[Senate Hearing 113-204]
[From the U.S. Government Publishing Office]
S. Hrg. 113-204
DEMAND LETTERS AND CONSUMER PROTECTION: EXAMINING DECEPTIVE PRACTICES
BY PATENT ASSERTION ENTITIES
=======================================================================
HEARING
before the
SUBCOMMITTEE ON CONSUMER PROTECTION, PRODUCT SAFETY, AND INSURANCE
of the
COMMITTEE ON COMMERCE,
SCIENCE, AND TRANSPORTATION
UNITED STATES SENATE
ONE HUNDRED THIRTEENTH CONGRESS
FIRST SESSION
__________
NOVEMBER 7, 2013
__________
Printed for the use of the Committee on Commerce, Science, and
Transportation
U.S. GOVERNMENT PRINTING OFFICE
86-955 PDF WASHINGTON : 2014
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800;
DC area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC,
Washington, DC 20402-0001
SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION
ONE HUNDRED THIRTEENTH CONGRESS
FIRST SESSION
JOHN D. ROCKEFELLER IV, West Virginia, Chairman
BARBARA BOXER, California JOHN THUNE, South Dakota, Ranking
BILL NELSON, Florida ROGER F. WICKER, Mississippi
MARIA CANTWELL, Washington ROY BLUNT, Missouri
MARK PRYOR, Arkansas MARCO RUBIO, Florida
CLAIRE McCASKILL, Missouri KELLY AYOTTE, New Hampshire
AMY KLOBUCHAR, Minnesota DEAN HELLER, Nevada
MARK WARNER, Virginia DAN COATS, Indiana
MARK BEGICH, Alaska TIM SCOTT, South Carolina
RICHARD BLUMENTHAL, Connecticut TED CRUZ, Texas
BRIAN SCHATZ, Hawaii DEB FISCHER, Nebraska
MARTIN HEINRICH, New Mexico RON JOHNSON, Wisconsin
ED MARKEY, Massachusetts
CORY BOOKER, New Jersey
Ellen L. Doneski, Staff Director
James Reid, Deputy Staff Director
John Williams, General Counsel
David Schwietert, Republican Staff Director
Nick Rossi, Republican Deputy Staff Director
Rebecca Seidel, Republican General Counsel and Chief Investigator
------
SUBCOMMITTEE ON CONSUMER PROTECTION, PRODUCT SAFETY,
AND INSURANCE
CLAIRE McCASKILL, Missouri, DEAN HELLER, Nevada, Ranking
Chairman Member
BARBARA BOXER, California ROY BLUNT, Missouri
MARK PRYOR, Arkansas KELLY AYOTTE, New Hampshire
AMY KLOBUCHAR, Minnesota DAN COATS, Indiana
RICHARD BLUMENTHAL, Connecticut TED CRUZ, Texas
BRIAN SCHATZ, Hawaii DEB FISCHER, Nebraska
C O N T E N T S
----------
Page
Hearing held on November 7, 2013................................. 1
Statement of Senator McCaskill................................... 1
Statement of Senator Heller...................................... 3
Statement of Senator Klobuchar................................... 48
Statement of Senator Ayotte...................................... 58
Witnesses
Hon. Jon Bruning, Attorney General, State of Nebraska............ 4
Prepared statement........................................... 6
Jon Potter, President, Application Developers Alliance........... 10
Prepared statement........................................... 12
Mark Chandler, Senior Vice President, General Counsel, and Chief
Compliance Officer, Cisco Systems, Inc......................... 15
Prepared statement........................................... 16
Julie P. Samuels, Senior Staff Attorney, Mark Cuban Chair to
Eliminate Stupid Patents, Electronic Frontier Foundation....... 20
Prepared statement........................................... 22
Lary Sinewitz, Executive Vice President, BrandsMart USA on behalf
of the National Retail Federation.............................. 28
Prepared statement........................................... 30
Adam Mossoff, Professor of Law, George Mason University School of
Law and Senior Scholar, Center for the Protection of
Intellectual Property.......................................... 34
Prepared statement........................................... 35
Appendix
Response to written questions submitted to Hon. Jon Bruning by:
Hon. Claire McCaskill........................................ 63
Hon. Richard Blumenthal...................................... 64
Response to written questions submitted to Jon Potter by:
Hon. Claire McCaskill........................................ 65
Hon. Richard Blumenthal...................................... 66
Response to written questions submitted to Mark Chandler by:
Hon. Claire McCaskill........................................ 67
Hon. Mark Pryor.............................................. 68
Hon. Richard Blumenthal...................................... 69
Response to written questions submitted to Julie P. Samuels by:
Hon. Claire McCaskill........................................ 69
Hon. Richard Blumenthal...................................... 71
Response to written questions submitted to Lary Sinewitz by:
Hon. Claire McCaskill........................................ 72
Hon. Richard Blumenthal...................................... 73
Response to written questions submitted by Hon. Richard
Blumenthal to Adam Mossoff..................................... 74
DEMAND LETTERS AND CONSUMER
PROTECTION: EXAMINING DECEPTIVE
PRACTICES BY PATENT ASSERTION ENTITIES
----------
THURSDAY, NOVEMBER 7, 2013
U.S. Senate,
Subcommittee on Consumer Protection, Product
Safety, and Insurance,
Committee on Commerce, Science, and Transportation,
Washington, DC.
The Subcommittee met, pursuant to notice, at 10:04 a.m. in
room SR-253, Russell Senate Office Building, Hon. Claire
McCaskill, Chairman of the Subcommittee, presiding.
OPENING STATEMENT OF HON. CLAIRE McCASKILL,
U.S. SENATOR FROM MISSOURI
Senator McCaskill. This hearing will come to order.
We thank our witnesses for being here. And I thank Senator
Heller for being a great working partner with me on this
subcommittee.
This morning we are examining a growing consumer protection
concern within our patent system. In recent years, the growth
of patent assertion entities--also known as PAEs or referred to
by many as patent trolls--has led to an increase in patent
litigation and spawned greater use of the so-called demand
letters. Too often, this appears to be an unfair and deceptive
practice that is harming everyday businesses, consumers, and
startups.
Patent trolls send out hundreds and, in some cases,
thousands of demand letters to unsuspecting entities alleging
patent infringement. These letters demand payment and threaten
to sue if payment isn't made. The demand letters we are talking
about often don't even contain the most basic information that
would allow recipients to know which patents they have
allegedly infringed or how. Many times, recipients can't even
tell who is sending the letter in question, because patent
trolls use multiple shell companies to hide their identities.
Sometimes the patents in question aren't even valid or already
covered by an existing license. But, of course, none of this is
disclosed in these ``demand letters.''
The result is that the recipients are left in the dark,
unable to know whether they should settle or fight the claim.
Even if the allegations are outrageous and untrue, companies
often choose to cough up the money anyway because they worry
that going to court would simply be too costly. Never mind
that, despite their threats to the contrary, many patent trolls
have no intention of bringing suit or no basis on which to do
so.
It's hard to distinguish the deceptive nature of this
conduct from the many other scams that prey on Americans who do
not have the resources or expertise to go on the offensive.
By many accounts, deceptive demand letters seem to be a
growing problem. By some estimates, patent trolls are sending
well over a hundred thousand demand letters a year, impacting a
wide swath of innovative startups and other small businesses.
Making matters worse, patent trolls are increasingly seeing
dollar signs in targeting small businesses that have nothing to
do with the patent system, such as coffee shops and brick-and-
mortar retailers. These small businesses aren't in the patent
business, and they don't have the expertise or resources to
evaluate the claims in a demand letter, much less hire an army
of lawyers for what could be protracted litigation.
