PAUL LIPPE GENERAL COUNSEL SYNOPSIS MR. LIPPE: Thank you, Mr. Chairman. By way of introducing myself to the Panel, let me say that I've sat where you're sitting. I used to be Chairman of a thing called the Colorado Air Quality Control Commission and having sat through two days of stupifyingly dull testimony about aromatic emissions of oxygenated fuels, I respect your stamina and your willingness to sit through this stuff. COMMISSIONER LEHMAN: Well, thera big difference. That may have been stupifyingly dull, but this isn't. It's intensely interest- ing. It really is. MR. LIPPE: So I'm going to try not to echo the comments that you've heard before, but I do want to stand in strong ratifica- tion of some of the critiques that Mr. Fiddler from Wind River made about the software patent system. The problem is, from my perspective, the legal system __ COMMISSIONER LEHMAN: Can you tell us just a little bit about Synopsys? MR. LIPPE: Yeah, I will. The broad problem is that the legal culture and the legal domain is so different from the technical innovation world that when you try to bring them together, at least from the technical people's side, it doesn't work very well. I'm General Counsel of Synopsys. Synopsys is an electronic design automation software company. I'm also the head of a lit- tle thing called "The Public Affairs Committee of EDAC". EDAC is our industry trade association. It stands for EDA Companies. There are about 4O companies in EDAC,ging from very raw startups to some half a billion dollar companies. EDA is probably one of the two or three principal domains within what your Notice refers to as "computer integrated design". It is a strategically critical_technology area for the United States, and Synopsys is, in the new parlance, clearly a national technology champion. We make software which is used in the design of complex electronics parts and our customers are in the semiconductor computer systems and telecommunications industries. People such as Sun, Hitachi, IBM, Intel, Siemens. Synopsys itself was founded about seven years ago, and, in the term of art, industry analysts expect that we'll do around 2OO million dollars of revenue this year. We are probably the second fastest growing company in the computer_aided integrated design sector, the fastest growing company in EDA, and we are considered to be one of the hot companies in our field. The reason I'm speaking today is I want to challenge what I think has been the animati dea behind the move towards enhanced intel- lectual property protection and patent protection and that is that enhanced intellectual property protection is per se benefi- cial for US companies. And my challenge comes not as an intellectual property lawyer, although I am a lawyer, and not as a technologist, because I'm not a technologist, but as somebody with some deep experience in the political sector who's given some thought to what mix of pol- icies makes the most sense to advance America's industrial in- terests. And as somebody taking a political approach, I think it's impor- tant, when you examine these policies, to think of __ to focus on the outcomes and who wins and who loses and not so much on the product, as well as what the ideas are that are advanced by the various speakers. The concern that I've got, and I think the gentleman from Wind River and other people have, is that the startup process and the innovation process is inherently fragile, and, as the domain be- comes increasingly littered with pate$ to have the ability to kill companies at each stage of the process. There are various what you might call choke points, at the financing stage, at the various financing stages, and at the stage of trying to begin to sell to customers, and it's all too easy for innovative companies to be blocked from bringing their products to market. And I want to talk about that a little more. The fundamental assumption that enhanced protection for patents is favorable to US industry is an idea that I think gained currency in the late '7Os and early '8Os and it was based on the notion, the basic idea __ and I hope I don't offend anyone by saying this __ that Americans invent and Japanese copy, and the way to make America stronger is to help to enhance intellectual property protection. My fear is that we've gone too far, that we've moved towards more aggressive patent enforcement, at the same time we've moved towards less aggressive anti_trust enforce- ment, and that the remedy, the inherent remedy for patent of monopol(otection and the nature of patents being issued is not __ we've gone too far. And the other thing to focus on in terms of the software industry is that software, as the gentleman from Microsoft used to say but won't say today, is a natural monopoly. Being first to market confers an enormous advantage in terms of the ability to set the standard, there are high barriers to entry, high fixed costs and low variable costs, so you've already got a huge head start if you're first to market. It's not clear to me that there's, as some of the earlier speak- ers have said and I agree with, that you're really furthering the goal to encourage people to innovate by conferring additional monopoly. And there tends not to be a lot of success in the software indus- try for copiers, clones, and followers. I think you'd be __ there are very few examples of people who followed, who have exe- cuted a following strategy copying other people's technology, that have been successful in software. Some of the ideas that underlie incr,d protection for patents, I think, are misconceptions, at least in the domain where we live. First, the key idea that I think is wrong is the notion that in- vention per se is what's important. If you go to a venture capi- talist in Silicon Valley and you say "I've invented something", they've got zero interest in that because they recognize that the whole Silicon Valley paradigm is based on the notion that what matters is customer_delivered innovation, which is very different from the level of invention that you need to get a patent, and that's why today the perception of the people in this room who are on the anti_patent side is that most patents are going to big companies who don't sell the products, they get the patents out of their industrial labs and then this group of people that you might call the lone inventors. But what really creates value for the United States and for the customers is when you deliver the technology to customers in a way they can be used and that, that has not been the focus of0 patent law, for good and sufficient reasons, in the past. The second thing that I