[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
ABUSIVE PATENT LITIGATION: THE IMPACT ON AMERICAN INNOVATION AND JOBS,
AND POTENTIAL SOLUTIONS
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
COURTS, INTELLECTUAL PROPERTY,
AND THE INTERNET
OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
FIRST SESSION
__________
MARCH 14, 2013
__________
Serial No. 113-13
__________
Printed for the use of the Committee on the Judiciary
Available via the World Wide Web: http://judiciary.house.gov
U.S. GOVERNMENT PRINTING OFFICE
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COMMITTEE ON THE JUDICIARY
BOB GOODLATTE, Virginia, Chairman
F. JAMES SENSENBRENNER, Jr., JOHN CONYERS, Jr., Michigan
Wisconsin JERROLD NADLER, New York
HOWARD COBLE, North Carolina ROBERT C. ``BOBBY'' SCOTT,
LAMAR SMITH, Texas Virginia
STEVE CHABOT, Ohio MELVIN L. WATT, North Carolina
SPENCER BACHUS, Alabama ZOE LOFGREN, California
DARRELL E. ISSA, California SHEILA JACKSON LEE, Texas
J. RANDY FORBES, Virginia STEVE COHEN, Tennessee
STEVE KING, Iowa HENRY C. ``HANK'' JOHNSON, Jr.,
TRENT FRANKS, Arizona Georgia
LOUIE GOHMERT, Texas PEDRO R. PIERLUISI, Puerto Rico
JIM JORDAN, Ohio JUDY CHU, California
TED POE, Texas TED DEUTCH, Florida
JASON CHAFFETZ, Utah LUIS V. GUTIERREZ, Illinois
TOM MARINO, Pennsylvania KAREN BASS, California
TREY GOWDY, South Carolina CEDRIC RICHMOND, Louisiana
MARK AMODEI, Nevada SUZAN DelBENE, Washington
RAUL LABRADOR, Idaho JOE GARCIA, Florida
BLAKE FARENTHOLD, Texas HAKEEM JEFFRIES, New York
GEORGE HOLDING, North Carolina
DOUG COLLINS, Georgia
RON DeSANTIS, Florida
KEITH ROTHFUS, Pennsylvania
Shelley Husband, Chief of Staff & General Counsel
Perry Apelbaum, Minority Staff Director & Chief Counsel
------
Subcommittee on Courts, Intellectual Property, and the Internet
HOWARD COBLE, North Carolina, Chairman
TOM MARINO, Pennsylvania, Vice-Chairman
F. JAMES SENSENBRENNER, Jr., MELVIN L. WATT, North Carolina
Wisconsin JOHN CONYERS, Jr., Michigan
LAMAR SMITH, Texas HENRY C. ``HANK'' JOHNSON, Jr.,
STEVE CHABOT, Ohio Georgia
DARRELL E. ISSA, California JUDY CHU, California
TED POE, Texas TED DEUTCH, Florida
JASON CHAFFETZ, Utah KAREN BASS, California
MARK AMODEI, Nevada CEDRIC RICHMOND, Louisiana
BLAKE FARENTHOLD, Texas SUZAN DelBENE, Washington
GEORGE HOLDING, North Carolina HAKEEM JEFFRIES, New York
DOUG COLLINS, Georgia JERROLD NADLER, New York
RON DeSANTIS, Florida ZOE LOFGREN, California
KEITH ROTHFUS, Pennsylvania SHEILA JACKSON LEE, Texas
Joe Keeley, Chief Counsel
Stephanie Moore, Minority Counsel
C O N T E N T S
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MARCH 14, 2013
Page
OPENING STATEMENTS
The Honorable Howard Coble, a Representative in Congress from the
State of North Carolina, and Chairman, Subcommittee on Courts,
Intellectual Property, and the Internet........................ 1
The Honorable Melvin L. Watt, a Representative in Congress from
the State of North Carolina, and Ranking Member, Subcommittee
on Courts, Intellectual Property, and the Internet............. 3
The Honorable John Conyers, Jr., a Representative in Congress
from the State of Michigan, Ranking Member, Committee on the
Judiciary, and Member, Subcommittee on Courts, Intellectual
Property, and the Internet..................................... 5
The Honorable Bob Goodlatte, a Representative in Congress from
the State of Virginia, and Chairman, Committee on the Judiciary 6
WITNESSES
Mark Chandler, Senior Vice President and General Counsel, Cisco
Systems, Inc.
Oral Testimony................................................. 9
Prepared Statement............................................. 12
Janet L. Dhillon, Executive Vice President, General Counsel and
Corporate Secretary, JCPenney Company, Inc.
Oral Testimony................................................. 35
Prepared Statement............................................. 37
John Boswell, Senior Vice President and General Counsel, SAS
Institute, Inc.
Oral Testimony................................................. 42
Prepared Statement............................................. 44
C. Graham Gerst, Partner, Global IP Law Group, LLC
Oral Testimony................................................. 49
Prepared Statement............................................. 51
Philip S. Johnson, Chief Intellectual Property Counsel, Johnson &
Johnson
Oral Testimony................................................. 55
Prepared Statement............................................. 57
Dana Rao, Vice President of Intellectual Property and Litigation,
Adobe Systems
Oral Testimony................................................. 78
Prepared Statement............................................. 80
LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
Material submitted by the Honorable Melvin L. Watt, a
Representative in Congress from the State of North Carolina,
and Ranking Member, Subcommittee on Courts, Intellectual
Property, and the Internet..................................... 113
APPENDIX
Material Submitted for the Hearing Record
Prepared Statement of the Honorable Melvin L. Watt, a
Representative in Congress from the State of North Carolina,
and Ranking Member, Subcommittee on Courts, Intellectual
Property, and the Internet..................................... 147
Prepared Statement of the Honorable George Holding, a
Representative in Congress from the State of North Carolina,
and Member, Subcommittee on Courts, Intellectual Property, and
the Internet................................................... 158
Material submitted by the Honorable Jason Chaffetz, a
Representative in Congress from the State of Utah, and Member,
Subcommittee on Courts, Intellectual Property, and the Internet 160
Letter from C. Graham Gerst, Partner, Global IP Law Group, LLC... 167
Letter from Bill Hughes, Senior Vice President, Government
Affairs, Retail Industry Leaders Association (RILA)............ 169
Submission entitled ``The Costs and Benefits of United States
Patents''...................................................... 171
Letter from the Coalition of Patent Fairness..................... 217
Prepared Statement of the American Bankers Association........... 220
Letters from John Lindgren, President and Chief Executive
Officer, MOSAID Technologies Incorporated...................... 222
Prepared Statement of Bruce Lehman, on behalf of
TeleCommunications Systems, Inc................................ 229
Response to Questions for the Record from Mark Chandler, Senior
Vice President and General Counsel, Cisco Systems, Inc......... 234
Response to Questions for the Record from Janet L. Dhillon,
Executive Vice President, General Counsel and Corporate
Secretary, JCPenney Company, Inc............................... 236
Response to Questions for the Record from John Boswell, Senior
Vice President and General Counsel, SAS Institute, Inc......... 239
Response to Questions for the Record from C. Graham Gerst,
Partner, Global IP Law Group, LLC.............................. 243
Response to Questions for the Record from Philip S. Johnson,
Chief Intellectual Property Counsel, Johnson & Johnson......... 249
Response to Questions for the Record from Dana Rao, Vice
President of Intellectual Property and Litigation, Adobe
Systems........................................................ 258
ABUSIVE PATENT LITIGATION: THE IMPACT ON AMERICAN INNOVATION AND JOBS,
AND POTENTIAL SOLUTIONS
----------
THURSDAY, MARCH 14, 2013
House of Representatives
Subcommittee on Courts, Intellectual Property,
and the Internet
Committee on the Judiciary
Washington, DC.
The Subcommittee met, pursuant to call, at 11:36 a.m., in
room 2141, Rayburn Office Building, the Honorable Howard Coble
(Chairman of the Subcommittee) presiding.
Present: Representatives Coble, Marino, Goodlatte, Chabot,
Issa, Poe, Chaffetz, Amodei, Farenthold, Collins, DeSantis,
Rothfus, Watt, Conyers, Johnson, Chu, Deutch, Bass, Richmond,
DelBene, Jeffries, Nadler, Lofgren, and Jackson Lee.
Staff Present: (Majority) Vishal Amin, Counsel; Olivia Lee,
Clerk; and (Minority) Stephanie Moore, Minority Counsel.
Mr. Coble. The Subcommittee will come to order. Without
objection, the Chair is authorized to declare recesses of the
Subcommittee at any time.
We welcome all of our witnesses and others in the audience
today.
Let me go off the record for a moment.
[Pause.]
Mr. Coble. Good morning, again. And as Yogi Berra once
said, it is deja vu all over again.
Although the ink from the American Inventors Act of 2011 is
still setting, the first topic for our Subcommittee in the
113th Congress is patent litigation.
In 1999, the American Inventors Protection Act dealt with
submarine patents, and although the recently enacted landmark
legislation, Leahy-Smith America Invents Act, is in the process
of overhauling our patent system, frivolous patent litigation
continues to stifle innovation and job creation.
Patent assertion entities, or patent trolls, appear to be
at the root of many problems. The Leahy-Smith America Invents
Act of 2011 reestablished the U.S. system as a global standard.
The U.S. Patent and Trademark Office has been working
diligently for the past 18 months implementing many of AIA's
provisions, and we probably will not fully realize its
innovative benefits and related job growth until this
implementation process has run its course.
That being said, the AIA has not resolved all of the drag
created by frivolous patent lawsuits. It is my belief that a
number of patents that have been issued or are currently being
reviewed under the old system have enabled patent trolls to
game the system.
Patent trolls have also sought out weak or overbroad
patents to foster more litigation. To ensure that the American
economy does not suffer due to the legal gamesmanship that is
currently taking place, it is important for us to consider ways
to remedy the situation.
There are many ideas out there to deal with various aspects
of abusive patent litigation. One idea is the SHIELD Act which
would allow fee shifting in certain patent cases to the
prevailing party who asserts invalidity or no infringement of
the patent.
Although another idea deals with patent discovery abuse,
that would limit discovery to court documents and require the
party seeking initial discovery to bear the cost.
Another idea deals with providing stays of action against a
nonmanufacturing party in patent cases.
Apart from the legislative process, there may also be ways
that our courts, the U.S. Patent and Trademark Office, and
litigants can help remedy the patent troll phenomenon. All
options should be on the table, it seems to me, for
consideration.
Another tangential issue that is not a priority for today's
hearing, but I am concerned, is the result of patent litigation
deals with federally mandated services. These services transmit
the caller's location alongside the 911 call and PAEs or patent
trolls have found secure, wireless technology to be fertile
ground. This is unfortunate and could seriously undermine
public safety.
Needless to say, we have an excellent panel for today's
hearing, with far more insightful and enlightening testimony on
how we can curtail abusive patent litigation in America.
At this juncture, I am going to reserve the balance of my
time and recognize the Ranking Member, the distinguished
gentleman from North Carolina.
But first of all, Mel, if you will, let me swear in the
witnesses, if you would.
Each of the witness's written statements will be entered
into the record in its entirety.
I ask that each witness summarize his or her testimony in 5
minutes or less, if possible. You will not be keelhauled if you
violate that, but we would like for you to stay within the 5-
minute rule, if possible.
To help you stay within that time, there is a shining light
on your table. When the light switches from green to yellow,
you have will have 1 minute to conclude your testimony. When
the light turns red, it signals the witness's 5 minutes have
expired.
I will begin by swearing in our witnesses before
introducing them.
If you would, please, all rise?
[Witnesses sworn.]
Mr. Coble. Let the record reflect that the witnesses
answered in the affirmative.
We appreciate it. You may be seated. It is good to have you
with us.
Now, I am pleased to recognize the distinguished gentleman
from North Carolina, Mr. Mel Watt, for his opening statement.
Mr. Watt. Thank you, Chairman Coble.
And of course, this is our first opportunity to
congratulate you publicly on your Chairmanship and note how
pleased I am that two North Carolinians sit at the leadership
of this important Subcommittee. I also am looking forward to
working with Vice Chairman Marino.
I also want to acknowledge that one of our----
Mr. Coble. If you will suspend for a minute, Mel? I am
sorry, Mel.
When I depart, the gentleman from Pennsylvania will assume
the Chair.
Mr. Watt.
Mr. Watt. Also, I want to recognize that one of our
witnesses today is from one of our North Carolina constituent
companies, SAS, which was very helpful to us during the debate
leading up to the passage of the patent reform legislation in
incorporating the joinder provisions that were designed to
address some of the issues we continue to examine today.
``Critics of the patent system, including many high-tech
and software companies, believe that trolls contribute to the
proliferation of poor quality patents. Ultimately, these
critics assert trolls force manufacturers to divert their
resources from productive endeavors to combat bogus
infringement suits. Other companies and individuals argue that
licensing is a standard and time-honored component of the
patent system. They also assert that some proposals to change
certain provisions in the Patent Act will disadvantage many
legitimate companies, vendors, and universities.''
If this characterization of the debate resonates, it is
with good reason. Those were the words of then-Chairman Smith
at a hearing of the Subcommittee entitled, ``Patent Trolls:
Fact or Fiction?'' June 15, 2006.
Then-Ranking Member Howard Berman made a statement at that
time, at the same 2006 hearing, that still resonates today, at
least with me. He said, ``Perhaps the place to start at this
hearing is not the question of whether patent trolls are fact
or fiction, but rather the definitional question of what is a
patent troll.''
Almost 7 years later, some things have changed and some
things have remained the same. There is widespread
acknowledgment that so-called patent trolls or patent assertion
entities do exist and that they impose a substantial cost on
innovation for the companies caught in their crosshairs by
engaging in litigation strategies that game the system.
Much has been done to address these abusive practices. In
2006, the Supreme Court, in eBay v. MercExchange, arguably made
it decisively more difficult for patent assertion entities to
obtain injunctions against infringing products where money
damages were sufficient to remedy the infringement.
This arguably made litigation in Federal court for the
purposes of extracting unwanted settlements less attractive, at
least in so far as it thwarted or frustrated the ability of
companies to continue to produce the product in question.
The Federal Circuit has increasingly issued orders of
mandamus to address venue abuse, disrupting the tactic of forum
shopping and the dubious joinder of defendants with tenuous
connections to the claim.
The America Invents Act also sought to curtail the practice
of joining unrelated defendants who, based on entirely
different acts, are accused of infringing the same patent.
The America Invents Act also gave the Patent and Trademark
Office additional tools to enhance patent quality. Of note are
the post-grant review procedures that will allow early
challengers to weed out poor quality patents.
The PTO has also embarked upon a process to aid in
deciphering ownership. This real party in interest proposal
will require patent applicants to disclose and update real
parties in interest information, including transfer of
ownership throughout patent prosecution. This will add
transparency to the process and enable patent users to identify
whether and from whom they should seek to license.
This will also undercut the ploy of hiding ownership until
infringement occurs when then suing to enforce the patent.
So 6 years since the patent troll hearing, much has been
done that acknowledges and tackles certain behaviors that must
be discouraged. But acknowledgment of the problem does not
expose its magnitude, or enlighten us on the specific entities
that are at the root of the problem.
This definitional problem, highlighted by Mr. Berman years
ago, was recently echoed by Federal Court Judge Randall Rader
in a recent speech, when he said that a patent troll can be
``anybody who asserts a patent far beyond the value of its
contribution to the art.''
He went on to say, ``That means any institution can be a
troll.''
Nor has the marketplace helped in streamlining our task.
Late last year, a group of 12 high-profile companies together
with a much-maligned patent troll purchased Kodak patents for
over $500 million, saving it from bankruptcy. News reports
indicate that the patent troll will retain ownership of the
patents.
Under the deal, the 12 companies will be immune from suit
on those patents for which they were alleged infringers at the
time of the purchase. The purchase undoubtedly saved thousands
of jobs and it insulates innovative companies from what would
have been viewed as normal litigation had Kodak been able to
survive without the sale to press its claims.
But it also enables a non-practicing entity to pursue
litigation against other infringers on patents duly acquired
from Kodak.
The GAO response to the mandate in the America Invents Act,
that it study patent troll litigation, underscores the problem
of defining both the entities and activities that ought to be
scrutinized.
Although the GAO study has yet to be released, and they
continue to work to meet the mandate, they initially questioned
the existence of reliable data or reliable methods to identify
trolls. When anyone can be a troll, the task of Congress to
craft legislation targeting only trolls becomes elusive.