Sometimes the alleged patent infringement is a technology
patent that they have purchased for their business like
scanners or Wi-Fi routers, or that is already covered by a
license from the manufacturer. As we will hear today from
Cisco, one patent troll sent 13,000 demand letters to Cisco's
customers for using one of its products.
This is not just an issue facing technology companies. I
have heard from businesses in Missouri and across the country,
large and small, that are facing similar challenges. Most are
reluctant to share their stories because of ongoing litigation,
terms of settlement agreements, or fear of becoming a target
for other patent trolls. But for many retailers, banks, credit
unions, app developers, hotels, restaurants, cable companies,
and broadcasters, dealing with demand letters has become an
additional cost of doing business.
The issue here is not about the right to assert one's
patent. Let me repeat that. The issue here is not about the
right to assert one's patent. It's not really even about the
patent system. It's about the deceptive and unfair practice of
threatening businesses and consumers based on often--unfounded
claims for the sole purpose of bilking them. It's about scam
artists preying on the vulnerable.
I'm pleased that the Federal Trade Commission recently
launched an in-depth investigation into the patent troll
industry. And I would like to applaud the various State
Attorneys General, including Attorney General Bruning, who is
here today, for taking steps to protect their constituents
against harmful demand letter tactics.
At the same time, perhaps there is something Congress can
do, too. It seems to me that demand letters should, at a very
minimum--well, nothing like missing electronics.
[Laughter.]
Senator McCaskill. Apple, do you hear me?
[Laughter.]
Senator McCaskill. At the same time, perhaps there is
something Congress can do. It seems to me that demand letters
should, at a very minimum, include basic common sense
disclosures: who, what, when, where, and why. In addition to
learning more about the impact of demand letters, I hope to
hear from our witnesses today whether these demand letters
could use some transparency to better protect American
consumers and businesses.
Senator Heller.
STATEMENT OF HON. DEAN HELLER,
U.S. SENATOR FROM NEVADA
Senator Heller. Well, I have my opening statement here on
my BlackBerry.
Senator McCaskill. Good luck.
Senator Heller. I think I better switch to the----
Senator McCaskill. I got to the last paragraph.
Senator Heller. Yes.
Chairwoman, thank you for having this hearing. I want to
take just a minute to thank her for her work that she's done
recently with the FAA. I noticed the gentleman sitting next to
me, as we were landing, was playing Angry Birds. So, for your
help and work in keeping those apps open----
Senator McCaskill. Did you send him Claire's love that he
gets to keep playing Angry Birds as he lands?
Senator Heller. While he lands, correct.
I also want to thank our witnesses. I don't think that
table was built for six witnesses, but you're squeezed in well.
So, thank you very much for being here.
Today we're taking a hard look at patent litigation.
Specifically, we're looking at the practice of some entities
that engage in aggressive pre-litigation practices based on
alleged patent infringements.
We all agree that patent holders should be protected under
the law. They should be able to assert patent protection
methods. Patents are incredibly important in our economy and we
all agree that patent holders should receive compensation for
their innovation. Unfortunately, there are some bad actors in
this sphere who are aggressively asserting that a patent they
own has been infringed on in a manner that some believe is, in
fact, deceptive.
Examples brought to our attention include a business that
accumulates patents often by purchasing them from the PhoneGap
companies or directly from individual investors. The companies
then make use of patents that are ambiguous or broadly written
in order to maximize the number of companies which they can
assert the patent.
These companies generally do not make or sell anything
related to these patents. Instead they identify companies using
a technology that it can allege as an infringement of the
patent. Then, they write a letter to the alleged infringer
stating that infringement has occurred and litigation will
commence unless the licensing agreement is entered into. Either
pay us or we will sue you for patent infringement.
This practice seems to have initially started with
technology companies. However, other industries including
retailers, hospitals, banks, restaurants and the gaming
industry have become targets as well. This practice concerns me
as I am sure it concerns many Senators.
If frivolous lawsuits are being filed across my state of
Nevada because a coffee shop allows their customer to use Wi-Fi
in Reno, or a Las Vegas Casino receives a demand letter on a
game they offer, it can have a negative impact on the economy
because it could hinder innovation and, of course, economic
growth.
So, I do not believe that there is any question that this
practice is taking place. It is. What I hope this hearing today
sheds light on is the scope of the problem, most appropriate
method to stem this behavior.
It is my understanding that the Federal Trade Commission
has authority to act under the existing Section 5 authority to
enforce against unfair and deceptive acts and practices. I also
understand--I understand that they are waiting for the results
of their own six-week study to be completed before moving
forward.
I think it's important to see that study or at least the
very least have a strong understanding of the scope of the
issues before us, especially before moving on to any proposal
that they be used that may be under the Committee's
jurisdiction regarding the FTC. I also know that patent reform
is an issue that the Judiciary Committee has looked at and will
continue to look at.
Many of the issues that will be discussed here will also be
solved by passing rulemaking authority instructing the Patent
and Trademark Office to enforce standards on these demand
letters.
I hope that we can aid in solving this problem by using
this hearing today to shed light on this issue, but this
committee is somewhat limited due to the narrow scope and lien
of jurisdiction that we have. Nevertheless, this is an
important issue and I thank the Chairwoman for holding this
hearing today and even by holding this hearing we're drawing
attention to it and rightfully so.
So again, thanks, Madam Chairwoman, for holding this
hearing to discuss ways in which we can work to ensure patent
holders can protect their faith that patents, frivolous patent
lawsuits, are mitigated.
Thank you.
Senator McCaskill. Thank you, Senator.
Let me introduce the witnesses. First, we have the
Honorable Jon Bruning, who is the Attorney General from the
State of Nebraska. Thank you for traveling here from Lincoln.
Now that we're in different conferences, I can show you a lot
more love.
[Laughter.]
Senator McCaskill. Mr. Jon Potter, who is President of the
Application Developers Alliance from here in Washington, D.C.;
Mr. Mark Chandler, who is Senior Vice President, General
Counsel and Chief Compliance Officer of Cisco Systems from San
Jose, California; Ms. Julie Samuels, who is Senior Staff
Attorney, Electronic Frontier Foundation, also out of San
Francisco, California; Mr. Lary Sinewitz, who is the Executive
Vice President of BrandsMart USA, who is from Florida; and
finally, Mr. Adam Mossoff, who is a Professor of Law nearby
here in George Mason University School of Law.
We will begin with your testimony, Mr. Bruning. Thank you
very much.
STATEMENT OF HON. JON BRUNING, ATTORNEY GENERAL,
STATE OF NEBRASKA
Mr. Bruning. Chairwoman McCaskill, Ranking Member Heller,
thank you very much for holding this hearing. And Madam Chair,
it's funny you say that about our conferences. I have in my
office a Missouri tiger tail that was a gift from Robin
Carnahan. I sent her a corn head from Nebraska; she sent me a
tiger tail. I keep it proudly even though, of course, I cheer
for the Huskers.
[Laughter.]
Mr. Bruning. Patent trolls abuse the open nature of our
intellectual property system and they represent a destructive
threat to small businesses, even out in nonprofit organizations
and consumers. They offer little or no innovative value to our
economy; they undertake their scheme in the shadows, often
beyond the view of regulators.
So the time is ripe for Federal and State authorities to
work in concert to address this issue and stem the tide of
patent trolling nationwide, but still protect the ability of
legitimate patent holders to enforce their rights.
