being filed every year.

And I think it is absolutely right for us to focus on steps that will ensure the kind of high quality standards that everyone in the system should want and expect.

Certainly, the congressional action late last year to address fee diversion, was a very important step.  We can't begin to expect the PTO to do its job unless it has the resources needed to do it we now need to make sure that that kind of step is put in place on a permanent basis so that resources are not diverted in the future.  But we also have opportunities to go beyond that in at least two significant ways.

One is to give people in the private sector the opportunity to submit prior art to the PTO during the examination process.  This would basically harness the resources of the private sector to support in an appropriate way the public interest in high quality patent review.  So that would be an important step.

The other important step that many in town I know are focusing on and that's reflected in the Berman-Boucher bill is the creation of a post-grant patent opposition procedure.  So that for a period of time after a patent is issued, people would have the opportunity to come forward and file or initiate an opposition.  I think that would enable us all to ensure that people have the kind of confidence they need in the quality of the patents that are being applied across the country.

If we were to take those three steps together and continue to rely on the PTO's progress in addressing business method patents as they have been over the last couple of years, I think all of that together would go quite far in giving the public the confidence it needs in the quality of the patents that are being issued.

Second, I think there's a real need to address the potential for abuse in patent litigation in this country.  I think it's fair to say that as in other areas of life, we confront a patent system in the U.S. that is excessively litigious.

It's too easy for a litigant to manipulate the U.S. system and look to a patent lawsuit as the ultimate lottery ticket, hoping to confuse jurors with technical jargon that will yield the payment of a lifetime.  We need to eliminate the abusive lawsuits and the patent litigation lottery it fosters.

One step that would do that would be the creation of a single district court at the federal level to hear all patent cases.  This would eliminate a lot of the forum shopping that takes place in the country today, and would give people I think much greater confidence and certainty as to how patent law is going to be applied.

But I don't think that the ending of litigation abuse can stop with that.  We need some other steps as well.

One is broadened efforts to address the willfulness standard, and the other is broadened efforts to address the standard for injunctive relief in patent litigation today.

The reality is that almost all of patent plaintiffs at least who bring lawsuits against companies in our industry invariable ask both for the treble damages that come from a willfulness finding and for injunctive relief, and there is more than fair room to question whether it is appropriate for people to expect that the courts will rule in their favor on these issues the way they do today.

The reality is that patent plaintiffs are using these devices simply to increase their demands for royalties from companies regardless of the validity or strength of the patents they possess.

There was a helpful discussion of the willfulness standard in the Knorr-Bremsey from the federal circuit late last year, but I think the reality is we would very much share the views of Judge Dike in his dissent; that we need to go farther and look at the willfulness standard more broadly.

Willfulness should be found when there are egregious cases.  It should not be found every time someone infringes a patent.  And the way that the duty of care standard is applied by many judges today, we do see willfulness equated with a lack of duty of care, which amounts virtually to a negligence standard rather than anything that is more substantial than that.  And we also think it's fair for us to look at the opportunity to take injunctive relief back to its equitable roots.

One should be entitled to an injunction when monetary relief is not sufficient to make a plaintiff whole, looking at all of the facts and circumstances.  But that is not, by and large, the way the plaintiffs who bring patent cases are using the injunctive relief standard today.

So here, too, there are important steps that if taken together, could bring some balance back to the patent litigation dynamic in the country.

Third, we need to look at harmonization.  We obviously live in a global economy.  Indeed, if you ask what is most different today from the issues of the 1870s, when Congress was looking at this and the newspapers were editorializing about it on a weekly and monthly basis, it is not the change in technology; it is the change in the global economy.

In the world today, no nation can look at its patent laws in a vacuum, separate from the rest of the world.  The world relies on the U.S. patent system.  It's striking when you look at the list every year of the top 10 applicants before the PTO.  This past year, six of the 10 were from outside the United States.  In many years, over the last decade, we've seen lists where eight or nine of the 10 have been from outside the United States.

So clearly, we see inventors around the world recognizing both the importance of patents and the importance of having their inventions patented in this country.  And at the same time, there is broader debate in the rest of the world as well, because people recognize that patent laws are important to put in place in virtually every geography.

We've certainly seen this in the European Union, where the Council of Ministers took I think a very constructive step this past week by endorsing a common position that will ensure that patent law remains healthy and balanced in Europe and that the European system retains its uniqueness.

But we need increasingly to look at opportunities to have some level of harmonization across national boundaries.  If we don't we build too much inefficiency into the system, and we may even create situations where different people will own the patents to the same invention in different geographies around the world.

The PTO has been addressing this, and there's been a lot of good work moving forward, but it absolutely needs to continue.  There needs to be more coordination, and ideally we should find a way to some form of mutual recognition at least among the three largest patent offices in the world--the European Patent Office, the PTO, and the Japanese Patent Office.

But we also need to look at legal reform.  Some level of reform is needed to get some greater degree of harmonization.  And here in the U.S., that clearly means we need to look at whether we want to retain the first to invent standard.

We are the outlier in the world today on this issue.  And I think there is a real need, therefore, for us as a country to adopt the first to file system and bring ourselves into greater synchronization with the rest of the world.

We also I think need to eliminate the remaining loophole that enables about 10 percent of patent applicants each year to avoid publishing their patent applications after 18 months.  If we do those two things, we'll take steps that will promote harmonization.

Finally, we do need to think about how to ensure that the system serves well the needs of small and individual inventors.  And you might think well, you know, you have a lot of credibility.  What the heck does Microsoft know about being a small inventor?

Well, we once were.  In fact, we're still fortunate to have the people running our company who were small inventors earlier in their careers.  And more importantly, the system will work and the system will maintain public confidence only if it strikes a balance among the needs of everyone who participates in it.

And so there is absolutely a need to ensure that the system today serves well the needs of small and individual and non-profit inventors, as well as large companies like General Electric and Microsoft, especially when you look at the world today in a global economy.  The patent system in the world is not the most hospitable to a start-up or an individual inventor.

Because patent laws vary and because multiple applications need to be filed, it's not only a daunting task to obtain patent protection worldwide, it's a mighty expensive one as well.  Large companies, like General Electric or IBM or Microsoft can afford the large army of lawyers needed to undertake that task.  In fact, I suspect that a few of you in this room have been enrolled in one ore more of those large armies.

But small companies cannot surmount those obstacles today.

And so part of what we need to do to make the system more accessible is either mutual recognition or some greater degree of harmonization, and the other thing we need to do is look at ways to help small inventors here in the United States as well.

I think we can take a cue from the United Kingdom, which for a number of years has had what I think is fair to say the lowest set of filing fees for small inventors, and we too, you know, can look for opportunities to remove obstacles inherent the system for small inventors today.  We believe there should be a zero filing fee system for small inventors that qualify for the small business entity status under the PTO regulations today.

If that type of zero filing fee system were put in place, it would provide a useful step for the small and start-up inventors that will continue to be such an important part of our economy.

So to conclude, we clearly have the opportunity here in Washington I think to have a renewed and broader dialogue about these issues.  As we do, we hope it will be grounded in a couple of principles.

The first is we need to continue to recognize that the patent system really is at the heart of what moves our innovation economy forward.  Without it, we can't look to the future with nearly the same degree of confidence that we do today.

