PAUL HECKEL ABRAHAM LINCOLN PATENT HOLDERS ASSOCIATION MR. HECKEL: Thank you. If somebody can display these slides? COMMISSIONER LEHMAN: Charlie Van Horn from our office will. MR. HECKEL: Thank you. COMMISSIONER LEHMAN: I think you testified at our hearings on harmonization. MR. HECKEL: Yes, I did. And __ COMMISSIONER LEHMAN: By the way, for those of you who don't know, Secretary Brown issued a statement yesterday, or on Monday, I guess this is Wednesday already, in which he indicated that we would not at this time proceed with international negotiations which would require the United States to change to a first_to_file system. I think it's important to bring this out at this point because these, this process of obtaining public input does make a difference. There are some people who don't think it makes a difference, but we had he,gs on the question of patent harmonization, and we heard public testimony, Mr. Heckel testi- fied, he had a very strong position on that, which I recall was somewhat consistent with the position that the Secretary has tak- en here on our recommendation, and so we have changed our policy, and so these hearings can make a big difference. I should add, just as a footnote on that, that that doesn't necessarily mean that we won't at some point reconsider the ques- tion of a change in our system, but we concluded on the basis of those hearings that we had that we weren't really getting a good deal, that we weren't getting harmonization, and that the disad- vantages to the U.S. creative community were not outweighed by the comparable advantages that we would receive as the proposed harmonization treaty was presently constituted. So this is a serious exercise, and thanks for joining us again, Mr. Heckel. MR. HECKEL: Thank you, Commissioner LEHMAN, and I was there, and I felt at the time that it was very useful to get ....0t from a lot of different people, and I feel that it's very good that you hold these hearings too. I think an awful lot of what has been spoken is really not supported by the facts, and I think it's useful for people to come there and to provide a reasonable basis for their opinions, because I think a lot of the time it doesn't stand. Well, I'm Paul Heckel, and I'm here basically as Acting President of an organization called ALPHA, which is an organization of software patent holders. We only have about twenty members, but fourteen of our members are patent holders. I think ten or twelve of those actually had founded companies based on their patents. Two of our members were on the board of directors of the Software Publishers Association. Three of our members had their patents attacked by the League for Programming Freedom in several of their publications, me being one of those people. In fact, it was those attacks that really started to bring me in, to get in- terested in the issue, and as I suspect the4missioner may know, I wrote two articles, one on the Communications of the ACM and one in Computer Lawyer on the software patent issue to try to bring out some of those facts and I'll bring out some of those facts later. Clearly ALPHA strongly supports software patentability in pretty much all the forms that are there. We've also had an opportunity to look at the statements of the American Bar Association, the Software Entrepreneurs Forum and the Intellectual Property Sec- tion of the California State Bar and we concur in their positions as well. Basically we feel we should have software patents. Inventiveness should be judged by the content of the invention and not by the color of the technology, as a variant on Martin Luther King's famous quote. We believe, by the way, that the quality of the examiner's position should be a more high_status position. We believe that trying to increase the pay and increase the profes- sionalism of examiners is desirable. We all want a system which will make it clearer8 less uncertain for everybody. Nobody, patent_holder or potential infringer alike, gets any advantage out of infringement. Now I want to talk a little bit about some of our members because I know you're interested in personal experience. For example, Mike and Susan Morgan found a company called MacIn- Tax, developed a couple of products. Because they had patents on them they told me that, as Susan told me, she said, with her ven- ture capitalists, when the venture capitalists asked us how we could protect ourselves against say Microsoft coming out with a competitive product and stealing our market, the fact that we had applied for patents put the problem to bed. It made the VCs feel much more comfortable, and that's a big difference. They have since sold out, they started another company. Reed Hastings is another person. He founded a company here in Silicon Valley called Purer Software. He started, he made it profitable, he raised a couple million dollars from venture capi- talists, the fact that he had patents made that possible; certainly it helped him a great deal. Currently he's facing a potential litigation problem with one of __ somebody