I thought both your statements were right on and very well
thought out. We want to protect the ability of legitimate
patent holders but this is not about that. This is about a
nationwide scheme that's happening because of a few.
These patent trolls seek to only extract costly licensing
fees from these alleged infringers. They lack any intention to
develop the underlying technology, improve upon it, or bring it
to market. They send scattershot demand letters, which include
a vague description of the patent and a demand that the target
pay up. Unfortunately, these targets are often small businesses
and nonprofits. Recently, we've had several examples of this in
my state.
MPHJ Technologies has been an active and notorious patent
troll in Nebraska and across the country. MPHJ claims it owns
the patent for using a basic scan-to-e-mail technology.
According to MPHJ and its lawyers, any person who has scanned a
paper document to an e-mail attachment has infringed MPHJ's
patent. That's about everybody in this country, seemingly.
MPHJ demands a thousand dollars per employee from hundreds
of organizations around the country. So for small businesses
and nonprofits, this can be a death threat.
MPHJ's scheme functions through dozens of shell companies
that it and its lawyers have created. These shells go by names
like AccNum, GosNel, FolNer and build themselves as licensing
agents for MPHJ.
One example of MPHJ's targets in Nebraska was Eldon
Steinbrink. Mr. Steinbrink is perhaps the perfect example of
not only the absurdity of MPHJ's campaign, but how little
research that MPHJ does before they send out these letters
scattershot across the country. MPHJ, through its shell company
FosNel, somehow decided that Mr. Steinbrink was infringing on
its scan-to-e-mail patent through his work for Phelps County
Emergency Management and sent him a demand letter. And these
are the--we have the letters right here, Exhibits A, B and C
and we included them in our filing.
Mr. Steinbrink never worked for Phelps County Emergency
Management. He is an elderly gentleman; he lives in a nursing
home in Holdrege, Nebraska. He once served on the Phelps County
Board many years ago. He now has Alzheimer's.
Other examples in Nebraska have included nonprofits, such
as Voices of Omaha, which is a community choir group; they have
a few hundred dollars in their checking account, small
businesses ranging from plumbers to accountants. Very few of
MPHJ's Nebraska targets would have had the resources to mount a
full defense had MPHJ followed through on its threats, which
they never do. They have never sued anyone.
These letters are designed to frighten consumers and small
organizations who lack the resources to mount an expensive
legal fight. The average cost for such a defense is estimated
in the hundreds of thousands of dollars, at a minimum. So
accordingly, many of these people pay to make the patent troll
go away. It's a silent extortion is what it is.
My office and other state attorneys general have declared a
bipartisan, multistate war on these patent trolls. In Nebraska
and Vermont, my colleague, Bill Sorrell in particular, we've
taken aggressive and innovative steps to use our state consumer
protection laws to address these demand letters. My
understanding is yesterday, Attorney General Martha Coakley who
is a good friend of mine in Massachusetts, she's becoming
involved. And attorney general after attorney general is now
realizing we have to band together to fight these patent
trolls.
We're planning to introduce a bill in our legislature in
Nebraska, which will further focus on patent abuse. But really,
what we need is Congress to lead. The Senate has to lead here.
This Committee, in particular, has an important role in
conducting a national consumer protection investigation. You
can bring national attention to some of America's worst patent
trolls and their use of demand letters as weapons of extortion.
We encourage Congress to use your subpoena powers to bring
the most egregious patent trolls and their lawyers who enable
them to account. Call MPHJ to this subcommittee. Have them
explain why they sent a demand letter to Eldon Steinbrink in
Holdrege, Nebraska, with no knowledge that he had violated
their patent. Compel other patent trolls to come here and do
the same. Explain themselves.
This has to be a multipronged effort. It's not just the
Attorney Generals, it's not just Congress reforming the patent
system. States and the FTC have to be empowered to address
these demand letter abuses using our consumer protection laws
and we're going to go about doing that.
This issue has to be given prolonged and meaningful
attention. Through these efforts, we can stop the problem of
patent trolling in America; we can protect our consumers, our
small businesses, and our nonprofits who have been victimized.
Again, I want to thank the Subcommittee for inviting my
testimony. I look forward to your questions.
Thank you.
[The prepared statement of Mr. Bruning follows:]
Prepared Statement of Hon. Jon Bruning, Attorney General,
State of Nebraska
Good morning, Chairman McCaskill, Ranking Member Heller, and
members of the Subcommittee. I am the Attorney General of the State of
Nebraska and have served in that capacity since 2003. I appreciate the
Subcommittee's interest in addressing the growing problem of patent
trolls and am pleased to have the opportunity to share the state
enforcement perspective on this issue.
Patent trolls abuse the open nature of our intellectual property
system and represent a destructive threat to small businesses,
nonprofit organizations, and consumers. They offer little or no
innovative value to our economy and undertake their schemes in the
shadows, often beyond the view of regulators. The time is ripe for
Federal and state authorities to work in concert to address this issue
and stem the tide of patent trolling nationwide, while protecting the
ability of legitimate patent holders to enforce their rights. I am
pleased to participate in that effort.
I am charged with the obligation to enforce Nebraska's Consumer
Protection and Uniform Deceptive Trade Practices statutes and view this
role as one of my top priorities. My office includes a division of
attorneys and staff devoted exclusively to combating fraud, unfair, and
dishonest trade practices. We pursue these efforts using a broad
spectrum of tools, including consumer mediation, multi-state
investigations, and full-scale litigation. Because we understand that
financial predators are often sophisticated, technically savvy, and
adept at creating an air of legitimacy, we take our role as guardian of
the public interest in this area very seriously.
Over the past year, we have grown increasingly aware of the threat
posed to Nebraska small businesses, nonprofits, and consumers by patent
assertion entities, commonly known as ``patent trolls.'' Generally,
patent trolls acquire patents solely for the purpose of using them to
coerce license fees from legitimate charities or businesses they claim
have infringed on the patent. Patent trolls typically lack any
intention to develop the underlying technology, improve upon it, or
bring it to market. Rather, they seek only to extract costly licensing
fees and/or pretrial settlements from alleged ``infringers.''
Our investigations and research have developed insight into the
modus operandi of the prototypical patent troll. First, the patent
troll acquires one or a handful of patents relating to a particular
technology. The patent troll will then gather a list of targets against
which it believes it can assert ``infringement.'' Very little research
is likely performed at this stage. The troll simply assembles a list of
a substantial number of targets it believes might be utilizing the
patented technology.
Our investigations have revealed little rhyme or reason to the type
or size of entity a patent troll will include in its target list. We
identified victims ranging from small businesses and nonprofits for
whom patent trolls can represent an existential threat to global
technology producers and nationwide telecommunications firms for whom
patent trolls represent a drain on resources and constant annoyance.
The former are often caught off-guard by the notion that they are
``infringing'' on a patented technology totally unrelated to their
organization's actual work.
The scope of a patent trolling effort can be extraordinary in
breadth and scope. A 2013 White House report noted that one patent
troll sent eight thousand demand letters to coffee chains, hotels, and
retailers seeking compensation for use of Wi-Fi equipment made by
several manufacturers that the patent troll alleged to infringe on its
patents. One constant has emerged, however: in virtually every case, we
found the process began with a ``demand letter.''
A patent troll's demand letter usually includes several components.
