a\ IMPACT ON EXPORTERS OF THE NEW GAH U.S. PATENT ACCORD Y 4. IN 8/16: EX 7/13 Inpact on U.S. Exporters of the Keu... HEARING BEFORE THE SUBCOMMITTEE ON INTERNATIONAL ECONOMIC POLICY AND TRADE COMMITTEE ON INTERNATIONAL RELATIONS HOUSE OP REPRESENTATIVES ONE HUNDRED FOURTH CONGRESS FIRST SESSION OCTOBER 25, 1995 Printed for the use of the Committee on International Relations FE3 2 3 1233 U.S. GOVERNMENT PRINTING OFFICE 44-248CC WASHINGTON : 1997 ForsalebytheU.S.GovernmentPrintingOffice SuperintendentofDocuments,CongressionalSalesOffice,Washington,DC 20402 ISBN 0-16-055746-1 . ^ IMPACT ON EXPORTIRS OF THE NEW GAH U.S. PATENT ACCORD Y 4. IN 8/16: EX 7/13 Inpact on U.Z. Exporters of the Keu. . HEARING BEFORE THE SUBCOMMITTEE ON INTERNATIONAL ECONOMIC POLICY AND TRADE COMMITTEE ON INTERNATIONAL RELATIONS HOUSE OF REPRESENTATIVES ONE HUNDRED FOURTH CONGRESS FIRST SESSION OCTOBER 25, 1995 Printed for the use of the Committee on International Relations FE3 2 3 t2S3 U.S. GOVERNMENT PRINTING OFFICE 44-248CC WASfflNGTON 1997 : ForsalebytheU.S.GovernmentPMntingOffice SuperintendentofDocuments,CongressionalSalesOffice,Washington,DC 20402 ISBN 0-16-055746-1 >t COMMITTEE ON INTERNATIONAL RELATIONS BENJAMIN A. OILMAN, New York, Chairman WILLIAM F. GOODLING, Pennsylvania LEE H. HAMILTON, Indiana JAMES A. LEACH, Iowa SAM GEJDENSON, Connecticut TOBY ROTH, Wisconsin TOM LANTOS, California HENRYJ. HYDE, Illinois ROBERT G. TORRICELLI, New Jersey DOUG BEREUTER, Nebraska HOWARD L. BERMAN, California CHRISTOPHER H. SMITH, New Jersey GARY L. ACKERMAN, New York DAN BURTON, Indiana HARRYJOHNSTON, Florida JAN MEYERS, Kansas ENI F.H. FALEOMAVAEGA, American ELTON GALLEGLY. California Samoa ILEANA ROS-LEHTINEN, Florida MATTHEW G. MARTINEZ, California CASS BALLENGER, North Carolina DONALD M. PAYNE, New Jersey DANA ROHRABACHER, California ROBERT E. ANDREWS, New Jersey DONALD A. MANZULLO, Illinois ROBERT MENENDEZ, New Jersey EDWARD R. ROYCE, California SHERROD BROWN, Ohio PETERT. KING, New York CYNTHIA A. McKINNEY, Georgia JAY KIM, California ALCEE L. HASTINGS, Florida SAM BROWNBACK, Kansas ALBERT RUSSELL WYNN, Maryland DAVID FUNDERBURK, North Carolina JAMES P. MORAN, Virginia STEVENJ. CHABOT, Ohio VICTOR O. FRAZER, Virgin Islands (Ind.) MARSHALL "MARK" SANFORD, South CHARLIE ROSE, North Carolina Carolina PAT DANNER, Missouri MATT SALMON, Arizona AMO HOUGHTON, New York TOM CAMPBELL, California Richard J. Garon, ChiefofStaff Michael H. Van DUSEN, Democratic ChiefofStaff Subcommittee on International Economic Poucy and Trade TOBY ROTH, Wisconsin, Chairman JAN MEYERS, Kansas SAM GEJDENSON, Connecticut DONALD A. MANZULLO, Illinois MATTHEW G. MARTINEZ, California SAM BROWNBACK, Kansas MICHAEL R. MCNULTY, New York STEVENJ. CHABOT, Ohio ROBERT G. TORRICELLI, New Jersey DANA ROHRABACHER, California HARRY JOHNSTON, Florida DOUG BEREUTER, Nebraska ELIOT L. ENGEL, New York CASS BALLENGER. North Carolina Edmund B. Rice, Subcommittee StaffDirector John Scheibel, Democratic Professional StaffMember Christopher Hankin, Professional StaffMember Alexander Q. Schmitz, StaffAssociate (II) CONTENTS WITNESSES Page The Honorable Bruce A. Lehman, Commissioner ofPatent and Trademarks, Patent and Trademark Ofiice, U.S. DepartmentofCommerce 1 Mr. David L. Hill, President, Patent Enforcement Fund, Incorporated; accom- paniedbyMr. James Chandler, Intellectual Property Institute 25 Mr.James Chandler, Intellectual Property Institute 26 APPENDIX Preparedstatements: TheHonorable Bruce A. Lehman 35 Mr. David L. Hill 46 Mr. James Chandler 89 Recent U.S.-Japan Patent Agreements by the National Association of Manufacturers 92 Mr. Ronald J. Riley, President, Riley and Associates Inc., and Advisory BoardPresidentoftheAlliance forAmerican Innovation 98 (III) IMPACT ON EXPORTERS OF THE NEW U.S. GATT PATENT ACCORD WEDNESDAY, OCTOBER 25, 1995 House of Representatives, Subcommittee on International Economic Policy AND Trade, Committee on International Relations, Washington, DC. The Committee met, pursuant to notice, at 1:07 p.m., in room 2255, Raybum House Office Building, Washington, DC, Hon. Toby Roth (chairman ofthe Subcommittee) presiding. Mr. Roth. The hour of 1 p.m. having arrived, let me say that we are delighted to see everyone here this afternoon. Today the Sub- committee will conduct an oversight hearing on how the U.S.-Japan patent agreements and the patent provisions of GATT will affect U.S. companies in the global markets. This hearing is being held at the request of Congressman Rohrabacher who is a sponsor of legislation to change the GATT provisions. Let me reiterate that this is an oversight hearing on the trade and competition aspects ofthe issue. I compliment Congressman Rohrabacher for his initiative, al- though his legislation is not in the jurisdiction of this subcommit- tee. The question of patent terms has sparked sharply different views among corporate America, executives and the mentors. Those differences are reflected in Congress where Members have strongly held positions on both sides ofthe issue. Commissioner Lehman, we appreciate your being here today. We also welcome Mr. Hill and Professor Chandler, who