Proposals have emerged to target specific entities, like
the SHIELD Act. Others aim at specific phases of litigation,
like e-discovery. Others directly challenge patentability
altogether, specifically they call to eliminate or restrict
software patents. And one proposes to give judges greater
latitude to impose attorneys' fees or other sanctions by
lowering the exceptional case standard under current law.
While I believe that there is abuse in patent litigation,
particularly in suits against downstream users, we should be
cautious in considering remedies that focus on disincentivizing
poorly defined entities without examining the collateral
effects on the system as a whole.
Moreover, I am concerned that an insular view that only
seeks to deter one class of conduct without examining the
incentives that may unintentionally be provided to others is
wrongheaded and may result in today's prey becoming tomorrow's
predators.
Erecting overly broad barriers to enforcing patents could
lead to infringers having little or no incentive to respect the
patent owner, which would, in turn, destabilize the marketplace
and devalue patents.
In a letter to the Subcommittee, which I offer for the
record, renowned civil rights procedure and Federal courts
expert, Professor Arthur Miller, reminds us that, ``From its
inception, the U.S. system was designed to encourage people to
buy and sell patents, because doing so enabled the ordinary
worker or inventor that didn't have capital to commercialize
his or her own discoveries to still participate in the economic
upside of inventing and publishing those inventions.'' This
ability to license patent rights turned inventing into a career
path for thousands of people--but technically creative
citizens.
As we continue to examine the competing data and explore
possible solutions, I hope that we will do so with all that
background in mind. While we should seek meaningful reforms, I
believe that measures that would up-end or create more
uncertainty and litigation about definitions in other parts of
the judicial system are ill-advised.
I thank the Chairman for his indulgence, and I yield back,
and look forward to listening to the witnesses.
Mr. Coble. I thank the gentleman.
The Chair recognizes the distinguished Ranking Member of
the full Committee, the gentleman from Michigan, Mr. Conyers.
Mr. Conyers. Thank you, Chairman Coble.
I come here with a couple problems, and I apologize to this
distinguished group of witnesses that have to listen to us
first. And then after you are thoroughly exhausted, we listen
to you.
But I do want to commend you, Chairman. We have a pretty
even distribution of the witnesses here. We have two people
with us that have some reluctance about the SHIELD Act and
patent assertion entities.
But let me get to the heart of the matter, as far as I am
concerned.
We have a measure before us that the plaintiff pays and the
defendant, who might be the alleged patent infringer, pays
nothing, and this is disturbing.
We have a situation in which, in this kind of system, the
corporations can pressure injured parties into settlements,
because the dangers are so much greater for a small business.
And I hope we have some discussion about that.
In my view, so far, the law already provides a balanced
approach to fee shifting. And to the extent the bill is
designed to protect against meritless claims of patent
infringement, I suspect that the tools to deal with this
already exist.
So I am going to listen carefully, but, if in the course of
your presentation or discussion that we will share with each
other, I want to try to find out if most of you agree with me
that current patent law already allows a judge to award
attorney fees for meritless cases, patent law allows that a
court may award reasonable attorney fees for the prevailing
party in exceptional cases.
And most of all, why can't we fix this problem by improving
patent quality and notice of patent ownership? What is the big
deal?
The America Invents Act directed the GAO to study the
consequences of this kind of litigation and will soon make
recommendations. And so we look forward to reviewing these
findings.
The final rules of the America Invents Act were implemented
last September, and I think they will help address this abusive
behavior. So we should work with PTO, all of us, to require
better notice requirements of patent ownership to enable folks
to avoid infringement.
This Congress can make sure that, going forward, the Patent
and Trademark Office retains its fees, all of its fees, to hire
more patent examiners to allow them to find all of the relevant
prior art for every patent application.
So I am happy to join you. I invite your best thinking on
this subject, and I thank the Chairman for allowing me this
time and return the balance of it.
Mr. Marino [presiding]. Thank you, Mr. Conyers.
The Chair now recognizes the Chairman of the full Judiciary
Committee, Congressman Goodlatte.
Mr. Goodlatte. Thank you, Mr. Chairman.
During the last Congress, we passed the America Invents
Act. That bill was the most significant reform to our patent
system in my lifetime. The AIA modernizes our patent system and
sets it on the right path for decades to come.
The AIA included a number of provisions that went directly
to addressing the issues surrounding patent quality. The PTO
has new programs in place to ensure higher quality patents that
can stand up to review, setting the bar higher so that quality
control starts on the front end rather than relying on the
Federal court system to fix problems.
The U.S. patent system is designed to be fair, meeting our
international obligations and not discriminating against any
field of technology.
The strength of the U.S. patent system relies on the
granting of strong patents, ones that are truly novel and
nonobvious inventions, those that are true innovations and not
the product of legal gamesmanship.
An example of a positive retrospective provision from the
AIA is the work being done to implement a transitional program
to correct the egregious errors made in the granting of a wide
range of business method patents.
This program will provide the PTO with a fast, precise
vehicle to review low-quality business method patents, which
the Supreme Court has acknowledged are often abstract and
overly broad. This program will make our patent system stronger
and better, and it may even make sense to make it permanent in
the future and expand its applicability to other
nontechnological patents.
While the AIA paved the way for higher quality patents on
the front end, there were a few issues that were left on the
cutting room floor during the last Congress that could help go
more directly to the immediate issues surrounding patent
assertion entities, or patent trolls.
Abusive patent litigation is a drag on our economy.
Everyone from independent inventors to startups to mid- and
large-sized businesses face this constant threat.
The tens of billions of dollars spent on settlements and
litigation expenses associated with abusive patent suits truly
represent wasted capital, wasted capital that could have been
used to create new jobs, fund R&D, and create new innovations
and technologies that would promote the progress of science and
useful arts.
Nonpracticing entities are those that hold patents, but do
not practice or produce an actual product based on those
patents. The term ``NPE'' covers everything from universities
to high-technology companies that focus on R&D, but monetize
their research through legitimate licensing.
But within that universe, there are a specific subset of
entities, PAEs, which oftentimes acquire weak or poorly granted
patents and proceed to send blanket demand letters, or file
numerous patent infringement lawsuits against American
businesses with the hopes of securing a quick payday.
Many of these PAEs file lawsuits against small- and medium-
size businesses, targeting a settlement just under what it
would cost for litigation, knowing that these businesses will
want to avoid costly litigation and probably pay up.
PAE lawsuits claim ownership over basic ideas, such as
sending a photocopy to email, podcasting aggregated news
articles, offering free Wi-Fi in your shop, or using a shopping
cart on your Web site.
Something is terribly wrong here. The patent system was
never intended to be a playground for trial lawyers and
frivolous claims. We need to work on reforms to discourage
frivolous patent litigation and keep U.S. patent laws up-to-
date.
Abusive patent troll litigation strikes at the very heart
of American innovation and job creation, and that is why
Congress, the Federal courts, and the PTO should continue to
take the necessary steps to ensure that the patent system lives
up to its constitutional underpinnings.
I look forward to hearing from all of our witnesses on the
issue of abusive patent litigation and potential solutions to
this growing problem in order to ensure that we continue to
promote American ingenuity, innovation, and jobs.
Thank you, Mr. Chairman.
Mr. Marino. Thank you, Chairman.
Initially, I am going to introduce each of our witnesses. I
want to thank you for being here today. Once you are
introduced, then you will have up to 5 minutes to make an
opening statement. You do not have to take 5 minutes, and I
reserve the right to determine whether I will use the
keelhauling if one goes over 5 minutes, particularly with us up
here.
So to begin with, our first witness today is Mr. Mark
Chandler, Senior Vice President, General Counsel, and Secretary
of Cisco Systems, Inc. Mr. Chandler leads a team of 250
professionals and has served in that role since 2001. Prior to
his current position, he was the company's managing attorney
for the Middle East and African region, based in Paris. Mr.
Chandler joined Cisco in 1996, when the company acquired
StrataCom, where he served as General Counsel. Mr. Chandler
received his bachelor degree in economics from Harvard College
and his law degree from Stanford Law School.
Welcome, Mr. Chandler.
Mr. Chandler. Thank you, Mr. Chairman, Ranking Member Watt,
Chairman Goodlatte.
Mr. Marino. I am to go through and introduce everyone.
Our second witness is Ms. Janet Dhillon, Executive Vice
President, General Counsel, and Secretary for JCPenney, Inc.
Prior to joining JCPenney in February 2009, she served for 5
years at U.S. Airways as Senior Vice President and General
Counsel. In that role, she directed the airline's corporate
governance and legal affairs, including litigation, commercial
transaction, and regulatory matters. Ms. Dhillon received her
J.D. from UCLA Law School and her bachelor's degree from
Occidental College, graduating magna cum laude.
Our third witness is Mr. Boswell, Senior Vice President,
Chief Legal Officer, and Corporate Secretary of SAS, pronounced
``sass,'' Institute, where he manages a group of 40 attorneys
and 220 staff members globally. He joined SAS in 1991 as a
Senior Marketing Counsel, where he authored many of the
company's standard license agreements. Mr. Boswell's prior
experience includes serving as President of Vista Development,
a software company, and General Counsel and Secretary for
Raima, another software company. Mr. Boswell attended the
University of South Carolina at Columbia, where he received
both his law degree and bachelor's degree in philosophy.
Our fourth witness is Mr. Graham Gerst, partner at the
Global IP Law Group, where he specializes in patents including
sales, licensing, and litigation. Before joining Global IP Law
Group in 2009, he served as Senior Counsel to the Deputy
Attorney General at the Department of Justice, handling
technology-related security matters, international IP
enforcement, and computer forensics. He also served as Special
Assistant U.S. Attorney and as Deputy U.S. Coordinator for
International IP Enforcement. Prior to that, Mr. Gerst spent 9
years as partner at Kirkland and Ellis, specializing in patent
litigation. Mr. Gerst received his--good point, Mr. Nadler.
Okay, I think we got it. Thank you.
Mr. Gerst spent 9 years as partner at Kirkland and Ellis,
specializing in patent litigation. Mr. Gerst received his J.D.,
cum laude, from the University of Chicago Law School and
bachelor's degree, cum laude and with honors, from Williams
College.
Our fifth witness is Mr. Philip Johnson, Senior Vice
President and Chief Intellectual Property Counsel at Johnson &
Johnson, where he manages a group of 100 patent attorneys in
the United States and in Europe. Prior to joining Johnson &
Johnson in January 2000, he worked in the private sector for 27
years. Mr. Johnson also served as trial counsel in more than
100 patent cases, with more than 50 cases resulting in reported
decisions in the Federal District Courts. Mr. Johnson received
his bachelor of science degree, cum laude, from Bucknell
University and his law degree from Harvard Law School.
Last but not least, our sixth witness and final witness is
Mr. Dana Rao, Vice President and Associate General Counsel for
Intellectual Property and Litigation for Adobe Systems. Prior
to joining Adobe, he served as Associate General Counsel of
Intellectual Property at Microsoft for 11 years. Mr. Rao
received his BSEE, bachelor of science in electrical
engineering, degree from Villanova University and his J.D. from
George Washington University Law School. Mr. Rao also worked as
an engineer at GE Astro Space before attending law school.
I want to welcome you all and thank you for being here. And
we will begin with no more than 5 minutes with Mr. Chandler.
Thank you.
TESTIMONY OF MARK CHANDLER, SENIOR VICE PRESIDENT AND GENERAL
COUNSEL, CISCO SYSTEMS, INC.
Mr. Chandler. Mr. Chairman, Ranking Member Watt, Chairman
Goodlatte, Members of the Subcommittee, I apologize for my
jumping the gun, but I am eager to testify before you today
about abusive patent litigation.
Mr. Marino. That is quite all right. I think I led you on
there for a moment, so I apologize.
Mr. Chandler. This Subcommittee and the Judiciary Committee
as a whole have consistently shown leadership on a bipartisan
basis in addressing problems in the patent system, and for
that, we are grateful.
I have testified previously on the economically destructive
nature of certain aspects of patent litigation. In fact, since
the first time I testified on this issue in 2006, Cisco has
spent a third of a billion dollars in legal fees alone related
to this type of litigation.
This problem has now spread to my customers and partners,
retailers like JCPenney, as well as small businesses,
hospitals, auto companies, the telecom companies that use our
equipment. In short, this problem has now spread from Silicon
Valley to Main Street.
I am here today in support of three legislative changes:
first, passage of the SHIELD Act or other means to discourage
the procedural abuses that feed this litigation; second,
completing a technical fix to the post-grant opposition
provision that was in the AIA; and third, slowing down patent
assertion entity, or PAE, use of the International Trade
Commission as another shakedown mechanism.
As general counsel of Cisco, I am responsible both for
intellectual property and for litigation for the world's
largest manufacturer of telecom equipment. This year, we expect
to receive our ten-thousandth U.S. patent, a reflection of our
long-term investment in telecom innovation, and our commitment
to a strong patent system.
However, despite spending over $6 billion per year on R&D,
employing over 20,000 engineers in the U.S., we currently spend
more than $50 million a year on legal fees, fighting about 50
PAE litigations, a phenomenon that did not exist for us a
decade ago. We have virtually no patent litigation with
companies that make products.
In one current matter, a PAE, which bought nearly expired
patents from a large chip manufacturer, has targeted 13,000
entities, including small businesses, retirement homes,
children's health clinics, restaurants, which happen to offer
Wi-Fi to their customers using equipment supplied by Netgear,
Motorola, my company, and others.
Tellingly, much of that equipment is already licensed,
because they include chips costing just a few dollars apiece
that are made by licensed manufacturers.
This PAE tells these targets, however, that unless they pay
up $2,000 or $3,000 per location within 2 weeks, they will be
sued and have to engage counsel to review thousands of pages of
documents.
While we are pursuing our rights against this PAE in court,
this case is just a symptom, sort of like lab mice running
through a maze and--actually, I wanted to say ``rats'', but my
staff asked me to soften it--like lab mice running through a
maze because there is food at the end, PAEs simply follow the
incentives in their ecosystems. It is up to Congress to
redesign the maze to remove the incentive for antisocial
behavior, so that patents are used to defend actual markets for
real products.
First, we need to fix the cost asymmetry by making PAEs pay
when they bring litigation on weak patents and drive costs up
by abusing discovery or using procedural games. The SHIELD Act
starts us down that road, and we command you, Congressman
Chaffetz, and also Congressman DeFazio, for your efforts in
that regard.
For instance, PAEs would be more likely to voluntarily stay
their patent litigation if the patent office has found cause to
commence a reexam if they are the ones who face both sides'
costs for fruitless litigation if the patents are invalidated.
Now that the AIA has speeded up the time for reexams, there
is no excuse for refusing such a stay.
Second, many asserted PAE patents are weak, either because
they are invalid or cover very narrow inventions. PAEs
ultimately lose 92 percent of the time of the court, versus 60
percent for other plaintiffs.
The AIA, as passed for this by this Committee, included a
new procedure to challenge weak patents when they are first
issued. But somehow the language changed to raise an
unreasonable estoppel bar to those challenges before it was
voted on the floor. Congress should fix what leaders in both
chambers have called a scrivener's error.
Third, many PAEs now use the ITC as an additional shakedown
forum. The ITC's mission is to protect U.S. industries and
universities by excluding foreign knockoffs. PAEs use the ITC
as leverage for larger settlements.
Face it, they do not want an injunction; they do not make a
product. They just want the money.
We recently spent $13 million defending ourselves in the
ITC against a Canadian PAE called MOSAID, using a patent
originally created in Israel, but trying to keep our products
out of the United States, which the ITC judge ultimately called
out for its ``wrongdoing'' for improperly trying to concoct a
domestic industry.
Finally, we need more clarity on how damages should be
calculated, as uncertain damage awards are one of the biggest
incentives for patent profiteering. We applaud Chief Judge
Rader, Judge Posner, and others' efforts to focus damage
calculations on the value of the invention itself, rather than
on systems which use the inventions.
In conclusion, the $50 million my company spends annually
on patent litigation does not grow on trees. To meet my budget,
I have reduced the number of new patent filings we make each
year from 1,000 to 700, in order to fund the litigation.
This isn't a trade-off American industry should face. We
ask for your help in having the patent system operate as it did
for over 200 years before being transformed by 21st-century
financial operators into a casino unrelated to innovation.
Thank you.
[The prepared statement of Mr. Chandler follows:]
Appendix A:
RPX Research Patent Litigation Data (2006-2012)
Appendix B:
ITC Working Group white paper
__________
Mr. Marino. Thank you, Mr. Chandler.
