[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
PATENT REFORM IMPLEMENTATION AND NEW CHALLENGES FOR SMALL BUSINESSES
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HEARING
before the
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
FIRST SESSION
__________
HEARING HELD
MAY 15, 2013
__________
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Small Business Committee Document Number 113-017
Available via the GPO Website: www.fdsys.gov
_____
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HOUSE COMMITTEE ON SMALL BUSINESS
SAM GRAVES, Missouri, Chairman
STEVE CHABOT, Ohio
STEVE KING, Iowa
MIKE COFFMAN, Colorado
BLAINE LUETKEMER, Missouri
MICK MULVANEY, South Carolina
SCOTT TIPTON, Colorado
JAIME HERRERA BEUTLER, Washington
RICHARD HANNA, New York
TIM HUELSKAMP, Kansas
DAVID SCHWEIKERT, Arizona
KERRY BENTIVOLIO, Michigan
CHRIS COLLINS, New York
TOM RICE, South Carolina
NYDIA VELAZQUEZ, New York, Ranking Member
KURT SCHRADER, Oregon
YVETTE CLARKE, New York
JUDY CHU, California
JANICE HAHN, California
DONALD PAYNE, JR., New Jersey
GRACE MENG, New York
BRAD SCHNEIDER, Illinois
RON BARBER, Arizona
ANN McLANE KUSTER, New Hampshire
PATRICK MURPHY, Florida
Lori Salley, Staff Director
Paul Sass, Deputy Staff Director
Barry Pineles, Chief Counsel
Michael Day, Minority Staff Director
C O N T E N T S
OPENING STATEMENTS
Page
Hon. Sam Graves.................................................. 1
Hon. Nydia Velazquez............................................. 10
WITNESSES
Dennis D. Crouch, Associate Professor of Law, University of
Missouri Law School, Columbia, MO.............................. 2
Jeff Grainger, Managing Partner, The Foundry, LLC, Menlo Park,
CA, testifying on behalf of the Medical Device Manufacturers
Association.................................................... 4
John R. Thomas, Professor of Law, Georgetown University,
Washington, DC................................................. 6
Mark Grady, Founder and President, INdigital Telecom, Fort Wayne,
IN............................................................. 8
APPENDIX
Prepared Statements:
Dennis D. Crouch, Associate Professor of Law, University of
Missour Law School, Columbia, MO........................... 22
Jeff Grainger, Managing Partner, The Foundry, LLC, Menlo
Park, CA, testifying on behalf of the Medical Device
Manufacturers Association.................................. 31
John R. Thomas, Professor of Law, Georgetown University,
Washington, DC............................................. 36
Mark Grady, Founder and President, INdigital Telecom, Fort
Wayne, IN.................................................. 39
Questions for the Record:
Questions and Responses Submitted for the Record by Rep.
Bentivolio to Mr. Grainger................................. 44
Questions and Responses Submitted for the Record by Rep.
Bentivolio to Mr. Thomas................................... 49
Questions and Responses Submitted for the Record by Rep.
Bentivolio to Mr. Crouch................................... 54
Additional Material for the Record:
National Retail Federation - NRF............................. 62
PATENT REFORM IMPLEMENTATION AND NEW CHALLENGES FOR SMALL BUSINESSES
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WEDNESDAY, MAY 15, 2013
House of Representatives,
Committee on Small Business,
Washington, DC.
The Committee met, pursuant to call, at 1:05 p.m., in Room
2360, Rayburn House Office Building, Hon. Sam Graves [Chairman
of the Committee] presiding.
Present: Representatives Graves, Luetkemeyer, Mulvaney,
Hanna, Schweikert, Bentivolio, Rice, Velazquez, Chu, and
Schneider.
Chairman Graves. Good afternoon. We will go ahead and call
the hearing to order. The Ranking Member is going to be a
little bit late but she said for us to go ahead and get started
so we didn't delay you all. But I want to thank all of our
witnesses for taking time away from their jobs and making the
trip to Washington. Some of you have come a long way, and we
obviously look forward to your testimony.
Since the founding of this great Nation, intellectual
property rights have been protected as a way to inspire
innovation and perpetuate economic growth. Our Founding Fathers
enumerated this within our Constitution. And last Congress, we
passed the America Invents Act, which represents the most
significant reform to the American patent system in over 50
years.
The AIA included historic changes such as moving to a
first-to-file system, as well as revisions in patent fees and a
post-grant review process. These reforms help strengthen our
patent system to ensure that the United States remains the
world leader in innovation.
In the patent arena, small firms play a critical role in
developing innovation, producing 16 more patents per employee
than big businesses do. Obtaining a patent is equally critical
for small businesses in their ability to attract startup
capital and grow their businesses. According to the United
States Patent and Trademark Office, it takes more than 31
months to process a patent application. The AIA was passed to
help reduce this backlog while also improving the overall
quality and strength of the patent system. For small firms,
this is vitally important and it helps expedite the development
of businesses and, in turn, aids in creating new jobs.
However, as expected with major policy initiatives, there
will be challenges and some obstacles. As Chairman, I have
frequently heard from inventors and small businesses about the
changes to the patent system and opportunities to address the
new challenges.
Despite the substantial progress made under the AIA, many
firms have expressed concerns about patent assertion entities,
PAEs, or patent trolls, as they are often called. Patent trolls
attempt to bring frivolous patent claims against all types of
businesses, which hinder innovation and economic growth. Recent
studies found that the direct cost of these litigation cases
was approximately $29 billion in 2011, with 55 percent of those
costs attributed to firms with less than $10 million in
revenue. For small businesses, the costs of litigation are
particularly harmful, and it turns their limited monetary
resources away from building that next great product or
service, whatever that may be.
While it is important that those with valid infringement
claims protect their intellectual property, one must carefully
examine if merely receiving a demand letter will cause a small
company to shut its doors rather than challenged the validity
of the claim to ensure its merits.
With that, again, I appreciate all of you being here, and
we will start right out with our first witness. Our first
witness is going to be Dennis Crouch.
Mr. Crouch is an Associate Professor at the University of
Missouri School of Law, where he specializes in patent law. In
addition to his work educating new legal minds, Mr. Crouch also
authors Patently-O, which Business Week called the most widely
read patent blog. As a leading expert in the patent community,
we appreciate you being here today, and we look forward to
hearing your testimony.
STATEMENTS OF DENNIS D. CROUCH, ASSOCIATE PROFESSOR OF LAW,
UNIVERSITY OF MISSOURI SCHOOL OF LAW; JEFF GRAINGER, MANAGING
PARTNER, THE FOUNDRY, LLC, TESTIFYING ON BEHALF OF THE MEDICAL
DEVICE MANUFACTURERS ASSOCIATION; JOHN R. THOMAS, PROFESSOR OF
LAW, GEORGETOWN UNIVERSITY; AND MARK GRADY, FOUNDER AND
PRESIDENT, INDIGITAL
STATEMENT OF DENNIS D. CROUCH
Mr. Crouch. Thank you, Mr. Chairman, for having me, ranking
member, Members of Congress. Usually we think of patents as a
form of intellectual property that is a form of property
rights. But small businesses often see the patent system more
as a set of regulations. And in fact, really, these days it
might be called a morass of regulations. That is, regulations
in terms of obtaining patent protection, enforcing those
patents, a morass of difficulty in terms of figuring out how to
make a product without infringing patents, and as the chairman
mentioned, the difficulty in terms of litigating and
challenging patents and fending off litigation from patent
trolls.
Now, regulations require expertise, they require contacts,
they require money. And all of those are elements that are in
short supply among small businesses. And so it is no surprise
that small businesses are complaining about the patent system.
Now in my view, the greatest problem and the keys to any kind
of solution, whether it be legislative, through the courts, or
through the Patent Office, is in thinking about how to reduce
this regulatory burden. And in particular, I think the greatest
problem and the best way to address this is by thinking about
clarity and transparency in the patent system.
We have a problem with the patent system today in that
innovators, patent attorneys, and patent applicants have a
strong incentive to hide the ball when they are filing for
patent protection. That is, in essence, to disguise or not
fully disclose or point out the particular innovation that they
are trying to protect and draft patent claims that are intended
to delineate the scope of their property rights, but in fact,
do so in a way that is ambiguous that leads to some confusion
down the line.
And so my proposal and my idea for the best way to address
the patent system is to figure out ways and focus especially at
the Patent Office on clarity in patent rights, clarity in the
scope of rights, clarity in defining who owns patent rights,
and clarity in defining exactly what innovation has been
developed. With that clarity, I certainly believe we can move
toward a system where strong patent rights will be available,
it will be easier to determine bad patents, invalid patents,
and invalidate those. And although no with one enjoys paying
licensing fees, it is a much more straightforward path when you
understand the scope of a patent and it is easy to tell that
your particular project does, in fact, infringe that patent.
Now I want to change gears just one minute and think about,
in particular, small businesses. Now in preparation for this
Committee hearing, I did some amount of research in terms of
patenting amongst small business entities and I found one
interesting, although perhaps not entirely surprising, finding
that the percentage of patents being obtained by small
businesses in this country has dropped significantly over the
past 15 years or so from about 30 percent; that is, 30 percent
of issued patents in 2000 were issued to companies or
individuals designated as small entities. Today, that number is
down to about 20 percent. So it dropped from 30 percent to 20
percent.
Now in fact, in looking at these numbers more particularly,
I found that the decrease was not actually a decrease in the
number of patents being filed by small entities, but just that
large entities greatly increased their filings. And so, in a
sense, it is not like they are falling behind by staying
steady.
My view, although I did not develop particular data on
this, my hunch is that this decrease in patenting is more a
result of the regulatory burden, the difficulty of obtaining
and enforcing patent rights, than it is on any lack of
innovation among small companies. And I am sure we will get
more testimony on that front.
Now there are two particular points of data that also come
out from this that have to do, in a sense, with American
ingenuity. One is that the vast majority of small entity filers
in the United States are United States-based small companies,
whereas the majority of large entities that are filing for
patent protection in the U.S. are actually foreign entities.
And what that means is that any focus, any help that is given
to small entities has a particular effect that is primarily
addressed toward U.S. companies.
Although my students would understand I could go on for a
long time, but I will stop here and look for any questions as
we move on.
Chairman Graves. Thank you, Mr. Crouch.
Our next witness is Jeff Grainger. Mr. Grainger is the
managing partner for The Foundry, which is a medical device
incubator located in Menlo Park, California. In this capacity,
Mr. Grainger helps transition numerous innovative ideas into
successful medical device startups. In addition, Mr. Grainger
is a patent attorney and inventor, holding over 30 patents
himself. He is testifying on behalf of the Medical Device
Manufacturing Association. I thank you for coming all the way
from California.
STATEMENT OF JEFF GRAINGER
Mr. Grainger. Thank you. I want to thank Chairman Graves
and the other Committee members for the opportunity to testify
today. I am a patent attorney and entrepreneur and have worked
continuously in startup companies for the past 20 years, almost
entirely in the medical device field. I currently work for The
Foundry, which is a medical device incubator in Menlo Park,
California. What we do is develop new medical technologies. We
prototype them, we test them. We file for patent protection.
And then we start new companies to pursue those technologies
with venture capital funding. We have started 15 companies in
the past 14 or 15 years, and our companies have created not
only hundreds of jobs and built value for their investors but
also improved the lives of thousands of patients who have heart
valve disease, who have hypertension, or suffered from stroke.
While the dialogue concerning patent reform has been at
times dominated by forces that wish to weaken the patent
system, I am thankful to be able to speak today to help you
hear another view, which is that of entrepreneurial companies
that bring new medical treatments to Americans. We depend upon
a strong patent system that provides fast and efficient
examination, discourages frivolous patent challenges, and
imposes serious sanctions on infringers.
The United States leads the world in medical device
innovation, and a major source of this innovation is small
entrepreneurial companies. These companies must raise
substantial capital in order to develop their products, perform
clinical studies, and obtain the regulatory approval, all
before a single device is sold. Investments of more than $50
million, timelines of more than 10 years from invention to
commercialization, are common.
Understandably, investors in medical devices are intensely
concerned with the ability to obtain strong patent protection.
They know that after spending the money to blaze the trail to
bring a new product to market, there will be some period of
protection before the product can be knocked off by
competitors. Any change to the patent system that impedes our
ability to get patents or that weakens the protections that are
conferred by patents would be a serious detriment to our
ability to raise the money we need to start medical device
companies.
The America Invents Act implemented some significant
changes to the U.S. patent system. While it is too early to
tell whether the AIA has been successful as a whole, several
aspects of the Act clearly improve the patent system for
innovators, who depend upon a predictable, efficient, and
competent patent process. The change to first-inventor-to-file
creates more clarity and certainty by removing nonpublic
information from the determination of who is entitled to a
patent. Post-Grant and Inter-Parties Review improve upon
reexamination by providing a process under specialized judges
for overturning invalid patents, while including estoppel
provisions, which ensure that challengers will think twice
before launching an attack.
Of all these changes, however, the Track One prioritized
examination has probably had the biggest impact on our ability
to get new companies funded. Under Track One, we can get a
patent application allowed within 1 year. We are now able to
approach venture capital firms with issued patents in hand,
rather than a collection of filed applications. As a result, we
are more likely to get a our companies funded and we spend less
time and less money getting through negotiations and the due
diligence process.
I would like to make a comment about something that did not
make it into the law. While the AIA gave the Patent Office the
authority to set user fees and generate the revenues it needs,
the law fell short in failing to prohibit diversion of these
revenues. So long as revenue diversion remains a possibility,
the PTO's budget will be uncertain and the office will be
unable to do the hiring, the training, and the infrastructure
improvements that must be done to improve the quality and the
efficiency of the patent process.
If there is one issue in which all stakeholders in the
patent system should be aligned, it is the funding of the
Patent Office. A fully equipped Patent Office cannot only be
faster and more efficient, but it can focus on improving the
quality and rigor of patent examination so that those patents
which are granted have undergone rigorous scrutiny and are
appropriately limited in scope. This will ensure that patent
rights are not unfairly wielded to the detriment of innovation,
and I would urge the Committee to make this prohibition on fee
diversion a priority.
In sum, the extraordinary innovation in medical device
technology is largely the work of small venture-backed
companies that depend upon strong patent protection to raise
the funds needed to bring medical devices to commercialization.
Streamlining and accelerating that examination process,
improving patent quality, discouraging frivolous patent
challenges, and imposing serious consequences on infringers are
essential components of a system that protects and encourages
this innovation.