And second, we need to focus on innovation and take a middle course.  We need to retain the strengths of the patent system while addressing the areas where it needs to change.  I mean this too has always been a part of the dialogue in this country.  If you go back to the days of electricity when some were arguing that Edison and others shouldn't be permitted to patent anything relating to electricity because electricity was, after all, a natural force or if you look even farther back to the days of Jefferson and look at what he said about our patent system, it's very clear that our system has been strong precisely because it has been balanced.

So I think it's fair in concluding to say the U.S. system really has contributed more to technological innovation than any system in the world.  But as the world has changed, so the patent system needs to change with it.  We do need a system that will adapt to the 21st century in a way that's right for the information age and for our expanding global economy.  Thank you.

[Applause.]

MR. DEMUTH:  Brad Smith, thank you very much.  We now turn to Todd Dickinson.  Todd.

MR. DICKINSON:  Thank you very much, Chris, and thank you for the invitation today and also I'm very pleased that the AEI is focusing on these issues, because, as Brad suggested--and let me congratulate him on an excellent, excellent overview of the issues involved and the kind of challenges involved in patent reform.

To get to patent reform, it is not always the most scintillating topic, particularly on Capitol Hill.  It is a critical one, however, as Brad I think clearly pointed out, and we'll need all the help we can get if we're going to get there, and so I thank the AEI for focusing on these issues.

But let me reflect on a few things that Brad said--also let me lay a little groundwork.  I'm very pleased now to be at General Electric.  We have a long history of involvement in technologies across the board.  I'm very pleased that our founder, Thomas Edison, is still the number one holder of patents until some of Brad's and Marshall's folks I think may get through, but for the moment, we're number one.

We're perennially in the top ten--we're one of the American-based companies that's in that top 10 that Marshall mentioned.  We are a huge--again, across a huge range of technologies.  We are now with an acquisition that occurred last year of the Amersham bio technology company, we're a member of bio.  We're a member of [inaudible].  We acquired Universal Studios last year, so now we're a member of the Motion Picture Association.  We are the largest diagnostic company in the world.  We may be the only company in the world to have won a Nobel Prize and a Academy Award.

[Laughter.]

MR. DICKINSON:  We are also among the larger filers at least at the moment of business method patents, because we have a huge financial services business as well, as you may know.

So that kind of gives me a broadish [sic] I think and also having served on the other side of the coin in the U.S. government, I can appreciate a number of the challenges from that perspective as well.  I noticed there are a lot of former colleagues from the U.S. PTO that are here, too.

Let me also echo what Brad said about the importance at the highest levels of intellectual property.  I got off the phone just before I came over here with my general counsel, Brackett Denniston, and he was reporting back on the meeting of the--what's called the Chief Executive Council--or the Corporate Executive Council--all of the senior leadership, business leadership at GE, where our Chairman, Jeff Immelt, had just presented yesterday on intellectual property, following up on a meeting and work that we had done with him.  So let me, as I say, echo what's been said.

This is an interesting time, and I think it's a right time, and this is a perfect opportunity to talk about patent reform.  There's been a huge amount of work done over the last year, year and half, among the traditional intellectual property organizations, following up on work that was done and was alluded to by Brad in the previous year by folks as varied as the Federal Trade Commission and the National Academy of Sciences, and I see Steve Merrill from NAS is here now, who led that.  NAS is also now doing a follow-up study on genomic patenting, which I think is equally critical.  And I think these will lead to the opportunity I think for a lot of this reform discussion, and I hope that it moves forward.

Let me maybe be the pragmatist a little bit and point out there are folks here who know a lot of these challenges.  There are others who may be brand new to this area, and let me suggest a number of the issues that will be a challenge, because reform h as a wholesale ring to it, a sweeping ring to it in some ways.  I think that much of what we're going to talk about in this is more of a calibrated effect.  The system also works because it hasn't changed a whole lot in that 225 years.

To take one example, we still--and in a lot of ways bound by treaty to this--but we still treat all technologies equally at the PTO, and that often sometimes comes under criticism.  Should we treat software patents differently than we treat pharmaceutical patents?

Well, I think both those industries would probably like that.  If we did, I guess a question would be whether the public would be well served by varying the term on, for example, on each of those two issues.

To talk about a few of the things that Marshall talked about specifically.  Let me reflect on them.  I think one thing you're going to hear a lot about in the next year is this issue of post-grant review.  It was a key feature of both studies that were done.  It's been at the top of the agenda now for almost all the major IP organizations, and I think that's the one you're going to hear a lot about.

But let me also say generally about these reform measures that we're talking about, and to the AEI folks who are new to these issues or the other folks that are here that are new to these issues or the reporters who are new to these issues, hang in there.  Hang in there.

[Laughter.]

MR. DICKINSON:  Remember something about most patent lawyers:  they are either engineers or scientists, and that's a deadly combination.  The devil is in the details on this.  And we can go from a broad discussion of the importance of these issues and the broad and very quickly get down into the weeds on them.  I don't know where you all stand on the expanded novelty, the use of expanded novelty internationally or whether the Create Act overruled Odds On, or didn't overrule Odds On; or the estoppel effect under post-grant review.  But we get down pretty quickly to a somewhat numbing group of issues, so you got to kind of hang in there.

Another thing to remember I think is the politics of these issues.  It's obviously important here in Washington.  There will be folks who will resist these reforms.  They'll resist them for good reasons, and they may resist them for reasons that don't seem quite so valid sometimes.

There is a long tradition, for example, in the independent inventor community in this country of resistance to any kind of change in the patent system.  They believe that the patent system works best for them, and that all efforts at change, in large part, may be driven by companies like Brad's and mine, who are trying to get some advantage over them.  That's not true, by and large, but it is a key part of the political rhetoric that will evolve.

When the last major revision to the Patent Act occurred, which was about six years now, in 1999, 1998, it took about three sessions of Congress to get it through.  I see Manus Cooney here, who led the Judiciary Committee staff at the time, and it was a big challenge to get it through because of some of this opposition.  But it was not the traditional kinds of political things you're thinking about.  It's not liberal versus conservative--that sort of thing.

The principal folks who were causing some issues in terms of--actually some of the issues that Brad just mentioned--were among the more conservative members of Congress.  Congressman Rohrabacher, for example, Congressman Manzullo, representing the small inventors.  Brad suggested that the opportunity for pre-grant submission of prior art to the Patent Office is a good idea.  And it's a great idea in a lot of ways.  But there's a provision in that Act, only passed in 1999, that specifically prohibits any kind of use of that submission for any kind of adversarial or opposition or protest purpose.  So we have to deal with that kind of issue in the politics of how this plays out.

I certainly agree with what Brad said on the willfulness standard.  I think that the CFAC, the Court of Appeals for the Federal Circuit, in Knorr-Bremsey went a long way towards addressing the most egregious concerns and problems there.  But remembering the other side, treble damages are only awarded in a fairly small minority of cases.  They are significant when they're awarded, but it's still a fairly small number.  But I think that the court has gone a long way towards addressing those problems.  One thing which the court left standing, which I think is, and I may differ with Brad on this, which I think is a good idea is that they left the duty of care in place.

I think that the duty of care is important.  I think those who put products in the marketplace have an obligation to make sure they're not infringing other people's patents.  I think that's inherent in the system.

I' concerned that there are industries where, for a variety of reasons, willfulness, the principal one, there is not a regular searching or clearance for new products that occurs, and I think that's a challenge.  We make every effort to make sure that we do a pre-new product introduction clearance of all of our products across the board at GE.