are here at the invitation of Mr. Rohrabacher. Before calling on Commissioner Lehman, let me recognize any Member of the Committee who may have an opening statement. None? OK. Mr. Lehman, please proceed as you see fit. We will put your entire testimony into the record and we will proceed with questions after your testimony. STATEMENT OF THE HONORABLE BRUCE A. LEHMAN, ASSIST- ANT SECRETARY OF COMMERCE AND COMMISSIONER OF PATENT AND TRADEMARKS, PATENT AND TRADEMARK OF- FICE, U.S. DEPARTMENT OF COMMERCE Mr, Lehman, Thank you very much, Mr. Chairman. It is a pleas- ure for me to be here and I want to thank you for holding these hearings. I think that they ought to be able to shed a great deal oflight on a very controversial issue. Also, I would just like to say (1) that it is a pleasure to be here with a fellow Wisconsinite. We both have common roots and, also, I happened to grow up right across from the Illinois State Line, in Beloit, Wisconsin. So I am inti- mately familiar with Mr. Manzullo's district as well. So we are all sort offrom the same part ofthe world. Mr. Roth. Well, that means you have at least two good friends on the Committee. [Laughter.] Mr. Lehman. Actually, my mother lives in Florida and we cer- tainly have a common interest in intellectual property with Con- gressman Rohrabacher, so we are one big happy family. Mr. Johnston. Mr. Chairman, everybody's mother is in Florida. [Laughter.] Mr. Lehman. I have a prepared statement that I believe has been submitted, Mr. Chairman, and I would be happy to submit that for the record and then try to summarize my statement so we can get to some ofthe questions that the Members might have. Mr. Roth. Please proceed. Mr. Lehman. First ofall, I would like to start out by putting this issue in context and to say that there are three principles, at least, that operate in my stewardship of the Patent and Trademark Of- fice as it relates to both the internal administration of the office and our international relations. And those three basic principles or touchstones are as follows: The first is that the best patent system is one that gets people in and out of the patent office and into the marketplace as quickly as possible. We do not want people spending many, many years in bureaucracy in the patent office. We want to get them in and out and to give them a valid and quality patent that they can take to venture capitalists to the marketplace, the stock market, to banks ifnecessary, so that they can build factories and put people to work and provide new products for the American people and become globally competitive. The second basic principle is that we are functioning in a global marketplace today and, therefore, it is not good enough just to have effective patent protection in the United States, we have to have timely exclusivity for American innovators in every single market in which they wish to do business in the world. And that is very important because patents are granted on a national basis. You do not have patent protection unless an individual national patent of- fice gives you a patent. And, frankly, that system has been very im- perfect in the past. It is still imperfect and we are making improve- ments and the subject that we are going to talk about today is one of the areas where we are making some improvements. To reit- erate, global marketplace is the second touchstone. And the third is that even though any given patent term is inevi- tably somewhat arbitrary and during the period of American his- tory we have had different patent terms, at one time the patent term was 14 years. Today, it is 20 years from filing. In my view, we should be able to provide every patent applicant with at least 17 years of exclusive patent protection. That is the third touch- stone. So I would like to put all my comments in that context. Let me tell you a little bit about how the U.S.-Japan accords on patents came into being because that really is the specific focus of today's hearing. First of all, I mentioned with regard to my second touchstone, that effective international protection ofintellectual property in the global marketplace is very important. Japan is the second largest market in the world. As in so many areas, we have not gotten a very good deal in Japan in the patent area. And let me just give you an illustration of what the historic problem there is and con- trast it to the United States. When you come into our patent office, within 3 years, you get a patent application either granted or denied and you walk out ofthe office and you will have exclusivity. You have the complete exclu- sive right to exclude anyone else from making, selling, or using your invention. Of course, that is a very powerful economic tool to take to the marketplace. In Japan, it has not worked that way, historically. In Japan, you have very difficult times getting into the patent office. You have to file an application in what is a minority language, Japanese. And you have been stuck with your Japanese language application. You could not change it at a later time if you had found translation mistakes. Second, it has taken