The AIA takes significant steps toward achieving these
goals, and it should be given a chance to work. However, we
must fully fund the Patent Office and end diversion of PTO fees
so it can build an organization that is faster, more efficient,
and highly focused on issuing quality patents.
Finally, in addressing the problem of patent assertion
entities, we must avoid diluting the important rights conferred
by a patient upon which innovators rely. Rather, we should
focus on improving the quality and rigor of the patent process.
It has been an honor to speak to you today. I thank you
again for inviting me to testify.
Chairman Graves. Thank you, Mr. Grainger.
Our next witness is John Thomas who is a professor at
Georgetown University Law School, where he teaches a course on
patent law and has published numerous articles and books on the
subject of intellectual property law. He has served as a
visiting scholar at the Congressional Research Service for the
past decade and was named the inaugural Thomas Alvin Edison
Visiting Scholar at the U.S. Patent and Trademark Office in
2011. He formally served as a visiting fellow at the Max Planck
Institute for Foreign and Comparative Patent, Copyright, and
Unfair Competition Law in Munich, Germany, and is a research
scholar at the Institute of Intellectual Property in Tokyo,
Japan.
Welcome.
STATEMENT OF JOHN R. THOMAS
Mr. Thomas. Thank you, Mr. Chairman and distinguished
members of the Committee. It is great to have the opportunity
today to testify before you about patent reform implementation
and new challenges for small businesses.
First, I want to thank the Committee and give my
congratulations to the Committee for enacting the AIA. I think
it has been a very positive step forward for the patent system.
I am grateful. When I teach, I no longer have to say here is
what the rest of the world does with respect to best patent
practices and here is what we do in the United States, on the
other hand. So those days are gone. And I think the Committee
did a wonderful job of protecting the interest of small
businesses by maintaining the small business discount, the
small entity discount at the PTO, and introducing a micro
entity discount that is even steeper for the aid of small
businesses.
For example, the fee to file a patent application for a
micro entity is only $70. So this committee has represented
small firms very well.
Consideration of patent reform implementation in large
measure involves a consideration of what is going on at the
USPTO. And as someone who has been critical of the agency at
times in the past, I do want to report a very highly favorable
impression about what the agency has done. I think they have
met the deadlines, they have implemented the law in a timely
and transparent manner, and they deserve a lot of
congratulations for doing that.
I further observe that the agency has reduced its first
office action pendency to 18.7 months and has cut its inventory
of filed but unexamined applications to under 600,000 cases,
which, again, are pretty impressive accomplishments given its
implementation of the AIA as well. The USPTO also has a large
number of programs to help small businesses. There is an Office
of Innovation and Development--it is right as you go in the
agency in the Madison Building--that helps small businesses.
There is an Ombudsman, an Inventors' Assistance Center. And the
agency is very active in the conferences to help independent
inventors.
Obviously, a lot of these programs are in jeopardy, or at
least being scaled back, because of sequestration. And I would
like to associate myself with the comments of Mr. Grainger
about the importance of the agency getting the funding and how
important that was in the enactment of the AIA. Obviously, the
Office of Management and Budget has reportedly reasoned that
the fees that the USPTO collects are, in fact, subject to
sequestration, which for many of us was a surprising ruling. We
will see what impact that has on the ability of the USPTO to
maintain an environment for innovation that takes us as a world
leader.
The cost of certain USPTO post-grant proceedings is another
area of concern for small businesses. The new Inter Parties
Review proceeding costs at least $8,000. The minimum fee for
Post-Grant Review is $12,000. As you know, these are mechanisms
for companies to challenge patents at the USPTO in an
administrative opposition system that gets them out of court
and also enlists the expertise of the agency. Obviously, these
are high-cost proceedings. So one issue is, is it pricing small
businesses out.
Patent trolling remains another big issue for businesses of
all sizes in the United States. In the 113th Congress, there
are two bills right now that seem to be addressed toward patent
trolling. One is the SHIELD Act that would create a fee
shifting system where the loser would pay the attorney fees of
the victor in patent litigation. Fee shifting seems to be a
fairly good mechanism. It is used abroad, where trolling seems
to be less of a problem. But it also might discourage small
businesses from bringing meritorious cases, because patent
litigation is notoriously uncertain. So if they have to pay the
loser's fees, they may not be as willing to assert their
rights.
Another bill, the Patent Quality Improvement Act, would
essentially expand the transitional program for covered
business method patents, increasing the array of patents to
which it applies and getting rid of its sunset provision.
Again, harnessing the expertise of the Patent Office, keeping
people out of the courts seem like good ideas. Of course, one
thing is when patents survive these proceedings, advocates can
argue, Look, this patent was initially allowed by the Patent
Office, and they looked at it again, and it is still a valid
right. That sometimes can make patents a little more
troublesome. They are galvanized by going through again.
So thinking about how to deal with patent trolling is a
complicated problem. I am not sure it is amenable to a quick
fix. It is something that I think is systematic with our patent
system.
Just one more issue to raise and a concern to small
business is the so-called integrity loophole over the respect
of post-grant proceedings. Post-grant proceedings at the USPTO,
while they are pending, sort of place a cloud of title on the
patent. While this thing is being issued, it is a moving
target, is it going to survive? What are the claims going to
look like? One concern for small businesses, if opponents of
the patent vote fraud or engage in misconduct in requesting the
proceeding, what remedy is available to small businesses whose
patents have been challenged for this period of time? Often,
the patents come out many years later, unscathed, but those
years don't come back, technology has moved on. Recent judicial
holdings have said there is no remedy for patent holders.
So one thing Congress may wish to consider is legislation
that would allow an aggrieved patent holder to obtain relief
against parties that have challenged their patients in an
inappropriate way.
Mr. Chairman, members of the Committee, I appreciate the
invitation to come here today, and I look forward to working
with you as you consider patent reform issues.
Thank you.
Chairman Graves. Thank you, Mr. Thomas.
Our next witness is Mark Grady. Mr. Grady is founder and
president of INdigital Telecom in Fort Wayne, Indiana.
INdigital was formed in 1995 and was selected by the Indiana
Wireless 911 Advisory Board to build an innovative, new e-911
network to bolster public safety. As a patent holder himself,
Mr. Grady understands the benefits and challenges still
existing for small, innovative companies under the new patent
system.
Welcome, Mr. Grady, and thanks for coming in.
STATEMENT OF MARK GRADY
Mr. Grady. Good afternoon, Chairman Graves and Ranking
Member Velazquez. Members of the Committee, thank you for
having me today. I am Mark Grady, and I will tell you a little
bit about our company. INdigital operates in rural areas of
Michigan, Ohio, and Indiana. We serve the public, many of whom
are represented by members on this committee. Thank you for
inviting me to share my small business perspective for the
reformed patent system. My full testimony is on file and I hope
you find it useful in conjunction with these brief remarks
today.
INdigital Telecom is a specialized type of telephone
company, a 911 system service provider. Wireless, Voice over
IP, and legacy telephone companies send 911 calls from their
customers to our network, and we make sure these calls are
connected to the right local 911 authority so that emergency
help can arrive as soon as possible. 911 services are currently
undergoing a revolution in technology. Public safety, homeland
security, and first responders are all moving from legacy
systems created the 1970s to modern digital and Internet-based
systems. You may have heard these called Next Generation or
NG911.
In the race to better create NG911 systems, small business
innovators like INdigital face a number of IP-related
challenges. We need a strong patent system to help us monetize
our inventions. For this reason, the reforms of the American
Invents Act have helped make applications more affordable and
changes such as first to file and provisional patent concepts
make the decision to file a patent easier. We look forward to
other refinements that will raise patent quality.
Even so, we are not patent experts and INdigital is not
patent-centric. Our business succeeds by putting a working
product or service into our customers' hands, not just by
filing patents whenever technically feasible. For our small
business, the biggest challenge today is the inappropriate
assertion of poor quality, overly broad patents.
As public safety providers transition to NG911, we see
aggressive patent assertion happening in an unexpected place--
against the public safety community and 911. For example, a
company that INdigital works with acquired another entity that
owns a patent issued many years ago. This happened before the
patent quality improvements of the AIA. The concepts in the
patent are very common in telecommunications and not at all
specific to public safety. However, this company has unleashed
a patent assertion firm to seek enforcement against many
providers, including INdigital. The old patent had its
allegation based on a simple notion that INdigital provides 911
service.
Letters have been sent to our existing and potential NG911
customers, making the claim that INdigital is, or soon will be,
infringing on the patent. In one case, a potential customer was
forced to put its project on hold and start over in protective
response to getting the letter.
We are increasingly concerned this will become a trend,
particularly as new technologies already commonly in use by the
public such as text messaging and sending pictures are being
incorporated into NG911 systems. The recent terrorist bombing
in Boston is a horrific and unfortunate example of how public
safety and first responder access to video and related
information directly from the public could and did greatly
enhance emergency response in homeland security, thereby saving
lives and property.
We need to work hard to implement this kind of technology
into new NG systems, but first, we need this Committee to help
level the playing field as it relates to 911 and intellectual
property disputes.
To begin, patent law should recognize both 911 and NG911 as
essential government services. All 911 patent litigation should
be managed under an existing patent statute, 28 U.S. Code
Section 1498. This will help defer frivolous lawsuits while
ensuring that legitimate patent holders can monetize their
patents.
Next, every patent complaint should contain a detailed
explanation of the infringement claims. It is simply unfair to
burden small businesses like ours with patent allegations that
are no more substantive than a TV commercial.
Whatever other conclusions you have from this hearing, our
request is that this committee take prompt action to address
these frivolous 911-related lawsuits while protecting valid
patent holders.
Thank you very much for your time, and I look forward to
your questions.
Chairman Graves. Thank you very much. We will start our
questions with Mr. Bentivolio.
Mr. Bentivolio. Thank you, Mr. Chairman.
Gentlemen, before we discuss the merits of the AIA as it
concerns small business, I would like to begin with a more
fundamental question. The AIA changed our system from a first-
to-invent system to a first-to-file system. I fear we have
overlooked a basic question here. Article 1, Section 8 Clause 8
of the Constitution is the foundation upon which our entire
patent system rests. And the language of the clause is as clear
as it is plain: ``the Congress shall have the power to promote
the progress of science and useful arts by securing for limited
times to authors and inventors the exclusive right to their
respective writings and discoveries''.
Please note the terms ``inventors'' and ``discoveries''
does not say the first person who files. And nobody could
possibly believe the founders intended the word ``inventor'' to
mean anything other than he or she who discovers a given
invention. The dictionary is clear what a discovery is. Once
someone else has discovered something, it cannot be discovered
again.
My question to the three patent lawyers here is this: If
you were tasked to defend the constitutionality of the AIA in
court, when the AIA clearly takes the right of patent away from
the inventor to instead upon the first person to file, even
when it can be determined that or she is not the first
inventor, could you do it, and if so, how?
Mr. Thomas. I think the current system is highly
defensible, sir, the reason being it is the first inventor to
file. So it is someone who has invented the technology herself
and has submitted an application. Even prior to the AIA, if I
invented and kept something as a trade secret for years, and
Professor Crouch then filed, I would not get the patent and
Professor Crouch would. So in fact, the patent law has long
been the case in the United States that the patent proprietor
is not necessarily the first inventor in the manner that you
seek. The bottom line is it has to be the inventor herself and
someone who has not derived it from another who seeks the
patent. Thus, I believe that the first-to-file system comports
with our Constitution.
Mr. Bentivolio. Right. But you can't just change the
meaning of the word ``inventor'' in the Constitution 224 years
later. The Constitution doesn't even use the word ``patent.''
Clause 8 specifically says Congress's job is to protect the
discoveries of inventors. You can't just say an inventor now
means he or she who files. In Kendall v. Windsor (1859), the
Supreme Court held that only writings and discoveries of
authors and inventors may be protected.
You can think this over and respond on the record. My time
is short and I would like to talk about solutions.
Mr. Thomas. Well, again, it seems to me that you have to be
the first to file, but you actually have to be an inventor. So
if I steal the invention from Professor Crouch and file, I am
not an inventor and I won't get the patent. So I will stick to
my guns on that one. Thank you.
Mr. Bentivolio. I yield back my time. Thank you very much.
Chairman Graves. Ms. Velazquez.
Ms. Velazquez. Thank you, Mr. Chairman. Let me take this
opportunity to thank all the witnesses for being here. I am
sorry I got here late. I was in another meeting.
I would like to address my first question to both Mr.
Crouch and Mr. Thomas.
This week, the Supreme Court ruled for Monsanto in a
landmark case regarding its patent of a genetically modified
soybean seed. It found that self-replicating products can be
expansively protected from patent infringement. I would like
for you to comment on the impact of this ruling.
Mr. Crouch. I will start. When I think about Monsanto's
patents on their Roundup-Ready genetically modified seeds, the
kind of future impact for that technology in particular is most
interesting, not because of the Supreme Court decision, but
because over the next couple of years, and now I think less
than 2 years, the patents covering those innovations will all
expire. And what that means is that anyone then who would like
to can genetically modify whatever plant they want to by adding
those genes into those seeds.
And so while Monsanto has really had that technology locked
down for the past 20 years and not allowed kind of Roundup
Ready tomatoes, Roundup Ready whatever crop you want, that is
now potentially going to change, and that is going to have a
dramatic marketplace effect and we just don't know where that
is going to go.
Ms. Velazquez. In terms of short term, do you think it will
hurt consumers?
Mr. Crouch. And I think that the Supreme Court decision,
which was a 9-0 decision, was entirely expected. It would have
been a very surprising decision, just because although the
technology at issue are these genetically modified seeds that
raise some political concern about whether that is patentable,
the particular legal doctrine was quite clear, in my
estimation, and so no one expected really that to be
overturned.
Ms. Velazquez. Okay.
Mr. Thomas. My views are the same of those of Professor
Crouch. I understand that self-replicating technologies raise
complex issues of intellectual property and agricultural
policy, and farmers have often cited the traditional right to
save seed and replant. And they can continue to do so, just not
with someone else's patented seed. Again, it is a time-relative
right, as Professor Crouch said, and soon the other case is
effectively going to be moot.
Thank you.
Ms. Velazquez. Mr. Crouch, the USPTO reduced the backlog of
applications from 722,000 in December, 2011, to 607,000 in
March of this year. During the same time, the number of
examiners increased by 22 percent. Is it correct to assume that
this decrease in the backlog is due to an increase in the staff
or is there some speculation out there saying that it looks
like they are applying a less rigorous approach when it comes
to evaluating those applications?