Harmonization, a very, very critical issue, an extremely critical issue, and at a very critical point, critical turning point right at the moment it turns out.  We've had procedural harmonization.  We've had trademark harmonization.  We came through I think six treaties in the 1990s that harmonized a number of IP systems.

Substantive patent harmonization is still a major, major challenge.  And we are I think losing--at the moment, we seem to be losing that battle a little bit.

The primary forum for that is the World Intellectual Property Organization.  The standing committee on patents is there.  And a number of other issues have come into that beyond the scope of what you might think of substantive patent harmonization that I think have threatened to derail that process, and that's a major problem.

The so-called trilateral countries--Japan, the European Patent Office, and the U.S. PTO, trilateral group--have now just very recently attempted to come up with a different approach by meeting together collectively and trying to work out among themselves harmonization, since something like 80 or 90 percent of the world's patents come through those three bodies.  That's I think a very positive step.

But we're seeing things like the Brazilian and Argentinean governments putting forward the so-called development agenda, trying to amend the WIPO Charter in ways which would basically eviscerate the mandate of WIPO, and I think we have to be very, very careful there.

On the small inventors issues, again, it might be a little odd because I represent such a large entity, but I was--when I was Commissioner, the small inventors were real important to me, both politically and because I--they are the backbone of our system in a lot of ways.  The mythology of our system, and the importance to the extent that the Congress acknowledges that they tend to acknowledge it as a function of small inventors in a lot ways, and so they are critical.  But one major issue which we do have to address internationally and domestically is the question of can we still sustain ourselves as a so-called first to invent system.  Brad spoke directly to it:  the need to move to a first inventor to file system, and I would suspect that if that debate gets ginned up, you will see the small inventors focusing on that particular issue, almost to the exclusion of all others, and I think unfortunately for them that's a misallocation of their very limited resources to try to--because I think that we need--that moving to first inventor to file would actually benefit small inventors.

The promise that they believe they have in the first to invent system is a false one, because the way to win that battle when there is a battle over was the first inventor is to go into what's called interference, which these days cost you around a half a million bucks, which small inventors don't have.  So they're going to lose anyway, and there have been studies to demonstrate and back that up.  So I think it's important to move that way.  But we need other reforms to help them out as well.  I think reducing the filing fee is a great idea, an excellent idea in a lot of ways.  You got to make sure in the rules, of course, that companies like mine don't start filing as individual inventors to try to avoid the filing fee, but I think that we can do that certainly.

We've made a number of changes in the last decade that helped small inventors that go I think underappreciated.  For example, you're allowed to file what's called a provisional application now.  We used to like to say file a photograph or file on the back of a napkin, probably not that basic, but you can file with a lot less disclosure and get that early filing date which you need and you can do it even--I wouldn't recommend it--but you can do it without using an intellectual property patent lawyer or agent to do that.

You can also--we also have much greater access to resources because of the Internet now.  You can find patent lawyers much easier.  You can find--

[TAPE FLIP.]

Trademark office database.  You can research yourself, and I think those kinds of resources have improved things a lot.  So I'm probably close to the end of my time a little bit.  Those are some of my initial comments.

Let me talk just briefly about litigation, because I understand--again, we are in the same boat.  We tend to be a defendant in patent litigation, by and large.  I think it's important to remember that this is not all--and it may get framed this way sometimes--this isn't all, as we say patent trolls versus, you know, like the Lilliputians going after Gulliver.  This is not--most patent litigation is corporation against corporation.  And increasingly, and interestingly sometimes university against corporation.  But, by and large, because those are the only ones who can really afford the litigation.

But the challenges that litigation presents and particularly the cost of it, which is a major function of discovery costs, needs to be addressed.  It really does need to be addressed.  Thank you.

MR. DEMUTH:  Todd, thank you very much.  We turn now to Professor John Duffy.

DR. DUFFY:  Thank you.  I want to begin by saying that I agree with almost--I think almost everything that's been said so far, but I think that there's one very important thing that's missing.  If you look down the list--now I've been trying to keep a list of the proposed reforms that have been mentioned here today--if you read them down, most of them are procedural reforms.  Most of them are reforms about getting a procedure to allow private parties to submit prior art, to allow a procedure of post-grant opposition, to reduce the potential for abuse in litigation; in other words, making the litigation system procedurally more streamlined.

The issue I'm going to talk about really goes to the standard by which a patent should be granted.  Brad Smith began by saying that Microsoft or at least he supports the idea of high quality standards.

But in talking about the standards, he talked mainly about the procedures by which the patent--the procedures by which those standards would be enforced and not so much about the standard itself.

So I want to talk a little bit about the standard by which a patent is granted historically and how that has changed in the last few years, and why I think a lot of the problems that we're talking about in terms of patent quality flow from that diminishment of the standard for obtaining a patent.

Now to begin I'm going to have to try and give a sort of really fast nutshell summary of all of patent law.

[Laughter.]

DR. DUFFY:  So this is pretty daunting, but I guess I've been in the Academy for about seven years or so, so maybe I can get this done.  Let's see.

Every patent lawyer will tell to get a patent, you need to do something that's new or novel, useful and non-obvious.

Now new is not something I'm going to talk about.  A lot of things are new.  When new problems come up, the solution to that problem is by definition new.  In an era where technology changes very quickly, new combinations of those pieces, those new pieces, will themselves be new.

Useful is another requirement to the patent system, but that is not so important.  Many people think it's not so important.  Indeed, the traditional position, outside of a few very specialized areas of the patent area, is that the Patent Office essentially leaves it to the market to determine utility, because there's no harm.

If you issue a patent that has no use whatsoever, well, you can see pretty quickly that the market effects of a useless patent--I think a famous example is the electric hat tipper--you know, it's not going to cause huge economic distortions in your economy if you issue that patent and nobody wants to buy the device.

The key to the patent system historically, the lynchpin, what people call the heart of the patent system, what people call the ultimate gatekeeper of the patent system is the obviousness doctrine.

This doctrine says that in order to get a patent, you have to produce something not just that's new, but something that is non-obvious, that's not obvious to people who are skilled in the art.  And if you can't meet that standard, then you don't get a patent.  It's the most difficult standard to nail down historically.  Judge Learned Hand at one point said that this was one of the most elusive phantoms on all the paraphernalia of legal concepts.

But, nonetheless, though it's very difficult, it is extraordinarily important for the proper functioning of the patent system.  I my case book and at the FTC hearings a couple years ago, I used as the poster child for an obvious patent--a patent called the Seldon patent, which historically many people are not familiar with.  This is the patent on the car.

It was filed by somebody who was a patent attorney.  So immediately red flags should go up, and you should think wait a minute now.  You mean a patent attorney was on the cutting edge.  So you should be a little--anytime you see that--we should be a little suspicious.

The reason--first of all, it's important to realize that this patent was extraordinarily valuable.  It was written very broadly as a combination of just an internal combustion engine, gears, a steering wheel, and a carriage.

Every one of your cars today, with the exception possibly of rotor engine cars, would infringe this patent.  And every car that was produced would infringe this patent in the early industry of the United States.

The reason it's obvious, we can say that that combination is obvious is this so-called inventor did nothing to produce an internal combustion engine.  He made no advance in the creation of gears or carriages or steering wheels.