It typically identifies the patent or patents owned by the troll,
usually by number accompanied by a vague or generalized description of
the nature of the patent(s), with a conclusory statement that the
targeted company is infringing upon the specified patent. The demand
letter will often indicate it is necessary for the targeted entity to
engage in some type of negotiation to pay the patent troll a license
fee and will explain, in very broad terms, why a license is needed.
Though the demand letter may indicate the possibility that the targeted
entity is, in fact, not infringing, this caveat is often at the end,
coming well after a series of conclusory and ominous statements that
the targeted entity's use of a particular technology--usually
completely unrelated to the entity's actual business--has infringed on
the patent or patents in question.
If the initial demand letter carries the implicit threat of
litigation, as described above, then subsequent correspondence from the
patent troll will often include the explicit threat of litigation.
Should a targeted entity not respond to the initial demand for license
fee negotiations or should such negotiations stall or prove
insufficiently profitable for the patent troll, additional letters may
include a draft copy of a Federal court complaint, complete with the
targeted entity's name in the caption and numbered allegations. Though
the inclusion of such a document may appear to some to be the ultimate
leverage as the final step toward litigation against the targeted
entity, chosen by the patent troll solely toward the aim of winning a
significant patent infringement award specifically from the target, it
is often simply a template scare tactic. In reality, the same complaint
with virtually the same language may well have been submitted to a
number of other targeted entities as a result of their own alleged
``infringement.''
One patent troll active in Nebraska is ``MPHJ Technologies.''
Nationwide, MPHJ has become notorious. MPHJ has asserted it owns the
patent for using a basic office scanner to scan a document to e-mail.
According to MPHJ and its lawyers, anytime any person has scanned a
document to e-mail, that person has infringed on MPHJ's patent. The
potential financial consequences to MPHJ's targeted victims are
significant. MPHJ has demanded a thousand dollars per employee from
hundreds of organizations around the country. In many instances, such a
claim can mean a death threat to a small business or nonprofit
incapable of defending itself without incurring substantial legal
expenses.
MPHJ's scheme functions through dozens of shell companies it and
its lawyers have created. MPHJ itself owns the patents--ostensibly for
scan-to-e-mail technology--but the initial assertion of infringement
comes from a veritable alphabet soup of LLCs such as ``AccNum,''
``GosNel,'' or ``FolNer.'' These shell companies bill themselves as
``licensing agents'' for the patents owned by MPHJ and are the entities
from which demand letters are sent to hundreds of alleged infringers.
One example of MPHJ's targets in Nebraska was Eldon Steinbrink. Mr.
Steinbrink is perhaps the perfect example not only of the absurdity of
MPHJ's campaign but also of how little research MPHJ and its lawyers
perform before sending threatening letters scattershot across the
country. MPHJ, through its shell company FosNel, somehow decided that
Mr. Steinbrink was ``infringing'' on its scan-to-e-mail patent through
his work for Phelps County Emergency Management and sent him a demand
letter. See Exhibit A (on information and belief, a demand letter
virtually identical to the one sent to Mr. Steinbrink), Exhibit B (the
second demand letter sent to Mr. Steinbrink), and Exhibit C (the third
demand letter sent to Mr. Steinbrink which included a draft lawsuit
complaint).
The problem with this scheme was that Mr. Steinbrink never worked
for Phelps County Emergency Management. He is an elderly gentleman
living in a nursing home in Holdrege, Nebraska, and who once served on
the Phelps County Board many years ago. It is obvious MPHJ and its
lawyers performed little or absolutely no research prior to threatening
Mr. Steinbrink.
Mr. Steinbrink's story is but one of many. Others in Nebraska have
included nonprofits, such as Voices of Omaha, a community choir, to
small businesses ranging from plumbers to accountants. Very few of
MPHJ's Nebraska targets would have had the resources to mount a full
defense had MPHJ followed through on its threats and most were forced
to find alternative means to resolve the issue. In sum, MPHJ represents
patent enforcement abuse at its very worst.
Patent troll demand letters, usually marked by a steady increase in
pressure and aggression, are typically designed to ultimately achieve a
single aim: the extraction of as big a payment as possible from the
targeted entity. Indeed, it is our understanding that most patent
trolls do not ordinarily desire their enforcement actions be fully
adjudicated--or even subjected to a preliminary evaluation--by a
Federal court. For if such adjudication occurs and the patent or
patents are invalidated, efforts against other targeted entities based
on the same patents are rendered useless and unprofitable.
Instead, patent trolls generally seek to ``price'' their license or
settlement demands such that the sum obtained will be high enough to
make the effort worthwhile but low enough that it can actually be
afforded (using the term loosely) by the targeted entity. In other
words, it is worth it to simply pay the troll to go away (for a price
which reflects not any true market value for the patented technology,
but its litigation-induced value) instead of engaging in protracted and
costly litigation.
The latter point appears to be one of the main reasons patent
trolls have been so successful and, thus, so destructive. To put it
simply, most targeted entities have neither the time, resources, nor
inclination to engage in a pitched legal battle to defend a patent.
This is particularly so when the patent in question is collateral to
the entity's actual line of business. The average cost of a full-scale
patent defense ranges from $350,000 to $3 million. Regardless of the
exact price, defending a patent can be fairly described as one of the
most expensive forms of litigation in existence.
A large entity, such as a software or technology firm (frequent
targets of patent trolls), may have the resources to fight those
efforts which are facially illegitimate, but it also has the resources
to simply make a troll go away through settlement. Indeed, large
corporations may employ an intellectual property specialist on staff to
manage the large number of challenges it receives, in addition to one
or more outside firms to handle disputes if they are ultimately
litigated.
Smaller entities, including nonprofits and firms who cannot afford
to hire attorneys well-versed in the intricacies of patent litigation
(which, candidly, applies to most attorneys, including seasoned
litigators) are often even more eager to limit significant litigation
risk and will pay the patent troll a sum to dispose of the case.
Indeed, even if a targeted entity can hire an experienced patent
litigator, prudent risk management strategy still often results in a
settlement with the patent troll. This is so because a hired patent
attorney will usually foresee the resources and expense which are the
hallmarks of successfully defending almost any patent infringement
enforcement effort and recommend the prompt resolution of the matter.
In any event, a smaller entity will have little choice but to so hire a
specialized patent attorney because few small organizations have the
capacity to employ a patent lawyer on a full-time basis.
The damaging effects of patent trolls are clear. Patent trolls
succeed through the issuance of egregious threats which serve to
advance no valid legal purpose or the legitimate protection of
productive intellectual property but, rather, seek only to extract
quick settlements from those otherwise committed to building their
businesses and providing positive value to society. The question for
policymakers charged with building a legal framework of robust consumer
protection is how to stem the destructive tide of patent trolls and
give targeted entities some support in what has, thus far, been a
rather one-sided fight.
As a preliminary matter, I proceed from the premise that America's
intellectual property enforcement system, though in need of significant
reform, should remain one which readily enables holders of valid,
productive patents to enforce such patents without undue hurdles or
unfair obstacles. I firmly believe in the principle that intellectual
property is precisely that--property--and that legitimate enforcement
of the rights which flow from such property should be protected. Patent
trolls, however, have abused America's relatively open system that
expressly provides for a presumption of validity of patents. To protect
the integrity of that system while simultaneously protecting consumers
and businesses from patent trolls, therefore, increased consumer
protection tools are necessary at both the Federal and state level to
address this issue.
