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.

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