He might have been the first person, though it's very hard to tell historically whether he was actually the first person to put these elements together.

But what we can say with confidence is that it was obvious to put--once you get a good light-weight internal combustion engine, it is obvious to take something whose output is measured in horsepower to substitute it for a horse.

And eventually, after years of litigation and the investment by Henry Ford of millions of dollars of litigation fees, eventually the courts came up with the right answer.

The Patent Office didn't come up with the right answer.  The Patent Office issued this patent, and it took literally years of litigation and I think millions of dollars by Ford.  And, in fact, this very patent convinced that the patent system was ultimately not a good system.

But I think that this problem, the lowering of the obviousness standard, the lowering of the standard to get an invention is behind a lot of the problems that we see today.

First of all, the theory of obviousness tells us when we should be particularly concerned about the possibility of obviousness--obvious patents issue.  When there are lots of changes going on, when somebody can say here's something new, and here's something new, let me just combine them.  Or here's something new and here's something old, and I'll just put the two together and file a patent application, and even though it's an obvious thing to do, and everybody would do something with this technology, I can patent it as long as the standard of obviousness is not rigorously enforced.

And that I think is what's happening with software patents and patents on the Internet.  Take, for example, a very famous patent--Amazon's so-called one click patent.  This is a patent that the Patent Office issued.  It might have been issued on your watch.  I'm not sure.  But anyway, it is a basic--

MR.          :  [Inaudible].

DR. DUFFY:  It is a basic patent which says that it is a patent for Internet ordering by which you can order something just by one click of your mouse.  Now, it's new.  At the time it was filed, in like 1995, '96, it was new.

Now the question of why no one thought of this before is it the brilliance of the inventor, Jeff Bezos, who came up with this.  Is that really what explains the emergence of this streamlining?  Of course not.  There was no need for this streamlining of Internet commerce prior to the mid 1990s, 'cause there was no Internet commerce prior to the 1990s.  It is a novelty, but it is also obvious.  This patent has still not be declared invalid, and it has taken years of litigation in order to come up with the prior art to try and prove that this thing is obvious.

The problem with the current standard is that the federal circuit has adopted a standard of enforcing this obviousness standard to say that in order to prove something is obvious, you have to show that something in the prior art actually suggested the combination, the relevant combination of elements, and suggested that it would be successful.

That's an extraordinarily forgiving standard for allowing patents, and this is a relatively new development in law.  It's probably about two decades old.  It began with the creation of the federal circuit.  It is--and I can detail this in more--I don't want to go over my time limit here--but I can detail this more in the questions.

It is recognized--every commentator who has looked at this standard has recognized that it's utterly inconsistent with the historical standard that the Supreme Court has applied.  I've said this in presentations.  I said this to a presentation a year ago at the Intellectual Property Owners Association.  Many commentators, some of whom may be sitting in this audience, have recognized this inconsistency.

And I think that one of the things which Brad Smith said is true:  that the time to act on this issue is now.  This is a matter that's not just about procedure.  This is matter about the substance of the patent system.  And if allow obvious patents, we are allowing patents governmental restrictions on competition on information that can be competitively produced; that multiple people in the economy will come up without any incentive for--of exclusive rights.  And that will give us exactly what people do not--what economists will say is inappropriate, which is monopoly restrictions, anti-competitive restrictions on the economy with no corresponding benefit in producing innovation.

And so finally, I want to say that I think that the time to act is now, and, in fact, this coming month, in April, there will be a surpetition [ph] filed on this very issue, and I think that the Supreme Court, after being out of this area of not addressing this substantive area for more than a quarter of a century, I predict will--I predicted last year--and I am more confident than ever now that the Supreme Court will very soon renter this field.  And when it does, it is going to be quite a sea change in the law, because the Supreme Court precedents have an utterly--the Supreme Court precedents are utterly inconsistent with the federal circuit standards.

I'd like to talk more about that in the question and answer period, but I do suggest that--in closing, I suggest that in addition to the procedural reforms, many of which, indeed most of which I think I support, we should also talk about the substance of patent law and the substantive standards by which patents are granted.

MR. DEMUTH:  John, thank you very much.  Jim DeLong.

MR. DELONG:  Thank you, Chris.  First, I'd like to make one comment on John's presentation, and that is you will find in your packet a series of blogs that appeared on the Progress and Freedom Foundation's web site last year--ipcentral.info--on this issue of obvious, one of which includes a very long and very interesting quote from one of John's articles.

And I was delighted to hear Brad mention the 19th century, because the start of this was a series--was my reading a book on railroads in the 19th century, when, as Brad said, patent law just roiled America's politics, and the issues that came up were very much the same as the ones that are coming up today.

You know you have a very--a burgeoning technology.  You have a lot of things that are sort of in the air.  You know somebody's going to get it.  Everybody's working on it.  And it's really a question of what is obvious in a sense, in a real sense, in a fundamental sense in the am way that you have a question now of people working on the Internet.

And Justice Bradley eventually came up with what seemed to me an excellent formulations, and what are you saying?  Well, you know, you get--maybe you can patent exactly what you invented, but not simply putting together events that any mechanic who knows the trade is going to try to put together.

And it seemed to me a very creative event, and perhaps we need a new Justice Bradley now.  I told John I'd probably write an amicus brief supporting his surpetition as long as I got to cite 19th century railroads and Justice Bradley.

Moving on, I just wanted to make a few sort of perhaps not very well connected points.  One of the them is I, too, am not a patent lawyer, unlike some people here.  But my organization is very much involved in property rights and markets, and I described this recently as an organization somewhat religious in its ideology that property rights and markets are the way to organize the economic dimensions of society.  And that applies to intellectual property as well as physical.  The differences between them are much less than one might think.  Again, actually, John Duffy has covered this point, too, in a fine article on marginal cost pricing, which you should all look at and read and memorize.

We see patents as tying together very much with other property rights issues, including--well, Todd ties them all together in the his own person now, which I hadn't realized--but including the copyright issues.  We see them tying together a lot with capital market issues, ranging on to the fight over stock options and over the organization of corporations.

There is a movement now, largely academically based that sees sort of the commons as the way to go.  It sees that as the way to go in connection with content, you know, with music, movies, games, software, et cetera; that sees it as a way to go to patents, where they would abolish the patent system, often citing some of the more ridiculous patents for the proposition that well, so the whole thing needs to be destroyed.  I don't know anyone who actually supports the patent on sideways swinging or on one click.  But that does not mean, oh, therefore, we abolish the system.  And but and then also, of course, there is a commons approach or the same commons approach tends to be applied now to spectrum, to the Internet.  And in general the idea that somehow the Internet has changed things and that we can get rid of quaint old ideas of property.  We simply do not think that's true.  We think that the old faith is still the best; that obviously the changes in the Internet have profound effects on things.  And the nature of property rights and our thinking about them has to change profoundly.

But that, too, is not new.  And, in fact, if you look on the web site of Perk, in Montana, www.perk.org, you will find a book by Terry Anderson, called the Not So Wild West, in which he talks about the way in which the miners and ranchers of the West in the 19th century developed new institutions of property to meet their new and changed circumstances.  You know, water law in particular changed very drastically by the people on the spot to meet the new circumstances of a water short area, short of beyond the hundredth meridian.