Several states, including Nebraska, have explored using our
existing Consumer Protection and Unfair and Deceptive Trade Practices
statutes to combat patent trolls. The theory behind this strategy is
simple: if a patent troll sends a demand letter demanding licensing
fees from an alleged ``infringer'' but in fact lacks a good faith
belief in the validity in the underlying patent or its application to
the target's technology, or if the troll threatens litigation
categorically lacking any intention of ever filing suit, that may
violate existing consumer protection laws.
Though we are confident this approach using existing statutes can
be highly effective, we are also exploring ways in which we can
strengthen existing laws and further tailor their applicability to
patent trolls. Such state legislation--which must be done in a manner
that does not stray into the clearly pre-empted Federal sphere of
patent regulation--may include stricter demand letter content
requirements, the requirement of a bond posting by the asserting
entity, or the inclusion of a sworn affidavit by the asserting entity
that the assertion is legitimate and made in good faith. I look forward
to continuing my work with my fellow state Attorneys General to develop
what could ultimately be termed ``model legislation'' for this purpose.
Congress must also act to align Federal consumer protection
activities with state efforts. Though reform of the patent system
itself must originate with your colleagues on the Judiciary Committee,
the Commerce Committee possesses the jurisdiction to empower Federal
enforcement authorities to take a hard line against unfair and
deceptive demand letter practices. I encourage you to do so.
I am pleased that the Federal government has already shown a
willingness to address this problem. The FTC has proposed a patent
troll information gathering project which is currently in the public
comment phase. Vermont Attorney General William Sorrell and I have
partnered to co-sponsor a multi-state letter of support for that
project. I encourage the Subcommittee to champion that project and use
its results as the basis for additional hearings on the workings and
methods of patent trolls nationwide.
In the meantime, however, I call upon Congress to utilize its
subpoena power to bring the investigation of some of the worst known
patent trolls to the national level. I encourage you to bring the most
notorious patent trolls--and the lawyers who facilitate their schemes--
to account for their alleged abuses of the patent enforcement system
and explain how they do business. For too long patent trolls have
operated in the shadows with virtual impunity. It is now time for
Federal and state authorities to bring them into the open.
In conclusion, addressing the problem of patent trolls is
achievable and necessary if we are to truly fulfill our consumer
protection roles. Frankly, it is one of those rare issues which
commands truly broad consensus on the need for reforms. Entities of all
types and sizes--from the very large to the very small--view patent
trolls as a threat to their productivity and, sometimes, their
existence. Scholars and practitioners from across the intellectual
property legal spectrum have voiced the problems posed by these
financial predators. Democrats and Republicans alike view patent trolls
as a direct threat not only to our constituents but to innovation,
overall. In short, few other consumer protection concerns are more
deserving of our immediate attention.
Again, I appreciate the Subcommittee's attention to this issue and
for the opportunity to share my views. I look forward to working in
partnership with Congress to bring about changes which will enhance our
consumer protection tools and put an end to the problem of patent
trolls.
Senator McCaskill. Thank you, Attorney General.
Mr. Potter.
STATEMENT OF JON POTTER, PRESIDENT,
APPLICATION DEVELOPERS ALLIANCE
Mr. Potter. Thank you, Chairman McCaskill and Ranking
Member Heller.
The App Developers Alliance and our more than 30,000
members urge swift enactment of legislation to eliminate patent
trolls' favorite weapon: vague, deceptive, baseless and
threatening demand letters that inhibit investment and
startups; cause app developers to stop hiring engineers; and
bully companies into extortionist settlements because the
settlements are cheaper than litigation.
I invite you to join me this morning in your local version
of startup land. At Lab1500 in St. Louis, Work In Progress, Las
Vegas, and work share spaces nationwide, passionate, energetic
app developers are creating new products and services to
improve our lives. They dream about IPOs, but in reality money
is tight, risk is the norm and threatening letters from patent
trolls are devastating.
Legitimate companies assert their patents by offering
voluminous documentation after researching the letter
recipients' business or technology. In contrast, smash and grab
patent trolls buy cheap patents and use them to extract
shakedown licenses from small companies and startup land.
Letters threaten protracted litigation. They demand fixed-fee
licenses regardless of how valuable the patented technology is
for the recipient's businesses. They offer limited time, six
figure settlement specials, and they threaten to increase
royalties if a business hires a lawyer or requests more
information about the patent.
Please remember, patent trolls make no products and produce
no services. They are the patent equivalent of the penny stock
boiler room that sells worthless stock to our grandmothers and
exterminators who help rid you of termites that they just flung
into your garage.
The patent troll racket has reached epidemic levels that
require a legislative response. A study released this week
documented that one third of VC funded startups have received
patent demand letters and 60 percent of the letters were from
trolls. Defending against patent demands cost at least $100,000
and quickly rises into the millions. And every dollar wasted
against a troll is another marketing person not hired, another
engineer without a job, and a sales person who can't get work.
Our website shows an interview of a moderately successful
startup CEO lamenting that he now pays six lawyers but only
five employees. He hasn't paid himself for a year and he names
the three employees that he hasn't hired. Beyond the costs to
fight, patent demand letters scare away potential business
partners and customers and are a major deterrent to investment.
For all these reasons, app developers are vulnerable.
As several attorneys general and trade associations have
documented, the trolls are taxing business, investment, growth
and opportunity. Last week, visiting St. Louis, I learned of
three local companies recently attacked by patent trolls. One
company's service was built on a digital platform but the troll
had an analogue technology patent. It didn't matter. The
company had to hire a lawyer. The company ultimately settled
because it couldn't afford the fight. Nationwide there are
stories like this.
Earlier, I was in Los Angeles with a four-employee startup
that once held a highly ranked app in the iTunes store. A troll
demanded an unjustified license in royalties, but the company
couldn't even afford a lawyer. Instead of fighting, it gutted
its own app. It took away all the features that were compelling
and it created sales for it. So in one sense they think they
have won because they haven't paid the troll, but they have
lost because their app is no longer successful, the company is
floundering, and they are no longer hiring.
All across America app developers and main street
businesses are frustrated by trolls and their demand letters.
And they wonder how the government, which manages the patent
system, has allowed this to happen. Skeptics suggest that
trolls and demand letters and demand letter problems have been
enabled by poor quality patents that our underfunded Patent and
Trademark Office should not have allowed. The alliance agrees
and we urge Congress to remedy this by legislating expanded
opportunities for the Patent and Trademark Office to
administratively review and cancel poor quality, previously
issued patents through its covered business method program.
Other skeptics suggest that Congress needs more demand
letter data before we're legislating to stop the abusive
startups, grocery stores, coffee shops and retailers. But app
developers are being driven out of business today. Main street
businesses are being sued or being attacked today and Americans
are paying higher prices in food and lost innovation and lost
jobs today.
To be clear, I'm not asking this committee to amend the
Patent Act. Rather, I'm urging the Committee to legislate very
precise standards to prevent a new and growing strain of garden
variety fraud--the transmittal of deceptive, unfair and abusive
demand letters that just happen to be bolted onto our patent
system.
On behalf of our thousands of innovators and
entrepreneurial members, I urge you to prohibit demand letters
that knowingly overstate the breadth of a patent's coverage,
that do not disclose the patent or claim being infringed, that
accuse businesses of infringement without the sender having any
knowledge of whether infringement has actually occurred, or
that menacingly threaten litigation when there's no intention
of following through.
Please promote the patent system, promote app innovation
and promote economic growth by ending demand letter abuse.
Thank you.