you in the neighborhood of 7 or 8 years to get a patent once you applied for a patent. Further, 18 months after you file, your patent application in Japan has been published and Japanese industry has been able to take a look at it and they have a very long period in which they are able to work with your application and figure out what it means. If they want to slow you down from getting patent protection in Japan, they could use a sys- tem ofwhat we call pre-grant opposition. They come in and litigate against you right in the patent office and delay the grant of your patent. And then at the very end of the process, once you went through this gauntlet, Japan has had a system ofdependent patent compulsory licensing. And that is a system whereby if a Japanese competitor came up with an improvement on your underlying pat- ent, they could get a separate patent on that improvement and then have an automatic right to license or use your underlying in- vention. Well, clearly what that meant is that for the most part of the post-World War II period, the Japanese patent system has in effect put American innovators in a big quandary. Keep in mind, if you do not file any patent application, then you are completely open to piracy. So if you wanted to get anything out of that market, you had to file a patent application, but when you filed the patent ap- plication, then you were stuck with all of these procedures which, in effect, at the end ofthis gauntlet, all you might get is just a roy- alty. Now what that means, let us just say that you are an automobile company and I know there is a big automobile plant in Congress- man Manzullo's district, if you are Toyota operating out of Japan and you come up with a new technology and you file in our patent office, within 3 years, in fact, on an average of 19.1 months, you will get a patent and it will give you exclusivity over an innovation. For example, it may be an improvement to a carburetor. By contrast, ifChrysler files in Japan, Chrysler will disclose that technology at 18 months and then Toyota, or any other company, will be able to avail themselves of that technology and use it and once the patent is granted, the most that Chrysler may get w—ill be a right to a royalty. So what that means in practical terms and this has market-opening implications, because in the automobile industry among big companies, there are always innovations and there are always going to be important things that are going to be developed that all companies will need to have access to. Chrysler is in the unfortunate position, if they want to get the patented part from Toyota, Toyota will be able to say, "OK, send over your ship and pick up the part that you need at the dock in Yokohama." That is what Chrysler has to go through to get the part that is patented in the United States by Toyota. By contrast, in Japan, Toyota can simply say to Chrysler, "OK, we will pay a licensing fee and give you X-royalty for this technology, for the product that we, Toyota, will make and use here in Japan." I think that gives you an idea ofhow the patent system in the second larg- est market in the world has worked much to the detriment of the United States. Now, one ofmy primary objectives was to try to change that situ- ation and that is what this hearing is all about. I want to tell you that story today and I believe that we have changed that situation very substantially. The agreement that we have achieved with Japan, and I will de- scribe for you how that came about; is an agreement to which the Japanese Grovernment already has implemented regulatory and legal changes which will do the following: It will permit the filing of applications in the English language by American companies and the amendment of the application, if there are any mistakes in it, by reference to the English language filing. Second, upon request, there will be a guarantee that every single patent will be either issued or the application will either be denied or granted within 36 months. This is not 7 or 8 years, it is 3 years. Mr. Roth. I am sorry. What was that time, again? Mr. Lehman. Thirty-six months. Mr. ROHRABACHER. That was a guarantee? Mr. Lehman. That is correct. That is right in the agreement. Third, the pre-grant opposition procedure is being abandoned. So a Japanese company will not be able to go into the Japanese Pat- ent Office and slow you down anymore and, fourth, the dependent patent compulsory licensing is also being abandoned. The ultimate result of these changes is that for the first time in history, American companies will have in Japan what they now have in the United States and that is timely exclusivity over their intellectual property innovations. And that will have, when those changes start to really take hold, a big market opening impact in Japan. Ifyou think back to my story comparing Chrysler and Toy- ota, Chrysler is going to be able to then say, "OK Send that boat over to Seattle and pick up the part that we, Chrysler, made in Belvedere." That will have an enormous effect, along with a lot of the other things that we are doing to open the Japanese market.