In my view, much the same thing is going on now in the Internet space, in that one of the truly fascinating things going on is in the standards area, where people historically worry about patents as a monopoly.  This is over done.  You know, patents rarely produce monopoly power in a real market power sense, and you know, Ed Kitch has written on that in what I regard as a very uncited article, too seldom cited article, what is it what in Vanderbilt in 2000--called Elementary and Persistent Errors in the Economic Analysis of Intellectual Property.

But, nonetheless, the monopoly point is of some concern, and it's especially of concern to intermediate producers, where the fear is that if you develop a new software application, for example, and it has to depend on Microsoft's operating system, Microsoft will then move in, give you a license fee to carefully calibrate how to give you a subsistence wage, and take all the profit.

But what's going on in the standards space is that people are developing ways of avoiding the problem of monopoly pricing.  And they're doing this through various--through an institution--and I call this an institution, even though essentially it's a contract term that people are putting in for the standards setting organizations called RAND, of reasonable and non-discriminatory.  And nobody's too sure what it means.  But essentially it's a commitment to fair dealing and commitment to non-discrimination in an--non-invidious discrimination.  You can still do minor discrimination.  And but as long as people are assured that the people who would develop patents or have the monopoly on a standard will apply the standard, they're willing to invest millions of dollars to hook on to it.

It's a fascinating development of Terry Anderson would like, you know, people on the spot working out and operating--working out the operators of the system are developing new institutions of property.  And one of the points that we regard as very important to make is our usual PFF point to the government:  don't screw it up.  You know, if you move in and try to shove what's going on into the old institutions and old categories, it won't work.  You have to go--let the law follow the culture and follow what people will do and how they will work it out on the basis of sort of the culture and the economic necessities and then let the law adapt to figure out how to codify that.  You know, this is a very hard thing for lawyers in particular to come to I must say.  You know, they really want to do it the other way.

But, for example, when somebody asked me what I thought about the music sampling issue.  Should you be able to take a snippet from one artist's work, put in another, and put out the new thing.  My response was I don't know.  What do the artists think?  You know, that seems to me something that the people doing the creativity have to work out among themselves.  You know, this is fair.  This is not.  And then you need the lawyers in to write the contract and sort of, you know, codify it and then eventually maybe you'll make it a law.  But it's not something where the patent lawyers or the IP lawyers should decide in advance.

Now, finally, I think precisely because of our great dedication to property and markets as the defining, as the desirable institutions, we're strongly in favor of patent reform.  I think, you know, things have gotten sort of fuzzy.  They've gotten--the standards, the criteria seem fine.  They've been around since what--Venice in 1272 I think had the basic, the three basic criteria.  It was the first recorded mention of them.  I do think that John's point was excellent about the difficulty and the obviousness thing as I said.

But it is very important precisely because the problems are used as a basis for attacking the concept of intellectual property.  It is important to get them right, and get them reformed.  And I think the time is really very good for that.  I attended a conference of the National Academy of Sciences a few years ago, and afterward I wrote that the issues were so complicated and everybody was so confused that the corporations were seriously considering acting on principle.

[Laughter.]

MR. DELONG:  And I think that's true.  I think the point that's been made by our two giants here that they are both producers and consumers of patents is a good one.  They are on both sides of the issue, and they strong internal incentives to get it right.  And you know, it doesn't that much better than that in Washington, when you have people who actually strong players who actually have an interest in getting it right and a pretty good chance of actually doing something.

And I find Brad actually very credible when he says that he wants small inventors to prosper and wants to be able to deal with them, and that's because, as I understand the Microsoft model, essentially what it does it is now providing a platform here, but then it relies on the product, you know, the basic rule of the Internet is wherever you are, most of the smart people are somewhere else.  And so they rely on produce--I'm getting a lot people working in other places to produce stuff and then bring it to them.  They've got to be able to deal with them, and they've got to have the people--people have a lot of confidence that they can deal with them.  Of course, the problem of intellectual property is that once you reveal it, all of a sudden it's gone.  You haven't got protection anymore.

And so somebody like Microsoft or GE needs a patent system that assures the inventors that they can work on spec and bring it in and be protected.

You know, it's the old--I don't know if many of you are familiar with Tom Shelling--his writings on game theory from some years ago--but he made a crucial point that the ability to commit yourself, to guarantee that you will not double cross your partner or opponent or whatever is absolutely crucial.  And this is one of those situations.  You know, large corporations need to be able to commit themselves credibly and irrevocably.  And if they can do that, then you know then they can set up these systems, then they can rely on the world at large to come in and deal with them.  So, Brad, you're very credible.  I believe you, because it's a self interest on that.

I'll stop with that and turn it on to Andre.

MR. DEMUTH:  Jim, thank you very much.  Andre Carter.

MR. CARTER:  Thank you.  My name is Andre Carter, and I own and run a small consulting company called the Irimi, Incorporated.  Irimi, the name is odd.  It's Japanese in root.  It's from marshal arts.  It means to enter.  Every firm we deal with is either entering a new market or entering the world as a new non-real entity.

So that is what we do, and we provide strategic business consulting, which at the end of the day takes itself through the house of IP, patents, copyrights, trademarks, trade secrets, and the like.  And so I'm happy to be here, and thank you for having me, and I feel a little bit like a pair of brown shoes at a black tie event, but I'm going to try to tail on to these very fine presentations.

I'm not a lawyer, and I'm not a patent lawyer, and I actually don't have an IP or patent issue per se.  And I make that statement because for me a lot of what we do is we work with companies, and the companies we work with IP is not something they do.  It's what they are.  A typical entrepreneur quits his or her job, starts a company, with two or three other people, with an idea, or with the idea that they can come up with an idea.  But it's about the idea, and if they can't own, control, license share, do something with the idea, then they're probably not going to make any money.  They may increase the public good, which is something they probably want to do, but they probably like to get paid in the bargain.  And so it's good to hear Brad and Todd talk about small business--and they're both--you know, you listen for the placement and, you know, who you are determines who you see things, but--and so they--I think most of the things they said were right on.  They just came at the end, and I guess the obviousness standards.  I have some ideas about that, but I would take it back to maybe trying to add some perspective to what we're calling reform, because it is a very wholesale word, and I don't know--it scares me, because reform means a large company is going to have to do something different, and probably 10,000 small companies are going to be dead because they can't afford the first try at changing something, which everyone agrees six months later is a mistake.  So that's the world I come from.

But if we look at it, and we look at small business, and it's what they are--when we talk to companies we also talk to them about five things, using IP as kind of the, you know, prism, if you will, for how they see the world.  And that stands for a couple of things.

First of all, we see IP as kind of the equalizer, and that's what it is for small firms.  So it's more real than court cases--and that all has real value, but in our world, it's the ability to walk into Microsoft or IBM or Oracle or anybody else, like at the deli line, and say I'm number 63, and this is my number.  And if you want to talk to me about a ham and cheese on rye, you got to talk to 63.  And that's life and death.

It's also--if you want to go to a standards board and put investment and time into that, it's your seat at the table.  If you don't have some form of IP, you'll never get in.  It also creates a level of parity when you go to put things on the shelf and I think it was you who just said, and I love the phrase, let the law follow the culture.  Well, here's the culture.  People walk into a CompUSA--I mean I grew up in the business of technology by putting technology onto shelves; right?  I can always take my parents in and say here's the 60 feet of CompUSA that's technology that we brought from cradle to hopefully not grave, but cradle to adulthood.  And when you look at that, you see people.  They walk in.  They look up, and they go well, who is that.  I've never heard of this company.  Well, they have the patent for X, Y, Z.  And that takes the place of the Super Bowl ad; that they're never going to be able to run.  And so the ability to apply for patents, to go after them, is really the parity of a company to deal in an industry where people already exists, are larger than they are, and have more resources.

