Written Testimony of Marshall C. Phelps, Jr., Corporate Vice President and Deputy General Counsel for Intellectual Property, Microsoft Corporation
“Patent Harmonization and Other Issues” Before the Subcommittee on Intellectual Property, Committee on the Judiciary, United States Senate
July 26, 2005
Chairman Hatch, Senator Leahy and members of the Subcommittee, my name is Marshall Phelps, and I am Corporate Vice President and Deputy General Counsel for Intellectual Property at Microsoft. I thank you for the opportunity to testify before you today and to provide Microsoft’s views on patent harmonization and other matters impacting the patent system.
Microsoft believes that our patent system is fundamentally strong, but that its long-term health could be threatened unless we take the opportunity to embrace reforms that address 21st-century challenges and realities. Through its series of hearings on the patent system and opportunities to improve it, the Subcommittee has heard testimony on patent quality, the impact of excessive litigation and the benefits of promoting international harmonization. I will address each of these areas today.
Microsoft is among the nation’s largest investors in research and development, spending nearly $7 billion per year. This makes us one of the nation’s largest holders of intellectual property rights and one of its leading patent filers.
Patents are a key part of Microsoft’s intellectual property portfolio and that of virtually every technology company. The reasons for this are simple:
Patents provide critical protection for distinctive technologies that are often difficult to innovate, but which could easily be replicated without the protection of a patent;
Reflecting the way in which our industry and other industries operate and have operated for decades, patent protection encourages technology developers to license and share key technologies; and
Patents provide a repository of accumulated knowledge that allows new generations of innovators to learn from the state of the art and design new solutions that further advance that body of knowledge.
In today’s technology marketplace, customers often build systems to meet their specific needs. The ability of different products and systems to work together is essential. Patents enable technology companies to integrate systems and meet customer needs while ensuring a return on their investments and their inventions.
Promoting Patent Harmonization
Microsoft earns more than 50 percent of its revenue in overseas markets. This is not at all unusual for companies in the IT sector. The globalizing economy raises new challenges for innovators, whether large corporations, small start-ups or individual inventors.
While our business and that of a growing number of American companies is global, there is no global patent system. Inventors who desire protection in a particular country must take steps to obtain protection within that jurisdiction. The costs and barriers to access posed by a multiplicity of national patent regimes – all sharing the same basic goal, but each imposing disparate administrative burdens on inventors – is something that industry and policymakers should care deeply about. A focus on promoting international patent harmonization and greater cooperation and work-sharing among national patent authorities is key to reducing these barriers.
The U.S. patent system plays an important role in the global economy. Consider this: of the top ten recipients of U.S. patents in 2004, only four were U.S. companies. That number is actually higher than in years past. In the 1990s, it was not uncommon for only one or two of the leading patent recipients to be U.S. firms. These figures speak to the importance innovators all over the world assign to patents and patent protection and to the importance of the U.S. market as a driver of global economic growth. They also demonstrate how important it is for the U.S. system to get it right.
In this environment, it is essential that the U.S. recognize where its system is out of step with the rest of the world. The U.S. “first-to-invent” system is an often-cited example. The United States is the only country in the world that applies a “first-to-invent” standard for establishing priority between true inventors claiming the same invention. Every other country awards the patent to the first inventor to file. In the past, some have argued that the first-to-invent system benefits small inventors and should therefore be preserved. But recent research indicates that this is not the case. Former PTO Commissioner Mossinghoff’s work in this area has demonstrated that “interferences” – the U.S. Patent and Trademark Office (USPTO) procedure used when two parties claim the same invention at nearly the same time – often disadvantage small entities and can come with considerable costs. We urge the Committee to revisit this issue in light of this new and persuasive information.
In moving to the first-inventor-to-file system, however, care must be taken to avoid unnecessary changes that could impact patent quality. For example, wholesale redefinition of what constitutes prior art is not required for harmonization with a worldwide first-inventor-to-file system and could serve to increase uncertainty and diminish what is currently considered prior art.
We also endorse the proposal that USPTO publish all pending applications at 18 months after their initial filing. U.S. law already requires 18-month publication where the invention is also the subject of a foreign patent application. According to USPTO data, only 10 percent of applications currently filed are U.S.-only applications not published at 18 months. Adopting full 18-month publication will make the patent system more transparent and will complement the goals of the proposed post-grant opposition procedure.
Moving to first-inventor-to-file and full 18 month publication would significantly enhance the opportunity to make real progress toward a more global, harmonized patent system. USPTO continues to recognize the importance of progress toward international harmonization through its considerable efforts to advance substantive patent law harmonization and to promote greater cooperation among patent offices. We commend USPTO’s efforts to bring together interested international parties and to drive this work forward.