Mr. Crouch. I think that is a difficult question to fully
answer. Certainly, the throughput at the Patent Office is a
function of the number of examiners they have. Although the
recent rise in examiners--when you have a new examiner, it
takes some amount of time before they become kind of an
efficient worker in that system.
One thing that has happened at the Patent Office in terms
of decreasing the number of pending unexamined applications is
that the Patent Office has, in essence, shifted focus toward
those to reduce that particular backlog, but there is a
different stack that is growing. And those are the ones that
are kind of partially examined.
To answer your questions bluntly, though, there has been a
significant increase in the percentage of patent applications
that are issued as opposed to those being abandoned. And so
that is absolutely true. And what is unclear is whether have we
gone too far in that direction or not?
Ms. Velazquez. Would you say that the bar has been lowered
for patent approvals?
Mr. Crouch. One thing that has certainly happened in the
patent system is that this has very much become a major
business and patents are more valuable than ever today. And so
one reason that why there is a higher grant rate is that folks
are putting more effort into the patents themselves and making
better documents and thinking more about the patentability. But
certainly, it is also true that a significant number of patents
issued that should never have issued. And that is something
that the Patent Office has to address. I think Mr. Grainger and
Professor Thomas thought about that in terms of funding of the
Patent Office in terms of ensuring that they are capable of
doing this examining activity.
Ms. Velazquez. Thank you.
Mr. Grainger, you note the benefits that the expedited
Track One process has for your companies. Could this two-track
system create an advantage for those companies with deeper
pockets while adversely impacting those unable to afford the
higher fees, advocated with Track One?
Mr. Grainger. Thanks for your question. So we are the
companies without the deep pockets, usually. We are in that
position. And so I feel that the cost of that added filing fee
is not a deterrent to using that system, and it is well worth
it. It is an extra $2,400 for a small entity. For a micro
entity it might be less. But in any event, I think it is an
investment definitely worth making. Actually, I think the
larger companies probably aren't using it as much, would be my
hunch. Dennis may have the data.
Ms. Velazquez. That they are not.
Mr. Grainger. Right. I think smaller entities tend to want
to get their patents faster because they need the funding to
move forward.
Mr. Crouch. That is right. And to establish the credibility
with investors and others. And the Patent Office did just
reduce the fee down to $2,000. So it is now slightly cheaper.
Ms. Velazquez. Thank you, Mr. Chairman.
Chairman Graves. Mr. Mulvaney.
Mr. Mulvaney. Thank you, Mr. Chairman. Thank you,
gentlemen, for being here today.
Let's talk a little bit about the AIA and the impact that
it has had. Personally, for me, having come out of a real
estate background, I always liked the first to file system
because it brought a certain certainty. I think if we try to
run a real estate-based economy under a program where the first
to think they had acquired it but didn't tell anybody else
about it would be an absolute disaster. So I was somewhat
sympathetic to the folks who wanted to see the first-to-file
system take place.
Mr. Grainger, I will start with you because it sounds like
you are probably as plugged into the small business community
here as anybody. I got the impression from your testimony you
think the impact on small business specifically of the AIA has
been positive. Am I reading that correctly?
Mr. Grainger. Absolutely. That is my experience and
impression. There are many aspects to the AIA, but I think the
clarity that you get from first inventor to file is excellent
because we now know when we look at a patent application
exactly when the priority of that document begins. We don't
have to wonder whether did they invent some time earlier than
that. So that clarity really helps us help our investors
understand who is going to own this intellectual property.
Mr. Mulvaney. I think you also mentioned that the number of
patents applied for by small business entities has actually
stayed the same or gotten slightly larger. Everybody else has
gotten larger as well. So the percentage has gone down. But
small businesses are still actively engaging in protecting
themselves through applications for new patents.
Mr. Grainger. I will say in my industry, that is the case.
I also think in the information technology industry there has
been so much focus on the importance of patents, for better or
for worse, in the last few years, that now they are focusing
much more on filing than in the past.
Mr. Mulvaney. Ms. Velazquez asked you about some of the
improvements at the U.S. Patent Office. Is that related
directly to the passage of the AIA or is there a different
justification or rationale behind that? That is to everybody.
Have we have seen the backlog go down? We have seen the fast
track systems used. Can the AIA take credit for these or would
these be separate and apart from the passage?
Mr. Crouch. I think in the time since the passage of the
AIA, the biggest change to the Patent Office has been that they
have had more money. And that was part of the AIA in that there
was an immediate, I believe, 15 percent surcharge; they were
able to add to fees. And then, in addition, since then they
have been able to set their own fees in a way that essentially
structures their budget in a way that allows them to examine
this backlog of patents.
Mr. Mulvaney. What I am hearing from Mr. Grainger is that
addition of those fees have not deferred small businesses from
continuing to take advantage of applying for patents. Is that
correct?
Mr. Grainger. That is certainly my experience.
Mr. Mulvaney. Who was it that said--and I apologize I don't
remember--the sequester has been ruled to apply to fees of the
Patent Office. Was that you, Mr. Thomas?
Mr. Thomas. It was, sir.
Mr. Mulvaney. Are you aware of whether any other fees,
fines, those types of things, similar types of moneys that are
collected by other agencies have been treated the same or is
the U.S. Patent Office being treated differently here?
Mr. Thomas. Regrettably, I am not an expert on that point.
But I am of the strong conviction that the amount of funding
that's being discussed to be taken away from the agency means
that that 600,000 application backlog is going to go right up
and there are going to be a lot of other problems. I wish I had
more information, but that is the best I know.
Mr. Mulvaney. I understand.
I will finish with you, Mr. Thomas.
You had mentioned in your testimony the SHIELD Act. And I
was just wondering if you might want to talk a little bit more.
I got the impression that generally you were in favor of it,
but there were certain risks involved with it. This is the
program that would essentially create a loser pay system within
the patent infringement area of lawsuits. Tell me quickly--I
have got a minute left--tell me the advantages and
disadvantages, the risks and the benefits.
Mr. Thomas. Right. So to remind the Committee, the SHIELD
Act mandates an attorneys fee award in favor of any party that
prevails on either validity or non-infringement, with
exceptions for initial assignees of a patent, universities, and
companies that spend substantial resources on the production or
sale of the patented invention. That means litigants would have
to post a bond before they could even get into the courthouse.
One of the issues with fee shifting, it certainly would
discourage suits that may not be all that meritorious, but even
a patent owner who brings a suit, it is a very close case, it
is a meritorious case, it is just you lose--litigation has its
uncertainties--would have to pay fees. So the risk is that it
really targets specific classes of patent proprietors rather
than really going at what I think we probably should be doing,
is behaviors. So, in other words, identifies actors by their
status, not by their behavior.
Mr. Mulvaney. How would you respond to Mr. Thomas? I am
generally in favor of loser pay systems. How would you respond,
though, to the criticism that having to post a bond would
actually have a chilling effect disproportionately on small
businesses in terms of pursuing their patent rights?
Mr. Thomas. I believe that is correct. I would agree with
that assertion.
Mr. Mulvaney. Thank you, Mr. Chairman.
I yield back.
Chairman Graves. Ms. Chu.
Ms. Chu. Well, as a member of the Intellectual Property
Subcommittee in the Judiciary and a member of the Committee
that marked up the America Invents Act, I commend Chairman
Graves for convening this hearing to discuss how this bill
affects the small businesses of America, and to commend all of
you witnesses for the testimony. I found it to be very
valuable.
In the Judiciary Committee, we are closely following the
patent troll issue. From our examination, we have learned
patent assertion entities don't have a favorite target. They
are not just going after the large businesses but the small
ones, and even individual customers.
Now, Mr. Grady, you mentioned that your business is a
victim of patent privateering in which a competitor company
transfers patents to patent assertion entities and provides
incentives to assert them against their competitors. Companies
like Google and BlackBerry are also victims of this and are
speaking out. But small businesses do not have the resources of
these companies to fight these frivolous infringement lawsuits.
Can you tell us about your experience in fighting the
patent assertion case and did this assertion entity file suit
and how much your company spent on legal fees?
Mr. Grady. They have not yet filed suit. We have only been
threatened. We have spent about $45,000 so far in legal fees
and internal time to try and protect any damage to the company
for the alleged infringement. So it has been very difficult. We
don't know yet what the claim is. We think that it is likely to
be a very simple concept.
What we have in the 911 space is that there was not a lot
of technology that was patented in the 911 sector, it was all
based on industry standards. So now we have got this tide that
has turned that we have these PAE issues that we are battling.
And what I am sort of asking for is a carve-out, that public
safety be given a little bit of laser-like precision in
protection, that it be governed by the Federal court as opposed
to civil.
Ms. Chu. Mr. Grady and also others on the panel, I would
like to ask this question about patent trolls targeting end
users. In a Judiciary Committee hearing recently, I was
outraged to hear that Sysco reported that 13,000 of its
customers got demands from patent trolls. And these were
customers that simply were using routers. They were the end
users of these routers.
I wonder if you have experience with end users getting
these types of baseless patent infringement cases and what your
customer base has received, have any of them resorted to paying
settlement fees to avoid litigations, and is there something
that Congress should do to protect consumers from patent trolls
that go after end users such as your clients?
Mr. Grady. I will respond to that, too. We use a good bit
of Sysco equipment in our business, and yes, our end user
customers have received demand letters, both for Sysco
equipment and for other digital subscriber line or DSL
equipment. Most businesses, I think, that are served by small,
independent telephone companies were targeted by that. And a
lot of those end users got demand letters as well. Frequently,
they refer them to us. We referred them to the vendor that we
purchased them from, and tried to dispute the claim informally
as much as we could. But it has been an ongoing problem.
Ms. Chu. And do you know if anybody has paid these fees?
Mr. Grady. Not to the best of my knowledge. I was involved
in a matter in 2002 prior to AIA where a small business was hit
with a shopping cart violation proceeding, and we successfully
defended would against that.
Ms. Chu. Anybody else on the panel?
Then, Mr. Thomas, you acknowledge that the U.S. Patent
Office is considering small businesses in a more improved way
through the America Invents Act. And I successfully amended the
bill to create a pro bono program designed to help financially
undersourced independent inventors and small businesses. Are
you familiar with the pro bono program and how it helps small
businesses? If so, do you think there are improvements that can
be made to not only sustain the program but make it more
successful?
Mr. Thomas. I am familiar with the program. I believe it is
very beneficial. It is my understanding it is up and running in
several regions of the country. The USPTO has augmented that
with a 1-800 help line that is staffed by retired senior
examiners. They come on in and help people who are having
trouble getting their applications through. They have inventors
conferences all over the country that people are attending. So
I think the pro bono program, it is just starting, so I think
it is early days before we can assess it fully. Again, with
sequestration, it means these programs are going to be scaled
back.
Ms. Chu. Okay. Thank you. I yield back.
Chairman Graves. Mr. Hanna.
Mr. Hanna. Thank you, Chairman.
This is for anybody, but maybe Mr. Grainger. Patent
trolling. I guess the overlying assumption is it is a bad
thing. But there have been estimates that less than 8 percent
of the total number of cases brought would actually survive in
court. Can you talk about what that means? It seems like
profiteering, pirating, yet people still opt to pay fees to
settle it. So the whole thing is kind of this mix-match of
leverage, disproportionate and unfair. Can you just talk about
that, if you think I am at all right in that?
Mr. Grainger. I would say at the outset that patent
assertion entities, or trolls, have not been a big issue in the
medical device industry. However, reportedly, some of the
biggest trolls out there, some of these organizations that
collect intellectual property, are amassing war chests of
medical device-related, health care-related patents. So we may
see this in the future.
My view is that needs to be addressed on two fronts: One
would be just the Patent Office doing a better job so that
overly broad patents are not issued in the first place. And
maybe there needs to be some sort of systemic reexamination of
patents in certain art spaces, particularly in the computer
software space. But in addition, what really makes the whole
troll industry thrive is that everybody settles. And if you can
get at that problem----
Mr. Hanna. It works in the legal profession.
Mr. Grainger. Maybe there could be a pool created for
companies to collaborate in defense of these claims, and also
maybe an insurance scheme has been proposed to fund defending
rather than just settling. If you----
Mr. Hanna. What you are saying is it is unbalanced and
there is no one on your side if you were that victim?
Mr. Grainger. Right.
Mr. Hanna. Mr. Thomas.
Mr. Thomas. I tend to agree with your assessment, and I am
impressed the Committee is aware of this issue at this level of
detail. I think there was an effort in the AIA to deal with
trolling, in terms of having rigorous post-grant reviews at the
agency that would get suspect patents before them.
Obviously, the price of the proceedings is high. Also, it
is a public goods problem. Many are accused of infringement;
who is actually going to lead the charge to invalidate the
patent. Why should I do the effort if I can get Professor
Crouch to do it. That also tends to be an issue. Again, I think
quality patent grant and an effective and efficient revocation
proceeding at the agency may be the way to go.
Mr. Hanna. Is there a good side to it? Why would you pursue
a patent to basically take it if you didn't have an opportunity
to do something more with it? I know that may be beside the
point.
Mr. Thomas. There are many different flavors of patent
trolls, which makes it difficult to elucidate this problem.
Some are startup companies, some are universities, some are
companies that are marketing other products but not that
particular product. So we have a lot of different kinds of
patent assertion entities, or non-practicing entities to deal
with. The good side can be sure, it is a small company that
wants to market its product, just hasn't done it yet. But short
of sorting out behaviors that we like and those that we don't,
I think----
Mr. Hanna. Is it possible that if you lose a lawsuit, you
should pay more than the cost? That there should be some
compulsory damages associated with it?
Mr. Thomas. Absent an antitrust violation or sham
litigation, we don't currently have such a system. That seems
to me to be fairly Draconian, but I have to think about it. I
have never heard that proposal before.
Mr. Hanna. Thank you. I yield back.
Chairman Graves. Mr. Rice.
Mr. Rice. Thank you, members of the panel, for being here
and testifying today. I have learned a lot about patent law.
Generally, what I am hearing from you, I think, is that you
like the effects of the AIA. That you think it is a good law
and generally a move forward, is that correct? What would you
do, outside of this trolling issue and potential for loser pay
and these other types of things you are talking about, what
would you suggest to make this law better?