Ms. Dhillon, please.
TESTIMONY OF JANET L. DHILLON, EXECUTIVE VICE PRESIDENT,
GENERAL COUNSEL AND CORPORATE SECRETARY, JCPENNEY COMPANY, INC.
Ms. Dhillon. Thank you. Good afternoon. And I appreciate
the opportunity to appear before you this afternoon.
Every day, stories are written about patent lawsuits
between large technology companies, but very little is reported
about the abusive patent lawsuits filed against retailers like
JCPenney.
Through my testimony, I hope that the Subcommittee will
have a better understanding of the constant struggle by
JCPenney and other retailers to contain the damaging effects of
abusive lawsuits that are brought by an ever-growing group of
increasingly sophisticated and well-financed patent trolls.
My name is Janet Dhillon. I am the executive vice
president, general counsel, and corporate secretary of
JCPenney. JCPenney is a 111-year-old company. We operate 1,100
stores in 49 states, and we employ over 100,000 team members.
Our business model is simple. We sell quality, affordable
men's, women's, and children's apparel and footwear, and a
collection of home products. While our business model is
simple, the means that we use to promote and deliver our
products and services to our customers is not.
As customers embrace and utilize technology in their daily
lives, they expect retailers to do the same. And, therefore, to
support and deliver the services to our customers, we are
employing innovative technology to heighten the shopping
experience, both in our stores and online.
When I joined JCPenney over 4 years ago, we had no patent
cases, and I did not expect that we ever would. We are a
department store. But over the past 4 years, the company has
had to defend or settle over two dozen patent infringement
lawsuits that have absolutely nothing to do with what we sell.
These suits forced the company to invest in an infrastructure
to defend these cases and to hire sophisticated outside counsel
who charge well for their services.
And the number of lawsuits is just continuing to grow. In
2012, the number of patent suits increased over the 3,600 that
had been filed in 2011. And for the first time, a majority of
these cases were filed by patent trolls.
The fact that our company headquarters is in the Eastern
District of Texas, and that we are increasing our use of
technology, are two reasons that JCPenney has become a target.
The other core problem is that patent trolls attempt to extend
the reach of the issued patent far beyond the metes and bounds
of what is allowed by the PTO.
Please understand, JCPenney is a responsible user of
technology. We pay the license fees that we owe when we license
technology. But what patent trolls are attempting to do is
something fundamentally different from the way the process was
designed to work.
The PTO awards the inventor a narrow invention, but long
after the issuance, most times near the end of the life of the
patent, the patent is acquired by the troll who then attempts
to enforce the patent far beyond what the invention intended.
We have been sued for displaying catalog images and having
drop-down menus on our Web site, activating gift cards at the
point-of-sale, being able to browse our mobile Web site on a
phone, or enabling the customer to put her purchases in an
electronic shopping bag.
We have also been subject to multiple claims for providing
information regarding our store locations on a mobile phone.
These patents date back to the late '80's and the early
'90's, have had multiple owners with minimal or no continuing
involvement by the actual inventor.
Defending suits against broadly asserted patents that are
15 to 25 years old is very difficult. The trolls know that the
evidence necessary to invalidate these patents has been
discarded, potential witnesses have died, memories have faded,
and that reconstructing the prior art can be almost impossible,
and in all cases is extremely expensive.
And the cost of defending these suits is why we have to
settle so many of them without a judgment on the merits, which
means that the companies often settle even though there is no
actual infringement, and the patent holders are compensated far
beyond what they have invested to acquire these patents.
A study by the American Intellectual Property Law
Association reported that the median cost of litigating a
patent case, asserting a single patent through trial, is
between $650,000 and $5 million. The discovery phase alone
costs between $350,000 and $3 million.
In the retail business, our margins are already thin and
the decision to settle or go to trial and spend millions of
dollars litigating what we know is a junk patent has to be
weighed against growing our business.
Unlike retail, patent trolls do not manufacture or sell any
product to American consumers. They do not build stores. They
do not contribute to charities in our communities. They do not
create local jobs. And they do not participate in civic
organizations.
JCPenney does all of those things. What patent trolls do is
produce lawsuits against retailers and other businesses just to
enrich themselves.
At the end of the day, companies like ours have to ask a
simple question: Do we pay to settle, or do we spend millions
of dollars to invalidate patents that we know are simply junk
and that we are not infringing on in the first place?
It is a situation that no general counsel should have to be
put in to, but it is something that I and my colleagues face on
a regular basis. That is why I look forward to continuing this
dialogue with the Committee in hopes of finding some solutions
to curtailing these abusive suits, while maintaining a robust
patent system.
Thank you.
[The prepared statement of Ms. Dhillon follows:]
__________
Mr. Marino. Thank you, Ms. Dhillon.
Mr. Boswell, please.
TESTIMONY OF JOHN BOSWELL, SENIOR VICE PRESIDENT AND GENERAL
COUNSEL, SAS INSTITUTE, INC.
Mr. Boswell. Mr. Vice Chairman Marino, Ranking Member Watt,
Members of the Subcommittee, SAS is a privately held software
company based in the great State of North Carolina.
We have been in business since 1976. We do our software
development in North Carolina and in Texas.
The only time SAS ever gets sued for anything, we are being
sued by a patent troll.
Now, we have never lost a patent troll case, but that does
not mean we are not losing. Patent trolls are business
terrorists. Their weapons of mass destruction are software and
business method patents with fuzzy boundaries that can be
asserted against many different products, many different
companies, in many different ways.
And the terror is not really the threat of losing the case.
It is the cost to fight.
Patent trolls have no employees. They make nothing. They
sell nothing. They have no witnesses. Therefore, they are
immune from the discovery burden.
Given that patent trolls are immune from the discovery
burden, their strategy is to make discovery as broad and
expensive as possible. Patent troll cases are filed in
jurisdictions that allow broad discovery and that do not decide
dispositive motions, including motions to transfer, until most
of the money for discovery has already been spent. In other
words, when the case is filed, the defendant has already lost.
In a recent case, we actually won the case on summary
judgment, but we had to spend over $8 million to get there.
$1.5 million of those dollars was paid to an outside consultant
simply to collect electronic documents. We had to collect over
10 million documents because the judge allowed that level of
discovery.
The plaintiff in the case listed as possibly relevant 1,873
documents. Had the case gone to trial, probably 20 or 30 of
those documents might have shown up.
The stack of documents that might possibly have been
relative, I did the math: 8 inches tall. The stack of
documents, if we had had to print them out, that we had to
collect, if you took the World Trade Center and put the
Washington Monument on top of it, the stack of documents would
have been higher than that.
That is abuse.
Now, to be clear, SAS is not in favor of ending the ability
for legitimate inventors to enforce their patents in Federal
court. That is not what this is about at all.
It is about ending abusive litigation tactics by entities
that are not advancing the idea behind the patent system. They
are not advancing knowledge and advancing society. They are
taking advantage and being opportunistic through weakness in
the patent system, and they are extorting money from the very
companies that are advancing, that are inventing, that are
hiring people, that are moving the economy forward.
And ladies and gentlemen, this is completely a Federal
Government problem. We are being sued on patents that should
have never been issued, that were issued by a Federal agency.
We are being sued in Federal courts that are allowing this
abuse to happen. And unfortunately, this has been going on for
some time.
So I disagree with some of my colleagues who are going to
advocate ``let's just wait and see if this will all work itself
out. I don't think we need to do anything.'' No, if the courts
were going to fix this, they would have done so already.
There are many good ideas being discussed, some of which
Chairman Coble mentioned. One that I think bears serious
consideration is an idea that we sort of borrowed from Chief
Judge Rader, and that is the only thing you really need to
decide a patent case is, what does the patent say and what does
the product do? And if you share the information around that,
you should be able to decide your patent case.
If you want more discovery than that, fine. You just have
to pay for it.
In that way, patent cases that should go forward, can go
forward. We do not have to worry who is or isn't a patent troll
or a patent assertion entity. It will rein in abusive
discovery, whether it is done in the patent troll litigation or
in any other litigation.
If we did that, and if, additionally, we made sure that
judges first decided motions to transfer before you had to go
through the process of paying for discovery, so they would
decide whether you should be there at all before you had to pay
for it, I think that we would go a long way to ending abusive
patent tactics.
But unfortunately, or maybe fortunately, only you can help
us. And that is why we are here.
Thanks.
[The prepared statement of Mr. Boswell follows:]
__________
Mr. Marino. Thank you, Mr. Boswell.
The Chair recognizes Mr. Gerst, please.
TESTIMONY OF C. GRAHAM GERST, PARTNER,
GLOBAL IP LAW GROUP, LLC
Mr. Gerst. Thank you very much.
My firm, the Global IP Law Group, represents the broadest
range of interests represented on the panel today. We have
represented very large technology companies like Alcatel-
Lucent, Motorola Mobility, and Nortel Networks. We also
represent midsized and small companies, including many
startups. And we also represent non-practicing entities.
What I hope to do today is highlight how changes at one end
of the spectrum can have ramifications throughout the system
that are unanticipated.
Any large system is going to have problems and
inefficiencies, and the patent system is no exception. But you
run the risk of unintended consequences for the system as a
whole in trying to fix those limited problems.
And let's remember that this is the system that is,
overall, working very well. That is something that often gets
lost.
The Founding Fathers included the patent system in the U.S.
Constitution to encourage innovation. Today, we have the
strongest patent system in the world, and at least part in
relation to that, or part as a result of that, we have the most
innovative economy in the world. And we need continuing
innovation to maintain the strength of our economy.
Changes that weaken our patent system put future innovation
at risk. It is the sort of risk that isn't immediate or that
makes for good stories in the newspaper. The biggest issue our
patent system does face is the cost of litigating patent
disputes, which creates two problems. One is the opportunity to
sue simply to get a settlement that is less than the cost of
litigation, and numerous of my fellow panelists have already
talked about this, and that will continue during the remainder
of the panel here today.
The second problem is less talked about, and that is that a
lot of companies that cannot afford to protect their own
investments in innovation by asserting their own patents.
Moreover, because of recent changes to the Federal Circuit in
damages law and related to injunctions, those costs are even
more difficult to justify.
When I had lunch with the chief IP counsel at a sizable
company, he said that he no longer considers the NPEs anything
more than a nuisance. But he is worried that his company, which
relies on innovation to distinguish itself, cannot use it
patent portfolio because of the costs and the weakened
remedies. And a couple weeks ago, I was at an event where the
chief patent counsel for Conair said much the same thing.
This is part of the reason why the statistics about how big
a percentage of patent cases are brought by NPEs, why that
statistic exists. It is because a lot of small and midsize
companies cannot afford to bring their own patent cases.
What is not an issue for the patent system is the existence
of NPEs. NPEs are not new, and they do fill a valuable role in
the patent system by helping to reward innovators. My firm
recently represented a technology company that was one of the
lead developers of electronic communication technology in wide
use today.
That company invested in the development incentivized by
the promise its patents would ultimately prove very valuable.
We, ultimately, sold those patents to one of a group of NPEs
that were the only ones really willing to give what approached
fair value for those patents, thereby rewarding those
innovators.
In addition, NPEs provide a way to recirculate capital to
investors. In the situation I just described, I know that major
investors in that company have circulated some of those
earnings from that patent sale back to other innovative
companies.
And finally, by acquiring patents, non-practicing entities
keep the market liquid and keep patent values up, which is
valuable to companies that use their patents as collateral.
That includes large companies, like the recently concluded
Alcatel-Lucent deal, and small startups.
What can Congress do to improve this system? It can make
changes that are limited and target particular behaviors, but
minimize the risk to the system from unintended consequences.
I would echo what Mr. Chandler said about changing the law
regarding injunctions at the ITC. But that is a limited change,
and it creates consistency through the patent system.
In addition, the creation of a small claims patent court
would help some of the problems with companies being able to
enforce their own patents, which are blocked today by the cost
of litigation. And continuing to fund the PTO to improve patent
quality is important.
What Congress should not do is engage in getting into the
business of dictating to the Federal courts about how to manage
Rule 11 sanctions and discovery costs. Those issues are best
done in a very tailored, measured fashion that the courts are
in the best position to determine.
In addition, the SHIELD Act is something that I would
advocate Congress not pursue. It is wrong on a whole number of
levels. But it targets entities, not activities. And it would
have a whole host of unintended consequences.
If Company A buys Company B, the patents of Company B would
automatically be subject to the rules of the SHIELD Act. In
addition, in the Alcatel-Lucent deal that we recently
concluded, if something terrible were to happen to Alcatel-
Lucent and it were to go bankrupt and the lenders took control
of that patent portfolio, those patents would be subject to the
SHIELD Act.
Finally, the SHIELD Act, if it helps anybody, it helps big
non-practicing entities. Those big, non-practicing entities,
and you know the names of them, have the money to post bonds
for these litigations. It would basically eliminate the
competition they have from smaller non-practicing entities.
Finally, there has been talk about a straight loser pay
system for all patent cases. That would just aggravate the
problem of small and midsize companies being able to enforce
their own patents.
Thank you very much.
[The prepared statement of Mr. Gerst follows:]
__________
Mr. Marino. Thank you, Mr. Gerst.
The Chair recognizes Mr. Johnson, please.
TESTIMONY OF PHILIP S. JOHNSON, CHIEF INTELLECTUAL PROPERTY
COUNSEL, JOHNSON & JOHNSON
Mr. Johnson. Thank you, Mr. Chairman, Ranking Member Watt,
and Members of the Subcommittee. I appreciate being invited
here today to give the views of the Coalition for the 21st
Century Patent Reform, a broad and diverse group of nearly 50
corporations, including 3M, Caterpillar, Eli Lilly, General
Electric, Procter & Gamble, and my company, Johnson & Johnson.
Our coalition advocates for patent reforms that foster
investment, innovation, and job creation, and that promote
vigorous competition in bringing new products and services to
American consumers.
The issue of patent litigation abuse is simply not a new
one. Over the last 6 years, both the Supreme Court and the
Federal Circuit have issued important decisions addressing the
criticism that our courts unduly favor of the assertion of
vague or overbroad patents by non-practicing entities.
These decisions restrict the availability of patent
injunctions to NPEs, mandate transfer of patent cases to more
convenient and less NPE-friendly jurisdictions, clarify the
damages may be awarded based only on the value of the invention
rather than on the entire system on which the invention is only
a small component, clarify that innocent infringers may not be
subjected to treble damages, and strengthen existing patentable
subject matter, written description, and enablement
requirements to ensure that overly vague and ambiguous patents
will not be upheld.
In early 2011, Congress passed the pilot patent court bill
to establish a 10-year pilot program to test the concept that
patent cases can be better handled and abuses deterred by
District Court judges specializing in them.
This initiative is now being implemented and is already
yielding fruit in the form of a number of proposals for courts
to limit the amount and cost of discovery in patent cases, and
to actively deter and punish litigation abuse.
Congress acted again later in 2011 by passing the AIA,
which included many additional provisions now going into effect
to lessen the opportunity for abusive patent litigation. The
AIA revamped the criteria for patentability, authorized the
public to participate in the patent examination process, and
increased patent office funding, all to ensure that future
issued patents will be of the highest possible quality.
The AIA also created several new procedures to allow
members of the public, including those who are being sued for
infringement, to quickly and inexpensively challenge a patent's
validity before a panel of administrative law judges in the
patent office.
It also eliminated NPE marking suits, mandated that patent
plaintiffs could no longer indiscriminately join unrelated
parties in a single lawsuit, and provided for further as of yet
uncompleted study of issues relating to NPE patent assertions.
As Congress recognized in authorizing a study into NPE
litigation, little empirical evidence existed to confirm or
refute claims that NPEs bring a disproportionate percentage of
specious patent suits.
Unfortunately, specious claims and specious defenses have
always been a part of patent litigations and can be perpetrated
by any party, if so inclined. Fortunately, courts already have
the power to award attorneys' fees in exceptional patent cases,
and in our experience are willing to do so when a party engages
in reprehensible litigation conduct.
This does not mean that everything that could be done to
deter patent litigation misconduct has been done. Other
remedies have been suggested during the consideration of the
AIA that include lowering the standard for fee shifting, so it
is easier for judges to award fees to the prevailing party, and
automatically staying suits against customers and users where
the original provider of the product or service accused of
infringement elects to bring a suit to resolve the issue with
the patentee.