Ensuring Patent Quality at a Time of Increasing Patent Quantity
During his recent testimony before the Subcommittee, Under Secretary of Commerce for Intellectual Property Jon Dudas commented extensively on the increasing volume and complexity of USPTO’s workload and on the burgeoning U.S. and international backlog of patent filings. To ensure that USPTO has the resources it needs to address the challenges before it, we believe continued adequate funding for the agency and an end to the diversion of user fees paid to the USPTO must be a priority. We believe that this, more than any other action, can help assure patent quality, and we thank the Chairman and Ranking Member for their leadership in this regard.
We also believe that persistent concerns about patent quality in the face of increasing patent quantity could be alleviated if interested parties were given sufficient opportunity to address questionable patents through appropriate and carefully structured administrative mechanisms. Currently, the primary way to challenge the validity of a patent is through costly and difficult litigation. Microsoft supports the establishment of a post-grant opposition procedure enabling third parties to challenge the validity of issued patents. Such a process would allow the USPTO to take a careful look at any challenged patent in the context of an administrative proceeding designed to augment the patent’s initial examination. Similar procedures already exist in the European system and in Japan and could help weed out questionable patents before they become the subject of court actions.
We also support proposals to ensure that interested parties have sufficient opportunity to alert the USPTO to questionable patents within the USPTO review process itself. Under current law, members of the public with relevant prior art have only limited options to submit that art to the examiner. Allowing third parties to submit information regarding relevant prior art to the patent examiner during the examination process would help address concerns about a lack of adequate prior art in certain technology areas and would help harness private-sector resources in USPTO’s efforts to improve patent quality.
In both instances, however, care must be taken to ensure that the procedures serve the interests of innovators and the public by safeguarding against abuses that could burden the patent office, harass applicants or delay the issuance of patents. Establishing limits on the amount and nature of prior art submitted by third parties, and ensuring that post-grant opposition procedures are promptly initiated and concluded would advance this goal.
Confronting Excessive Litigation
The IT industry, like so many others, is encountering the enormous costs of dealing with patents of questionable quality. Today, hundreds of patent infringement cases are pending against computer software and hardware companies, costing the industry hundreds of millions of dollars each year. Too many of these cases are brought by patent speculators, who do not develop, make or distribute any products, but rather look to the civil litigation system for leverage in the marketplace. Our industry is particularly vulnerable to such claims because our complex products often have hundreds of patented or patentable features contained within them.
Left unchecked, these practices stand to disrupt the activities of true innovators and impede their ability to deliver products and services to consumers. Proposals to deal with the situation have focused on ensuring that courts weigh the equities before enjoining distribution of a product with broad consumer benefit and on deterring opportunistic litigation by reining in excessive damage claims and settlement demands.
For example, it has been suggested that the criteria for establishing willful infringement ensure that a finding of willfulness hinges on the conduct of the accused infringer and not on whether lawyers for one side or the other have used the right combination of “magic words” in notice or opinion letters. We believe that punitive, triple damages should be reserved for cases of egregious conduct, such as intentional copying of a patented invention.
Another proposal has focused on ensuring that the patentee is entitled to claim damages only on the portion of the allegedly infringing product attributable to the asserted patent. Today, when a small component of a complex product or system is alleged to infringe a patent, the damage claim often seeks some portion of the value of the product as a whole. This often leads to unduly inflated verdicts or settlement demands.
And it has been suggested that Congress should repeal section 271(f) of the patent law which, in recent cases involving Microsoft, has been applied to allow U.S. damages to include copies of software made outside the U.S. where the copies are made from a master disc developed in the United States. If the software were developed outside the U.S., the rule would not apply. The rule stands to penalize companies that develop their software here and has been criticized as giving extraterritorial reach to U.S. patents.
While these problems are real and growing ones for our industry, we recognize that other industries are not as directly impacted, or are impacted differently, by patent speculators and others who would abuse the patent system. Microsoft has been working with other affected interests to explore ways to address the challenges of excessive litigation while ensuring that the system continues to function well and fairly for other sectors. We stand ready to continue to engage in those discussions.
Ongoing consideration of improvements has always been a part of our intellectual property system. We look forward to working with the Subcommittee in its efforts to ensure that the patent system continues to serve our nation’s great interest in promoting innovation and providing the public with the benefits that innovation brings.
Thank you again for the opportunity to offer Microsoft’s views in this important process.