And if you're talking about reform, and you don't have small business at the front of that because you are producers and consumers, and small companies have to be there.  But that's kind of the engine--that's how this machine is built.  It's built that small companies go out.  They go out to kind of green fields, if you will, to use the development analogy--to someplace where nobody is. 

When I talk to a company I go what are you working on, and they tell me, and I say well it's four or five people in that space.  Why don't you go there where there's no one, but you think people will be in 18 months.  And you develop something.  And you try to put your fence up, you know, kind of a like a land grab.  And when the rest of the world reaches you, maybe you're a half block off Main Street; maybe you're on Main Street.  The building not be very nice, but it's yours.  The deed is in your name, and everybody wants to go through there.  So guess what?  To get that big supermarket, they got to talk to you.

And that's the patent issue for small companies.  It provides incremental revenue if you make a misstep in what you start out to do.  It provides scope.  This is incredibly important.  It--even a patent that's not wildly useful economically is of great value to a company that gets one try, because if I see someone's filed, and it's there, it tells me, boy, I got one shot at this.  Maybe I shouldn't go here.  I should go there.  And for tens of thousands of companies that's like--that's a real value, and I'm not an economist, so I won't even pretend to try to extrapolate that into numbers, but small businesses do a lot.  They pay a lot of taxes, employ a lot of people, build a lot of wealth.

And at the end of the day, the market value of those companies, because they're all started either to be handed over to children or someone that they care or love about or to be sold or to go public, and that's going to come back to your IP.  Just like the financing of the company deals with your intellectual property.  You can't have any of those discussions without having a conversation about patents and IP.  So the notion--should we have more quality patents?  Sure we should.  I don't think it means we should any fewer people applying for them.  I can't be an expert on the standard of obviousness.  I only know--I can only guess that, you know, when Seldon--Seldon got paid first of all.  So as an entrepreneur--

MR.          :  He made a lot of money.

MR. CARTER:  He made a lot of money.  So that's a good thing; right?  You know.  The other thing is that if no one else was driving around in a car before, I don't know how obvious it was.  I mean if he--if there were people walking by him when he put the car out the first time--

[Laughter.]

MR. CARTER:  Right?  I don't know how obvious it was.  You know, but that's just me.  I don't know.  But, you know, we look at things like the notion of--we've also in this discussion and it's a large discussion when you confuse bio tech and information technology together.  I mean, small software companies--that's five guys, some hot pockets, a PC that they didn't ask them to give back when they quit their job.  I mean, it's--you know, it's--

[Laughter.]

MR. CARTER:  And they're there, and, you know, that's where this has come.  I mean, yeah, Venice 1217 or Section One, Article Eight of the Constitution.  You know, this thing has moved forward and hopefully it moves and expands, and I guess the point is that, you know, when we started, we were an agrarian society, and land was the measure of how you built wealth.  If you had land, you could be wealthy.  Industrial age, if you had the means of production, which either means money or inherited factories, you could be wealthy.  Today, and I think it's a good thing, if you've developed your mind in any area, and you are truly human capital, you can come up with ideas, create ideas that can give you the ability to be wealthy.  And puts you on part in a way that you've never been before.  So all the things that you've acquired are smaller companies that in some way shape or form survived or--news flash--didn't; right?  You know, lots of times, you know, you've been there.  You're at the helm of the plane, and it's like boy, why is that Billy goat up here in the sky, right?  And you realize that you're headed into a mountain; right?  And the fact that you've got some patents or some intellectual property, and you never really know which one will be valuable.  That's the point.  You only know that you came up with something that was good.  And I've never been in a situation where programmers or engineers came up with something, and they said well, let's just patent everything.  That's something lawyers like to do, because to a small company, it's a huge expense.  And I think the provisional does work.

MR.          :  It's a huge expense to large company.

MR. CARTER:  It is.  It is.  But it's--yes, it is.  It is.  It is.  It is.  But to a small company, it's a huge expense, but at the end of the day, you do it, and you try to do the things that you really believe are important.  You might be wrong, right?  And you might be wrong in that it's of no value.  You may even do it believing that we can really pursue that, but I know that that's valuable.  I might be able to sell it later.

And I don't--and so when I hear the notion of reform, it's probably because I'm not an attorney, I'm dizzied by, you know, the kind of legal aspect of this, but the one thing I know is is that there are thousands upon thousands of people out there who are going to start companies this week, who are going to try to invent something, and they're going to apply for patents, and they're going to try to use copyrights and I think as an economy we want them to do that.

I was in a conference last spring about--for building a software in a developing companies--countries rather.  And, you know, a little out of what I do, but I thought well, I'll go.  We may need some folks abroad who have some good ideas.  Who knows?  Right?  It's always business.  And--but the one thing I was struck by was the extent to which the entrepreneurs who showed up there wanted what we have; right?  And so when I hear, you know, wholesale reforms, it's like, boy, you know, there's people in the rest of the world developing stuff that want the things that we have.

You know, and you look at it and say we don't have a great venture community and we think that's because we don't have IP.  I'm like, hey, you're right, 'cause you're never going to get funding from anybody unless you can tell them what intellectual property you own.

So I guess I've gone a long way around the barn.  I guess what I'm trying to say is that what I'd really try to add to this discussion perhaps is just a perspective that I think in some respects starts with small business, because you can see the SBA reports that small businesses are more likely to create cutting edge stuff, that the patents they come up with are more highly cited, and they're working in areas where frankly large companies won't, because the overhead of going into a market that's only $10 million is not going to work.  So I would try to add that and remember also the practical implications; that everything that you decide that comes out of any policy discussion that's even rumored that causes a shift has a much bigger effect.  I mean, you can hurt these guys, but it's probably terminal to a small company, and that's just really important to remember, and I would never let the remarks get away from that, because if it does, then it's not real.  So I'll stop there.

MR. DEMUTH:  Okay.  Andre, thank you very much, and thank all of you for a very robust series of presentations, and in light of that and because we have just about 30 minutes, 35 minutes remaining in the session, I'm going to first go back in order and see if anybody on the panel wishes to add comments in response to things that came subsequently, and then I'm going to move immediately to questions and commentary from the audience.  So we'll start with you, Brad, and you don't have to say something, but if you want to respond to--if anything else has stimulated you, please go ahead.

MR. SMITH:  Sure.  I'd address two topics.  First, the willfulness standard.  I very much agree that the patent law should encourage a duty of care.  But I actually think you could take the willfulness standard out of the law, and it does still encourage a duty of care.  Even for a large company, you just know that you're best off solving a problem early by either negotiating a license or otherwise dealing with it, and you don't need the threat of treble damages to do that.  I think to the contrary the willfulness standard and the way it has been interpreted has undermined the incentive for a duty of care at least in the information technology industry.  You certainly find in the legal profession that works most closely with our industry a sense that you expose yourself to treble damages if you exercise your duty of care, and so I just think it's gotten things a little bit backwards.