Mr. Thomas. One area that was subject of very significant
discussion during the debate that led to the enactment of the
AIA was damages reform. And ultimately, it did not make it into
AIA. That remains a point of significant concern, especially
for manufacturers of products of many components. So the notion
is, I have got my iPhone sitting here, I turn it off, and one
statistic suggests that one patent out of six relates to a
smart phone. There are over 200,000 patents that cover this
phone. So how do courts assess damages when you infringe just
one patent on functionality in the phone? So manufacturers of
electronic products, the hard tech companies, are seeking
clarification of damages, particularly when, again, the patent
just covers a small part of the product. This is called
apportionment. Patent lawyers calling that apportioning
damages. Apportion means something different, I think, to you,
but to patent lawyers that is what apportionment is. Many
people think it is unclear. On the other hand, we have medical
device manufacturers and pharma companies who are concerned
that are by watering down patent damages, you ultimately
devalue the entire system.
Mr. Rice. Is there anybody else on the panel who has any
ideas about trying to make this AIA any better? Are there fixes
we can do?
I am real concerned about American competitiveness and
jobs. Is there anything we can do to shore it up, make it
better, and make us more competitive in the world?
Mr. Crouch. I will step in here. On the damage reform
point, I think one reason why it didn't get put into the AIA
was because that traditionally really has been a common law
question for the courts to decide. And in the lead-up to that
AIA, the Court of Appeals for the Federal circuit, kind of
feeling the wind of Congress, made several important decisions
that have really clarified that law in a lot of important ways.
Although I believe that the AIA is a good law and an
important change in terms of clarifying the law, I don't think
it really addressed the greatest problems in our patent system.
Patent applications filed today will be under this first-to-
file system. But if someone picks it up--even a patent
attorney, even one of our Court of Appeals for the Federal
circuit judges--and reads that patent, likely they won't able
to tell you what the invention really is. We have a problem in
our system where folks are filing patent applications that just
aren't clear what invention are they trying to claim here, what
have they really come up with? And so it turns out that it is
currently within the power of our Patent Office to address that
and to force patent applicants and their own examiners to make
sure that it is in those documents.
We had a little talk about real property rights. The nice
thing about real property rights is you can really tell where
the boundary line is. With patents today, it is impossible to
tell where the boundary line is; where does your patent stop
and where does somebody else's begin?
If anything could change, that would be the most
significant change, I believe.
Mr. Rice. Thank you very much, gentlemen. You have
something you want to add?
Mr. Grainger. I would echo that. That is why I go to the
quality and rigor of the examination process, just making sure
the patent application clearly tells you what the invention is,
and is appropriately limited in what it is trying to cover so
we don't have----
Ms. Velazquez. Will the gentleman yield?
Mr. Rice. Absolutely.
Ms. Velazquez. Thank you.
Mr. Granger or Mr. Thomas or Mr. Crouch, given the
statements or comments that you just made, that is why it is so
important to have the rigor. Do we need legislation to achieve
that goal?
Mr. Grainger. Maybe the--my friends in academia could talk
about that, but I think that the--the law is there. It tells
you what you need--what the requirements are to get a patent,
but it is being interpreted loosely and perhaps without, you
know, sufficient rigor.
Mr. Crouch. And so I don't think any of us are here--we
haven't--we don't have any proposed legislation for you today,
but certainly the way you have to think about the Patent Office
is as an agency that needs oversight, and that could come from
strong statutes that clearly tell them what their job is, or it
can come from oversight from this committee and other
committees to ensure that they--that the job is being done with
rigor.
Ms. Velazquez. Mr. Thomas.
Mr. Thomas. I agree with what has been said, and I also
would additionally suggest that the AIA brings about these
post-grant review proceedings that would provide a means for
harnessing the energy of the private sector to sort of turn its
private attorneys general come in and challenge the patents and
that perhaps we should give that a little bit of time to play
it through.
Ms. Velazquez. Thank you. Thank you.
Mr. Rice. I reclaim. I yield back.
Chairman Graves. Mr. Schweikert.
Mr. Schweikert. Thank you, Mr. Chairman. A couple of
things. First, it is always fun when the people sitting next to
you have asked the questions you wanted, but let's--before AIA,
after AIA, you and I are a small business or someone that has
come up with an invention, we have angel funding. Easier to
finance, get investment today compared to before the new law?
Mr. Grainger. I think so, absolutely, because I think,
number one, we can get our patents done--issued much more
quickly, so that angel stage, you know, maybe I still got a
patent application, but 6 months later, I can have a notice of
allowance in hand.
Mr. Schweikert. One of the discussions, and this is for
everyone on the panel, maybe a bit ethereal that was happening
during the AIA was the ability to almost sell a future on your
idea, that, look, we are heading towards filing our patent,
will you help me finance, you know, the additional rigor and
engineering I need, and because my timeline, are we seeing that
out there? Are we seeing people being able to raise money on
the ideas?
Mr. Crouch. Well, sir, and I think Mr. Granger will likely
agree with me, but the most common approach is to get--is to
have some amount of funding and quickly, as quick as you can,
file your patent application. And this change with the AIA,
what it allows is not--right, the change that Mr. Grainger is
referring to is not that we not--not that it is now a first-to-
file system, but under the AIA, you have a right to a--an
expedited examination if you pay a fee, and so, right, and so
you--right, so you hope to scrape enough money together to get
these patent applications and hopefully a patent before, right,
and then at that point, because you are able to get it quickly
and because some of the--it is more clear because of the prior
art, at that point it may well be easier to get funding.
Mr. Schweikert. For all of you, are you seeing out there in
the sort of angel-type of investing world, are you seeing more
structure to be able to do that sort of run fast mechanics
thing; we are going to put up the money, let's do this
instantly, not spend, you know, a year contemplating, you know,
the mechanics and the design.
Mr. Crouch. And my comment would be that the structure of
that particular marketplace is much less affected by the impact
of this particular legal change than kind of the general
structure of the marketplace and the availability of financing
in general for small businesses.
Mr. Schweikert. Everyone agree?
Just as an aside, AIA had an ombudsman. Anyone have an
experience with it yet?
Mr. Thomas. Yeah. The ombudsman is--provides assistance
when patent applications are sort of--get clogged up. There is
some problem, the application is not advancing to the agency,
so there is the ombudsman program. It has been operating. I
have heard positive things about it.
Mr. Schweikert. Okay. Last question. Has anyone done a
study on patents we are seeing, particularly in technology, on
their lifecycle of value? Is that lifecycle getting shorter and
shorter and shorter and--or, as you spoke of on, you know, your
iPhone, you know, that you are holding and is that speed of
that technology changing the value of these patents?
Mr. Crouch. So, one study I have done looked at the payment
of something called maintenance fees. Those are the renewal
fees that once you get a patent issued every, right--I think
after 4 years you have to pay a fee, after 8 years, and after
12 years you have to pay a fee, and these are essentially like
taxes.
Mr. Schweikert. Uh-huh.
Mr. Crouch. And if you don't pay the taxes, you lose your
patent. And so over the past 15 years or so, the percentage of
entities that are paying the fees, all of the fees, stretching
out to the end, has increased, and so that--that is something
that is going up, and at the same time the actual fees have
gone up, and so folks are--so, folks are paying more and more
often paying that.
Now, the change--I would estimate the change in why that is
happening is generally because of this recognition of patents
sets a strong form of intellectual property right; whereas, 20
years ago, most companies did not think about patents on a CEO
level and now they are, small and large companies.
Mr. Schweikert. So, and we are not going to have time
because I was heading towards this whole discussion of patents
almost become commoditized out there as, you know, you can
borrow on them, trade them, you know, and how you turn them
into cash flow. But Mr. Chairman, thank you. Yield back.
Chairman Graves. Mr. Bentivolio, do you have another one?
Mr. Bentivolio. Thank you, Mr. Chairman.
Just want to follow up on Mr. Thomas. Just so I understand
this correctly. If person A, for instance, has evidence they
invented a product in January and they file in June, and person
B, for instance, in another State, in another garage, invents
something in March and files it in April and they happen to be
the same invention, who gets the patent?
Mr. Thomas. As someone who has just been busy writing final
exams, this is in a good spirit for me.
Mr. Bentivolio. You are a student, so I think--right.
Mr. Thomas. Under the AIA, the new law, Inventor B gets the
patent because he is the first to file.
Mr. Bentivolio. Okay. So, the original inventor who
actually invented the product or whatever, in January, even
though because--you know, maybe because of money or they wanted
to perfect their patent or improve upon it, filed later, the
actual inventor doesn't get the patent, correct?
Mr. Thomas. Having been deposed many times, so I have to
disagree with the question to some degree, it depends on what
you mean by ``first inventor.'' Under your hypothetical, B has
self-invented the technology and then----
Mr. Bentivolio. Mr. Thomas, I am just going by the
Constitution. That is all I am doing. I am using the
Constitution as my guide. I am not a patent attorney. I am an
inventor, okay. So, January I invent, or you invent or Fred
invents something and--but he--because of money or time and
circumstance, he can't get to the Patent Office. Maybe he is a
better inventor than he is in calling patent attorneys and he
files after somebody else. He loses.
Mr. Thomas. That is correct. And let me also point out that
prior to the AIA, under your hypothetical, if can change the
facts of it, if inventor A had invented first but then sold the
product more than a year before he sold--he filed.
Mr. Bentivolio. I understand.
Mr. Thomas. He would be divested of the patent.
Mr. Bentivolio. I understand.
Mr. Thomas. So even under the predecessor regime--in other
words, that has been the Patent Act of 1952, which governed
prior to the AIA under your reasoning, it would also be
unconstitutional, because I think it is unlikely that the
entire history of the U.S. patent system has been--has not
comported with the Constitution. I will have to come to a
different conclusion than you about its constitutionality.
Mr. Bentivolio. Well, I am just going by the definition on
the OED, what an inventor is, and it is the authority for
definition of words, and in 1789, what the word ``inventor''
meant.
Mr. Thomas. One way to discern the meaning of legal
documents is to look at the dictionary. Another is to consider
intellectual property policy. If we had patent terms that run
20 years from the date of filing, we want to get the patent in,
filed, and as long as it is the person himself is an original
inventor under the AIA, that person can obtain the patent. I
think that is a salutary policy goal for this country.
Mr. Bentivolio. Thank you. I yield back.
Chairman Graves. With that, I want to thank all of you for
participating today. Your testimony, obviously, underscores the
importance of maintaining a strong patent system, one which
allows entrepreneurs to thrive by commercializing innovative
products and services. We will continue to monitor the
implementation of the AIA and its impact on small firms as well
as continuing to examine some ways to strengthen the patent
system and mitigate the effects of patent controls on small
businesses.
So with that, I would ask unanimous consent, that Members
have 5 legislative days to submit statements in support of
materials for the record, and without objection, that is so
ordered, and with that, the hearing is adjourned, and we
appreciate you being here.
[Whereupon, at 2:15 p.m., the Committee was adjourned.]
A P P E N D I X
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Written Testimony of Jeffry J. Grainger
Managing Partner, The Foundry LLC
May 15, 2013
U.S. House of Representatives
Meeting of the Committee on Small Business
Hearing on How Procedural Changes under the America
Invents Act Affect Small Businesses and the Impact of Patent
Assertion Entities on Small Firms
TESTIMONY
My name is Jeff Grainger. I want to thank Chairman Graves
and the other Committee members for the opportunity to testify
today. I am a patent attorney with an engineering degree, and
have worked continuously in start-up companies over the past 20
years, almost entirely in the medical device field. I am also
an entrepreneur, having founded my own start-up company and
participated in starting a number of others. Currently I am a
partner at The Foundry, which is a small company, often called
an incubator, based in Menlo Park, California that develops new
medical technologies and starts new companies to pursue those
technologies with venture capital funding. The Foundry has
started about 15 companies since it was started in 1999. Our
companies have not only built value for their investors and
created hundreds of jobs, but the medical technologies we have
developed have advanced the state of the art in medical
treatment and improved the lives of thousands of patients.
These technologies now allow heart valves to be repaired using
catheters inserted through blood vessels rather than through
open heart surgery, high blood pressure to be treated through a
single catheter treatment rather than a lifetime of drugs, and
blood clots to be removed rapidly from cerebral blood vessels
to reduce the damage caused by strokes.
While the dialogue concerning patent reform has been at
times dominated by forces arguing to weaken the patent system,
I am thankful to be able to speak today to ensure you hear a
different view, the view of the innovators and entrepreneurial
companies that bring new medical treatments to Americans: We
depend upon a strong patent system that provides a fast and
efficient examination process, discourages frivolous patent
challenges, and imposes serious sanctions on infringers. I have
genuine concern for those who are harassed by patent trolls, or
``patent assertion entities;'' however, in addressing that
problem, I urge the Committee to maintain a strong patent
system that ensures the American medical device industry will
remain on the forefront of innovation and that the most
advanced medical technologies will be available to American
patients. It is from this perspective that I approach the topic
of today's hearing.
The development of new medical technologies in this country
is highly dependent upon the continued ability of small
entrepreneurial companies to start and grow. Venture-backed
companies founded by biomedical engineers or physicians are
more than ever the primary source of groundbreaking new
therapeutic and diagnostic devices. The established
multinational medical device companies rely more and more upon
the acquisition of these companies rather than internal R&D
programs for product innovation and expansion into new markets.
The availability of venture capital is thus critical to allow
new medical innovations to reach patients.
Investing in medical devices is not for the faint of heart.
Medical device companies must raise substantial capital in
order to develop their products, perform clinical studies, and
obtain regulatory approval, all before a single device is sold.
Investments of more than $50 million and timelines of ten years
or more from invention to commercialization are not uncommon.
Investors in medical device start-ups are thus intensely
concerned with the ability to obtain strong patent protection.
They need to know that after a company has blazed a trail over
many years to bring a new product to market there will be some
period of exclusivity before the product can be knocked-off by
competitors. When we approach venture capitalists for financing
a new company, patent protection is a threshold concern that
must be satisfactorily addressed before we have any chance of
receiving an investment. Any changes to the patent system that
impede our ability to obtain patents or that weaken the
protection conferred by them would be a serious detriment to
our ability to raise the funds necessary to start medical
device companies.
The America Invents Act (AIA) implemented significant
changes to the US patent system. These include First Inventor
to File, Post Grant Review and Inter Partes Review, special
procedures for certain business method patents, third party
prior art submissions, supplemental examination, Track One
prioritized examination, and USPTO fee setting authority, among
others. While it is too early to tell whether the AIA has been
successful as a whole, several aspects of the Act clearly
improve the patent system for innovators, including medical
device entrepreneurs and start-up companies.
The change that has garnered perhaps most attention is the
change from a first-to-invent system to a ``first inventor to
file'' system. However, for many patent filers including The
Foundry, this has resulted in little change in the way business
is conducted. Under the first-to-invent system, if a party was
second to file a patent application, the statistical chances of
proving earlier invention were extremely low, and counting on
it was risky. Our standard practice has therefore always been
to file as rapidly as possible. Taking one's time in filing on
the assumption one could prove earlier invention was not a
rational approach.