Our coalition continues to view these approaches as having
merit. In my written testimony, we make specific legislative
recommendations for the Subcommittee to consider.
Otherwise, our coalition believes that Congress should
monitor the effects of these numerous remedies, which have
already been enacted, to see how they do. Congress has already
gone a long way toward fixing the problem of patent litigation
abuse. To further modify the system at this time would run the
risk of chilling innovation and the jobs that flow from it by
making reliable patent import enforcement substantially less
certain.
I thank you for the opportunity to testify here today, and
I would be happy to answer any of your questions.
Thank you.
[The prepared statement of Mr. Johnson follows:]
__________
Mr. Marino. Thank you, Mr. Johnson.
The Chair recognizes Mr. Rao, please.
TESTIMONY OF DANA RAO, VICE PRESIDENT OF INTELLECTUAL PROPERTY
AND LITIGATION, ADOBE SYSTEMS
Mr. Rao. Mr. Chairman, Ranking Member Watt, and other
distinguished Members of the Subcommittee, thank you for
inviting me to testify on this important issue.
I am appearing before you on behalf of Adobe and BSA, the
Business Software Alliance. I oversee all aspects of Adobe's
intellectual property and litigation matters.
The focus of this hearing is very important, enhancing our
patent system to promote innovation and make sure patents are
not used opportunistically in ways that disrupt the
marketplace. Some may say that the problems in PAEs today are
software patents, and that the solution is to stop granting
patents on software or to make it harder to get such patents. I
do not agree with those proposals and believe they do not
appreciate or address the actual nature of the litigation that
our industry faces today.
There are important steps we can take. We do need to
address the asymmetry of incentives in our patent litigation
framework, and we have to improve the quality of our already
strong patent system.
For 30 years, Adobe has pushed the boundaries of computing,
publishing, and printing. With over 11,000 employees and over
3,000 patents and pending applications, it should come as no
surprise that Adobe is a strong supporter of the patent system.
Congress and the courts have acted with vision and
foresight by protecting software with intellectual property
rights. The creation of these rights has led America to have
the leading software companies in the world, companies that
contribute over $400 billion to our gross domestic product. And
patents help protect that investment.
Recent trends in patent litigation have created a serious
problem for Adobe. This is a new problem. Lawsuits by patent
assertion entities, or PAES, take advantage of the lopsidedness
in our litigation system, where it is more expensive to win
than lose.
We recently took a case from a PAE to trial. We won. There
is no infringement, no damages. But it cost us $4 million to
prove that point.
Studies show that PAEs lose at trial 90 percent of the
time, but who can afford to prove it? Adobe's customers are now
the targets of PAEs.
Since 2009, Adobe has received more than 100
indemnification requests from our customers. The PAEs target
the end-users, small retailers all across the country.
One of our customers was recently sued. The PAE
immediately, after filing the complaint, offered to settle for
just a few thousand dollars. There is no way our customer could
answer that complaint for less money than that.
The nature of the patent is irrelevant. After reaching a
few low-cost settlements, the PAEs acquire a new asset and
repeat the process all over again. These repeat serial patent
aggregators are manipulating our patent system, but they are
only adding cost, not innovation, to our economy.
We recommend the following actions. We believe Congress can
make important changes that will help curb abusive litigation.
I note that patent law already permits shifting fees to address
abuse of process, as was mentioned before. If there is an
exceptional case, a court can shift fees under 35 USC 285.
However, the way it is currently applied, it is a high standard
rarely met.
Let's clarify this law. When a court sees litigation with
these telltale signs--high demands, low settlements, no
practice in the field of the patent--the court can act.
Similarly, strengthening Rule 11 of the Federal Rules of
Civil Procedure would also help. Rule 11 serves a similar
purpose. Unfortunately, it suffers the same problems.
We can also look at more focused fee shifting, such as
being proposed in the SHIELD Act or the SAS proposal around
discovery costs that was mentioned earlier.
SHIELD focuses on shifting fees if there is an assertion
without any exploitation. That is a good focus: Is the
plaintiff really using the patent system to validate a property
interest, or are they taking advantage of issues inherent in
our litigation system?
In any solution, it is imperative that the PAEs face
significant financial exposure if they are found to violate the
standard. Preferably, this determination is made as early as
possible in the litigation. Otherwise, the defendants will
still settle in the face of a low-cost offer.
And the approach also has to protect the rights of those
seeking legitimate access to the courts. We note the SHIELD Act
does have provisions in place explicitly protecting the
original inventors of the patent and universities. We applaud
that approach and look for such protections in any bill that is
passed.
Finally, we can also continue to improve the quality of
patents. A clear patent is a good patent for the public and the
public interest. Using the new tools in the AIA, patent quality
is on the rise, and we commend PTO leadership. They have
offered various proposals now on increasing the clarity of
claims, and Adobe supports those.
The AIA also established mechanisms for challenging
recently granted patents through procedures of the U.S. PTO.
These have a real chance in helping address the questionable
patents before they even enter the marketplace.
We need to continue to focus on improving examiner access
to prior art, especially in the software area where it
difficult to find the best prior art merely by searching the
patent database. The crowdsourcing efforts they have introduced
go a long way in helping that problem.
Mr. Chairman, Ranking Member Watt, and Members of the
Subcommittee, I thank you again for giving me the opportunity
to testify before you, and I look forward to answering your
questions.
[The prepared statement of Mr. Rao follows:]
__________
Mr. Marino. Thank you, sir.
We are now going to move to the questioning from the panel.
I ask my colleagues to do their best to keep those statements
and questions at 5 minutes.
And the Chair now recognizes the Ranking Member of the
Subcommittee, Congressman Watt.
Mr. Watt. Mr. Chairman, I think I am going to pass and go
last. So if Mr. Johnson is ready, I will defer to him.
Mr. Marino. The Chair recognizes Mr. Johnson, Congressman
Johnson.
Mr. Johnson of Georgia. Thank you, sir.
Mr. Marino. My traveling companion.
Mr. Johnson of Georgia. Yes.
At this time, I would like to, while reserving my 5
minutes, yield to the lady from California, Congresswoman
Lofgren, if that is acceptable.
Mr. Marino. The Chair recognizes Congresswoman Lofgren.
Ms. Lofgren. Thank you, all of you. I am sorry to be late.
I was meeting with John Chambers, so I know that Mr. Chandler
will forgive me for that.
And also, to have Adobe also in my district, represented
here, is awesome.
And, of course, Mr. Johnson. We have worked together.
I have this one question, if I can. Mr. Chandler, I read
your testimony, which was excellent. You mentioned in the
testimony that there was a patent troll threatening small
businesses with Wi-Fi patents that have already been licensed.
I am interested in this case, the specifics of this case. Could
you even tell us who is doing this?
And I will end very promptly, because I do not want to
abuse Mr. Johnson's courtesy to me.
Mr. Chandler. Sure. Thank you very much.
The company involved is called Innovatio, but it is one
individual who is a former intellectual property counsel at a
chip manufacturer called Broadcom who bought 31 patents that
were nearing expiration. They were no longer useful for
protecting in the marketplace that Broadcom was in. Broadcom
had broadly cross licensed them to other chip companies--
Qualcomm, STMicro, Agere, and others.
And the Wi-Fi chips involved sell for a few dollars apiece
and are used by manufacturers to create devices that allow
people to use wireless Internet. Many of the patents had been
declared by Broadcom to be standards essential and had been
given to standards bodies on that basis.
Because they could not go to the chipmakers or did not want
to go to the chipmakers, because they would have gotten a
royalty of a few cents apiece, and manufacturers like us or
Motorola Solutions or Netgear would have said go talk to the
chip people, they decided to try to intimidated 13,000 small
businesses around the country, similar to a scheme of telling
people that they can't collect their Social Security benefits
unless they sign up for a certain service. That type of scam
has been well known for a long time.
By offering a license, in many cases, for products that
were already licensed--but if you run a cafe, and Caribou
Coffee was one of the companies they want to. Caribou does not
know what chips are in the boxes that are in their closets that
offer Wi-Fi.
And the choice was pay $2,000 or $3,000 per location, or we
will sue you. And if you want to defend it, you can. Here are
the documents you need to review, and it listed the length of
each document, adding up to thousands of pages. And it told
people what it would cost to litigate a patent case. So many of
them just paid up.
Now, we were pretty outraged that our customers were being
treated that way. My first job as general counsel really is to
make sure our customers get taken care of. So we brought an
action against them for breach of contract, because they did
not fulfill the obligations to the standards bodies that
Broadcom had put out, and also for racketeering.
The breach of contract claims are moving forward. The judge
in the case decided that they were petitioning the government
by bringing this patent litigation or by preparing for
litigation. And since Innovatio did not know for sure whether a
particular customer's Wi-Fi device included a licensed chip or
not, he did not view it as enough of a sham to allow the
racketeering claim to go forward.
But I think the case illustrates well the way a financially
driven operator will use the procedural opportunities in the
patent system to try to shake down people who really do not owe
any money. And that is where I think the focus of the Committee
should be, on how to fix these procedural abuses so that
companies that are really aiming only at litigation--it is
their only business--cannot establish the value of a patent, as
Mr. Gertz described, because of the litigation value, but to
get that value tied back not to procedural abuse, but tied back
to what the value of the invention is.
Ms. Lofgren. Thank you very much. I was just listening, and
the testimony was uniformly excellent.
I do not know what the remedies are. But as I am listening
to you, I am thinking maybe we ought to have a vexatious
litigant statute, as we do in California, as an additional part
of our arsenal in the Federal system.
And with that, I yield back, Mr. Chairman. Thank you for
letting me go out of order.
Mr. Marino. Thank you, Congresswoman.
The Chair now recognizes Mr. Chaffetz.
Mr. Chaffetz. Thank you, Mr. Chairman. And I appreciate the
panel and all the expertise that has come here before us.
I think, clearly, with the one example of Mr. Gerst's
testimony, we have exemplified the idea that there is a major
problem here. It is a Federal problem. It is something that can
be remedied. It is something that must be addressed.
I thought, actually, Ranking Member Conyers made an
important point that I want to respond to. One of the
assertions that he said is that we have to be careful that we
are protecting the little guy so that they have some resources
and the ability to go after some of the big boys. But then we
also have to make sure that there is some balance there.
There is a statistic that I think is particularly pertinent
here. Look, I introduced the SHIELD Act with Congressman
DeFazio in a bipartisan way. I think it is a great piece of
legislation. If it needs further perfection or input, we are
totally open to that. But we want to help solve this problem.
But interestingly, statistically, 55 percent of unique
troll defendants made $10 million or less. Now, I appreciate,
we have some big companies here, from Adobe to Cisco and
others, that are very important. They are part of the growth of
this country. They are a success in our economy that is
thriving. We have to make sure that they continue to thrive
globally.
But think about that: 55 percent of the defendants are
making less than $10 million. And they need to be able to
defend themselves.
So, Mr. Gerst, to suggest that everything is fine. Your
quote was that it is working well. It is not working well for
those people. They do not have the resources that Cisco has.
And the SHIELD Act, if a company inventor does at least one
of the following things, nothing changes: They are the original
inventor or assignee; they are involved in exploitation of the
patent; they are a university or tech transfer organization. It
does not affect them.
But there are trolls out there. There are problems out
there.
Sixty trolls brought 62 percent of the 2012 patent
litigations--62 percent. That is what is going on in our
courts.
A Boston University study found that NPE litigation is
growing rapidly, affecting 5,842 defendants in 2011. The direct
costs of NPE patent assertions are substantial, totaling about
$29 billion. And 55 percent of those defendants are making less
than $10 million. There is a huge, massive problem that we can
solve with a very simple, straightforward approach.
I think I would go first, actually, to Mr. Chandler. Again,
there are some that doubt that there is a problem. If you
could, in your own way, because you are dealing with lots of
vendors, you have a lot of suppliers, people contracted, give
us a perspective, if you can, also, on what the little guys are
going through, because I think Mr. Conyers brings up an
important point, but I think that is an argument actually in
favor of the SHIELD Act, not in opposition to it.
Mr. Chandler. Well, I agree with you. Just to add to the
information you just shared, from 2005 to 2011, 82 percent of
the targets of the non-practicing entities, the PAEs, had less
than $100 million of revenue, as opposed to Cisco.
You are right. We have the resources to defend ourselves. I
was able to spend a third of a billion dollars on legal fees in
the last 6 years on suits with companies that do not produce
products.
I think the key focus ought to be on the procedural abuses
that run up the costs. I think Mr. Boswell spoke very
effectively about the discovery costs and the imbalance in
discovery.
In that ITC case I referred to, we produced over 3 million
documents, had to provide over 20 of our employees as
witnesses, all before the ITC ever even looked at the issue of
domestic industry and threw them out.
I had $13 million of expense there.
So I think you find a situation where--I have one case that
is in trial right now, as a matter of fact, where all of the
patents in suit have been subject to reexam and at least
partially declared invalid. And yet, the case is proceeding.
Those reexams are moving much more quickly, thanks to the
America Invents Act. I think that when a party makes a decision
they want to go ahead, even though a case is in reexam, they
ought to be bearing the cost of the litigation. The same with
the discovery approach that Mr. Boswell referred to.
Mr. Chaffetz. And, Mr. Boswell, you gave a very vivid
explanation of the problem and challenges that you are facing.
I want to have, given the remaining seconds that I have,
the gentlewoman from JCPenney to give us her perspective,
because this is not a problem that is just in the tech sector.
Again, tech is one of the most important, thriving parts of our
economy. Let's talk about outside of tech, because it is also
affecting them.
Ms. Dhillon. Thank you. And I do agree with your comments.
As I indicated, retailers and other businesses that are not
typically what you would think of as high-tech companies are
being seriously affected by the menace of the patent trolls.
I think that a number of the proposals that have been put
forward here today could definitely help retailers like
JCPenney and other companies that are similarly situated. And I
think, in particular, what is important is looking at
limitations around suits against downstream users before the
litigation against the licensor has been fully exhausted.
Mr. Chaffetz. Thank you.
Thank you, Mr. Chairman. I yield back.
Mr. Marino. Thank you. The Chair will now recognize
Congresswoman Chu from California.
Ms. Chu. Thank you, Mr. Chair.
Mr. Chandler, I am concerned and outraged by these
frivolous suits that are filed against the end-users of
products, these 13,000 demand letters that were levied against
those who rightfully purchased your products, such as wireless
routers.
My question is, do the patent trolls have an actual legal
claim against the customers? Would it actually even stand up in
court?
Mr. Chandler. Well, certainly not if they are already
licensed. But the patent statutes, I think, appropriately, will
allow anyone who makes, uses, or sells, a product that
infringes to be subject to suit, and so that can include anyone
in the chain of distribution.
But what the assertion entities want to do is sue the
people as far down the user chain as possible, because they
have a bigger revenue base.
Why sue the maker of the chip that is a $5 chip that
Broadcom might have licensed to get a royalty that is $.50 when
you can sue a Cisco that sells a box for $100 that allows Wi-
Fi.
But why stop there? Why not sue the coffee shop and try to
get some of their revenue?
That is an issue of how damages are calculated. And what we
need to do is move toward much more clear standards, so that,
in advance, it is known what that revenue base is that will be
subject to the patent infringement claim. Even if you sue
Caribou Coffee, the damages should still be based on the value
of that chip. That is the unit that includes the patented
invention.
And until the courts or the Congress make clear that that
is the only way that the damages will be calculated, there will
still be an incentive for these assertion entities to go for
the biggest possible revenue base and to be suing innocent end-
users who have very little means to defend themselves.
Ms. Chu. Should there be a test case in court?
Mr. Chandler. Well, there are cases moving forward. Chief
Judge Rader at the Federal Circuit helped with this a few years
ago. Judge Posner of the Court of Appeals, sitting by
designation on a District Court case, made this clear.
But at the moment, the law of the land is a case called
Georgia-Pacific that gives the jury very wide latitude in
looking at 15 different factors. Because of the uncertainty
that that causes, at this point, it is a casino when you walk
into litigation. You have no idea how those damages will be
calculated, and that creates a huge incentive to settle,
especially when you look at the cost of litigation.
So there are cases out there. I think that is one that
courts are going to work through. We tried very hard with the
Congress for over 7 years to work on it, and very hard to
balance the various interest groups. Our hope is the courts
will fix that in years to come, if Congress does not.
Ms. Chu. And is there a way that the end-user could protect
themselves?
