PRESENTATION BY MR. JOHN E. DeWALD
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
MR. DeWALD;:  Good morning.  My name is John DeWald.  I'm an
Assistant General Counsel at The Prudential Insurance Company
of America, and I'm responsible for its intellectual property
matters.
My remarks this morning will focus on the impact of
software-related inventions on The Prudential as a large
insurance and financial services company.  I believe our
experience in this regard is representative of the industry as
a whole.
In San Jose, my colleague and client Charlie Morgan confronted
the panel of a software patent infringement charge against his
Prudential business unit under a patent that essentially
claims a method of doing business.  A computer system is used
in that product to estimate tax contribution limits, forecast
premiums, and the like for health benefits using a 501(c)(9)
trust.
That charge is a specific example of a general issue I'd like
to discuss today.  For several years there have been
practitioners advising in trade journals, such as the National
Underwriter and Insurance Trade Weekly, and elsewhere, that
you could virtually lock in for 17 years the exclusive rights
to market a new product or service by patenting the computer
system created to support it.
Those who know the insurance industry and have no special
self-interest would probably agree that most such efforts
should fail for inability to prove novelty or nonobviousness,
or as for claiming a mere method of doing business, which is
non-statutory subject matter.
But the patent confronted by Charlie Morgan illustrates
graphically that many an insurance or financial product, even
one based squarely on the Internal Revenue code, can be
patented if the applicant simply embeds it within a computer
system.
This is relatively easy to do because in fact everybody
already uses computers to crunch the large numbers involved
with any insurance product or financial instrument.
In theory, defending against such a claim should be a
straightforward matter.  But in reality, the risks and costs
of responding are so extensive that economics alone often
dictates that many such claims be settled rather than
defended, even where the accused infringer is advised by
counsel that the patent is invalid.
The presumption of validity in favor of the patent-holder, the
so-called patentee advantage, creates economic risks far out
of proportion to the intrinsic merit of the patent.  This is
because insurance by its very nature involves contractual
obligations and risks for large numbers of policyholders and
beneficiaries, and these numbers can easily run into the
millions.
Further, to the average business person who must decide
whether or not to deal with an insurance company, the patent
itself appears to give an impartial government stamp of
approval to the patentee's allegations.  Even the informed
business person with competent legal advice does not want to
become involved in any insurer's complex, possibly costly,
patent disputes, let alone be drawn into a lawsuit.
This has a chilling effect on the market.  If customers decide
not to purchase a product, the market freezes, and the
business can die.  And all of this can happen before the
insurer has even a reasonable opportunity to obtain an
adjudication on the patent.
Even if an alleged infringer wants to contest the merits of
the patent claim, the long delays involved, the burden to
identify, locate, and produce a compelling array of prior art,
plus the cost of counsel, let alone the huge potential cost of
litigation, becomes a daunting and expensive alternative, even
beyond the expenses typically associated with patent
litigation.
This raises the nuisance value of such claims, so patentees
and their advisers expect huge sums in settlement.  Because of
all this, the patentee gets much more than the right to sue. 
Given the right circumstances, the patent holder gets in
effect a lottery ticket.
And with this result comes the social cost of diverting the
insurer's resources away from actually doing business, the
possible withdrawal of products from the market, hurting
individuals as well as companies.  And it could also mean an
increase in the cost of products to consumers to cover added
legal costs.
For mutuals like Prudential Insurance, it could also mean a
diversion of revenues which otherwise could have gone to the
policyholders as dividends.  And again, all this cost comes
without any corresponding value added to the economy or
technological benefit.
Accordingly, I'm responding to the first six questions on
Topic B as follows:
First, patents and printed publications do not provide
examiners with sufficient representative collection of prior
art to assess the novelty or obviousness of software-related
inventions, particularly in the insurance and financial area. 
For example, many program products constitute prior art by
virtue of being on sale, or the subject of public use.
It's been traditional not to publish these methods embodied in
the packages.  So the public is unaware of the nature of --
and unable to search -- this type of prior art.  The
collection of prior art must be drastically improved.  I
endorse in principle the establishment of the machine-readable
database now being organized by the Software Patent Institute. 
That project should be enthusiastically supported.
But also, much of the internal programming which companies did
in this area has been treated as, and considered a trade
secret, and not patented at all.
Finally, to the extent appropriate, that database should also
include policy filings from state insurance departments or
other regulatory agencies.
Two, for the same reasons, an accurate measurement of the
ordinary skill in computer programming, particularly in
insurance and financial services, cannot be derived from
printed publications and issued patents alone.  New products
or variations on old existing ones are constantly being
developed by the industry in response to market demands,
changing economic conditions, or changes in the law.
Internal computer programs at these companies are modified
accordingly on a continuous basis.
In view of this situation, the PTO should impose a special
duty on patent applicants for software-related inventions,
particularly in the insurance and financial services field, to
disclose information relevant to the invention.
Applicants should not be rewarded, and everyone else
penalized, for the proverbial empty head and clean heart.