While not having a significant effect on how we file for
patents, the change to ``first inventor to file'' is good
because it creates greater certainty and reliability in the
patent system. Because it revolved around secret information
about when and how an invention was made, the first-to-invent
system was fraught with uncertainty. The prospect, however
unlikely, that someone who filed after us could prove earlier
invention created a cloud over who owned the intellectual
property. Even if we had filed before another party, there
remained a lingering risk that they might have invented first,
a risk that could not be clarified except through expensive
interference proceedings or litigation. In financings and
strategic negotiations, this uncertainty lengthened the due
diligence process, increased legal fees, and threatened the
ability to reach a deal. Under ``first inventor to file,'' the
determination of who is entitled to patent an invention is
clearer, simpler, and based on data available to all parties.
Moreover, in the vast majority of cases, the results will be
the same as they would be under a first-to-invent system.
Another significant change under the AIA pertains to post-
grant proceedings for challenging issued patents. Post-Grant
Review allows a patent to be challenged by third parties on
almost any grounds during the first nine months after grant,
while Inter-Parties Review allows a patent to be challenged
beginning nine months after grant on ground related to novelty
or obviousness. Both procedures serve an important purpose in
providing a process for overturning patents that should not
have been allowed in the first place, without having to engage
in costly litigation.
Importantly, the Act establishes a Patent Trial and Appeals
Board (PTAB) composed of specialized administrative law judges
who will decide Post Grant and Inter Partes Reviews. This is an
important change from the former reexamination procedures,
which were decided by patent examiners. Many practitioners felt
they could not rely on patent examiners to overturn patents in
reexamination, even when new information was presented clearly
calling into question the validity of the patent. The chances
were good that the reexamination would result in an affirmation
of the patent, which could then be perceived as stronger since
the Patent Office had approved it twice. By establishing the
PTAB with specialized judges, it is hoped that the new AIA
procedures will result in better and more predictable
decisions.
Another important aspect of both types of post-grant
proceedings is the estoppel provision that prevents a
challenger from later challenging a patent in another
proceeding or in litigation on grounds that were raised our
could have been raised during the first post-grant proceeding.
This is a critical aspect of the procedures, for not only does
it prohibit re-litigation of the same issues, but it creates
meaningful consequences for those who decide to challenge a
patent. The estoppel provisions appropriately cause a
challenger to think twice before launching a Post Grant or
Inter Partes review. They help to ensure that innovators will
not be forced to defend groundless or serial post grant
challenges by those with greater resources.
Of all the AIA changes, perhaps the most impactful for
medical device start-ups is ``Track One'' prioritized
examination. Under this provision, for a higher filing fee, our
patent applications are examined and either finally rejected or
allowed within one year. In some cases we are getting our
patent applications allowed within 6 months. This ability to
get a decision from the Patent Office rapidly can have a
dramatic impact on our ability to get our projects funded. For
a new startup, we are able to approach venture capital firms
for funding with a patent already in hand, or with an official
indication of what is patentable. We are also able to build our
patent portfolios much more rapidly, so that when we seek later
rounds of funding, we have multiple patents issued protecting
various aspects of our technologies. This can eliminate much of
the concern investors have about the availability and scope of
patent protection. As a result we are more likely to get
projects funded and can get through funding negotiations
faster, with lower legal costs, and with potentially higher
valuations than we have in the past.
The last aspect of the AIA on which I wish to comment
relates to the PTO budget. If there is one issue in which all
stakeholders in the patent system should be aligned, it is the
provision of sufficient funds to the Patent Office so that
patent pendency is reduced, patent examination is more
competently performed, and patent quality is increased. These
goals benefit everyone, including those who would like to
obtain patents faster, those who seek a more efficient and
intelligent examination process, as well as those who want to
reduce the issuance of poor quality patents.
To accomplish these goals, the PTO must receive sufficient
funding to hire and train more and better-qualified examiners,
update its computer systems, and implement other important
programs. Yet, even though the PTO generates a revenue surplus
from user fees each year, its revenues are subject to diversion
by Congress for other purposes. The Office is thus unable to
rely on receiving the level of funding needed to expand and
improve its services.
Establishing reliable funding for the PTO was recognized to
be an important issue to address in patent reform legislation.
To this end, the AIA gave fee setting authority to the office,
allowing it to set user fees at an appropriate level to
generate the revenue it needs. But the AIA fell short in
failing to prohibit the diversion of PTO revenues by Congress.
So long as revenue diversion is a possibility, the PTO's budget
will remain uncertain, and the office will be unable to do the
planning and hiring that it needs to do to achieve its larger
objectives.
A fully equipped Patent Office can focus on improving the
quality and rigor of patent examination, so that the patents
that are granted have undergone rigorous scrutiny and are
appropriately limited in scope. This, more than any proposal to
weaken the rights of patent owners, will ensure that patent
rights are not unfairly wielded to the detriment of innovation.
Therefore I would urge the Committee to make the prohibition on
fee diversion a priority for any future legislation aiming to
improve the patent system.
In sum, the American medical device industry continues to
lead the world in innovation. Much of this innovation arises
from entrepreneurs and small companies who depend on strong
patent protection in order to raise the substantial funding
needed to bring a medical device through clinical trials to
commercialization. Streamlining and accelerating the
examination process, improving the quality of patents,
discouraging frivolous patent challenges, and imposing serious
consequences on infringers are essential components of a patent
system that protects and encourages such innovation. In order
to attain these goals, we must fully fund the Patent Office and
end diversion of PTO fees so it can build an organization
equipped to handle the changing and expanding landscape of
inventions. Further, in order to solve the problem of patent
assertion entities, we must avoid diluting the important rights
conferred by a patent upon which innovators rely, but rather
focus on improving the quality and rigor of the patent process.
It has been an honor to speak to you today, and I thank you
again for inviting me to testify.
Prepared Statement of John R. Thomas
Professor of Law, Georgetown University
Before the
Committee on Small Business
United States House of Representatives
On
``Patent Reform Implementation and New Challenges for Small
Businesses''
May 15, 2013
Mr. Chairman and distinguished Members of the Committee:
Thank you for the opportunity to testify on the subject of
patent reform implementation and new challenges for small
business. I testify today in my personal capacity.
The Small Business Administration recently found that small
businesses that patent regularly obtain 16 times more patents
per employee than larger firms. Because patents matter to small
businesses, this Committee deserves congratulations for
participating in the enactment of the America Invents Act and
subsequent technical corrections legislation. As someone whose
principal occupational task is to teach patent law, I am
grateful that I no longer need to describe internationally
adopted rules reflecting best patent practices--and then have
to explain how the U.S. patent system operates differently. The
Committee should also take pride both in maintaining the small
entity discount at the USPTO, and in engineering even steeper
discounts on filing fees for micro entities. For example, the
fee assessed against a mirco entity for filing a patent
application is a modest $70. These measures will surely inure
to the benefit of small businesses.
Consideration of patent reform implementation in large
measure involves an assessment of the efforts of the USPTO. As
a legal academic who has observed that agency for many years--
and on occasion been critical of it--I wish to report my highly
favorable impression of its implementation efforts. In my
personal opinion, the USPTO has persistently met its
obligations under the AIA in a timely and professional manner.
Particular accomplishments for the agency include:
Leading a transparent rule-making process
with due regard to public commentary.
Staffing the Patent Trial and Appeal Board
with experienced lawyers of exceptional quality.
Educating its staff of 8000 patent examiners
about the new provisions of the AIA.
Making great strides towards full operation
of four satellite offices across the United States.
I further observe that the USPTO has reduced its First
Office Action pendency to 18.7 months and decreased its
inventory of unexamined applications to 600,000 cases--two
notable achievements in view of the agency's contemporaneous
implementation of the AIA.
The efforts of the USPTO to contribute towards small
business and independent inventors should also be acknowledged.
Agency programs that are of particular benefit to these
constituents include:
An Office of Innovation of Development that
oversees the agency's efforts to assist independent
inventors and small businesses. These efforts include
outreach programs for independent inventors, women,
small business concerns, minorities, and other
underserved constituencies.
An Inventors Assistance Center (IAC) that
provides patent information and services to the public.
The IAC is staffed in part by retired, experienced
examiners who answer general questions concerning
patent examining policy and procedure.
An Ombudsman who assists in getting stalled
patent applications back on track.
Independent Inventors Conferences, conducted
around the country, which deal not just with the patent
application process, but also entrepreneurship and
marketing.
A Global Intellectual Property Academy that
conducts a number of programs for U.S. small
businesses; one recent program was titled ``What Every
Small Business Must Know About Intellectual Property.''
Although the efforts of the USPTO have been exemplary,
issues remain for small businesses. First and foremost is the
potential impact of sequestration. One of the primary points of
concern during the pendency of the AIA was USPTO fee diversion.
To that end Section 22 of the AIA established a Patent and
Trademark Fee Reserve Fund that was intended to allow the
agency to retain the fees it received for services provided.
While I am no expert on sequestration, to my understanding the
Office of Management and Budget has reportedly reasoned that
fee payments to the USPTO are not ``voluntary'' within the
meaning of the Budget Control Act--with the result that USPTO
fees are not exempt from sequestration. Understandably, loss of
substantial revenues from the USPTO budget could have a
significant deleterious impact upon the agency's ability to
protect the nation's environment for innovation.
The cost of certain USPTO post-grant procedures is also a
potential issue for small firms and independent inventors. The
new inter partes review proceeding costs at least $9,000, while
the minimum fee for post-grant review is $12,000. These
relatively high rates are based upon the congressional decision
in the AIA to allow the USPTO to assess fees designed to
recover the aggregate estimated costs of the proceeding to the
agency. Given that the AIA requires post-grant proceedings to
be conducted by at least three administrative patent judges of
the Patent Trial and Appeal Board, one would expect the fees to
be substantial--and indeed I believe that the agency faithfully
complied with the statute in setting its rates. Nonetheless the
fees are very costly and may contribute to a pricing out of
small entities from robust administrative challenges to patent
validity.
Patent trolling remains a significant concern for U.S.
enterprises of all sizes. In my opinion, trolling results from
systematic problems within the U.S. patent system and is not
amenable to a quick fix. In the 113th Congress, two bills are
directed towards patent trolling issues. The SHIELD Act
mandates an attorney's fees award in favor of any party that
prevails on either validity or noninfringement, with exceptions
for initial assignees of a patent, universities, and companies
that spend substantial resources on the production or sale of
the patented invention. Further, unexempted litigants must post
a bond for these fees before they could even commence
litigation. Fee shifting certainly holds the potential to deter
non-practicing entities from asserting weak patents. Yet it
might also discourage small businesses from bringing
meritorious cases in an often unpredictable litigation
environment. In particular, the SHIELD Act would cause certain
types of patent proprietors to pay fees if they lose
infringement cases, no matter how close the issues in the case
may have been.
Another bill, the Patent Quality Improvement Act of 2013,
would make two changes to the Transitional Program for Covered
Business Method Patents. First, the sunset provision associated
with that post-grant proceeding would be eliminated. Second,
the post-grant proceeding would be expanded in order to cover
virtually any sort of business method patent. Augmentation of
the transitional program would potentially enlist the expertise
of the USPTO to weed out improvidently granted patents in a
timely manner. Nonetheless, patents that survive a second round
of review may actually become more robust and troublesome--
after all, advocates may assert that they withstood USPTO
scrutiny twice and ought to be readily enforced by the courts.
In closing, I appreciate the invitation to provide my views
to the Committee on these and other patent reform proposals,
and looks forward to working with Members of the Committee as
it continues to consider these issues.
INdigital Telecom Testimony of Mark Grady, Founder and President
Before the Committee on Small Business U.S. House of Representatives
May 15, 2013
Prepared Testimony and
Statement for the Record of
Mark Grady, Founder and President
On Behalf of
INdigital telecom
Before
The Committee on Small Business
U.S. House of Representatives
Hearing on
Patent Reform Implementation and New Challenges for Small Businesses
Wednesday, May 15, 2013 - 1:00 p.m.
2360 Rayburn House Office Building
Good afternoon. Chairman Graves, Ranking Member Velazquez
and Members of the Committee. I am Mark Grady, Founder and
president of INdigital telecom (INdigital), a leading provider
of advanced 9-1-1 public safety communications services.
INdigital began in 1998 as a cooperative effort of several
independent telephone companies in the rural areas of Michigan,
Ohio, and Indiana, including New Paris Telephone, in northern
Indiana, which I also manage.
Thank you for allowing me the privilege of sharing with you
our small business's perspectives on the opportunities and
challenges surrounding patent reform, and its impacts on our
business, communities, innovation, and jobs.
By way of background, INdigital telecom is a specialized
type of telephone company, a 9-1-1 system service provider.
Wireless, Voice over IP, and legacy telephone companies deliver
``9-1-1'' calls their customers make to our network, and based
on the location of the caller, we manage the vital process to
make sure these calls are connected to the appropriate local
police, fire, or medical authority so that emergency help can
be on the way as soon as possible. Through our systems in Ohio,
Indiana, and Michigan, we provide a vital service that protects
the lives and property of the citizens in these communities--
many whom are no doubt represented by members of this
Committee. Along the way, our company has created 38 high
paying technical jobs, and has provided training to many more
interns and technical staff.
We are working hard every day to provide an important
public service, and we are proud of the jobs that we do and the
communities we serve.
As to the connection between our business and intellectual
property matters, I need to explain that even today many 9-1-1
networks continue to use technology that dates from the 1970's.
We envisioned that this technology had to, and was going to
change. In 2005, over four years before industry standards were
adopted, we pioneered methods of using new digital internet
protocols to provide advanced 9-1-1 public safety
communications. What we created helped launch the revolution
that is occurring now in public safety. Many of you may
recognize the term ``Next Generation'' or ``NG9-1-1''. That's
what I am referring to. It's a complete re-invention of the old
9-1-1 network using new digital systems and methods to deliver
advanced emergency services.
Small company innovators like INdigital face a number of
IP-related challenges. In the public safety industry, there are
giants like AT&T and Verizon, who use many different suppliers
to create full service public safety networks. There are also
other large companies that perform backroom 9-1-1 location
analysis and call processing. The work of these companies
primarily serves the large telephone companies in the big
population centers, and other large industrial businesses.
INdigital is a small company serving more rural areas. For
example, our largest market is Fort Wayne, the 74th largest
city.