Mr. Chandler. Well, I think Mr. Johnson made some very
helpful observations on that. One thing that Congress could
perhaps provide is that the end-users could force the cases to
be stayed, so that the litigation would be with the
manufacturer of the device. And we would certainly be open to
working with Mr. Johnson on a proposal that could work for all
industries, that maybe Congress could enact.
Ms. Chu. Yes, sir, in fact, I do want to pursue that with
Mr. Johnson.
You said that a solution would be allowing suits against
manufacturers of the allegedly infringing products to take
precedence over suits against the customers, and that then a
manufacturer would have the right to pursue a separate suit, or
intervene in an existing suit.
If your solution is enacted, do you foresee companies
willingly intervening in an existing suit or pursuing suits on
their own? And what would be the incentive for them to
intervene?
Mr. Johnson. Well, I think whether they institute new suits
or choose to intervene may depend a lot on the venue of the
original suit, and their view of the convenience of the forum.
I think quite frequently the manufacturers would bring
suits, probably declaratory judgment (DJ) suits, and their home
jurisdictions, where it would be convenient to pursue them. And
if that would result in the automatic stay of the customer
suits, then I think it would be an expeditious way and a less
expensive way to resolve the litigation.
And Mr. Chandler and our other witnesses point out, it
would avoid large numbers of litigations against very small
users who are not in a position to join the issue, and it would
allow one lawsuit to resolve the matter once and for all.
Ms. Chu. And would companies even know about these demand
letters?
Mr. Johnson. Excuse me?
Ms. Chu. Would companies even know about the demand letters
being sent to the end-users?
Mr. Johnson. Yes. Usually, I think most of us who make and
sell products find that our customers are pretty quick to let
us know when they have been sued.
Ms. Chu. Thank you. I yield back.
Mr. Marino. Thank you.
The Chair now recognizes Congressman Issa from California.
Mr. Issa. Thank you. I will follow up with Mr. Johnson.
Do you envision any kind of test for the question of
whether a DJ would take precedent? For example, would there
have to be a relationship between the retailer which you have a
responsibility to indemnify him? And could that be a test, if
we were to enact it into law, that could codify that?
Mr. Johnson. I do think we would have to look closely as we
move forward in developing legislation, because there are a
variety of relationships between suppliers and their customers,
and there may, as you point out, be indemnities. There may be
UCC implied indemnities. And there may be some situations where
the components have been supplied pursuant to the
specifications of the customer where it would not be
appropriate.
Mr. Issa. Well, I want to thank you for that answer,
because that begs the point for us in legislation.
I would not want to see an automatic stay, based on the
manufacturer's DJ. In fact, there could be a material
difference in the two cases, and if I were a retailer, or
someone else in the supply chain, I wouldn't want to be
prejudiced by a case being argued somewhere else. On the other
hand, you do not be prejudiced by it.
But I do think you are onto something very important. As a
manufacturer, they never shopped my venue. As a patent holder,
I have to be honest, when I found myself with Chrysler in a DJ
in Detroit, I was not happy, so I am well-aware why each of us
would look at that.
Let me go back to Mr. Chandler. Currently, we do have this
dilemma that the ITC is where you go for an exclusion/
injunction. And you go to District Court for damages and you
use one against another.
It is an oddity of Congress that we have jurisdiction over
one part. Another Committee has primary jurisdiction over
another. The two questions I have for you are, should we as a
Congress actively take on to resolve this, so that never again
could somebody essentially shop both to the detriment of, to be
honest, cost to the government, and for a resolution not
envisioned post-eBay?
Mr. Chandler. Certainly, there has been a trend in the last
5 years, since the eBay decision, to a very significant
increase in the caseload in the ITC, both in terms of the
number cases and the number of defendants involving
nonpracticing patent industries.
Mr. Issa. And I do not want to limit it to nonpracticing.
If you take the Qualcomm-Broadcom suit, you had two large--and
there were others. There was Kodak. There were others. You have
large domestic entities in which they clearly both are
domestic, and importation is simply a matter of a portion of
the supply chain in America today, including for your company.
Those are really the cases where I want to know, because we
can talk about trolls. We can talk about people who do not
manufacture. The ITC requires there be a domestic entity in
order to get standing.
But let's assume that you are talking about two S&P 500
companies, substantial assets, more than enough to pay any
damages. And yet one of them goes to the ITC in order to,
essentially, twist the knife and get a settlement. It could be
your company doing it to somebody else, on occasions.
Mr. Chandler. The ITC has a specific mandate to move
quickly to stop foreign knockoffs from coming in. Now, some
parts of the supply chain, as you alluded to, there simply are
no domestic sources of components. And the fact that a very
small component of an essentially domestic product comes from
abroad, and is alleged to infringe, can subject you to the ITC.
I wouldn't say that the ITC's reason for existence is
obsolete. And, certainly----
Mr. Issa. No, and I'm not suggesting.
And my time is very limited. What I am suggesting is that,
currently, in some of the cases I mentioned, the ITC told us
they were without power to do anything other than to use the
sledgehammer they were given. And we, in the Congress, have the
ability to give them an additional tool.
For example, the ITC finding that there is substantial
domestic assets sufficient to pay any damages could choose to
stay their case, and recognize that their need is only when, if
you will, there is an import situation in which money is not
going to be paid because there is not as substantial import.
And to be honest, the Open Act, something that I sponsored
in the last Congress, and will re-drop in this Congress,
envisions that, in the case of intellectual property--classic
movies, music--that the ITC may have a greater role, because it
is, by definition, coming from entities that you can't touch
other than through exclusion.
Mr. Chandler. I agree with you completely that
rationalization of the dual jurisdiction and duplicative
litigation would make an awful lot of sense. There is no reason
that these cases need to be carried out in two different fora
simultaneously.
Mr. Issa. Thank you, Mr. Chairman.
Mr. Marino. Thank you.
The Chair recognizes Congressman Deutch from Florida.
Mr. Deutch. Thank you, Mr. Chairman.
Mr. Chairman, I want to thank all the witnesses for
appearing today. It is actually very helpful hearing.
And I understand there are a number of elements in our
patent system that have contributed to the troll problem that
so many of you have already discussed. And patent quality,
particularly in emerging technologies, has been a problem with
PTO. That has come up, today, as well. And I know it is an
issue that they have been working on to remedy.
But even if we assume that, going forward, the quality of
all new patents is unimpeachable, there is still a question of
what to do in the interim to deal with vague patents, overbroad
patents that have already been issued.
So there are lots of proposals, lots of ideas. You have
laid out some. The SHIELD Act has been introduced by my
colleagues as a way to, in that case, limit litigation using
the questionable patents.
I remember the discussions that we had during the America
Invents Act about reexamination of limited types of patents.
Everyone that I have talked to about this troll problem, all
the folks who have been in office, people that we have met
with, seem to agree that there is no silver bullet here. There
is no one thing that can be done.
We have to look at all the options to minimize abuses. But
there would also be unintended consequences, if we are not
careful.
Mr. Gerst, you spoke about the unintended consequences that
would stem from the SHIELD Act. If we had this fee-shifting
provision, the impact that that would have on small and medium-
size businesses would be exactly the opposite of what we would
want to encourage and the kind of innovation that we are
actually trying to encourage, by having these discussions to
begin with.
Mr. Rao, I wanted to ask you about one small aspect of the
entire ecosystem. I understand it is not a significant issue in
this whole broad discussion. But I think the troll problem in
the patent system as a whole would benefit from greater
transparency, significantly greater transparency.
And in my background, coming from real estate law, there
was always very obvious title for all property. Records were
kept up to date. They were easily searchable. And similarly, I
understand the copyright has diminished remedy for failure to
register in a timely manner.
But in the patent world, in the patent universe, the
records seem woefully lacking.
Why can't we--let me phrase it more positively. Is there a
way to have a more transparent system to record patents, so we
know who it is who we are talking about, we know who these
trolls are, and there's a clear line, and that we don't
simply--they don't simply wait until there is a lawsuit to go
ahead and record an order for them, to proceed?
Mr. Rao. Thank you for the question.
Absolutely, I think there is a way to address this problem.
And we think it is a problem.
We think that the large patent aggregation entities are
typically holding the patents in other names or shell
companies, because they don't want to draw attention to the
size of their portfolio. And they also want to ensure that
there is not declaratory judgment actions are reexamination
proceedings initiated against them. And by hiding the true
ownership of the patents, that is their way of avoiding that
problem.
The PTO has suggested some process for identifying the real
party of interest. For example, having the patent holders
record the current assignee status at the time of maintenance
fee renewal. That seems to be a very low-cost way of providing
up-to-date information about who the true owner of the patent
is, because you already have to interact with the patent office
at that time.
There has been some concern about real party in interest
causing a burden on patent holders, but I think that if you
take the PTO's approach, I think the burden is low, and I think
the benefit to the public is pretty high.
And not only do we want that transparency at the time of
when they own the patent. We would also like to have a little
more transparency when we are being sued. We find that our
discovery is also limited into finding out who is suing us.
And we feel that, as defendants, we should know who is
getting the ultimate economic benefit from the patents that are
being asserted against us.
Mr. Deutch. Also, what is the best way to do that? What
would that look like?
Mr. Rao. Right now, there is a corporate disclosure
statement you have to file, Rule 7.1. It is fairly nominal, the
information you have to provide.
So we could strengthen that and require disclosure of all
the entities that are getting an economic interest in the
pattern that is being asserted. That would really help us
understand who is asserting the patents against us.
Mr. Deutch. What about the idea of diminished remedies for
failure to provide the necessary transparency?
Mr. Rao. What the remedies would be for failing to disclose
it?
Mr. Deutch. Limiting the remedies in the event that they
don't disclose?
Mr. Rao. I think that is a solution that has merit. I think
that if you are unwilling to state that you own the patent, I
think, like you mentioned in real estate law, there should be a
prohibition or limitation on your ability to assert the patent,
just like it is in copyright.
Mr. Deutch. Thank you.
Thank you, Mr. Chairman.
Mr. Marino. Thank you. The Chair now recognizes Mr. Holding
from North Carolina.
Mr. Holding. Thank you, Mr. Chairman.
Mr. Boswell, you used some pretty strong language referring
to patent trolls as business terrorists. Perhaps that might be
a bit strong.
But I will say that you look at their activity, and it
doesn't take too much imagination to imagine it as criminal
activity. Perhaps I have spent too much time with criminals
over the past 10 years, and I am thinking about it in that
context. But a protection racket where ``we won't sue you if
you just give us a little bit of money'' isn't too far removed
from ``we won't burn down your business if you just give us a
little bit of money this week.''
It is one of the oldest criminal activities in the
business--the protection racket.
You were talking about discovery and the cost of discovery,
and that being a weapon, an instrument of terror.
Other than the cost of discovery, the AIA looked at the
issue of joinder and at the issue of what was driving venue.
How has that been working? How has that solution been received?
And how is it working?
Mr. Boswell. Well, I believe when Congress passed the
joinder position, the intent was to allow the traditional venue
rules to operate. Prior to that, patent trolls would sue 20 or
30 defendants in a favorable jurisdiction, because venue wasn't
appropriate anywhere, so they would sue them wherever they
wanted to, which would be the best venue for the patent troll.
The idea, I believe, behind the joinder provision was to
allow the traditional rules of venue selection to operate. You
had to sue the defendant where it was appropriate to sue the
defendant.
Unfortunately, that hasn't been our experience. We have no
connection to the Eastern District of Texas. And in the last
case we were sued, we were sued in the Eastern District of
Texas. We made a motion to transfer. But unfortunately, that
motion sat, but discovery had to start.
And so, if what happens is a motion to transfer doesn't get
heard until so much discovery has happened that, in the
interest of judicial economy, the case should stay there, then
I think that the courts are thwarting what the America Invents
Act intended to have happen. And I know that that issue was
just looked at in an EMC case that went up to the Federal
Circuit Court of Appeals.
So without requiring that motions to transfer be heard
first before the burden of discovery attaches, then I think one
of the main provisions that the America Invents Act hoped to
accomplish didn't get accomplished.
Mr. Holding. It seems like the Eastern District of Texas is
the most popular venue. And I think I read somewhere in the
materials that the number of cases being filed in the Eastern
District of Texas is up 104 percent in the last 2 years. Is
that correct?
Does anyone know that statistic?
Mr. Boswell. I didn't see that statistic. I know the
greatest patent filing day in the history of the world was the
day before the America Invents Act went into effect. And that
happened in the Eastern District of Texas.
Mr. Holding. Mr. Gerst, I assume you practice in the
Eastern District of Texas. You take cases there, and so forth.
Mr. Gerst. I have, Congressman.
Mr. Holding. What makes the Eastern District of Texas so
different from everywhere else? Why is it such a favorite
jurisdiction?
Mr. Gerst. That is a great question.
I think there are a few reasons, and the reasons have
evolved over time. I think, first, early on, you had some jury
verdicts there that were very pro-plaintiff, and so you started
to see more activity taking place there. You also had a court
that issued local patent rules that made it more
straightforward, and you had a very patent sophisticated set of
judges down there, who knew patent law and----
Mr. Holding. Let me interrupt. Do they have different local
rules in the Eastern District of Texas than they have in the
other Federal districts of Texas? Are they much different from
Federal districts in general?
Mr. Gerst. At this point, I haven't compared them. But the
Eastern District of Texas was one of the first jurisdictions to
institute----
Mr. Holding. How many judges are there in the Eastern
District of Texas?
Mr. Gerst. I believe there are two.
Mr. Holding. And is there anyone that is particularly
inviting to plaintiffs?
Mr. Gerst. Now that I am aware of. I haven't looked into
that.
Mr. Holding. So two judges in one Federal district are
attracting all of the patent troll litigation that can possibly
be attracted. Doesn't that seem a bit odd?
Mr. Gerst. One of the big reasons, that I didn't get a
chance to get to about why so many of the cases go there, is
that the Eastern District of Texas has tended not to stay
patent cases pending reexamination.
So a standard tactic employed by a lot of defendants is to
put the patent in for reexamination and you move for a stay.
Under the old rules, it would stay the case for, essentially, 2
years. The Eastern District of Texas did not do that.
I know I filed a motion to stay a case pending
reexamination that I thought should have been granted, and it
was not. It was very difficult to do in the Eastern District of
Texas.
That is why there are so many patent cases there.
Mr. Holding. Thank you.
Thank you, Mr. Chairman.
Mr. Marino. Thank you. The Chair now recognizes Mr.
Richmond from Louisiana.
Mr. Richmond. Thank you, Mr. Chairman.
I would just say, before I start, that I thought Congress,
that we get called some bad names, but today I have heard rats,
terrorists, criminals, and now we have added arsonists and
protectionists to the list. So it kind of makes me feel good up
here. [Laughter.]
I will start with you, Mr. Chandler, because in the
beginning, you mentioned the case in which the judge ruled that
the First Amendment protected the action. And we are here today
to talk about maybe remedying that.
But if the judge is ruling that the Constitution trumps,
what can we do beside a constitutional amendment to affect his
ruling, if he is ruling that it is protected by the First
Amendment?
Mr. Chandler. Yes, I will say that I said lab mice and not
rats, and it was an analogy.
In that particular case, we were dealing with a set of
facts that we thought constituted racketeering. And I think
access to justice is an extremely important principle and the
right to petition the government is as well. And the legal
doctrine applicable to that is called Noerr-Pennington, that
allows people to bring litigation and have that be a
petitioning activity.
There is an exception to that, if litigation is sham, if
the only purpose of it is to use the litigation process to
extract some benefits.
In this particular case, because some of the customers that
these people were suing or threatening to sue might have had
equipment that wasn't licensed, the judge said it wasn't a
complete sham, and, therefore, he wouldn't apply the
racketeering statute to the activity that these people had
undertaken.
At the same time, the range of procedural games that are
played by these financial operators--and you have to
understand, many of these patent assertion entities are funded
by hedge funds or other private equity groups at this point.
MOSAID, for instance, is private equity owned, the one that we
spent $13 million with at the ITC.
And they are really in the business of only litigating. And
so the only thing they care about is how they can manipulate
the procedures.
So we certainly don't propose a constitutional amendment,
or anything that would limit access to justice. But we do think
some of the procedural games that are played in the patent
world can be remedied effectively by Congress.
I think Mr. Johnson and I agree on at least one of them.
And we also support what Congressman Chaffetz is undertaking
and look at ways that the SHIELD Act could be used to address
some of these procedural problems.