Second, on John's good points about obviousness and the substantive standard, I actually think that most problems when you really look at them are typically intertwined problems of process and substance; and I think the Seldon patent actually is a good illustration of that, as I recall.  And I think everything I know about the Seldon from reading John's paper.  So he knows more than me, but here's a fellow who patented this or filed the application in 1879.  You know, if things had worked right, it would have been extinguished by 1899; it really would have had no real impact.  He manipulated the process, and thereby was able to sustain a patent that was in force until 1912.  And there was a process problem, much as we see process problems with I think continuation procedures in the PTO today.

And, of course, you know, he I would say should have a weak case for injunctive relief, but that's not the way the injunctive standard is applied today.  But I still think the point is a valid one.  We need to look at the substantive standards, and it's right to look at obviousness.  I actually think obviousness and novelty go together to some degree, because one reason things are obvious is because they're no longer new.  And so it's really both things together.

The real question I think is have we done enough?  Or what more needs to be done?  There absolutely was an issue when the PTO was granting a number of business method patents for basically taking things that everybody knew how to do in the offline world and saying, ahah, you get a patent because you figured out how to do this obvious offline technique in an online way.  And the PTO has taken steps to address that through second tier review.  I think at least in our industry now there's a sense that the number of business method patents being issued for this type of practice have really dropped.  If there's more to be done and more should be done, but I think one needs first to have a good thorough discussion about whether there's more that still needs to be done.

MR. DEMUTH:  Todd?

MR. DICKINSON:  I actually--no comments I guess as well.  There's a--I'm not meaning to debate with Brad about the duty of care necessarily.  I think we are probably in agreement.  I think it will be interesting to see now that Knorr-Bremsey has come down and the willfulness issues have been moderated somewhat whether that does start to affect searching in the software industry, and that will be a nice change of it if it does I think.

With regard to some of the obviousness issues, I guess I don't necessarily disagree with John.  I've heard him talk on this before, but it sends a little bit of a chill down my spine to talk about how we get to where the standard may change and who changes it.  The last two or three times in the last three quarters of a century when the Supreme Court has dealt with obviousness, it hasn't dealt with it very well.  The last time they created something called synergism, which, thank goodness, has gone away as a standard, even though it exists in the law, and so I just am a little wary.  If all they're going to do is sort of overrule the CAFC on the motivation to combine tasks, well, that might be all right, but--the rhetoric is deep in this area.  Believe me.  The rhetoric is extremely deep in this area.

Just to take one example.  I'm not meaning to defend Jeff Bezos.  He did what he did.  The one click patent, though, if you read the evidence, if you read the testimony in that case, they invested thousands of hours in market research to come up with the--and real research in writing the software--to come up with how to do one click.  So to say it was obvious now that we're looking back at it in hindsight, I don't know.  That's maybe a closer question than we might acknowledge.  And the fact that it took litigation and looking under every rock to find a piece of prior art that finally undermined it, and the CFC has indeed said that it's basically undermined and invalid because of this piece of prior art from I think CompuServe, you know, the system eventually may work right.

The process problems I agree with.  Seldon was a long time ago.  I mean, we've straightened a number of those process problems since then, particularly the continuation practice.  It could be reformed a little bit more, but the much bigger issue is the Lemelson question of whether its submarine patents--much of that has I think clearly gone away.

And my final point, and it should have been my very first point, and it usually is, let me join with Brad hopefully everybody in the number one recommendation he had and it was, thank goodness, his number one recommendation, which is to give the system, and particularly give the U.S. PTO, the resources it needs.  The quality issue is directly tied to the resource issue.  The fact that Congress for many, many years and a couple of Administrations unfortunately diverted those resources to other purposes and have now started to stop that at least on an annual basis.  It needs to be stopped permanently.  The office needs the resources to get the job done and hire the examiners and train the examiners.  That should be the number one focus of any reform effort is to make sure that those dollars stay in place.

MR. DEMUTH:  Thank you very much, Todd.  John, do you want to?

DR. DUFFY:  Just really quickly because I'd like to hear as many questions.  I'll just say that many people say that the obviousness problem can be solved by just enforcing the novelty requirement really well.  In other words, if you just had the PTO look under every rock, connect all the dots, have perfect access to information, then maybe you could not even need an obviousness doctrine.  I think that's wrong, first of all because as a matter of theory, some things will be new.  When new problems arise, new solutions will be created and some of those may very well be obvious.  And the mere fact that you can find a piece of prior art just brings the problem back one step, which is what if that person had filed the patent application.  It just means that a different person would have the one click patent.  It doesn't mean that it's not still a problem of obviousness.

And finally, as a practical matter, if you think the government is going to be perfect, if you think government bureaucracies are going to have perfect access to information, then maybe you don't belong in this--I mean certainly AEI would suggest that that--

MR.          :  Not as [inaudible].

DR. DICKINSON:  Of course--so I just--part of the non-obviousness standard is to help the government articulate what it thinks is obvious without proof, and indeed the federal circuit has held the Patent Office literally cannot use commonsense in applying this.  That is a holding of a case, and that is I think a little surprising.

MR. DELONG:  Thank you.  We tried to change that.  We tried to change it by rule and to give--allow examiners to use tacit--what's called tacit knowledge or their own understanding without applying hindsight, which is the big problem in obviousness.  We can't--many things look obvious when you see them finally, like the car.  But I think we should get more tacit knowledge in the hands of the examiners.  The--IP community roundly opposed that change in the rules.

MR. DEMUTH:  We're going to move to questions and comments from the audience.  I'm going to ask that people wait until the roving microphone arrives, and if you could introduce yourself briefly before your comment or question, except that I will introduce our first commenter, who was my professor of patent law many long years ago, Professor Ed Kitch of the University of Virginia.  Ed?

DR. KITCH:  Well, I'd just like to place this discussion in a somewhat larger context.  I would see this effort at reform as related to a larger problem, which is the problem of the operation of the civil litigation system in the United States, which I think is creating issues on all sorts of fronts I think because of the over reliance on the jury system for handling civil cases and a system of discovery which has lost any sense of relevance and focus and control.  So you can't go to the court and get an answer at a reasonable cost.  And you see that in the Securities Litigation Reform Act.  You see it in the class action reforms.  The form that the reforms are all taking are various efforts to get out of that system and get into some kind of specialized system, and you see it here in the form of the desire to get more decision making power back into the Patent Office, and then a second suggestion, which I'd like to address specifically, which is the creation of a specialized United States district court for the adjudication of patent disputes.

And I have deep doubts about that proposal and the direction it would represent, because I think it's very difficult to create a specialized subject matter tribunal, and I think we see this in the history of the federal circuit, in which the tribunal does not inevitably itself get attached to the agenda of increasing its own importance and scope of the subject matter over which it has jurisdiction.  And I would think the combination of a specialized United States district court who would only hear cases based on patent claims reviewed by a specialized United States court of appeals for the federal circuit, which would only hear cases based on patent claims, and the fact that the Supreme Court, as a practical matter, hears almost no cases, would really in the long run set in place a system in which the general public interest in the maintenance of standards of patentability, such as non-obviousness that John talks about, would really be the loser.

And I think it would be helpful.  Some of this energy could be directed back towards correcting the problems in the general civil litigation system rather than everybody trying to bail out through a highly specialized proposal which is what we're seeing in the present phase of the politics.

MR. DEMUTH:  Thank you very much.  I'm going to ask our panelists to be patient.  And what I think I'll do is take a bunch of questions, and then--so take notes and we will get back to you.  Now this--we have many questions, but this lady right here was number two.