As a small business, we cannot afford the in-house
resources of a large company. We must rely on outside counsel
for our IP needs such as patents, copyrights, and other
intellectual property matters. Even so, we are active and
directly license the IP of others, cross-license our IP, and
provide critical protected technologies to other business
partners, and our customers.
As noted before, 9-1-1 emergency services are going through
a technological evolution. As other providers in the telecom
industry realized the need to update their 9-1-1 networks,
INdigital has been successful in capturing market share with
its 9-1-1 innovations. Therefore, we recognize the need, value,
and importance of a well-defined and efficient patent system to
protect and monetize those innovations. We appreciate and
support Congress's efforts in these regards. INdigital believes
in and supports a robust intellectual property system that
works for small business, not against it.
Having said this, please note that INdigital is not `patent
centric.' Our patent law firm understands our business and our
culture, and recognizes that our IP works in conjunction with
the actual products and services we provide, not in the
abstract. Our business succeeds by understanding our customers'
problems, then putting a working solution into our customers'
hands for refinement, not by just cranking out low quality
patents whenever technically feasible. Often, our patent
applications only start after the products are deployed and
proven. In short, like many small businesses, patents are a by-
product of and support our innovation, not the reason we exist.
Even so, we believe that, on balance, the new provisions of
the American Invents Act (``Act'' or ``AIA'') has been and will
continue to be of some benefit for INdigital. Certainly, patent
fee reform is helpful to our small business, as is the ``first
to file'' and ``provisional patent'' concepts that makes the
decision to file a patent clearer and easier. It's beyond my
expertise, but it's my understanding that the AIA attempts to
make it easier to challenge poor quality patents. Also, I have
read about special rules for challenging new ``business
method'' patent applications. While these sound sensible as
ways to increase patent quality, these seem to be too expensive
for a small business like ours. Again, we're not patent
experts, and are only now starting to see how net patent
applications will be processed and enforced under the Act. We
remain optimistic that the Act, with some refinements, will
yield faster results for higher quality patents without harming
small businesses.
As the public safety landscape transitions to NG9-1-1 and
to a more competitive environment, we are seeing an increased
use of patents in our industry sector. We are increasingly
aware that companies are hiring armies of patent attorneys, and
are buying stagnant companies solely for their patent
portfolios. This brings me to the biggest IP challenge that we
and other small businesses face today--the inappropriate
assertion of poor quality over-broad patents. This is
especially troublesome for us when they apply to 9-1-1 public
safety, an area that clearly deserves as much special
protection from frivolous lawsuits as ``business methods.''
One of our `frenemies', a company that INdigital works with
often on many types of projects, has fallen behind in
developing new NG9-1-1 technology. Rather than innovate in-
house, they acquired another entity that was issued a very
broad telecom-related patent many years ago.
Under pre-AIA patent law, there was insufficient legally
relevant prior art, and, unfortunately, the patent was
approved. The concepts in the patent are very common in
telecommunications, and not specific to public safety. However,
this company has unleashed a patent assertion firm to seek
enforcement against us of this old patent based, in large part,
on the simple notion that INdigital provides ``9-1-1 service.''
In case you are curious, nothing would please me more than
to explain to this Committee exactly how INdigital has
infringed this patent, but . . . I cannot. We have analyzed the
patent, and we have had it analyzed by other experts. We are
unable to determine how the NG9-1-1 industry standards we
follow in our products and services are infringing, yet the
litigation moves forward with swift precision. In one form it
is a letter to our existing and potential customers that claims
that INdigital is, or soon will be, infringing upon this
patent. It doesn't take much to imagine what our customers or
potential customers think when they receive such a notice, or
the fear, uncertainty, and doubt it generates throughout the 9-
1-1 public safety community. Our public safety customers are
often units of local government. They don't need or want the
distraction or expense of a `potential for infringement' letter
from a patent assertion firm.
A more pressing problem is that many new technologies
commonly used by the public today such as text messaging and
sending pictures are not part of the current 9-1-1 public
safety system. Just image how many lives or how much property
could be saved if they were. The recent terrorist bombing in
Boston is a horrific and unfortunate example of how public
safety and first responder access to video and related
information directly from the public could (and did) greatly
enhance emergency response and homeland security. 9-1-1 Centers
desperately need new technologies and new equipment as the
country transitions to NG9-1-1 services. A local 9-1-1 Center
isn't resourced or funded to sort out the complex legal demands
of patent claims, especially ones that say even offering ``9-1-
1'' could be infringement.
In one recent case, after receiving the letter, a potential
customer had to put its project on hold to completely reissue
its request for proposal. As a small business person, an
innovator, an employer, and a citizen, I believe this cannot be
Congress' intent for our patent system. The patent system
should not be used to put Americans' lives and property in
jeopardy by delaying their access to new and innovative 9-1-1
public safety and homeland security services. IP rules should
first serve inventors--not investors--to bring innovation to
the marketplace, not fruitless litigation which destroys jobs
and companies, and wastes a small company's limited resources.
But, that is exactly what is happening.
So that our message to this Committee is clear, please note
that INdigital supports, in general, the process and other
improvements in the America Invents Act. As the trade press
detailed, we recognize the difficult negotiations and
compromises required to pass the AIA. Unfortunately, however,
for all the progress that was made, the Act has not remedied
these current IP issues as they relate to essential 9-1-1
public safety services.
As we continue to work to develop and deploy important new
life-saving NG9-1-1 services, we are forced to divert our
limited resources to plan for the business and financial
impacts of unknown patent assertion claims. This has directly
affected our innovation efforts, ability to hire new employees,
and our work to help protect our communities. From the
perspective of our small business, the AIA is incomplete until
our nation's 9-1-1 public safety and homeland security system
is secure.
As we begin to benefit from the other aspects of the AIA,
our Company is asking this Committee to take half a step back
and help level the playing field as it relates to public safety
intellectual property disputes. Two ideas we've heard discussed
in the trade press, in our view, have particular merit and we
support their introduction into law. First, the law should
recognize 9-1-1 and NG9-1-1 for what they are; essential
government services, and patent litigation claiming 9-1-1
infringement should be managed under an existing patent
statute--28 United States Code Section 1498. This will help
control the costs of the court process, yet still guarantee a
legitimate patent will be enforced and the patent holder
compensated. Second, every infringement complaint should
contain a detailed explanation of the claim--something more
than just the assertion of a ``hypothetical'' infringement we
receive today. It is unfair to burden small businesses with
patent allegations no more substantive than a TV commercial.
No doubt there are other useful concepts that can be
considered. Whatever the conclusions from this hearing, our
request is that this Committee take prompt action to discourage
frivolous 9-1-1 public safety related lawsuits while protecting
valid patent holders.
In conclusion, thank you for your time and the opportunity
to help you understand the IP problems faced by INdigital and
other small business entrepreneurs today. I look forward to
your questions.
Committee on Small Business
Hearing: ``Patent Reform Implementation and New Challenges
for Small Businesses''
May 15, 2013
Questions for the Record Submitted by Rep. Bentivolio
Questions for Mr. Grainger:
1. Can you please elaborate how it is that Congress is
looting the USPTO's surpluses?
Answer: While I am not expert on the precise amount of the
PTO's revenues that has been appropriated for other purposes,
it has been reported that over $1 billion has been diverted in
the past 20 years. Having been on the management team of
multiple companies I know the importance of certainty with
regard to the level of funding that will be available to allow
for strategic planning and organizational and infrastructure
improvements. Even if the USPTO has good ideas about how to
solve its major challenges, if its level of funding cannot be
relied upon, the office cannot put its plan into effect. The
office now has the authority to set its own fees, and it has
the ability to forecast fairly accurately the level of filing
and prosecution activity to expect. But it has no assurance as
to how much of its revenue it will be allowed to keep. If the
PTO had control of its revenues, it could reliably predict its
funding levels for years to come, and it could implement
meaningful changes and infrastructure improvements. Until that
happens, or Congress passes specific budget allocation that the
office needs to make those improvements, we are likely to see
little change. It is important to remember as well that such
improvements are not just needed to reduce the patent backlog
and shorten pendency, but to improve the quality of the
examination process so that fewer ``bad'' patents are issued.
For this the office needs to hire more and better-qualified
examiners, conduct more examiner training, allow examiners more
time to examine each application, and upgrade its computer
infrastructure to allow more comprehensive and efficient
searching and data access. These are major undertakings that
cannot be implemented without budget certainty.
2. From your testimony I infer that you create companies
based off of patents. Can you please elaborate, perhaps by
naming some claimed inventions, on the novel ideas developed,
how it is that they, in your mind, attain the standard of
``inventive genius'' above and beyond simply being ``new
gadgets''?
Answer: I would ask the question, has anyone among your
friends and family suffered from high blood pressure, stroke,
or heart valve disease? These diseases are not treated with
gadgets. High blood pressure is treated with drugs, but for
many patients drugs do not work or cause unacceptable side
effects. The Foundry invented the first device-based therapy
available for high blood pressure that has the potential to
provide a lifetime of benefit from a single thirty-minute
catheter procedure. In a clinical trial of the device, patients
receiving the catheter treatment experienced a drop in blood
pressure substantially higher than they did from drugs and,
three years later, continue to maintain that reduction. The
device has been approved in Europe and is in clinical trials
for approval in the U.S. Medtronic recognized the value of this
technology and acquired the company for more than $800 million.
See http://www.medtronicrdn.com/intl/healthcare-professionals/
index.htm. Similar stories can be told about the devices we
invented for removal of clots from cerebral blood vessels to
reduce the damage caused by stroke (Concentgric Medical,
acquired by Stryker), and for repairing diseased mitral valves
using a catheter rather than open-heart surgery (eValve,
acquired by Abbott). Both devices were pioneering advances
without any comparable devices available for treating those
diseases. Currently we are working a catheter to enable
replacement of the mitral heart valve without open heart
surgery, and a device to relieve osteoarthritis of the knee for
patients not ready or not able to undergo knee replacement.
While companies have been working on these problems for years,
none have succeeded in developing a successful device-based
treatment.
It is not entirely accurate to say that The Foundry creates
companies based off of patents. We start by identifying major
clinical needs, then we develop the technologies needed to
solve those needs. If a technology shows the promise of working
clinically, we start a company to pursue it. We file patents on
everything we invent because we know it is a requirement to
obtain funding for these companies. Often we find that others
have invented technology that will complement or that is better
than what we have invented, and we will attempt to acquire
rights to that technology. In most of the companies we have
created (now working on the fifteenth), the patents protecting
their core technology include some invented internally and some
we have acquired from others.
3. The America Invents Act cited in its Constitutional
Authority Statement Article I, Section 8, Clause 8. Explicitly,
this clause secures to authors and inventors their writings and
discoveries. As I observed, the AIA removes this security from
an inventor, transferring it to a first-to-file entity who was
not the first to invent. Is that not explicitly forbidden by
I:8:8? If not, please explain how the definition of inventor is
lawfully changed from ``one who invents'' to ``one who files.''
Answer: With the disclaimer that I am not a constitutional
law scholar, I believe Article I can be interpreted to require
that a system be established that allows all inventors to
obtain patent protection for their inventions. However, I do
not believe it prohibits the establishment of a system that
makes sense in terms of efficiency and creation of economic
value, so long as all inventors have reasonable opportunity to
participate in that system. In my view the first inventor to
file system eliminates huge waste in time and resources spent
in resolving first to invent disputes, when it was well-
established that a party who was second to file rarely won
these contests. Under the first-to-invent system, inventors who
took their time in filing a patent were hurting their own
chances of obtaining enforceable patent rights, as well as
creating uncertainty and perceived risk for other parties who
were more prompt in filing. Further, the new system increases
the efficiency of commercializing valuable inventions by
allowing inventors and funders to know, based on public
information, whether a particular party is entitled to a patent
or not. On the other hand, the cost to an inventor of
participating in the first-inventor-to-file system is minimal--
a few hundred dollars to file a provisional application--which
I believe is not an unreasonable obstacle even to an individual
inventor, and well worth the benefits it confers to the system
as a whole.
The Supreme Court has ruled repeatedly that ``inventive
genius'' is the standard by which an invention overcomes the
``obviousness'' hurdle to patentability. Has the USPTO ever
endeavored to define standards of inventive genius, and if so,
what was the outcome?
Answer: I am not familiar with any judicial opinions or
USPTO rules that attempt to define ``inventive genius.'' There
are numerous factors which are considered in determining non-
obviousness. One case frequently cited on this topic is Graham
v. John Deere, 383 U.S. 1 (1966).
5. One issue today is that end-users of a device, using it
for its normal intended purpose, infringe on patents that the
manufacturers of the devices do not infringe upon. (See Ars
Technica, ``Meet the nice-guy lawyers who want $1,000 per
worker for using scanners,'' April 7, 2013.) The situation is
plainly absurd. Is there a judicial remedy for the victims of
the patent trolls? What legislative remedy would you envision?
More specifically, how is it that an end-user, using a device
in an advertised manner, it taken to be an ``inventor'' when
the maker of the device is not?
Answer: Because a patent confers on the he patent owner the
exclusive right to make, use, and sell the invention, it allows
the patentee to prohibit others from using the invention. The
doctrine of patent exhaustion, however, prohibits the patentee
from enforcing the patent against downstream users of a
patented item after a sale of that item which was authorized by
the patentee. In the cited example if the patent holder never
authorized the sale of the device to each user, patent
exhaustion would not be a defense. Moreover, if the patent in
the example covers only the end users' use of the device and
not the manufacture, sale or use by the manufacturer or seller,
then patent exhaustion is inapplicable. I am not aware of any
legal theory that would provide a defense to the victims in the
example, other than the usual defenses of invalidity or non-
infringement. I understand that in some cases the validity of
the asserted patents is questionable, but defending a lawsuit
is too expensive for such victims. Thus a legislative approach
might allow end users to form alliances to collaborate in the
defense and funding of such suits. In additions, legislation
could penalize plaintiffs who bring lawsuits that are clearly
meritless, such as by loser-pays schemes or imposing other
sanctions. Vermont, for example, just amended its consumer
fraud statute to allow damages to be awarded for bad faith
assertions of patent infringement. Further, legislation could
prohibit the enforcement of patents against end-users where an
infringement action could be brought against the manufacturer
or seller under a theory of direct or contributory infringement
or a theory of inducement to infringe.
6. Do you believe the lifetime of a patent, the same across
all types of utility patents, is reasonable in its duration for
all types of inventions?