Mr. Richmond. Ms. Dhillon, two questions for you. I will
start with the first one, which is, in your testimony you
discussed the range of areas in which you have been sued--
displaying catalog images, dropdown menus, and all those
things. At the end of it, you mentioned that patents date back
to the late '80's, mid-'90's. They have had multiple owners
with no continuing involvement of the actual inventor.
But when you mention that, I guess what stood out to me,
and I wanted to give you a chance to elaborate, was that you
didn't deal with the merits of the litigation. And I am trying
to figure out, if the fact that they are old and they are not
very active, and the person who created it has no involvement,
should that be pertinent to the lawsuit?
Ms. Dhillon. Absolutely. And please understand, whenever we
receive one of these suits, we do an analysis to determine, do
we think we are actually infringing on the patent? And if we
do, as I indicated, we and most companies are responsible
utilizers of technology. If we have overlooked something, and
we are infringing, we will compensate to make up for that
infringement.
But in the cases I described, our conclusion was that we
were not infringing on these patents, but the difficulty,
particularly when the patents are that old and when the owners
of the patents have transferred ownership so much, is to be
able to develop the evidence to establish the prior art
defense. Going back that far in time it is extremely difficult
for companies like mine, and very expensive.
Mr. Richmond. Which leads me to the question of do you
think there should be a different standard, not a carve out,
but a specific issues or legislation to address retailers?
Ms. Dhillon. Well, I think that it would be helpful to have
reforms around end-users. So I am most familiar with retailers,
but other witnesses have referenced, for example, restaurants
and the like, and I think that they are in a similar situation
to ours.
Limitations around suits against end-users, until there has
been a resolution, vis-a-vis the vendor or the licensor, in the
first instance, would do a lot to protect end-users like
JCPenney.
Mr. Richmond. I see that my time has expired, Mr. Chairman.
I yield back.
Mr. Marino. Thank you.
The Chair recognizes Congressman Farenthold from Texas.
Mr. Farenthold. Thank you, Mr. Chairman.
I apologize if I re-ask a question. The Governor of Texas
was in for lunch, and you don't upset Mr. Perry by no-showing
on him.
I did want to talk a little bit about the patent assertion
entities. In Texas, if you buy groceries, there's a pretty good
chance you buy them from HEB. It is a big grocery store chain
in Texas. And believe me, they get plenty of my money.
But one of the reasons the prices might be so high is they
tell me that they were approached by one of these entities for
a device that reads checks. They bought it off the shelf and
plugged it into their system. And they are basically saying
settle with us now, or we will run this through litigation, and
it will be 10 times the cost. JCPenney has mentioned that it is
happened to them.
My fear is I have a lot of electronics. I have Adobe
Photoshop Touch on my iPad. If you guys unintentionally have
something in there that is infringing, you would expect the
patents to be asserted against you. But if I take this to its
logical conclusion, they can come sue me for more than I paid
for my iPad, more than I paid for the software on my iPad, and
potentially more than I made this month. Do you think that is
accurate statement?
Mr. Rao. Unfortunately, they are allowed to sue you. That
is correct.
They are allowed, as Mr. Chandler mentioned earlier, they
are allowed to sue the user of technology, if that method is
patented. That is the law today.
I think the question, of course for you, particularly, is
damages. But I think Adobe, generally, we stand behind our
software, as mentioned before. We work with our suppliers and
our customers, and when we find that someone is accusing
Photoshop of infringing a patent, we will step in and
intervene.
Mr. Farenthold. And you have been approached by customers
to do this?
Mr. Rao. We have. Safeway, another grocery store, has asked
us to do this. REI has asked us to do this. L.L. Bean has asked
us to do this. Pacific Sunwear has asked us to do this. Small
retailers are asking Adobe to step in.
Mr. Farenthold. So, what percentage of your patent
litigation comes from these patent assertion entities?
Mr. Rao. About 85 percent of our patent litigation.
Mr. Farenthold. Eighty-five percent.
I am a little bit concerned. I guess it is enlightened
self-interest, because I am an early adopter of technologies.
But would a solution be legislatively create an end-user
exemption where, if I go buy something off the shelf and don't
modify it and use it the way it was intended and just plug it
into the USB port of my computer, or plug it into the wall, or
whatever I do, I will go down the line, does anybody see any
problems with that? Would that be at least a stopgap solution?
Anybody want to take a stab at that?
Mr. Johnson.
Mr. Johnson. Under the Uniform Commercial Code, there is
already an implied obligation, implied indemnity against
noninfringement from a manufacturer to a customer.
And the prevailing jurisprudence is that customer suits
like those we are talking about should be stayed in favor of a
manufacturer resolving the issue.
Mr. Farenthold. I guess my fear is, and I practiced law for
a while, and one of my lines to my client--you can beat the
rap, but you can't beat the ride.
Mr. Johnson. Well, that is exactly the problem, that some
courts have ignored that jurisprudence, which is why a
statutory fix may be required in order to get rid of this
problem.
But I don't think that you have to wholesale deprive a
patent owner of a right where there really is an infringement
in order to do that. It may be that you have unintended
consequences, because the only person who could be sued might
be the one you would exempt, and you wouldn't want to do that.
Mr. Gerst. Congressman, if I could just echo that? There
are certain patent claims that are called method claims that
are only infringed, in some cases, by the end-user. And so that
is the issue that Mr. Johnson is speaking of. So that adds
complexity to what you are trying to achieve.
Mr. Farenthold. All right, well, I appreciate it. I see I
am just about out of time, so I will yield back.
Mr. Marino. Thank you.
The Chair now recognizes Mr. Jeffries from New York.
Mr. Jeffries. Thank you, Mr. Chairman.
I want to express appreciation for the presence of the
witnesses to speak on such a very significant issue. I share
their concern, as I think all of my colleagues do, with making
sure that unnecessary or unjustified litigation doesn't stifle
innovation and entrepreneurship. And I think this is something
that we have to confront.
Obviously, there are various ways to get at the problem,
and the remedy here is going to be what we all need to find
common ground on, to determine the best way to address what I
think is universally or almost universally recognized as a
legitimate problem.
And there seems to be at least five different potential
remedies, and I want to get into the details related to a few
of those.
But you have the loser pay. You have expedited discovery.
You have the possibility of shifting burdens. You have enhanced
standing as a possibility. And then lastly, I guess, improving
or strengthening the Rule 11 requirements.
But I want to hone in on the notion, and I guess the proper
expression is patent assertion entities. I was hesitant at the
very beginning of this hearing to use the word patent trolls,
thinking that perhaps it was an unnecessarily aggressive
expression. But, as my good colleague from New Orleans has
catalogued so thoroughly, apparently, that may be the kinder,
gentler way to approach these individuals.
But I guess, Mr. Rao, from the standpoint of the subset of
individuals who fall within this category as plaintiffs, who
are bringing litigation, how many of those matters eventually
go to trial? I understand that many don't, because of the cost
of litigation resulting in settlement. but how many of those
matters--and anyone else can answer--but how many of those
matters go to trial?
Mr. Rao. As a whole, very few patent litigations go to
trial. They settle. In the NPE cases, at least in Adobe's
experience, very few historically have gone to trial. So I
would say the vast majority end up being settled.
And that is part of the problem, that you have highlighted,
that the cost of defense is higher than the money they are
asking for. And the current group of patent plaintiffs, they
are not looking to have the patents scrutinized. They are
merely hoping to get you to pay.
Mr. Jeffries. I gather you support a strengthened Rule 11
requirement. Is that correct?
Mr. Rao. That is correct.
Mr. Jeffries. So the reason I asked the question, and I
gather--in other words, in order for the Rule 11 sanctions to
kick in, there has to be some decision along the way, in the
litigation, whether that was a motion to dismiss that was
granted, summary judgment granted, or withdrawal perhaps, or a
decision at trial.
And so the question for me is, how do you get to the point,
if you are going to enhance the Rule 11 requirements, you are
still going to have to arrive at the decision. And so it seems
like you can't simply enhance the Rule 11 requirements. Perhaps
we need to look at either enhanced standing to make sure that
those who were bringing the litigation legitimately have an
issue, or you shift the burdens, which then perhaps make it
substantively more difficult to achieve a result, but design to
shift the burden so that those with legitimate claims can make
it through the litigation.
And if you strengthen either of those two requirements, or
perhaps both, then those who are bringing the litigation, it is
just a lot easier to determine who is bringing the frivolous
litigations and then the sanctions can apply.
If you or any of the other general counsels might comment
on that?
Mr. Boswell. Mr. Jeffries, may I respond to that?
Mr. Jeffries. Yes
Mr. Boswell. If at the end of the process, the defendants
had a way to just not lose more. In other words, even if we win
a case, we have lost, where these cases are filed, we are never
going to get Rule 11 sanctions. We are never going to cost
shifting.
If Congress did something to change that, then we would
have less incentive to settle. We would be inclined to take the
cases until you got a decision. And as soon as you do that, the
entire business model of the patent trolls changes, because
they use early settlements to fund litigation. And as soon as
people stop settling, the whole paradigm shifts.
Mr. Jeffries. Yes, I would suggest that we explore that.
But to that point, and I am not sure where I am at. I wasn't in
the institution when Congress--I think it was in 1995--passed
the Private Securities Litigation Reform Act. But it was an act
of Congress that was designed to get at this very problem, that
there was at least a perception that there was excessive
litigation being brought by individual plaintiffs, not all of
whom were legitimate.
Again, I don't know where I fall on this litigation. I have
been on both sides, on the defendant side and on the
plaintiff's side, in my prior practice. But it does seem to me
that it would be helpful for us, for you guys and the
gentlelady to take a look at its success, what Congress may
have done right with that litigation, what perhaps hasn't
worked. And then use that as a basis for perhaps coming up with
some creative suggestions to get at how to stop the excessive
litigation.
Mr. Marino. The gentleman's time has expired. I think he is
through.
Mr. Jeffries. Yes. Thank you, Mr. Chairman.
Mr. Marino. The Chair now recognizes the Chairman of the
Subcommittee, Chairman Coble from North Carolina.
Mr. Coble. The late Howard Coble has returned. I thank all
of you.
Mel, I want to thank you, and, Tom, for manning the ship.
Mr. Boswell, good to have you up from Carolina, as Mel
mentioned earlier.
Mr. Boswell. It is good to be here.
Mr. Coble. Curtailing abusive discovery practices could be
one way to deal with abusive patent litigation. Speak a little
more specifically to that.
Mr. Boswell. As I was mentioning just a minute ago, one of
the challenges is patent trolls have the ability to make it so
expensive that even if you are sure you are going to win, you
are going to lose.
I actually had a conversation with a patent troll where we
demonstrated without question that there is no way our product
that they accused could violate their patent. His answer was, I
don't care.
Mr. Coble. He just wants to buy his piece, I presume.
Mr. Boswell. Well, he wanted us to pay him money, so we
could prevent ourselves of having to go through the expense of
going through litigating. And he knew and I knew that even if
we won on all counts, we weren't going to get any of our money
back, and we were still going to have to pay the cost of
discovery.
So I am trying to change the paradigm, so that defendants
do not have to settle, so they can't be extorted, basically.
And that is, if you can afford to litigate, then you don't have
to settle. And that is really the point.
And as soon as we do that, I think the paradigm shifts in
the patent troll world.
Mr. Coble. Thank you, Mr. Boswell.
I will put this to either or all of the witnesses. Do you
believe that patent assertion entities are those that
accumulate large numbers of patents for purely offensive
purposes should be subject to antitrust scrutiny?
And we will start with Mr. Chandler.
Mr. Chandler. I think the patent grant is a monopoly in
order to encourage progress in science and the useful arts. And
patent holders try to find various ways to extend the scope of
that monopoly beyond what the patent grant intends.
And I think that patent aggregation efforts deserve very
close antitrust scrutiny for that reason. I think they have the
impact across whole industries of forcing settlements and
suppressing competition in ways that are not intended as part
of the patent grant.
Ms. Dhillon. I would concur with Mr. Chandler's remarks. I
know the Department of Justice and the FTC have been looking at
this very question, and we support that effort, because I think
that it does raise legitimate issues.
Mr. Boswell. Yes.
Mr. Coble. Thank you for your brevity, Mr. Boswell.
Mr. Gerst. Congressman, I am not an antitrust lawyer. It
does seem to me, though, that it is hard to conceive that these
patent assertion entities, non-practicing entities, have
anything approaching market power, but I am not an antitrust
lawyer.
Mr. Coble. Thank you, sir.
Mr. Johnson. The mere aggregation of patents may have very
beneficial effects, especially, for example, if it brings
together conflicting technologies, patents that would conflict
with each other, to make them available for competitive
purposes. It could be very beneficial. Or you could aggregate
patents as we have seen in the Hartford Empire case years ago
for anticompetitive purposes.
So I would say it's not the fact of the aggregation, but
you have to look at what the use and effect is under the
antitrust laws.
Mr. Coble. Thank you, sir.
Mr. Rao. I would agree with that. There are definitely
proconsumer aspects to patent pooling, for example, for
standards.
But I think the larger point that Mr. Chandler mentioned
about a patent assertion entity who is just aggregating lots of
patents and using that volume to demand fees I think is worth
looking at a little more closely.
Mr. Coble. Thank you, sir.
Mr. Chairman, I hope you will take note that the red light
has not illuminated, and I am yielding back.
Thank you, ladies and gentlemen.
Mr. Marino. We will give you credit for that in the future,
Chairman.
Mr. Coble. Thank you.
Mr. Marino. You are welcome.
The Chair now recognizes Congressman Nadler from New York.
Mr. Nadler. Thank you, Mr. Chairman.
Mr. Chairman, I have sat here through this hearing. It has
been very illuminating.
I have a couple questions.
Mr. Chandler, getting back to this question, and maybe Ms.
Dhillon, getting back to this question of end-users. It
certainly seems unfair to have the end-users, to have the
Starbucks or whoever, sued.
What about simply a rule or statute that said that they
cannot be sued. It goes right up the chain to whoever first
used to the patent in a productive way? You just implead the
first user, and it is their problem, and they just get right
out of the suit?
Mr. Chandler. Well, I think that Mr. Johnson's proposal in
that regard, regarding staying of suits with end-users and
permitting the manufacturers to intervene----
Mr. Nadler. Why stay it? Why not just dissolve it,
eliminate it?
Mr. Chandler. I think that there may be cases where the
only way to assert a patent would be against the end-user for
various reasons. And so an automatic elimination of that right
I think would be a significant change.
Mr. Nadler. If you gave the plaintiff the right to go
against whoever originally used it, he could initially sue
Starbucks. They just get out and say here, and go up the chain.
They have a right to sue. Even if the original complaint was
against Starbucks, just get rid of them and give them the right
to sue whoever first used that technology.
Mr. Chandler. I think that having patent litigation focused
on the technology that is described in the patent is the right
result. And there are going to be a number of different ways to
skin the cat, and I think the proposal you are laying out is
one that ought to be in the mix, in figuring out how to do
that.
Mr. Nadler. Okay. Thank you.
Mr. Boswell, in his testimony, Mr. Boswell says essentially
says, talking about shifting the cost, and the cost here is
overwhelmingly discovery. And he says the critical discovery
relates to certain core documents. These core documents include
the patent at issue, the technical specifications of the
allegedly infringing product or feature, and the prior art.
He proposes that in any patent lawsuit, normal rules of
discovery apply with respect to these core documents; that is,
the person producing the documents pays the cost of production.
But he would go one step further. We would propose
additional discovery is permissible, and that parties could ask
for whatever documents they need. The difference is that the
party requesting such other discovery bears the cost of that
discovery.
Does anybody object to that? And if so, why? Yes?
Mr. Johnson. I object to it, or we object to it, the extent
that it removes the discretion from the courts. Right now, the
courts have that authority. They have the authority to
condition the provision of discovery based on whatever
conditions are appropriate, including paying for the discovery.
They are the best positioned to get in and figure it out----
Mr. Nadler. Given the nature of the problem that we have,
if we define the classes of core documents and said that is
where the plaintiff pays for the discovery. Beyond that, it is
different. Or that is where the defendant pays for the
discovery. Beyond that, it is different.
What is wrong with saying that to the courts? Why do they
need further discussion?
Mr. Johnson. There are all manner of different plaintiffs--
universities, individual inventors, and the like--and all
manners of lawsuits. The core discovery concept was originated
by Judge Rader. And the pilot patent courts program is looking
at that very closely. And they have other management techniques
as well, to try to avoid excessive discovery.
Mr. Nadler. But that hasn't worked, obviously.