As a practical matter, the manner of implementing standards of
novelty and obviousness is returning results that do not
accurately reflect software inventive activities.  We
appreciate and applaud the efforts that the Commissioner has
made in this matter.  But so far to date what's happened is
that applying a competent standard to an incompetent database
has yielded a deficient result.
Perhaps most importantly, implementing on a computer a process
technique, system, or method of doing business which is well
known but for the use of the software should not be considered
novel and nonobvious unless implementing the well known
process on a computer results in a novel and nonobvious
process.  Generally this will not be the case.
To do otherwise merely invites speculators to gain the
system --
COMMISSIONER LEHMAN;:  Can I interrupt you and ask for Mike
who is here, what kind of guidance can you give on that at the
moment to our examiners, if any?
MR. FLEMING;:  Presently we are applying the same standard as
in any computer arts.  Unfortunately, we are having to find
the particular features that are being claimed to apply an
obvious standard.  And if that happens to be a business
practice, we have to find that business practice in order to
apply a 103.  And that's been very difficult.
COMMISSIONER LEHMAN;:  Especially since business practices
aren't to be found in our patent shoes very much.
MR. FLEMING;:  Right.  Nor do we have -- sometimes understand
what the business practices are since we're trained as
technology-types and not business -- in the insurance.  And we
have a large variety of fields that these come into.
COMMISSIONER LEHMAN;:  It reminds me -- as a lawyer, one of
the most frustrating things that can ever happen to you
sometime is when you know exactly what the law is and then you
a very inexperienced adversary who may have not -- and then
they come up with all kinds of totally off-the-wall ideas that
everyone who really is an expert knows are off-the-wall.
Then when you actually try to explain this to a court, or
whatever, a judge who may be similarly inexperience, well,
judge this is something everybody knows -- he may actually --
it sometimes is very difficult to actually define and explain
and elaborate on what may to those who do it every day seem to
be obvious.
And I have a feeling that in the software area, now that we've
opened up this Pandora's box a little bit and where people
realize, hey, you can patent a lot of stuff, we're getting
people coming in with things that are really quite bizarre
patent applications, and the system just isn't used to or able
to deal with this.
I see you're shaking your head yes that you agree with it, and
I gather that's a problem that Prudential is having.
MR. DeWALD;:  Exactly, Commissioner.  Yes.
To treat the matter otherwise merely invites speculators to
gain in the system by sandwiching software into products and
services that are already well known.  In effect, large blocks
of insurance products unjustifiably become sitting targets.
There should be enough flexibility in the patent system to
reward the truly innovative software inventor without allowing
a host of free riders to cash in on the system without making
a contribution to it.
For 6.A, until the database deficiency has been rectified, the
PTO should require patent applicants to conduct diligent
search of prior art before filing and to distinguish claimed
software inventions from the resulting references.  In many
instances, the applicant may be able to identify technology
that PTO would be unable to uncover.
I realize this may impose on software applicants a burden not
imposed on others.  But nevertheless, given the importance of
this technology and the curable problems inherent in its
present treatment, this temporary burden is justified and in
the public interest.
6.B, the PTO should require software patent applicants to
prove their inventions overall are distinct over the prior
art.  If the only difference between the claimed invention and
the prior art is implementation on a computer, then the
claimed invention is not patentable unless the computer
implementation is nonobvious over the preexisting
implementation.
Anything less allows software soldiers of fortune to bootstrap
the patent system without adding value to the product, the
economy, or improving our technical body of knowledge.
6.C, as in the case of requirement applicants search, the PTO
should be permitted at least temporarily to distinguish
software-related inventions by setting a standard less than
prima facia to establish that such an invention is not novel,
or is obvious.
With the tremendous leverage afforded to the patentee in the
huge private and social costs in challenging the presumption
of validity, substance, not form, should prevail, especially
where there is not yet developed an adequate database.
The closed nature of the examination process should be
revisited.  After initial approval there ought to be
publication for opposition.  And that opposition should allow
for a meaningful internal adversarial process.  Challengers
should have a right to rebut the patentee's response.
A form which allows for the reasonable determination of
contested facts without the need to resort to multi-million
dollar litigation will enhance the integrity of both the
system and issued patents, discourage frivolous applications,
and hopefully eliminate some of the roadblocks along the
information superhighway we hear so much about these days.
Thank you very much for you attention and for the opportunity
to make these remarks today.
COMMISSIONER LEHMAN;:  Thank you very much, Mr. DeWald.
Our next witness is David Clark.  You can come up right now --
or hold off.  I want to take about a three-minute stretch
break, and then we'll be right back.  But don't go away too
far.  We'll be right back.
(Recess.)
COMMISSIONER LEHMAN;:  Shall we proceed?  David Clark,
Aquilino and Welsh.  By the way, we have three more witnesses
after Mr. Clark.  I would think we would probably be able to
finish up by about 20 minutes after the hour, certainly by
12:30, even if we ask a lot of questions.
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