MS. SULLIVAN:  Thank you.  I'm Ann Sullivan [ph] from the Center for Strategic and International Studies.

And I'd like you to comment on how the reforms that you've discussed this morning should be played out in the broader international context and also in a context in the future where you have technology churning and increased globalization of research and development.  GE has labs around the world in Bangalore; Microsoft in Beijing and elsewhere.

What do you see as the primary contentious issues internationally in the next decade and how to the reforms that you talked about today, how should they reflect the future and this globalization?

MR. DEMUTH:  Thank you.  We have a queue, but I'm going to let this gentleman here jump it, because he's so close to the mike.

MR. CRIM:  Jonathan Crim [ph] with the Washington Post.  I'd be interested in hearing from any of the panelists who are troubled by a system that has evolved now where a patent is a tradable and arbitrageable commodity, and whether that is something that the founders envisioned happening and does it have any particular effects, deleterious or otherwise.

MR. DEMUTH:  Thank you very much.  My colleague, Claude Barfield, directs Science and Technology Policy Studies at AEI.  He'll be next.  I have a few others.  I see a lot of hands.  We'll take three or four more.  We're going to go to the panel, and then we'll come back to the audience.  Claude.

MR. BARFIELD:  This is a question or ask for some additional information from Todd Dickinson, but the rest of--I know that I've talked to Todd about some of these issues, but the rest of you may want to chime in, too.  You've had some reference to the other sector, which is obviously in play here, and that's bio technology, but we didn't talk a lot about it; and I wonder if Todd or any of the rest of you could talk a little bit about the nuances of reform for bio technology, and the questions of whether you should have a research exemption for universities or questions of non-obviousness as it applies to bio technology or people have said that we should amend possibly the Buy Dole Act or the whole set of questions relating to public research with the money going first to NIH, and whether NIH should have stronger marching rights.  I leave it to your judgment on these questions.  But what are the nuances or what are the special issues related to bio technology that we haven't talked about so much.  Thank you.

MR. DEMUTH:  I'm going to--I know we have many other hands up.  I'm making my list.  The next gentleman is here so that while we're moving around I think that we'll go back to the panel and, again, I'm going to go in the order of the initial presentations.  You don't have to answer every question, but where you have something to say, please do.  Brad?

MR. SMITH:  I'll try to address two things.  One is the connection between these issues and civil litigation issues more broadly, which I think are not only raised by the direct question on that, but I think that Jonathan's question about tradable patent rights sort of go in that direction as well.  I do think--

[START OF TAPE 2]

MR. SMITH:  Areas of civil litigation we see here and vice versa.  And we should look at these things and show that we're applying what we're learning more broadly when you look at the secondary market that has come into existence for patents, I think it's probably like just about every other economic phenomenon.  It can be used in ways that are both good and ways that we would say are not good.  You know, a secondary market can do a job of moving patent rights, and thereby I think encouraging innovation.  But one should worry that the secondary market that comes into existence, you know, might be subject to the same problems of civil litigation, you know, that we're seeing in other areas.  You know, there have been--there was one recent auction where, Jim, we still don't know who bought patent right.  One is seeing law firms, you know, go out and buy these rights.  And I think, as the Seldon patent shows, you know, just arming lawyers with patent rights isn't necessarily something that's going to advance the public interest.

I think as you look then at the even broader question of the global economy, there are clearly two very important issues with respect to globalization.  One we talked about before, which I think is this, you know, getting either enough mutual recognition or enough harmonization so that the global system works better than it does today.  It works more efficiently for all inventors.  There's need to do that.

The debate that is taking place, you know, in Brazil, to some degree in Europe, in other places is actually a bigger debate than that.  They're asking whether patents are going to be good or bad for their economy.  And I actually think one of the challenges we have in the world today is that developing countries look at the industrial governments, and they say patent protection would be great some day.  And what they forget is that the industrial countries industrialized because they had patents that encouraged people to invent, and I do think that there is a danger in the world today that unless there is a global consensus and unless there is broad application of patent laws around the world, we will continue to see in the next decade what we saw, for example, in our industry in the last decade--the smart people everywhere in software development moved to countries where they could patent their inventions, especially the United States.

And so there is a broad and important conversation about the fundamental connection between intellectual property rights protection and economic development.

MR. DICKINSON:  Touch on a couple of--oh, sorry, I apologize.  Okay.  Me?  Okay.  All right.

The civil litigation question just let me remind folks that there's a key issue there, which has to be addressed.  And I think pushing--trying to get things back in the Patent Office is one way to do it less expensively.  I think that's what post-grant review is about--less expensively and with avoiding the jury system.  And I think that's a good goal in some ways.

The challenge, of course, is the Constitution provides that you're entitled to a jury trial, and what the jury gets and what issues they end up deciding is a hot topic at the moment.  What are questions of law and what are not.  But at the moment, that seems like a pretty good stopper.

On the question of validity, at least one judge in the federal circuit has suggested that the whole question of validity when it arises in civil litigation should be put back in as it is other countries like Japan.  It should be put back into the PTO and that they should take up that question and that that doesn't contravene the Constitution.

The international question.  Again, it's very tough issue because there are a lot of different interests at play here.  Brad touched on, for example, and I did too a little bit the question of the Brazilians and developing countries, who when we rolled the intellectual property system into the international trading system through the TRIPS agreement, some countries now look back on that and think they might have not gotten the bargain that they should have gotten and that there's a lot of now movement and a lot of international discussion about whether we should--in whatever fora--substantive patent harmonization, TRIPS Council, the WTO and the Doha Ministerial Declaration--whether we should try to undo some of that.

The interesting thing, of course, as Brad pointed out, is some countries who traditionally would be opponents or antithetical towards IP have developed their own research capacities, and you're right--we're in Bangalore, for example, and there's been a--the exodus of Indian software has sort of reversed, and now it's going maybe the other direction, and what that's caused in a lot of ways and also the pharmaceutical, the proprietary pharmaceutical industry is now growing in India--has caused the Indians to take another look at the question of intellectual property protection.  And you're seeing a new bill which is before the Indian parliament right now, which fortunately the New York Times last week editorialized in scathing and I think under--way undereducated terms--and why the New York Times is interested in the Indian patent bill I'm not quite sure.  But the development of these systems I think grows in interesting and different ways.  The problem is are they going to be hijacked by these ancillary issues.

Real quickly on Claude's question about bio technology.  Yeah, a hot topic is indeed the research exemption.  I think there was a widespread belief in the academic research community that they were entitled to use patented technology for academic research.  That's not true.  It has never been true, and the CAFC indicated it wasn't true in Matey versus Dukafee [ph].  That set off a lot of bells and whistles, and the question of whether we get a research exemption now and what the bounds of that is going be a very difficult question.  The academic community would like it broad.  The bio technology industry in particular would like it as narrowly crafted as possible.  And that will be a huge and big fight.

Changing the obviousness standard in bio tech, I think it's one of the issues we're looking at the National Academies Panel.  Again, the devil is in the details.  There's laws of unintended consequences.  I think there's a big number of problems might flow from that, though I think there's an opportunity for reform there.  Having patenting in bio tech, allowing for genetically modified organisms, for example, to be patentable subject matter, as the Chakrabarti, another GE [inaudible], Chakr