[The prepared statement of Mr. Potter follows:]
Prepared Statement of Jon Potter, President,
Application Developers Alliance
Chairman McCaskill, Ranking Member Heller and Members of the
Subcommittee:
On behalf of the Application Developers Alliance, our more than
30,000 individual members and 145 corporate members, I urge you to
swiftly act to eliminate a favored weapon of America's patent troll
bullies--vague, deceptive, baseless and fraudulent demand letters.
In the last few years, a new business model has emerged. Patent
trolls send demand letters that knowingly overstate the breadth of a
patent's coverage, or alternatively do not disclose the patent or claim
being infringed. The letters accuse businesses of infringement without
the sender having any knowledge of whether infringement has actually
occurred, and they menacingly threaten litigation when they have no
intention of following through.
These demand letters unnerve startups, cause better capitalized
companies to needlessly hire lawyers, and force even large companies to
pay extortionist settlements just to avoid the even higher costs of
litigation discovery. But when the defending company fights back, the
often thinly capitalized trolls retreat without punishment or regret,
and simply move on to threaten another company or dozens of companies,
knowing that several will sign unnecessary licenses and pay unjustified
royalties because it is cheaper--much cheaper--than fighting.
Demand letters that abuse our patent system are a relatively new
phenomenon but no longer unusual. This is a business model; it is
growing; and it must be stopped. On behalf of the mobile app industry
and our thousands of innovative, entrepreneurial members, I urge you
to:
(i) Prohibit patent infringement assertions that do not identify:
(a) the patent being asserted; (b) the claim that is allegedly
infringed; (c) the specific means by which the patent is
allegedly infringed; and (d) the parties that are financially
interested in the license and royalty demanded.
(ii) Require patent infringement assertions to be supported by
honest, good faith appraisals of the patent's validity, and by
reasonable efforts to determine whether and how the business
might actually be infringing the patent.
(iii) Punish those who knowingly in demand letters inflate the
breadth of a patent's coverage or its value, and thereby
attempt to bully defendants into quick settlements that are
either entirely undeserved or obligate unjustifiably high
payments.
At the outset, it is important to clarify that my testimony is not
about patent reform legislation. The Alliance supports legislation to
reduce abusive patent litigation and to divert from expensive Federal
courts wasteful infringement litigation based on low-quality patents.
But today's hearing is about stopping fraud on small business, fraud on
the American public, and fraud on the patent system.
Ending demand letter fraud requires decisive action like that of
General Bruning and other Attorneys General. But Federal agencies,
including the Federal Trade Commission, must also have a critical role
in preventing intentionally deceptive business practices that undermine
public trust in the patent system, stifle innovation and hurt
consumers.
In the online world, a smash-and-grab patent troll's demand letter
is the equivalent of the popup ad that says your computer has a virus,
and for $49 the advertiser will remove it. The advertiser ``helpfully''
informs you about the high costs of not paying the fee, but it really
has no idea if your computer has a virus. In the offline world, the
troll is an exterminator who cheerfully offers to fix your termite
problem for only $125. And though he has no knowledge of whether your
house is infested, he is happy to give you a certificate after you pay
him.
Individually and in combination, many patent trolls' demand letter
practices are unfair, deceptive, fraudulent and are the equivalent of
legalized extortion. Patents are a grant of public trust, with the
value of coveted, beachfront property. They are granted by the Federal
government for a specific purpose, and enforced by Federal judges who
act with extraordinary deference to the PTO regarding a patent's
validity and scope. Just like land grants, research grants, tax-
exemptions and government contracts, rules regarding patents' assertion
and exploitation can be--and should be--imposed or authorized by
Congress in an effort to reduce abuse.
Earlier this year the App Developers Alliance began surveying our
members about abusive patent litigation and related legislative
proposals. We quickly heard strong support for proposals to reduce
litigation discovery costs, to increase the likelihood of abusive
plaintiffs being sanctioned, and to divert litigation from courts to
the Patent and Trademark Office so that questionable business method
patents can be closely scrutinized before courts enforce them.
But we also heard that the greatest challenge for the smallest
companies happens well before litigation--when they first receive a
patent assertion and demand letter. This is because the smallest
companies cannot even afford to litigate in Federal court. This
explains why patent litigation fee-shifting proposals are important to
many companies and to a healthy patent system, but not as directly
important to startups. For small companies the mere threat of expensive
patent litigation can kill a young company's fundraising efforts and
scare off potential customers.
How prevalent are patent assertion and demand letters? Earlier this
week a study was released documenting that fully one-third of startups
responding to the survey have received patent assertions. Sixty percent
of those assertions came from entities whose primary business is
asserting and litigating patents. And just for startups, the cost of
preparing for and defending patent demands generally exceeds $100,000--
and can easily reach millions of dollars in the very rare challenge
that proceeds to trial. It is easy to understand why settlement is
cheaper than fighting, even when the company is confident that the
claim is specious.
Last week I was in St. Louis with a serial entrepreneur who shared
stories of three local companies attacked by audacious trolls. One
innovator had built an entire company based on digital technology, but
was being threatened by a troll whose patent was based on analog
technology.
All three companies had similar experiences after receiving abusive
demand letters: they spoke to the troll's lawyer who offered a simple
choice- sign a license, or hire litigation counsel and prepare for a
lengthy, expensive battle. The first company retained counsel, but made
a business decision to sign an unnecessary and unjustified license.
This is a classic ``tax on innovation'' that our patent system was not
intended to support and our startup economy cannot afford. The second
two companies are still exploring options, undoubtedly while paying
lawyers to help them appreciate the cost-benefit analysis of their
choice--fight righteously and expensively, or settle quickly and feel
extorted.
An Alliance member in Los Angeles responded differently when he
received an abusive demand letter. He called several lawyers and
quickly realized that he could not afford to fight, though he was
almost certain to win. He did not want, however, to reward the troll by
signing a license, so instead he removed his app's community features,
its interactive features, and its most successful upgrade path. His app
quickly dropped from the App Store's Top 10 list and his business is
suffering. In one regard, he feels victorious because he has avoided
the troll's wrath and has not been extorted directly. But, his business
is harmed; his three employees are questioning their futures; and his
spirit has flagged.
Legitimate companies asserting high-quality patents that they seek
to license for a fair royalty do not hide behind vague and threatening
letters. They disclose the patents; explain the breadth of the claims
in detail; and justify financially the basis of their royalty requests.
They are seeking to engage in a legitimate business relationship and
they behave accordingly.
Trolls, in contrast, rely on vague and overbroad patents, and
bullying threats of costly litigation and years of executive
distraction. Settlement becomes very attractive, even when it is
unjustified.
To be clear, as General Bruning knows, the worst trolls have
absolutely no interest in litigation regardless of how strenuously they
threaten lawsuits. This is because a defendant's first affirmative
defense will be that the patent or the claims being asserted are
invalid, and the troll's worst nightmare is that a court will address
their validity on the merits.
But only the bullying troll knows where its particular limit is.
Will it back off when a business hires competent counsel, or prove
willing to spend money on discovery, or only when discovery concludes
and the case gets close to trial? Along the way the bloviating troll's
goal is to increase defendants' legal fees, increase executive
distraction, and continue to increase settlement costs--all in an
effort to persuade the business to settle, sign an license, pay a
royalty, and end the costly, painful litigation. And it all begins with
a baseless, threatening, and fraudulent demand letter.