in his market said, "Why don't we add his patented feature to our product?" and so he's having to deal with those problems. Another is Dr. Marcusson who is a patent_holder and a physician. His __ when Oracle recently announced its product for the Infor- mation Superhighway they used something that he had designed for teaching medicine. It was called "Salvaging a Patient with a Stab Wound to the Heart. It was running on a Hypercard_like en- vironment. He's had a lot of experience with inventors. He's a specialist in repetitive_strain injury, so he's familiar with that controversy which is going on. But what he has said is that, "I have seen first_hand emotional and financial damage done to independent inventors whose inventions are ripped off by big companies," and he said he "fears that many small inventors will be the roadkill for the Information Superhighway," wh@is the talk that I take, and having heard the previous talk I'm concerned that if their position is taken that it could very well happen that way. Hal Nesley is actually an investor, but he's invested in four start_ups which have software involved, one has a patent, the other three are in the process of getting patents. So those are some examples. In my own case, I started a company relying on patents. It gave me more confidence to start the com- pany since I had the patent or was going to get the patent, I thought, and it gave my investors confidence. They told me it was one of the reasons they decided to put money into it. We brought products to market, as did the other people that I have been talking about, and we then found out we were infringed by Apple, we got in some litigation and I've described it in my book that some people here I'm sure are aware of, and we settled and they took out a license. Then we got involved with IBM; that si- tuation still is not clarified. But I guess I'd like t..D into what I really found out when I ex- amined the patents that Mr. Stahlman attacked in some of his ar- ticles. And I particularly refer to the ACM article. If we can have that slide now. I went and I called. They gave an example of nine patents, and I went and I called the patent_holders on each of those nine patents. I found out some interesting things. I want to refer specifically to it. That chart is in Computer Lawyer, and this afternoon I'll have copies of Computer Lawyer out there for people to look at so they can see the chart. But based on that chart we have some conclusions. One. All nine patents protected commercial products. Every one that they brought up that they said is an example of a bad patent and absurd patent. Two. Software stimulated new business forma- tion. Four of those nine patents were held by companies that were started precisely to develop the technology that was in the patents, and a fifth company had only been in business for two years when it filed the patent. So fivH the nine companies real- ly were independent small start_up phase companies that were us- ing patents. Okay? I think that that's strong evidence, based on a sample selected by the people who are condemning patents that software does stimulate new businesses. Second, I would argue that they stimulate the introduction of fundamental technology. I think three of those patents introduce technology that was fundamental, at least in the sense that it was widely seen throughout the industry, and I'll talk about one of those later. By the way, I've talked to several inventors in different technologies, and I referred to a lot of that in my Harmonization testimony, and I found out in many ways that the problems faced by software developers or software inventors are very similar to the problems faced by inventors in other techno- logies. They're made more severe by the prior art problem and the newness of the technology, but fundamentally they're very very similar problems, and the way the trade system treats them Lery similar. My last point is an interesting one. Can I see the next slide, please? Small entities are exceptionally cost_effective in en- couraging innovation, especially compared to Federal funding, and I will give you the example. It might be a little hard to see there, but if you look down the first column we have the number of commercial products. The first item is four for large enti- ties. Next is five for small entities, and below that we have zero for Federally_funded. None of the nine patents cited a pro- duct that had a Federal patent behind it, and as you know, if you develop something under Federal law funding, you can get patents on it, you do have rights to use those patents in the commercial marketplace. Now I looked at what I call the efficacy of the invention, and I used the fact that somebody has asserted a patent as a measure of efficacy, because a lot of patents aren't asserted, and I found two of the large company patents were submitted, and all five of the small_entity patents wPasserted. So I use that as a measure of effectiveness, because we're going to look at taxpayer cost effectiveness. Now if you look