Mr. Johnson. Well, it is just getting going. Congress just
passed the bill in January 2011, and it is now being
implemented. And they are very active, and we should wait to
see how they are doing before we try to give them a blunt or
one-size-fits-all rule.
Mr. Nadler. Can anyone tell me why they disagree with Mr.
Johnson on this point?
Mr. Boswell.
Mr. Boswell. Because although the courts have that power
now, I don't think any of us will have ever seen a court that
has used it.
Mr. Nadler. Even though it is a brand-new power?
Mr. Boswell. No, I mean he was saying the courts could do
that now. But the patent trolls are not filing in any court
where any judge would do that.
And I disagree that there would be any problem with our
proposal. Obviously, I like our proposal.
And the other point I need to make here is that the idea
of, well, we are going to study this problem and we have to
give it time, if we were standing there and someone was
drowning, we wouldn't say, well, we are going to study the
problem.
Mr. Nadler. Congress might.
Mr. Boswell. We would jump in and save them.
Mr. Nadler. I said Congress might have a study completed.
Most people wouldn't. [Laughter.]
Mr. Boswell. I hope not.
Mr. Nadler. Thank you. I yield back.
Mr. Marino. Thank you.
We are going to go a little bit out of rules procedure
here. President Obama will be meeting with the Democrat Caucus
about 2:15 today, as he met with the Republican Caucus
yesterday.
So, my colleagues, my Republican colleagues, have
graciously agreed to allow the rest of the Democrat side to get
their questions in, so they can get to the meeting. And then we
will follow up later.
So I think the next person to have questions is Congressman
Johnson from Georgia.
Mr. Johnson of Georgia. Thank you, Mr. Chairman. And thank
you Members on the other side of the dais here for your
generosity and graciousness.
I hearken back to the days when I was growing up. My aunt
in the backyard, just past the backyard was a bridge that then
emptied onto the street behind her property. And she would
always tell us, do not go out there on that bridge, because the
three little billy goats. The three billy goats, she told us
that story about the three billy goats and the big, bad troll
waiting under there.
And so I understand what a troll is, but I also know that
every person or entity that files a patent infringement suit is
not a troll. And I also know that while software is a product
that can easily be broadened, or expanded, in so far as claims
are concerned, by those who would file patent lawsuits, this
legislation that we are looking at, the SHIELD Act, would apply
to all types of patents, not just those patents.
And I know that there is abusive behavior occurring in
patent litigation cases. Many examples of that, even in the
northern district of Georgia, scanner trolls targeted BlueWave
Computing and other Atlanta-based businesses for merely using
an office scanner to scan documents to email.
BlueWave reportedly received a demand from Project
Paperless, a patent assertion entity, stating that BlueWave had
to pay $1,000 per employee for a license to distribute its
computer architecture, or they would face a lawsuit.
In this case, BlueWave fought the lawsuit and won in court
after spending millions of dollars to defend itself. And that
is something that they should not have to be subject to.
Finding solutions to this problem is incumbent on the
courts, businesses, the Patent and Trademark Office, and on
this Congress. These solutions should both address immediate
concerns and also be forward-looking to enable the breadth of
patent claims to be included.
But we should also be careful to avoid solutions that
create barriers to the courthouse for some litigants and not
others.
I also have concerns with fee shifting and bonding rules
that would make it prohibitively expensive to enforce a valid
patent for parties that do not produce materials associated
with the patent.
Lastly, although this is, indeed, a worthy issue for our
consideration, we have to be careful that any legislation in
this area that we may pass could open the door for other
alleged reforms that would deny plaintiffs their rights to go
to court in other tort situations, so-called tort reform.
We must consider the implications of our solutions in other
areas, even ones as close as copyright.
Although we are not considering these questions today,
these are important issues that we must be mindful of as we
move forward.
Lastly, I will say that a patent holder who files a lawsuit
against a deep-pocketed predator corporation, making money off
that person's or entity's patents would be covered by this
legislation, would it not, Mr. Gerst?
Mr. Gerst. Your question, Congressman, is whether or not a
company----
Mr. Johnson of Georgia. Well, whether or not a person or an
entity filing a claim for patent infringement, they would be
covered by this act?
Mr. Gerst. By the SHIELD Act?
Mr. Johnson of Georgia. Yes.
Mr. Gerst. Well, if an individual is the inventor, the
person would be excluded from the SHIELD Act. But if the person
is not the inventor or one of the other exclusions, that person
or entity would be affected by the SHIELD Act, yes,
Congressman.
Mr. Johnson of Georgia. Thank you.
Mr. Marino. Thank you.
The Chair now recognizes Congresswoman Jackson Lee from
Texas.
Ms. Jackson Lee. Let me thank the Chairman and the Ranking
Member. And I do want to thank our colleagues, again, for their
generosity.
I remain open on this question. I think the witnesses have
laid out an able case for both perspectives. And I just want to
cite some language into the record.
A Boston University study suggested that NPE litigation has
had 5,842 defendants in the litigation in 2011, costing about
$29 billion. And the Boston University study represents that it
impacts diversion of resources; it delays new products; and
there is a loss of market share.
But I think the salient point by Chief Judge Rader out of
the Fifth Circuit makes the point that really provides
sufficient shock value, that we all understand that there are
entities that are created solely for the purpose of litigating
patents.
And he follows by saying, which is intrinsically not
necessarily bad, but that there is an entity or an industry.
I have a series of questions that, hopefully, will allow
for some give-and-take. And I think one just factual question
to Mr. Chandler is to find out what the status of the case was
that was with Judge Holderman, where you attempted to have a
rebuttal action. Where is that case at now?
Mr. Chandler. That is the Innovatio case that I was
describing to Congressman Lofgren.
The claims that we asserted against Innovatio for the way
they have targeted these 13,000 end-users, the breach of
contract claims related to their refusal to fulfill the
obligations that attached to those patents that were declared
to standards bodies are proceeding.
Judge Holderman granted a motion to dismiss the RICO claims
that we brought, and we are determining now how to proceed with
that.
I understand his decision and respect the reasoning that
went into it, because of the importance of access to justice
and the petition right. In that case, we felt that this
particular plaintiff was well aware that many, many, many of
the people they were sending letters to were already licensed.
This guy is an expert on his patents. He used to work on for
the company he bought them from.
And we felt he should have been held to account for the
tactics he was undertaking with innocent, unsophisticated end-
users that he knew many of whom were licensed.
Ms. Jackson Lee. And you decided not to appeal the
dismissal proceeding now in the District Court?
Mr. Chandler. Well, we are in a process of determining what
the right way is to proceed on that. I do understand the
judge's opinion. I respect him.
Ms. Jackson Lee. All right, let me try again to proceed
with some give-and-take.
Mr. Gerst and Mr. Johnson seem to be opposed to some form
of a SHIELD Act legislatively. And so let me try to juxtapose
Ms. Dhillon and Mr. Chandler.
Mr. Gerst, what is your answer, then? Would you see this as
a court solution or a patent office solution, because obviously
the SHIELD Act is a legislative initiative? What would be your
solution to a sizable amount of money being spent on this
litigation?
Mr. Gerst? And Mr. Johnson as well.
Mr. Gerst. Yes, Congresswoman, and first, I would say that
the $27 billion number that you cited in the Boston University
study, that has been widely refuted. I would recommend that you
read something by David Schwartz who has written an analysis of
it that really disposes of that number.
Unquestionably, as I said during the testimony, the high
litigation costs pose a problem. And I think a lot of, for
example, Mr. Boswell's recommendations about trying to get to
the bottom of that makes sense. I think both Mr. Johnson and I
posit that the best place to do that, the best place to tailor
those remedies, are at the courts. And it is being done now at
the District Court level. The Federal circuit has issued
guidelines. So, it takes little bit of time.
Ms. Jackson Lee. My time is short, and I think I got the
gist of it.
If Mr. Johnson could be quick, as you get ready to answer,
let me just pose this question to all of you who have a
different perspective: For those who are in the high-tech
industry, the question will be, can you not protect your
software, do nonobvious inventions that would lead to less
trolls being able to provide these lawsuits? Are there other
ways to protect what you have or to define what you have?
I am going to let Mr. Johnson answer, but with the
indulgence of the Chair, I hope I can get answers by Ms.
Dhillon, at least, to tell me why it does not work the way Mr.
Gerst wants it.
Mr. Johnson. Would you like an answer to the high-tech
question?
Ms. Jackson Lee. No, if you have a quick response to what
Mr. Gerst just said, because I want to hear from Ms. Dhillon
and Mr. Rao.
Mr. Johnson. Congress needs to provide the courts the
authority to act to take care of the problem, but the courts
are the best place to take care the problem, in my view, with
the assistance of the patent office by allowing the return of
the patent to the patent office, under the America Invents Act,
to challenge validity when that is appropriate.
Mr. Marino. The Congresswoman's time has expired and you
are going to have to be in that caucus, I think before the
President gets there, or else you do not get in.
Ms. Jackson Lee. Can I get my answers in writing? Ms.
Dhillon was supposed to answer quickly.
Mr. Marino. Yes, we just expect you to give them in writing
and send them to us.
Ms. Jackson Lee. Thank you very much.
Mr. Marino. The Chair now recognizes the Ranking Member of
the Subcommittee, Congressman Watt from North Carolina.
Mr. Watt. Thank you, Mr. Chairman. And I thank all of the
witnesses. It has been an exceptionally good hearing, very
balanced presentation. I think that is the kind of hearing we
need on this, to really try to get to the brunt of it.
Before I forget, I want to ask unanimous consent to submit
for the record written statements from the Electronic Frontier
Foundation, the National Retail Federation, Professor Arthur
Miller, and Professor Christal Sheppard.
Mr. Marino. Without objection, so ordered.
[The information referred to follows:]
ATTACHMENT
__________
__________
__________
__________
Mr. Watt. I want to thank my colleagues who have deferred,
to allow us to get through in time to go see the President.
And I want to ask a question, which I will really just ask
all of the witnesses to address in writing, if you do not mind,
because I think unless we get to some definition of what a
patent assertion entity is, we are never going--if we define it
too broadly, we are going to impact adversely a bunch of people
who we should not be impacting.
And a lot of what I have heard today, well, not a lot, but
some of what I heard today, might suggest that the troll or
patent assertion entity is anybody that we do not like. And we
obviously have to be very tailored if we are going to craft
legislation to deal with this. And I am not sure doing it by
exclusion, which is what Mr. Chaffetz's bill does, and Mr.
DeFazio's bill does, does it inversely. I am not sure that I am
comfortable with that.
So just give me a definition that you think would be
workable, for legislative purposes, of what a patent assertion
entity that would be covered by preventing them from proceeding
in a lawsuit would consist of.
Because if we cannot define what a troll is for this
purpose, I do not think we are ever going to be able to pass a
piece of legislation.
And I think we have to limit this to patent litigation,
because, otherwise, we are going to be over into a whole area
that has been a lightning rod for a number of years. We will be
back in tort reform and litigation reform. And we have done a
lot of that.
But I think this may be unique to the patent area of the
law. And if we started by having a good definition that we
could work from, I think we would all be serving ourselves very
well.
So with that, Mr. Chairman, I know my green light is still
on, but the President's red light is approaching quickly,
because if they are not going to let me in after 2 o'clock, I
am already in trouble.
So as important as everybody here is, sometimes the
President of the United States takes precedence over whatever
else we are doing. So I hope you all will forgive me.
That does not mean I think he is more important than you
all. It just means that I would like to hear what he has to
say, particularly since there is, ``charm offensive'' going on.
[Laughter.]
So I thank you all, and have a great day, and thank you for
being here, and thank you all for deferring to us.
Mr. Marino. Thank you, Congressman, for your help today.
What an appropriate word.
But the Chair now recognizes the Chairman of the full
Judiciary Committee, Chairman Goodlatte from Virginia.
Mr. Goodlatte. Thank you, Mr. Chairman. I know I was
charmed by Mr. Watt and not at all offended.
I apologize to the panel for not being here for all of your
testimony, and I very much appreciate your participation today
in this important issue, and I do some questions I would like
to address first, to Mr. Gerst, and then I will ask some of the
rest of you to comment as well.
When it comes to the patent system, especially patent
ownership, do you believe that it is appropriate for entities
to assert a patent far beyond the value of its contribution to
the art? Are there or should there be limits to asserting
patents in litigation?
For example, is it appropriate for an entity to send out
vague demand letters en masse without providing specificity as
to how an individual is infringing on a patent? Should there be
limitations toward bringing cases against customers or end-
users who are least able to understand the patent system or
meaningfully respond in litigation?
Mr. Gerst. Thank you, Congressman.
There are already limits on what litigants can do in
litigation, and these are Rule 11 sanctions. You can't make
assertions that are beyond the scope of the patent,
unreasonably beyond the scope of the patent.
And the problem is ex-ante. It is hard to tell exactly what
that limit is, so you do need to litigate the issue.
You are also talking about a----
Mr. Goodlatte. We could provide more specificity, could we
not?
Mr. Gerst. Again, Congressman, I think the courts are the
best place to tailor that and to allow the standard to evolve
over time, rather than having some standard one-size-fits-all
that is very difficult to change.
On the demand letters point, that is a slightly different
issue. I mean, what you really have there is asymmetry of
information, right? You have, on the one side, very
sophisticated patent dealers, and they are approaching
unsophisticated folks. And the answer may be, then, to try to
help out the symmetry of information by perhaps giving some
grant money to entities that will help coordinate and help
these various targets of this activity coordinate their
defenses.
I will tell you those sort of broad-based campaigns, what
they fear most is coordinated activity. So you don't need,
necessarily, to change the law. You just provide a way for that
coordination among defendants who are targets to take place.
Mr. Goodlatte. It seems an unusual thing for the government
to provide funds. We do not even know who we would be providing
it to, since the targets, when you are talking about end-users,
and companies like JCPenney, it could be anybody.
But, Mr. Chandler, do you have a view on this?
Mr. Chandler. Yes, I think that the issue of the broad
attacks by companies is really driven by procedural
opportunity.
I think Ranking Member Watt's question about the definition
of a patent assertion entity sort of begged the question of,
why is this activity happening? And it is happening because of
procedural weaknesses that allow it to go on with impunity.
And I think the courts have been reluctant to impose the
sanctions that Mr. Johnson and Mr. Gerst have pointed out they
have the ability to do today.
And I think shifting some of the balance on that, so that
when you have these particular procedural opportunities that
are being exploited and that have driven the creation of a new
industry that none of us faced a decade ago, when you address
those particular procedural defects, there will be a self-
correction.
I think Mr. Boswell described that as a paradigm shift
where the ability to, with impunity, extract unearned rents off
of patents that do not apply----
Mr. Goodlatte. Got it. Let me interrupt you, because I want
to get in a couple more questions.
Mr. Chandler. Sorry.
Mr. Goodlatte. Ms. Dhillon, as a retailer, JCPenney is not
sued because of the products it sells, but for the technology
that it uses. Patent litigation, per se, is obviously not a new
phenomenon, but the type of abusive litigation that we are
seeing today is new.
Why has there been such an exponential growth in these
types of cases? Is it a result of certain plaintiff-friendly
judicial districts, or are there other factors in play as well?
Ms. Dhillon. I think there are number of factors in play. I
think that there are certain plaintiff-friendly jurisdictions
that have fueled it. I think that there are, I mention in my
testimony, some older, more vague patents that have been
exploited. And I think that nothing translates into success
like success.
So I think as NPEs started to gain some traction and others
saw this as a money-making activity. They essentially have
jumped onto the bandwagon, to the point where we find ourselves
in the situation that we are in.
I think that if the courts were in a position and had the
ability to remedy these abuses, they would have done so. And
the fact that we are all sitting here today, explaining the
situation that we find ourselves in, suggests that the courts
do not have the tools that they need to contain it.
Mr. Goodlatte. Mr. Chandler, you recently brought a case
for you asserted that a PAE was violating RICO laws. I do not
know if you talk about that already here today, but could you
speak more about your theory?
Mr. Chandler. I described it a little bit earlier, but the
RICO statute was held by Judge Holderman in that case to not be
usable because he found that some of the 13,000 people might
not have already had licenses. And, therefore, the petitioning
right of the patent plaintiffs should be protected. It was not
enough of a sham to allow the RICO statute to apply.
But we are going to continue to try to find means to push
back on behalf of our customers, who are being wrongfully
victimized in that case.
Mr. Goodlatte. Does anybody else want to comment on that?
Nope.
Thank you, Mr. Chairman.