One troll went so far as to demand a meeting at its office in
California within ten days of contacting our New York-based member
company, and then increased its settlement ``offer'' every time that
our member contacted him again to learn more about the patent or to
negotiate. In an ironically different but also abusive contrast,
another troll thoughtfully offers a $300,000 flat-fee license without
any pretense of knowing if that amount bears any relation to the letter
recipient's alleged use of the invention in question, and then
enthusiastically offers an early settlement discount for the low, never
to be beaten, rate of $100,000. In this regard the troll resembles the
stereotypical used car salesman--asking how much will you pay me if I
agree to stop threatening you without justification today?
Congressional Action is Necessary, and Timely
Often Congress is reluctant to tackle a problem unless and until it
is absolutely clear that existing laws are insufficient. In this
regard, some might believe that the important and worthy actions of
General Bruning and his counterparts in Minnesota and Vermont
demonstrate that Congressional action is premature. They might also
look at the law enacted by the Vermont legislature this summer and
conclude the same. The Alliance, however, believes that state and
Federal action are complementary and that both are necessary right now.
The efforts of General Bruning and his counterparts in other
states, and of the Vermont legislature, only help the citizens of those
states. The Alliance believes that Congress and Federal agencies also
play an important role, by ensuring that citizens nationwide are
protected against abusive patent troll demand letters.
Courts--for example those handling patent infringement cases--do
not have jurisdiction over pre-litigation demand letters except to the
extent they are evidence of intentional infringement, which affects
damages calculations.
Also, the Federal Trade Commission's current authority over unfair
and deceptive trade practices has not been exercised to address the
problem of abusive demand letters. We believe the FTC could do more,
but that its enforcement actions necessarily will be against only a few
of the abusive trolls that send bullying, fraudulent demand letters.
The Alliance proposes three complementary solutions that will
reduce fraud and abuse, help demand letter recipients analyze demands
less expensively, and restore public trust in the patent system.
First, the FTC should set minimum standards on the transmittal of
patent assertion communications, and to define that communications
lacking indicia of good faith and fair dealing are per se ``unfair and
deceptive'' under the Federal Trade Commission Act. Including this
basic information will not conclusively define that the patent is valid
or that the troll is acting in good faith, but they will increase the
likelihood that the troll appreciates the gravity of its actions and
will minimize the risk of demand letter abuse. The required information
should include:
1. The patent number that is the subject of the assertion
communication;
2. The specific claims that are being asserted as being infringed;
3. The specific reasons why the asserting party believes that the
recipient of the communication is infringing the patent and/or
the claims, including a description of the specific
functionality or attribute of the receiving party's technology
or activity that is infringing;
4. The names of all parties with financial interests in the patent,
or in the settlement of the infringement, or in the licensing
fees or royalties that the asserting party is requesting to be
paid by the recipient of the assertion communication; and,
5. The names of all parties to whom the asserting party, or others
with financial interests in the patent, have sent assertion
communications with regard to the same patent.
Second, the Alliance urges Congress to codify that patents are a
public trust granted by the people's government, and that patent
assertion communications must include a sworn statement of good faith
and fair dealing regarding the breadth of the patent, that the
assertion is based on thorough research and fair analysis including
about the letter recipient's technology and business, and that the
requested royalty amount is reasonably related to the benefit derived
by the recipient by its use of the patented invention.
Third, the Alliance urges Congress to impose on patent owners
through the Patent Act the same terms and conditions delineated above,
and to empower courts to revoke or reduce patent ownership rights and
enforcement rights patents parties that deliberately or consistently
fail to comply with these requirements.
Irrespective of the agency or agencies empowered to act, the
Application Developers Alliance urges Congress to swiftly enact
meaningful minimum requirements for the form and content of demand
letters, including a requirement of honesty and fair dealing, and to
pair these requirements with potent penalties for failure to satisfy
them. These steps will protect America's innovative startups and our
Main Street businesses, and restore public trust in our patent system.
Thank you for your consideration of the Alliance's views.
Senator McCaskill. Thank you, Mr. Potter.
STATEMENT OF MARK CHANDLER, SENIOR VICE PRESIDENT, GENERAL
COUNSEL, AND CHIEF COMPLIANCE OFFICER, CISCO SYSTEMS, INC.
Mr. Chandler. Thank you, Chairman McCaskill, Ranking Member
Heller, Senator Klobuchar.
My name is Mark Chandler. I'm Senior Vice President and
General Counsel of Cisco. Today I'll describe our experience
with a new kind of scam that is based on a formula that's as
old as the hills, but dressed up with the language of patent
infringement and innovation.
The perpetrators send out thousands of threat letters to
small businesses and consumers and file lawsuits in the hopes
of a big payday, not based on any merits of the case, but on
the fears of victims who just want to make a problem go away.
These victims, mom and pop stores, hospitals, pharmacies, car
dealers, aren't manufacturers of products. They're simply users
like you and me.
I'm involved as General Counsel of Cisco because I want to
defend my customers, but we need your help in bringing a little
sunshine to a dark corner of the patent system.
Cisco was founded 30 years ago to build equipment so that
disparate computer systems could communicate with each other.
Today, we're the world's largest manufacturer of devices that
make up the backbone of the Internet and we also build Wi-Fi,
telephone and video systems. We employ 36,000 people in the
United States and create jobs for hundreds of thousands of
more. Our products are used directly or indirectly by billions
of people around the globe and are in tens of millions of
American homes and businesses. We, ourselves, hold over ten
thousand individual U.S. patents and we appreciate that your
colleagues in the Judiciary Committee are tackling issues
related to the patent system. But their efforts to make patent
litigation more fair won't affect what I'm describing today.
And let me tell you a story that unfortunately is not
unique, as has been well documented by others on this panel
including EFF which has collected many examples. Our story
begins when a lawyer named Noel Whitley bought patents related
to Wi-Fi from a great American chip company, Broadcom, and
created a company that he cynically named Innovatio.
Broadcom, for its part, didn't want the patents anymore
since their intrinsic economic value, related to innovation,
was coming to an end. They were near or past expiration, had
been broadly cross licensed to other chip companies and were
subject to binding contracts requiring licensing on fair terms.
But Whitley was not deterred. Whitley and his lawyers at
the Niro firm in Chicago, which specializes in this game, sent
almost 14,000 threat letters to small businesses, cafes,
bakeries, inns, hotels, a children's health clinic--basically,
anyone that might use Wi-Fi in their place of business. Did
they tell them what products might infringe? Nope. Instead, his
lawyers just wrote, ``I represent an individual who has
suffered injuries as a result of your company's business,'' in
claiming that the Innovatio portfolio covers all Wi-Fi usage.
Did his lawyers disclose that a huge proportion of Wi-Fi
devices were already licensed through the chip companies and no
more could legally be collected? No. Instead, they told them
that thousands of companies had already paid Innovatio and
referred to almost a billion dollars in royalties, without
letting on they were talking almost exclusively about Broadcom
cross licenses that have little or nothing to do with these
particular patents.
Did they tell them that the patents related to industry
standards and had to be licensed on fair terms? No. Instead
they told them, and again I quote, ``We wish to license your
company at a very affordable rate; far less than the cost of
patent litigation. I can quote you a rate of less than
$3,000,'' this for patents that a court determined were worth
pennies per chip.
And did they tell them that manufacturers like Cisco were
eager to defend them? No. Instead, they wrote that the
equipment manufacturers, and I quote, ``have not stepped in to
defend any of their users. This means we can still sue your
client and they cannot expect equipment manufacturers to aid in
their defense.''
Finally, for those who had the temerity to resist, they
enumerated thousands of pages of documents to be reviewed by
counsel, meaning a mountain of legal fees. Sadly, this isn't an
isolated incident as Attorney General Bruning has told you, as
others in the panel will, and as I've described also in my
written statement. This is a dangerous trend.