Answer: I think it is worth considering whether a shorter
patent term would make sense in fields where product lifecycles
are shorter, development costs are lower, and/or the time
required to bring a product to market is less. The challenge
lies in determining which fields should get the shorter term,
which inventions fall into those fields, and how to handle
inventions in those fields that are exceptions to the general
rule on lifecycle, development cost, or time to market. For
example, one could reasonably question whether a method of
buying a product by clicking a mouse only once should be given
twenty years of patent protection. Yet, even defining a
``business method'' can be a challenge, when many drugs,
medical devices, and other articles are protected by patents on
methods of use or administration which some might call methods
of doing business.
7. If two companies independently invent the same thing
within a reasonable period, doesn't that suggest the invention
is really neither's to exclude from the other? Does innovation
and invention mean the same thing?
Answer: After 20 years in medical device start-ups, I can
confirm that one can almost be certain that while one party is
working on an innovative new idea, another party somewhere in
the world is or soon will be working completely independently
on the same idea. I believe the patent system is in large part
responsible for this phenomenon by incentivizing and requiring
patent holders to disclose their technological advances so that
others can build upon them. If patents were not available
whenever m multiple parties invented the same or similar
inventions within weeks or months of each other, few patents
would be issued. The system enables multiple parties to begin
at the same starting line with the same information available
to all, so by its very nature creates a tight race to the next
advance. However, were the patent incentive no longer there,
publication of inventions would cease, and the ability to
advance the art would decline.
On the second question, I believe innovation is a general
term for creating something new in a particular field, while
invention, at least in the context of the patent system, has a
specific legal meaning. Invention is arguably narrower than
innovation, and requires that an innovation meet a particular
set of requirements defined by the law before it becomes an
invention.
How would you devise some standards for the patent office
to reject issuing patents for gadgetry?
Answer: I don't believe the government should get into the
business of defining what is a ``gadget'' and what is a
valuable invention. What may seem like a gadget today may well
prove to bring great economic value. The answer lies in where
the threshold for non-obviousness is drawn. If a qualified and
well-trained patent examiner truly (1) has done a comprehensive
and effective search; (2) cannot find any disclosure of the
invention anywhere in the prior art; and (3) cannot find any
combination of references that reasonably can be combined and
together disclose all the elements of the invention, then the
invention is non-obvious and a patent should be allowed. To
ensure this is done competently on a more consistent basis, the
patent office needs to hire better-qualified examiners,
increase examiner training, and improve searching techniques
and systems.
9. How do we return the patent office to its constitutional
role of protecting real ingenuity, by stopping the issue of
frivolous patents?
Answer: See comments above regarding hiring more and
better-qualified examiners, increasing examiner training,
allowing examiners more time to examine patents, improving PTO
computer infrastructure, and developing better searching
techniques and systems.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Committee on Small Business
United States House of Representatives
Prepared Responses to Questions for the Records
from Representative Bentivolio
Dennis Crouch *
On the Topic of
Patent Reform Implementation and New Challenges for Small Businesses
February 4, 2014
--------------------------------
*Associate Professor of Law, University of
Missouri School of Law; J.D., University of Chicago School of
Law; B.S.E., Princeton University (Department of Mechanical and
Aerospace Engineering and Engineering Management Systems).
My academic research interests focus on patent law,
intellectual property law and internet law. In addition to
traditional academic publications, I am the founder of
Patently-O, with a daily circulation of over 35,000 and that is
a regularly read by must US patent law professionals. Prior to
joining the University of Missouri faculty, I was a visiting
professor at Boston University School of Law and worked as a
patent attorney at a major intellectual property law firm in
Chicago where I represented inventors pursuing patent
protection as well as clients litigating claims of patent
infringement. Prior to entering law school, I served as a
United States Peace Corps Volunteer in rural Ghana, West
Africa; worked as a manufacturing engineer in upstate New York;
and conducted research on microgravity combustion with NASA.
I am not a registered lobbyist, I do not represent any
clients, and I do not own stock in any particular company with
a vested interest in patent rights (beyond broad-based mutual
funds).
Bentivolio Question: 1. You recommend ensuring the
availability of private insurance to guard against claims of
innocent patent infringement. Does that really solve the
problem, or would it simply transfer the risk to the insurer
and average out the costs across the market?
Crouch Response: The US legal and business environment
creates many major risks for small and medium sized businesses.
Although rare, these risks are often outsized and too large to
be self-insured against. A strong US insurance market helps to
mitigate these risks so that those business operators can go
about their business with the assurance that they are protected
against these rare-but-major potential liabilities.
Patent infringement litigation is an area where entrenched
leaders hold competitive advantages because of the costs and
complexity of the system. In this arena of repeat players,
small businesses are at a comparative disadvantage and an
insurance market for unintentional patent infringement would
help level this playing field. Because of their broader
industry knowledge, Insurance providers may be especially good
at identifying and eliminating bogus claims for relief (as they
do in other areas of liability insurance). At the same time, an
insurance market for unintentional patent infringement would
not eliminate or detract from a patentee's ability to enforce
its valid patent rights.
Bentivolio Question: 2. You recommend better
standardization and publicizing contractual indemnification for
downstream users and retailers. Can you please explain how what
sounds like a big-government solution solves a fundamental
issue of frivolous lawsuits threats and/or frivolous patents
creating real threats?
Crouch Response: A US patent provides its holder with the
exclusive right to make, use, sell, import, and export the
covered invention. That right extends to stopping an end-user
from unlicensed use of the invention so long as the patent
right has not been exhausted. As part of a business-to-business
transaction, large business typically negotiate the contractual
indemnification associated with potential patent infringement
of the product being sold, such as when a computer manufacturer
purchases elements from microchip manufacturers. Except for
their core business products, small businesses are much more
likely to purchase goods and services from a retail outlet just
like an ordinary consumer and without negotiating over these
particular terms. This leaves small businesses at potential
risk.
The Uniform Commercial Code (UCC) that has been enacted in
every state creates the background rules for business
transactions. The Code was largely designed as a way to define
clear understandable baseline rules in order to facilitate
transactions. Those baseline rules of understanding can
ordinarily be contracted-around, but offer clear, standardized,
and well understood default rules. That same process can be
done with patent infringement indemnification so that all
parties understand their relative risks and obligations early
in the process.
My suggestion does not arrive on a blank slate. Rather,
U.C.C. 2-312 already includes an implied warranty of non-
infringement. However, there are a number of important
uncertainties associated with what that warranty and those
uncertainties have been compounded by two recent Supreme Court
cases.\1\ See, Bowman v. Monsanto Co., 133 S.Ct. 1761 (2013)
(holding farmer liable for patent infringement for replanting
seeds purchased on the commodity market) and Quanta Computer,
Inc. v. LG Electronics, Inc., 553 U.S. 617 (2008) (interpreting
the scope of the patent exhaustion doctrine).
---------------------------------------------------------------------------
\1\ Uncertain issues include, for instance, when is infringement of
a process patent indemnified; is the merchant who induces infringement
required to indemnify; and does the indemnification pass-through to any
subsequent purchasers?
Setting of these default rules for market transactions is a
core a critical role of Government as the ultimate arbiter of
---------------------------------------------------------------------------
contract and property disputes.
Bentivolio Question: 3. The America Invents Act cited in
its Constitutional Authority Statement Article I, Section 8,
Clause 8. Explicitly, this clause secures to authors and
inventors their writings and discoveries. As I observed, the
AIA removes this security from an inventor, transferring it to
a first-to-file entity who was not the first to invent. Is that
not explicitly forbidden by 1:8:8? If not, please explain how
the definition of inventor is lawfully changed from ``one who
invents'' to ``one who files.''
Crouch Response: The US Constitution does not authorize the
grant of patents to non-inventors. Thus, a patent regime would
overreach its authority by granting patent rights to a non-
inventor (other than a non-inventor who possesses a legal
interest in the patent right based upon a chain-of-title from
the inventor).
The question then is whether the AIA provides the USPTO
with authority to grant patents to non-inventors. The answer to
this question largely depends upon the meaning of the
constitutional term ``inventor.''
Three possible definitions include:
1. An inventor is the first to conceive of an
invention.
2. An inventor is the first one to conceive of an
invention and reduce that invention to practice (either
actually or constructively by filing a patent
application) without abandoning, suppressing, or
concealing the invention.
3. An inventor is someone who conceives of an
invention and reduces that invention to practice
(either actually or constructively by filing a patent
application).
Although the first definition offers simplicity in
statement and strong moral appeal, it has never been the rule.
Rather, for more than a hundred and fifty years, the US patent
system has regularly granted patent rights to someone who was
the second-to-conceive of an invention because the first-to-
conceive failed to properly pursue his or her rights, either by
failing to diligently pursue reduction-to-practice or else in
unduly abandoning, suppressing, or concealing the invention. In
those cases, the first-conceiver's activities were essentially
ignored and the next-best inventor was granted the patent. The
second definition above highlights the traditional nuance
associated with being an inventor under the pre-AIA first-to-
invent rules. As you'll note, the definition has allowed for
many second-conceivers to get a patent so long as the first-to-
conceive failed to properly and fully protect her rights.
The third definition appears to roughly fit to the working
definition of invention under the first-to-file rules of the
AIA. The definition of inventorship is no longer tied to being
the first-one to conceive or reduce the invention to practice.
Rather, anyone who completes those steps qualifies as an
inventor. Under the first-to-file rules then, the one inventor
who receives a patent will be determined by speed at filing a
patent application. I should note there, that my use of the
term ``conceive'' implies that the invention was not fully
derived from elsewhere, but instead was created and realized in
the mind of the inventor.
For proponents of the AIA, this third definition is merely
a mild modification of the definition already used in the
first-to-invent regime. The first inventor is still given first
potential rights, but only if she is able to quickly file a
patent application before someone else independently invents
and files their own application. There is no precedent that I
know of that rejects this definition as defying the
Constitutional requirement.
The one potentially major caveat is the potential that the
AIA could be interpreted to grant patent rights to individuals
who do not fit any definition of the world inventor. In
particular, the statutory change removed the explicit
requirement that the patentee be the inventor. That change was
designed to make it easier for corporate patent owners to file
applications on behalf of potentially non-cooperative employee
inventors, but could have dire Constitutional implications. The
USPTO has recognized this potential problem and has provided
its interpretation that inventorship is still a requirement of
patentability required by the statute. The USPTO points to the
introductory patent provision: 35 U.S.C. Sec. 101 that
indicates a patent is to be granted to an individual who
``invents or discovers any new and useful process, machine,
manufacture, or composition of matter.''
Bentivolio Question: 4. The Supreme Court has ruled
repeatedly that ``inventive genius'' is the standard by which
an invention overcomes the ``obviousness'' hurdle to
patentability. Has the USPTO ever endeavored to define
standards of inventive genius, and if so, what was the outcome?
Crouch Response: The test for patentability is not
``inventive genius'' but rather whether the invention would
have been obvious to a skilled artisan.
A patentable invention must be novel and must also take a
substantial step beyond what was done in the prior art. In US
law, we use the term ``nonobviousness'' as the key term for
defining this substantial step. In a 1941 decision, the US
Supreme Court did write that a patentable invention ``must
reveal the flash of creative genius, not merely the skill of
the calling.'' Cuno Engineering v. Automatic Devices., 314 U.S.
84 (1941). However, that decision was rejected by Congress in
the 1952 Patent Act that established the modern test of
obviousness and rejected the ``flash-of-genius'' requirement.
Today, the statute reads as follows:
A patent for a claimed invention may not be obtained
... if the differences between the claimed invention
and the prior art are such that the claimed invention
as a whole would have been obvious before the effective
filing date of the claimed invention to a person having
ordinary skill in the art to which the claimed
invention pertains.
Patentability shall not be negated by the manner in
which the invention was made.
35 U.S.C. Sec. 103.
Although section 103 was amended slightly in the AIA, those
amendments have been seen as technical and not substantively
altering the test of obviousness. Thus, the leading cases on
obviousness continue to be KSR Int'l Co. v. Teleflex, Inc., 550
U.S. 398 (2007) and Graham v. John Deere Co., 383 U.S. 1
(1966). These two cases (along with the statutory language)
largely define the process of determining obviousness that has
been implemented by the USPTO and that is used by courts.
If it so chose, Congress could further raise the standard
of patentability to only allow patents for ideas of exhibiting
``inventive genius.'' However, such a change would represent a
major disruptive shift in patent law and would likely violate
many of the international agreements that the US has pushed
through over the past several decades.
Bentivolio Question: 5. One issue today is that end-users
of a device, using it for its normal intended purpose, infringe
on patents that the manufacturers of the devices do not
infringe upon. (See Ars Technica, ``Meet the nice-guy lawyers
who want $1,000 per worker for using scanners,'' April 7 2013.)
The situation is plainly absurd. Is there a judicial remedy for
the victims of the patent trolls? What legislative remedy would
you envision? More specifically, how is it that an end-user,
using a device in an advertised manner, is taken to be an
``inventor'' when the maker of the device is not?
Crouch Response: First, only an very small number of
individuals have been sued for patent infringement over the
past 100 years apart from wealthy corporate owners sued under a
corporate veil piercing theory. However, an increasing number
of patent holders are considering end-user campaigns against
relatively small companies who are merely using off-the-shelf
technology in a manner that it was intended by the
manufacturer. Compounding this issue, a number of these patents
(including the ones mentioned in the Ars Technica article) are
of questionable validity.
If we focus here on the hardship caused to small and medium
sized businesses, I should first note that the two solutions
noted above (insurance and standardized indemnification) could
go a long way toward protecting these interests.
I also would support an expanded fair-use doctrine of
patent infringement that would permit small-scale and non-
commercial use of another's patented invention without fear of
being charged as an infringer. Such a doctrine would have very
little negative impact on patent valuation, but could go a long
way in relieving fears associated with being accused of patent
infringement.
Bentivolio Question: 6. Do you believe the lifetime of a
patent, the same across all types of utility patents, is
reasonable in its duration for all types of inventions?
Crouch Response: The primary policy goal behind patent
rights is to encourage innovation. The offer of potential
exclusive rights provides an incentive to research and develop
new technologies and new solutions to contemporary problems.
Rather than granting rights in perpetuity, the drafters of the
US Constitution determined that those rights should be of
limited terms. To the extent a patent carries monopoly power,
that power will only be temporary, and, following a patent's
expiration, the ideas behind the invention will be fully
available for free public use. In general, a longer patent term
is thought to be more valuable to a patentee and thus provide a
stronger incentive for research while a shorter patent term
reduces the negative monopoly impact and give the public
earlier access to the invention.