at Federally_funded we gave one there just so you don't have a number of zeroes, so the numbers work out in some sense. Now we looked at the cost, and in 1989 the Federal funding of the Patent office was two million dollars, and so we allocated those costs and we got thirty, fifty thousand __ I can't quite read those numbers there, for those numbers, and then we divided to get the efficacy. By the way, the Federal funding of computer science in that year was four hundred and eighty_seven million dollars. So if we look at the cost_effectiveness of it, and the large entities had a cost_effectiveness thirty_three thousand, the small entities had a cost_effectiveness of two hundred and fifty thousand and Federally_funded had a cost_effectiveness of one point o three. Which says that a dollar spent in the tax __ to help the Patent Office really brings back more innovation. NTlearly if the Patent Office was clearly funded, the numbers would probably knock down to something like thirty_three and two hundred and fifty, which is still a very large number compared to one. Now I fully recognize that this is only nine numbers. It's a very small sample, but remember, these numbers were picked by Mr. Stahlman and the League for Programming Freedom to say that it's bad for innovation, and there's a very very strong prima facie argument that it does encourage innovation. So those were the results of those numbers. I want to talk now about a specific patent, which is the spreadsheet patent that I'm sure a lot of people have heard about. It's been described as the automatic recalculation patent, and when first suit was filed on it in 1989 it was attacked wide- ly in the press as obvious and it was well_known in the prior art and stuff like that. By the way, I called the inventor, I got a copy of the patent, and I said, Who's talked to you? Nobody in the American press had even called X person although widely his patent was attacked in the press, and it was clearly easy to find him as all you had to was get a copy of the patent. So it doesn't give me a great deal of confidence when I hear these press stories about these horrible patents. So since then I've learned a certain amount about the patent. In my opinion, that patent is to the modern computer spreadsheet what the Wright Brothers' invention was to the airplane. It might not have had a visual display; they used a teletype termi- nal. They started out with a concept of Basic, and instead of executing the statements in the numbered order, they said, Why not take the statement numbers, break them in two, use both halves as indexes into an array, and then calculate the formulas in the order which is natural, and use it to solve business prob- lems. That seems quite clear from reading the patent. They developed a product, they brought a product into the marketplace, and they had real users; okay? But they had a problem with the pateystem. By the way, they filed the patent in 1970, twenty_four years ago, they have yet to see dime one for an in- vention which is in many ways responsible for the success of Ap- ple, because VisiCalc helps out Apple Computers, the success of Lotus. They have yet to receive dime one. This is what happened to them. They got a Notice of Allowance from the Patent Office. Then the Benson decision came down, and then the Patent Office took their patent away from them, because of the Benson decision. They then appealed it, pro se, through the Courts, and got a decision at the CCPA called in re parto, which says that just because the inventiveness is in an algorithm or in the software does not mean it's not patentable __ that's an important decision as I'm sure everybody involved with software patent knows, it was done pro se without an attorney by those in- ventors. Now they are in trial, and in July I went to hear a one_day __ COMMISSIONER LEHMAN: Yeah, I think, Mr. Heckel, I think we're going to have to ........` MR. HECKEL: Turn me off? COMMISSIONER LEHMAN: Yes. MR. HECKEL: Okay, I'm sorry, can I just briefly __ COMMISSIONER LEHMAN: Is our machine on? I'm not sure if it's working right. VOICE: It was on but we gave you a few more minutes because we tied up in the beginning. MR. HECKEL: I'm sorry. I just want to say that I saw in Court their patent attorney in my opinion perjure himself on the stand to testify against his clients, to save himself from a malprac- tice suit. I saw that in July. The decision hasn't come down. I hope when the decision comes down you read it, Commissioner, Examiner, and look at that patent lawyer and consider whether or not this is what you want to have representing clients out there in the field. Thank you very much, Commissioner. COMMISSIONER LEHMAN: Thank you very much, Mr. Heckel. You know, we do have a procedure in the Patent Office for hearing com- plaints against people for not carrying out their professional responsibilities, so it's certainly available to peopld they wish to use it. Next I'd like to call Mr. Robert Kohn, the Vice_President and General Counsel of Borland International.