think, at least in our domain, that is a misconception is that people actually read patents and use them to advance the wrong technology. No engineer I've ever known has been willing to read other people's patents, and most people feel, at least in our field, that patents don't describe things with enough particularity to know how to copy them anyway. The third problem is the patents, as you've heard over and over again, I won't belabor the point, have been very incremental, they haven't been significant, and so there's so much overlap space between the existing patents. And the fourth misconception and I think the most important one is that the patent system protects small companies. As I said earlier, the patent process is fundamental in the legal process, a lot of lawyer bashing goes on, some of it justified, much of it not, but in any case recognize that the process of delivering in- novation to the customer is a tota4different culture, it's a to- tally different process, than that required to obtain and enforce a patent. That doesn't mean that obtaining and enforcing patents is a bad thing, but it's always going to be a diversion of energy and resources, as Mr. Warren said, from that process of delivering innovation to customers, and the litigation process is almost al- ways going to favor the bigger guy because he's got the resources and he's acculturated to going through that kind of drill. Small companies hate it. Engineers, most engineers I've ever known hate it, and they're very uncomfortable and they're very vulner- able to this kind of process. The other point is that the legal system doesn't really comprehend the technology. We happen to be the leaders in our field, we're glad of that, but the consequence of that is that, of the ten people in the world who understand what we do, eight of them work for us, none of them work for the Patent Office, and it's very unlikely that anybody who's got that kind of leading8e expertise would want to work for the Patent Office, no disrespect to the folks in the Patent Office, but they would like to be building the products and, you know, doing the things that people around here do. So there's an enormous amount of randomness in the system because the legal system cannot adequately __ and cannot be expected to __ adequately comprehend the technology at the level that our folks do. That randomness, then, introduces enormous transfer costs and friction costs because it doesn't really afford, the current system, doesn't really afford us a lot of inexpensive ways to resolve the issue. There's an article in "Electronic Engineering Times" which talks about patents in the EDA industry. The EDA industry is probably the most, maybe along with desktop software publishing, American_dominated industry, 99 percent of worldwide revenues from American companies, and it is absolutely a strategic tech- nology industry, central to everything happening in electronics today, but the people who had the patents by and large are Japanese companies, with the exception of IBM which is the largest patent- holder. Well, these Japanese companies happen to be our custo- mers, they're not our competitors because they don't sell any products, but it is a little worrisome that Hitachi's got 49 pa- tents in this area and they don't sell anything and we've got zero patents in this area. So if we were an earlier_stage com- pany, it would be even more worrisome because the ability of the large company to block the small company creates a lot of uncer- tainty. And I was always taught and always believed that in the law pred- ictability has got to be one of the principal goals of any well_conceived legal system and right now people feel like there's very little predictability in the system, instead there's a lot of randomness. The other thing that's happening in terms of where the world is going in our domain, and I don't know how to deal with this one, to tell you the truth, there's what I call "hardware/software converg@". We're able to represent in software things that were formerly only represented in hardware and so we now have sort of a confluence of the most patent_oriented domain, which is elec- tronic parts, and the least patent_oriented domain, which is software, and it's very confusing. We've also got the reality that the traditional US patent hold- ers, in particular IBM and AT&T, are no longer as constrained as they have been historically about their anti_trust worries and have been aggressively going after people. So, you know, one of the anomalies is that there's a very signi- ficant technology called RISC, Reduce Instructions Set Computing, it was invented by IBM in 1975 in Fishkill, and that's great but they didn't do anything with it, they left it in the closet for eight years, until Sun brought RISC to market and made a very significant technology shift and delivered a lot of value to cus- tomers through RISC. Well, IBM went after Sun and they were able to get Sun to pay them royalties on the technology, butD really important event that occurred was, not the conceptualization and creation of RISC in the lab, it was Sun creating the market and delivering the value to customers around RISC. In terms of suggestions, you know we've all got sort of overlap- ping suggestions so I won't belabor the point, I think some of the suggestions that were made were really good, but I think we ought to be thinking, and I would ask you to consider, I don't know how you get there, that some kind of sales is a requirement, that there be some kind of __ I think first_to_file is not going to solve any of the problems, but some notion of first_to_deliver_value as opposed to just having an invention in the lab. Especially where we've got this three_year black hole, where somebody can file a patent and everybody else is shipping products and then three years later people find out that they've got a problem with the products, and obviously Compton's Multi_Media Patent is an example of that. So my focus point is that intellectual propeHprotection per se is not necessarily a good thing for America. It's good for some com- panies, it's not good for others. I think on the whole the thing that we are best at, which is the smaller_company innovation, it is a very worrisome trend and a lot of companies are very concerned about it. I think it poses a significant threat to hurt the job creation and innovation and company creation machines that we've got going, and I'd like you to look for ways to rein back where we are. COMMISSIONER LEHMAN: Thank you very much. Next I'd like to call Tim Boyle, Executive Director of Multimedia Development Group.