The ``optimal'' patent term has been the subject of
substantial economic research and the most agree-upon
conclusion is that the patent term should be just long enough
to provide the necessary incentive to innovate. In a world of
perfect information and bureaucratic efficiency, the term could
be adjusted on an invention-by-invention basis where we
determine the term necessary for the patentee to recoup its
investments in research and development along with an
appropriate rate of return. That approach is a fools-dream.
A more practical approach could be to divide patent term
according to the market area or area of technology. Areas that
require more incentive (typically larger investment over a
larger period of time) could be given longer patent terms while
areas that require less incentive would be given less patent
term. Other levers could be used, such as increasing/decreasing
the patent damages award for particular areas of technology or
increasing/decreasing the requirement of proving obviousness
for those areas of technology.
I have developed a tentative stance against dividing the
patent system by areas of technology. My position is largely
based upon issues of political economy, tradition, and
reflection on the Copyright Act. In particular, the current
system where all patent rights (regardless of technology) are
given the same level of respect requires a substantial amount
of cross-industry agreement before any change will be made.
Lobbying by one industry (such as the branded pharmaceutical
industry) is countered by lobbying by another industry (such as
the high-tech and software industry). If the definition of
rights were defined by-industry I fear that we would see a
great increase in lobbying power by those industries in ways
that protect industry incumbents but that tend to exclude new
entrants.
Although something of an aside, the structure patent
examination and patent term help to direct research toward
particular types of inventions. In particular, the patent
examination process typically takes about three years and the
patent is not enforceable until it issues. Subsequently, the
patent will be in force four about seventeen years. Thus,
valuable inventions are those that will see market value during
that seventeen year period beginning three years from the
patent application date. New patents are thus something
corporations consider as part of their five and ten year
strategic plans rather than offering profits for the immediate
year. In my view, that delayed value is useful because it
rewards longer term planning and strategy that, in turn,
hopefully leads to increased stability and more lasting
economic security.
Bentivolio Question: 7. If two companies independently
invent the same thing within a reasonable period, doesn't that
suggest the invention is really neither's to exclude from the
other? Does innovation and invention mean the same thing?
Crouch Response: Yes, I agree that near-simultaneous
invention is one indication that an invention was obvious.
However, such an occurrence is not conclusive proof because
innovation races occur regularly where multiple companies (or
countries) are each racing to be the first to reach the same
hard target.
Invention and innovation are related but not the same. I
use invention as a term of art in patent law and innovation
more loosely as an advance that may or may not be patentable.
Bentivolio Question: 8. How would you devise some standards
for the patent office to reject issuing patents for gadgetry?
Crouch Response: The three primary standards for issuing
patents on gadgetry are (1) that the invention represents a
substantial advance in technology (nonobviousness); (2) that
the invention is fully described in the patent application so
that others can read and understand the invention (enablement);
and (3) that the patent claims are written in a way that
informs the public of the patent's scope (definite claims).
These standards are all in place and the USPTO has policies in
place so that these standards are considered by the patent
examiner for each and every patent prior to issuance. I have
studied the patenting process extensively and have found that
the USPTO initially rejects the vast majority of patent
applications (80% +) based upon one of these three standards.
Following that initial rejection, most patent applicants are
able to amend their patent to better fit within the statutory
guidelines. Some applicants are successful in this argument,
but more than 100,000 patent applications are abandoned each
year based upon their failure (in the eyes of the USPTO) to
meet the requisite standards.
Bentivolio ?Question: 9. How do we return the patent office
to its constitutional role of protecting real ingenuity, by
stopping the issue of frivolous patents?
Crouch Response: To be clear, the USPTO makes many mistakes
and issues thousands of patents each year that do not meet the
appropriate standards discussed above. The agency needs to do a
better job. Although there are some litigation abuses in the
system, I continue to see the greatest problems with the patent
system as derived from poorly issued patents. In truth, the
Patent Office has struggled with this issue for its entire
history--ever since Thomas Jefferson took on the role as the
original patent examiner. We should not expect to find a single
all-powerful solution that stops the issuance of frivolous
patents but instead we should expect a daily struggle to
maintain the highest standards and rigor. The following is a
concise and abridged list of several ways that Congress can
move this forward:
1. Over the past decade, Congress has been quite lax
at exerting detailed oversight over the USPTO and its
patent examination process. Former USPTO Director David
Kappos had a strong working relationship with Congress.
However, it has been more than one year since Director
Kappos left the position in January 2013. As we stand
now, the USPTO has been without a Senate approved
Director for more than one year, and has been without
even an Acting Director for the past three months. At
this point, direct Congressional oversight may be the
best way to push the Administration toward getting the
agency quickly back on track.
2. One of the most effective ways to improve the
patent examination quality may be to Ensure that the
USPTO receives funding necessary to hire, train,
retain, and retrain excellent patent examiners who are
both skilled in the appropriate areas of technology and
also committed to the valuable filtering role of the
Agency.
3. In addition to personnel, proper examination also
requires quality infrastructure so that examiners can
quickly and accurately identify the best potential
prior art and link that prior art to the patentee's
claim language. As with personnel, that infrastructure
requires necessary funding.
Thank you.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Graves, Ranking Member Velazquez and members of
the House Small Business Committee, on behalf of the National
Retail Federation (NRF) and its division Shop.org, I appreciate
the opportunity to submit this written statement to the
Committee in connection with its hearing entitled ``Patent
Reform Implementation and New Challenges for Small Businesses''
held on May 15, 2013.
As the world's largest retail trade association and the
voice of retail worldwide, NRF represents retailers of all
types and sizes, including chain restaurants and industry
partners, from the United States and more than 45 countries
abroad. Retailers operate more than 3.6 million U.S.
establishments that support one in four U.S. jobs--42 million
working Americans. Founded in 1996, Shop.org's 600 members
include the 10 largest outline retailers in the U.S. and more
than 60 percent of the Internet Retailer Top 100 E-Retailers.
Contributing $2.5 trillion to annual GDP, retail is a daily
barometer for the nation's economy. Retailers create
opportunities for life-long careers, strengthen communities at
home and abroad, and play a leading role in driving innovation.
Learn more at www.nrf.com.
Comments
Members of the National Retail Federation appreciate the
attention the Committee is paying to the issue of patent reform
and the changing landscape of patent law and its effect on
small businesses.
In recent years, over 200 retailers, including independent
retailers and small businesses, have contacted NRF about patent
trolls' demands and litigation because they have been, or are
currently, the target of patent trolls' abusive practices. The
threat typically comes from firms whose business model is
buying obscure patents which are about to expire and then
either licensing the patents to retailers through the threat of
litigation or filing lawsuits in an effort to force a
settlement. Often retailers will choose to pay the licensing
fee because patent litigation is prohibitively expensive.
Many retailers are using capital resources to settle with
or fight patent trolls' infringement claims that they would
otherwise use to invest in their businesses, including jobs,
innovation and refurbishment of their stores. Retail, at its
core, is a highly competitive industry, and many retailers are
using innovative technology creatively to expand and grow their
businesses. Patent trolls, who are not investing in
technological innovation, providing jobs or engaging in
communities, employ tactics that cut at the heart of this
growth and ingenuity.
Patent trolls sued more non-tech companies than tech
companies in 2012.\1\ Patent trolls employ a strategy that
focuses on end-users such as retailers because end-users are
more numerous. One manufacturer or vendor may supply a product
or service to thousands of retail end-users. Thus, there are
many more entities from which to demand a royalty. The end-user
retailers are also easy prey because they lack the legal
resources and in-house expertise to fight complex patent
infringement claims. Compared to high tech companies, retailers
typically operate on thin profit margins. Patent trolls,
knowing that retailers lack technical expertise, retail stores
operate on thin margins, and patent litigation is exorbitantly
expensive, will often price a settlement demand (which may
reach as high as millions of dollars) below the cost of
litigating, effectively blackmailing a retailer into
settlement. This is an abuse of the system.
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\1\ Colleen Chien, ``Patent Trolls by the Numbers,'' Patently-O,
March 14, 2013. http://www.patentlyo.com/patent/2013/03/chien-patent-
trolls.html
Patent trolls assert infringement claims covering the use
of technology in all areas of e-commerce and mobile retailing
because in addition to targeting specific software innovation,
their claims are based on broad concepts and a general way of
doing something. This approach is especially damaging to
retailers, who are embracing new technology and groundbreaking
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innovation to better serve their customers.
For example, MacroSolve, Inc. has filed numerous suits
related to violating U.S. Patent No. 7,822,816, which is a
method patent covering the process that many businesses have
used to develop their mobile apps. It has sued technology
companies, service providers and end-users, including
retailers. Over half of the defendants have settled, but the
settlement details have not been publicly released. MacroSolve
claims their patent covers thousands of apps as well as those
yet to be developed.\2\ This is of great concern to the retail
community, which increasingly relies on mobile apps as part of
their omnichannel presence in the marketplace.
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\2\ Robert Evatt, ``MacroSolve adds Wal-mart to list of patent
lawsuits,'' Tulsa World, February 8, 2012. http://www.tulsaworld.com/
site/
printerfriendlystory.aspx?articleid=20120208--52--
E1--Jsasat255194&PrintComments=1
Trolls' claims not only affect e-commerce applications but
also affect the operations of traditional ``brick and mortar''
retail stores. Some examples of the latter are claims that
purport to cover the printing of receipts at cash registers,
the sale of gift cards, and the connection of any product such
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as a computer or printer to an Ethernet network.
These cases rarely go to trial because the damages claims
are so exorbitant, and the prospect of relief through
litigation so time-consuming, that retailers make a business
decision to settle, rather than litigate. It has been reported
that trolls lose 92 percent of cases that do go to trial, but,
as noted, it is infrequent that a defendant has the fortitude
and resources to litigate. Small businesses in the retail
sector may find themselves particularly ill-equipped legally or
financially to defend themselves from abusive claims, and
dealing with these claims certainly inhibits their ability to
innovate and grow.
The excessive costs associated with seeing a court case
through to final adjudication are startling for retailers,
especially small businesses. We have heard from our members
that some spend as much as one million dollars or more annually
on patent troll-related litigation and other expenses. For
smaller-sized retailers, these costs could put them out of
business, and at the very least these expenditures and the
employee hours diverted to fighting patent trolls are precious
capital resources that they would rather reinvest in their
businesses.
The recent case of Soverain v. Newegg demonstrates that
many costly steps involved in litigating a patent case and the
enormous economic impact that just one patent troll can wreak
on an industry. Beginning in 2004 and continuing up through
2012, Soverain has filed numerous suits against dozens of
retailers alleging that the basic check-out technology used by
nearly all websites infringe its patents \3\. One large
retailer is reported to have settled the first suit for $40
million because of the fear of jury verdicts in that era in the
Eastern District of Texas. Numerous other settlement amounts
are unreported, but in a subsequent suit, an Eastern District
of Texas jury awarded damages of almost $18 million against two
other national brands.
---------------------------------------------------------------------------
\3\ Joe Mullin, ``How Newegg Crushed the ``Shopping Cart'' Patent
Troll and Saved Online Retail'' ArtsTechnica.com, January 27, 2013,
http://arstechnica.com/tech-policy/2013/01/how-newegg-crushed-the-
shopping-cart-patent-and-saved-online-retail/
In 2007 Soverain sued Newegg, which decided to fight back.
The case went to trail three years later in April of 2010 and
resulted in a judgment of $2.5 million against Newegg. But
Newegg decided to appeal to the Federal Circuit, and on January
14, 2013, more than five years after the suit against it was
first instituted, it obtained a judgment in its favor,
reversing the lower court judgment and declaring the patents
invalid due to obviousness. Although Newegg has won, it took
more than five years and millions of dollars in attorneys' and
legal fees. And the saga is not over yet because Soverain still
has pending before the Federal Circuit a petition for re-
hearing of the case en banc by the full court, as opposed to
the panel of three judges that rendered the most recent
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decision.
The Newegg case is just one example of the broad
infringement claims trolls are asserting against retailers.
There are over one million software patents in the United
States. Many software patents contain broad concepts dealing
with Internet functionality and have extraordinarily vague
claims.
NRF is engaged in discussions with Members of Congress to
address the abusive litigation practices patent trolls utilize.
Retailers support the Saving High Tech Inventors from Egregious
Legal Disputes (SHIELD) Act. By requiring the patent troll to
pay the defendant's attorneys fees and costs, the SHIELD Act
would help deter frivolous litigation.
The America Invents Act (AIA), which the President signed
into law in September 20122, established a Patent and Trademark
Reserve Fund. The United States Patent and Trademark Office
(USPTO) is required to deposit all patent and trademark fees
collected in excess of the annual appropriation amount into the
fund. The provision also provides for authorization to spend
all fees deposited in this fund in the USPTO's annual
appropriations. The AIA also establishes a provision requiring
patent fees to be used only for patent operations, including a
share of administrative expenses.\4\
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\4\ USPTO.gov
Senator Schumer recently introduced the Patent Quality
Improvement Act of 2013, which also aims to produce better
quality business method patents. Retailers feel his is an
important step, and coupled with further litigation reform will
---------------------------------------------------------------------------
be helpful in alleviating this extraordinary problem.
Retailers are also considering a legislative proposal which
would limit the scope of discovery requests in patent
litigation to ``core documents'' to help drive down the
excessive costs associated with patent trolls' current model of
abusive and endless discovery requests. These abusive discovery
requests are another expensive tactic used by trolls to drive
up the costs of litigation in order to compel retailers into
early settlements.
While these proposals are laudable, retailers are
ultimately seeking a solution that provides immunity from
patent trolls altogether. As we stated earlier, patent trolls
target retailers and other end-users because they are numerous
and are easy prey. But as end-users of the technology being
disputed broadly and vaguely, they should not be the principal
targets of these far-reaching lawsuits.
Conclusion
By papering retailers with broad and vague demand letters
and filing an endless series of lawsuits against retail end-
users alleging the same patent infringement claims alleged
against manufacturers and service providers of a particular
device or technology, patent trolls are able to cast a very
wide net that hauls in a lucrative catch. They have proven that
many of the companies they target will settle given the
extraordinarily high demands they make and the costs those
companies know it will take to fight even the most frivolous of
alleged claims. Addressing this abusive and growing patent
litigation problem will help release retailers from the
controlling grip on their industry that patent trolls currently
enjoy. Because the retail industry contributes $2.5 trillion to
our nation's annual GDP, removing or even loosening this grip
on retailers will allow innovation and growth to flourish, and
undoubtedly benefit the overall U.S. economy.
NRF thanks the Committee for their examination of the
impact of patent reform and is happy to work with Members of
the Committee to find effective solutions against patent
trolls' egregious behavior.