Mr. Marino. Thank you.
The Chair now recognizes Congressman Rothfus from
Pennsylvania.
Mr. Rothfus. Thank you, Mr. Chairman.
And thank you, panel, for a great discussion this
afternoon.
I am still trying to quantify the extent of the patent
troll issue. We have referenced or heard reference to the
Boston University study.
I think, Mr. Gerst, you mentioned a Schwartz study. Are any
panel members aware of any data on the number of patent troll
claims that have been filed over, say, the past 10 or 15 years,
actual actions?
We heard Congressman Chaffetz cite some reference.
Mr. Johnson?
Mr. Johnson. Cited in my written testimony is the Price
Waterhouse litigation study, which specifically focuses on the
number and success rates of NPE suits that have been brought
over the last, I believe, 11 years, citing also the success
rates by industry over several time periods.
Mr. Rothfus. What are the success rates?
Mr. Johnson. The success rates, I believe overall for the
11-year period, is about 24 percent, perhaps 23 percent, if my
memory serves, compared to 31 to 33 percent.
Mr. Rothfus. Is that for verdicts or is that for
settlements?
Mr. Johnson. These are the percentage of these cases that
are ultimately successful.
Mr. Rothfus. That could either mean reaching a settlement
or verdict?
Mr. Johnson. I believe that settlements are not included,
because that does not result in a win or a loss, so these are
of the decided cases, the cases that go through to final
decision.
Mr. Rothfus. Do we have any data on the number of claims
that may have been subject to Rule 11 sanctions?
Mr. Johnson. The number of cases that have been subject to
Rule 11 sanctions, in my experience, is extraordinarily low.
Mostly, Rule 11 is thought of as a remedy against the attorneys
rather than against the party.
More relevant would be the percentage of cases which were
deemed exceptional, and where fees were awarded as a result of
that. That is also very low, somewhere, I think, under about 1
percent.
And of course, those fees are usually only awarded after
the case has gone completely through trial. So as to settled
cases, you would not expect someone with a frivolous case to
push it through to trial, because there would be no upside in
doing that.
And so, therefore, the truly frivolous cases or the cases
that are brought out without regard to any merit at all are
brought for the reasons already discussed by many of the
witnesses here, the plan is to settle them out quickly. The
last thing they want to do is go on and go through trial.
Mr. Rothfus. Now, the Price Waterhouse study, would that
just include claims that were actually filed in court? So, for
example, they would not consider any number of demand letters
that may have been set out to various companies?
Mr. Johnson. No, the Price Waterhouse study does not
address demand letters. That becomes very problematic because
there, of course, is a very wide activity of patent licensing,
very legitimate patent licensing, as some of the witnesses have
mentioned.
And so a demand letter could be, ``I have a patent I think
you might be interested in taking a license under.'' And that
could be seen as a threat, or it could be seen as a legitimate
transactional offer.
A company like ours enters 300 to 500 licenses a year, and
are happy to do so, because it gives us access to many
technologies that can be brought together and incorporated in a
product in order to provide the truly best solution possible.
Mr. Rothfus. I was wondering if Mr. Gerst or Mr. Johnson
would have any concerns with the statistics cited by
Congressman Chaffetz, about 60 trolls having brought 62 percent
of the patent litigation.
Is that something we should be concerned about?
Mr. Gerst. You said 60 trolls have brought?
Mr. Rothfus. Sixty trolls have brought 62 percent of the
patent litigation, is what Congressman Chaffetz stated earlier.
Mr. Gerst. I do not know about the 60 trolls part. I have
seen data showing that 62 percent of patent cases are brought
by non-practicing entities.
And is that a concern? The bigger concern, from my
perspective, I mean, there is a lot that data does not show. We
do not know what the optimum level of that activity is. And the
other issue that I have a concern with is that such a high
percentage of them are against companies that make $10 million
or less. That does suggest that is more of the nuisance level
activity, than otherwise.
Mr. Rothfus. Thank you. I yield back.
Mr. Marino. Thank you. The Chair now recognizes Congressman
DeSantis from Florida.
Mr. DeSantis. Thank you, Mr. Chairman. Thank you to the
witnesses.
You know, I have looked at our litigation system generally,
and I think there is a big problem of cases being brought that
really are not patently frivolous, but they are not going to
win at trial, but it is usually just too expensive to try them.
So there is just incentive to cut settlements.
In my view is, if you have been wronged, you should be able
to be made whole. But if you really do not have a case, I think
that this is a huge inefficiency in our system. I think people
contort the system for economic gain.
But I must say, even with that view coming in, I mean, I am
a little surprised at how abusive some of this patent
litigation seems. Some of it seems pretty grotesque.
Ms. Dhillon, you got to JCPenney 4 years ago. You guys
didn't have any patent cases at that time?
Ms. Dhillon. No, we did not.
Mr. DeSantis. And obviously, any company of your size is
going to deal with litigation, but has the arrival of patent
litigation been a huge part of what you are now defending?
Ms. Dhillon. Yes. It represents now about half of my
overall legal budget.
Mr. DeSantis. Did you change your business practices at
JCPenney from the time that you arrived when there were no
patent cases to now, when you have patent cases, such that
maybe people would all of a sudden think that you are
infringing patents?
Ms. Dhillon. We have not changed our business practices. I
think it is being driven by other factors than how we go about
conducting our business.
I will say, however, that in response to it, we have
changed. In response to the wave of patent troll cases, we have
changed our business practices.
So for example, in the past, where we might have considered
licensing technology from a small inventor, the kind of typical
few guys in a garage who are putting together a very exciting
idea about technology, but that do not necessarily have the
wherewithal to defend and indemnify us in the event that a
troll came after the technology, we are taking a second look at
that. And there are times when we do not license that
technology, because we are concerned that that young inventor,
that startup may not have the wherewithal to defend and
indemnify us in a patent troll case. And I think that that is a
very unfortunate thing for innovation in general.
Mr. DeSantis. And to defend one of these cases, what is a
ballpark figure price tag?
Ms. Dhillon. To take a case through trial can be upwards of
$3 million or more. And that is hard dollar cost. That does not
also count the amount of time and internal resources that are
diverted to work on that case. And that is large, because those
people, then, are not spending time driving our business.
Mr. DeSantis. And that actually was going to be my next
question. So if you are having to defend these cases, it is not
just your legal department and outside counsel who deal with
it. You actually have to have other folks who are involved with
the company, now all the sudden their time is diverted from
trying to be productive and innovative to now having to
participate in a lawsuit.
Ms. Dhillon. That is exactly right.
Mr. DeSantis. Well, thank you, Mr. Chairman. I yield back
the balance of my time.
Mr. Marino. Thank you.
The Chair now recognizes Congressman Collins from Georgia.
Mr. Collins. Thank you, Mr. Chairman.
I think what is interesting here in just listening, and I
apologize for missing some. I heard a lot by watching remotely.
But the concerns that I have heard so far is stifling
innovation and looking at the costs that are associated with
some of these issues of ``are we abusing a patent, taking a
patent.'' And I want to address several things as we go along
here, because as I looked through all of your testimony, and
was reading, some of the things that kept coming up were,
``let's go back to court.''
And, Mr. Gerst and Mr. Johnson, especially, ``let's let the
courts handle this.'' ``Let's go to Rule 11.'' ``Let's look at
issues of discovery.''
Just yesterday in this room, we were having another hearing
on another issue that was not involved in this, and one of the
issues was changing discovery practices, changing this issue,
and using Rule 11. And my question was, why do not we use Rule
11 to fix this?
A retired-now judge basically said, as judges, we do not
like to do this. It takes our time, and we do not have--it
would consume and also being the standard of also punishing
litigants is too high.
Looking through all of your testimony, you come up to some
type at least of a discussion on procedure Rule 11 whether it
be discovery or others.
Sort of real quickly, and sort of not feeding off of each
other, but if this is what we are hearing from judiciary, and
this is court and IP, so there is a court aspect here as well.
If we are hearing this problem, we can be saying ``this is a
solution,'' but in the end, we are putting judges in a position
where they are going to throw their hands up and say we have a
problem with this anyway.
So I would like to hear somebody talk about that. Feel
free. Have at it.
Mr. Boswell. Well, I believe, Congressman, I believe that
while it is important that judges maintain discretion, I think
there are some hard and fast rules that it would be appropriate
for Congress to implement, which takes the ball out of judges'
hands and gives litigants certainty going in, so that they can
put that into their decisionmaking as to whether they want to
settle a case, whether they want to sue at all to start with,
whether they want to proceed through trial. Because as it
stands right now, particularly in the case of patent trolls,
they really have nothing to lose if they lose.
And we would like to see that changed in some way so that
it is more balanced, so there is not complete disincentive to
take a case to trial.
Mr. Collins. Mr. Johnson, do you disagree?
Mr. Johnson. No, I think we are in agreement. Most places
in the world, the loser pays. Here it is extraordinarily rare.
There may be a middle ground that the courts could be
instructed to use.
I think you are right, though. My experience in dealing
with the judiciary is they are reluctant to want to get in to
deciding whether a defense that lost was meritorious or not.
Mr. Collins. Mr. Gerst?
Mr. Gerst. Congressman, if I could just say one additional
point.
Leaving aside the whole NPE issue, the risk that you do run
with these rules is it makes it much harder to assert patents
for anybody. And the issue I pointed to in my testimony about
companies that everybody here loves--operating companies, small
and midsize--they do not have the ability to assert their
patents to technology. And if you include in these rules things
like loser pays or shifting discovery costs, it is going to
make it much harder for those entities to assert their patents
as well.
Mr. Collins. Okay, let me just change it a little bit. It
has been talked around a little bit, but I don't think it's
actually been discussed a good bit.
But one of the issues coming in here is the quality of
patents. And the issue of quality patents is saying it can be
looked at in a better way.
In your opinion, is a solution to curb some of the abusive
litigation, could it be drawn back to a quality of patent
issue? Is that something that we have looked at and has there
been enough time to actually see that?
Mr. Chandler, why don't you start?
Mr. Chandler. Certainly, over time, the reforms enacted in
the America Invents Act will result in higher quality patents.
Mr. Collins. Let me stop you right there. Have we given it
enough time?
Mr. Chandler. No. There are steps that need to be taken.
There are 20 years' worth of backlog of patents that need to be
properly subject to review.
And one of the things we could do is have plaintiffs
encouraged to stay litigation if the patent office found there
was good cause to reexamine their patents. Right now, they are
able to push forward with their cases, impose the costs, and
extract settlements, even if the patent office has
preliminarily found the patents invalid.
Mr. Collins. Legal extortion is what you are sort of
getting at there.
I will say it if you do not.
In a sense. And I am not saying they are all invalid.
And I think the problem, and I think Mr. Watt actually
explained it, is actually getting to those that have valid
claims, who are they and who are they not, and then dealing
with it in a format in which we can move forward and not tie up
companies' hands and not tie up these issues, and deal with the
ones who actually have a legitimate concern and complaint.
So there is a lot more to discuss here. I appreciate you
being here.
Mr. Chairman, I yield back.
Mr. Marino. Thank you.
I am going to take advantage of my couple minutes to ask
some questions. I am in the habit of just waiting and going
last, because I have to be here or the Chairman has to be here.
But I think my colleague, it looks like he is going to sit
there and listen to me. Thank you.
Mr. Collins. I will be right here with you.
Mr. Marino. We touched briefly on patent privateers, but I
want to go into it in a little more detail. And we know what
that patent privateers are companies that outsource their
patent lawsuits. They are PAEs.
What is the scope of this? And should such behavior be
subject to FTC and even, I think more importantly, because I
was a former United States attorney, DOJ antitrust scrutiny for
anticompetitive behavior?
Mr. Rao, would you please respond to that?
Mr. Rao. Thank you for the question.
So I think the question about whether or not there is a
anticompetitive issue with outsourcing your patent enforcement,
it is a complicated one.
I think the first issue is patents by themselves is a
monopoly, and that is anticompetitive by its nature. But it is
a constitutionally granted monopoly. So there is always an
anticompetitive aspect of patents.
And in the case where universities or small inventors want
to have licensing programs and have technology transfer
licensing programs, take their patents and license them and
look to get rewards form that, that tends to seem of
procompetitive way of getting their technology out there.
I think that when you stop and look at the bigger
aggregators who are just out there buying patents by the
thousands, and then basically walking into your office and
saying we have 100,000 patents, and you probably infringe a
couple of them, so pay us, I think there is an aspect of that
that we need to look at.
Mr. Marino. Thank you.
Let us move to discovery, and anyone of you can respond to
this.
What do we do about jurisdictions? And judges control their
own courtroom. They can actually hand out additional rules that
one has to follow, so if you are in another jurisdiction, you
better do some studying up on what the judge requires.
But what we do about the situation that happens a great
deal of time where a judge allows unlimited discovery?
Does Congress address that? Or do we seriously say to the
judicial system, you have to make some changes here.
Anyone or all of you?
Mr. Johnson?
Mr. Johnson. When the Federal Circuit Court of Appeals was
established in 1982, it is my understanding that the discussion
was had as to whether or not it should have the authority to
mandate rules of practice in patent cases, and the conclusion
was that it should not be able to disturb the rules of the
regular circuits on procedural matters.
So while Judge Rader has been very active and the patent
pilot courts program will be effective, Congress has not given
the Federal Circuit the authority to promulgate local rules
that would be applicable across all districts.
So at this point, if you are in a place where you have a
particular local set of court rules, you are stuck with them.
So the way litigants usually handle that is to try to get the
case in a place where they like the rules.
Mr. Marino. My point exactly.
Anyone else want to address that matter, because I do have
a couple other questions?
Okay, so the next one, Ms. Dhillon, and of course anyone
else, how often do we see a court dismissing defendants in
these types of cases, if there is a litany of them?
So, Ms. Dhillon, could you respond to that, and anyone
else?
Ms. Dhillon. That certainly does happen, and we have been
successful in being dismissed from cases. But I think it goes
to the point you made previously, which is, unfortunately, that
usually happens after we have incurred a great deal of cost in
the discovery process.
Mr. Marino. Right. Okay.
Anyone else? Mr. Boswell?
Mr. Boswell. As I highlighted earlier in my testimony, the
issue is not necessarily can you get out, but if you cannot get
out until the end, it is really somewhat of a moot point. You
have already lost.
If the judge will not hear dispositive motions until all
the discovery is done, in some ways, it does not matter,
because you have already lost the case.
Mr. Marino. I am going to ask you to look into a crystal
ball here.
We get this legislation passed. It is on the books. It is
signed, sealed, and delivered. What do you foresee out of this
legislation happening?
Do you understand my question?
Mr. Gerst. Which legislation?
Mr. Marino. Legislation where we improve what we have
already done in the reform act. I mean, this is a never-ending
process. At what point do we stop and draw the line and at what
point to we say enough is enough?
So, please, anyone want to respond to that?
Mr. Rao. I think if we pass something like the SHIELD Act
or a fee-shifting bill, you would see a number of these patent
assertion entities drop fairly dramatically.
I mean, it has been a new phenomenon. I feel like people
have found a litigation business model that works for them
right now. If we correct that behavior, they will leave this
field and find some other nonpatent-related field to employ
themselves.
But I think if you change the incentives--it is an economic
problem--if you change the incentives, I think you will see the
number of litigations go down.
Mr. Marino. Anyone else?
Well, ladies and gentlemen, I want to thank you. This
concludes today's hearing, and I want to thank all of the
witnesses for being here.
[Whereupon, at 2:26 p.m., the Subcommittee was adjourned.]
A P P E N D I X
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Material Submitted for the Hearing Record
Material submitted by the Honorable Jason Chaffetz, a Representative in
Congress from the State of Utah, and Member, Subcommittee on Courts,
Intellectual Property, and the Internet
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__________
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__________
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Response to Questions for the Record from Mark Chandler,
Senior Vice President and General Counsel, Cisco Systems, Inc.
Response to Questions for the Record from Janet L. Dhillon, Executive
Vice President, General Counsel and Corporate Secretary, JCPenney
Company, Inc.
Response to Questions for the Record from John Boswell,
Senior Vice President and General Counsel, SAS Institute, Inc.
Response to Questions for the Record from C. Graham Gerst,
Partner, Global IP Law Group, LLC
Response to Questions for the Record from Philip S. Johnson,
Chief Intellectual Property Counsel, Johnson & Johnson
Response to Questions for the Record from Dana Rao,
Vice President of Intellectual Property and Litigation, Adobe Systems