Let me close by suggesting four simple steps that would
make it much harder to carry out these schemes. First, require
anyone who is sending more than ten patent demand letters to
someone who is not a manufacturer or reseller of the accused
product to file the letters in an online registry at the FTC.
Second, require them to include a list of model numbers which
are believed to possibly infringe, the fact that manufacturers,
like Cisco, may be required to defend, and contact information
for the manufacturers. Third, require any such letter include
the names of the real entities or individuals who own the
patents. And fourth, require the letters to include a list of
all previous licenses and whether the patents are subject to
special licensing rules that apply to standards.
We aren't asking you to change substantive patent law, but
these simple steps will provide basic transparency to protect
the innocent end users. The paycheck I get every other week
says Cisco on it, but every cent comes from my customers.
That's why I'm passionate about making sure they don't get
ripped off by charlatans dressed up as innovators when they
trust us to supply them with products. And if the predators are
forced to come to me, once they have disclosed what they are
after, I can guarantee they will get a fair fight.
Thank you.
[The prepared statement of Mr. Chandler follows:]
Prepared Statement of Mark Chandler, Senior Vice President, General
Counsel, and Chief Compliance Officer, Cisco Systems, Inc.
Chairwoman McCaskill, Ranking Member Heller, members of the
Subcommittee, I am grateful for the opportunity to appear before you
today and describe our experience with a new kind of consumer scam that
we are seeing with increasing frequency.
This is deceptive behavior of the kind that has long existed but
now comes clothed in language like ``patent infringement'' and
``innovation.'' The goal is the same as in many old-fashioned consumer
rip-off schemes that the government has long taken action against--
trying to scare or convince people to pay something they don't owe or
buy something they don't need. The direct victims are not large
companies like Cisco Systems, but small businesses, non-profit
organizations and individuals.
I am involved because I need to defend my customers. But we need
your help.
We need a little sunshine to disinfect this dark corner of the
patent world--because once the practices used by these scam artists are
exposed, and the harm to their victims better understood, these rip-off
artists will be forced to change their ways.
Introduction
I am Senior Vice President and General Counsel of Cisco Systems. We
are a 30-year old company, founded by two Stanford graduate students,
who developed the key technology to allow different computer systems to
communicate with each other.
Our products are used every day by billions of people around the
world, and we sell everything from the core switches and routers that
make up the backbone of the Internet, to Wi-Fi systems people use in
their homes and businesses, to telephone and video conference systems
used by tens of millions of businesses and consumers.
Our annual revenue is approximately $50 billion, and we directly
employ 36,510 people in the United States and indirectly provide jobs
to hundreds of thousands more.
We hold over 10,000 U.S. patents and file many hundreds of new
patent applications every year. Our patents portfolio is regularly
rated among the strongest in the telecommunications industry. Most
importantly, our products are used in tens of millions, and perhaps
over 100 million, American homes and businesses.
Earlier this year I testified in front of your colleagues on the
Judiciary Committee about the scourge of abusive patent litigation
practices.\1\
---------------------------------------------------------------------------
\1\ Abusive Patent Litigation: The Impact on American Innovation &
Jobs, and Potential Solutions; Hearing before the House Judiciary
Committee (Mar. 14, 2013) (statement of Mark Chandler), available at
http://judiciary.house.gov/hearings/113th/03142013_2/chandler%2003
142013.pdf (last visited Nov. 4, 2013)
---------------------------------------------------------------------------
I am pleased to report that your Judiciary Committee colleagues and
their counterparts in the House of Representatives are working to make
patent litigation fairer and more efficient.
We are also hopeful that your Finance Committee colleagues and
their counterparts on the House Ways and Means Committee will soon work
to assure that International Trade Commission procedures can no longer
be used for shakedowns by non-practicing entities that do not truly
want an exclusion order. Exclusion orders are the only remedy available
from the I.T.C., but often non-practicing entities only want to
leverage the threat of such an order to obtain money to which they are
not entitled.
These reforms, which focus on litigation abuses, however, don't
address the kind of rip-off I'm describing today--a rip-off that
targets small businesses and consumers with threat letters, deception,
and intimidation tactics.
Examples: Innovatio
Our first story begins with a lawyer named Noel Whitley, who bought
patents related to Wi-Fi from his former employer--a great American
chip company, Broadcom--and then worked with a team of Chicago lawyers,
the Niro firm, which specializes in representing patent assertion
entities, to target legitimate businesses.
He created a company which he cynically called ``Innovatio,'' since
innovation is the last thing that the company does. Broadcom sold the
patents because they were near their expiration date, heavily licensed
to Broadcom's competitors and subject to binding commitments to license
on fair and reasonable terms.
So Mr. Whitley and the Niro firm came up with a scheme. He sent
over 14,000 letters to small businesses, cafes, bakeries, inns and
hotels, a children's health clinic--anyone who he thought might be
using Wi-Fi.
Mr. Whitley's team of lawyers and licensing ``consultants'' told
these non-profits and small businesses: ``I represent an individual who
has suffered injuries as a result of your company's business.'' They
went on to say, ``We are highly confident that the Innovatio portfolio
covers effectively ALL currently implemented embodiments of Wi-Fi
technology in use today.''
They didn't tell them that a huge proportion of Wi-Fi devices were
already licensed, because of Broadcom's cross licenses and the license
Broadcom kept for itself, and that therefore they might not even need
any further permission or licenses from Innovatio. Instead, they
claimed that almost a billion dollars had been collected in royalties
already; referring mostly to amounts paid to Broadcom by its arch-
competitor Qualcomm to resolve numerous U.S. and foreign legal claims
that had almost nothing to do with these patents.
They also claimed that thousands of companies had already paid
Innovatio as well. They didn't tell their targets that the patents
related to industry standards and therefore had to be licensed on fair
and non-discriminatory terms--something that all three of the former
owners including Broadcom had irrevocably promised to do. Instead they
told them, that ``[W]e wish to license your company at a very
affordable rate--far less than the cost of patent litigation. I can
quote you a rate of less than $3000 per location''--this for patents
that a Federal court recently determined were worth pennies per
chip.\2\
---------------------------------------------------------------------------
\2\ In re Innovatio IP Ventures, LLC Patent Litig., MDL No. 2303,
2013 WL 5593609 (N.D. Ill. Oct. 3, 2013).
---------------------------------------------------------------------------
And he didn't tell them that the manufacturers of the products,
including Cisco, were suing Innovatio to defend their customers.
Instead he misrepresented to them that the equipment manufacturers,
``have not stepped in to defend any of their users. This means we can
still sue your client and they cannot expect equipment manufacturers to
aid in their defense.''
Finally, for those businesses who had the temerity to resist,
Innovatio enumerated thousands of pages of documents that would have to
be reviewed by counsel to even begin to defend against Innovatio's
allegations, meaning thousands of dollars in legal fees. Unfortunately,
thousands of businesses may have fallen for this scam.
So, although Innovatio cloaks its business in the patina of patents
and patent infringement, the reality is that Innovatio is just a modern
take on an old scam.
Innovatio conducts its racket by sending letters containing
mistruths and omissions to thousands of consumers in an attempt to
obtain money from these targets to which Innovatio is not entitled.
And, unfortunately, Innovatio is only one example of this emerging
type of consumer fraud.
Project Paperless/MPHJ
There have been numerous news articles about a similar scam by an
entity that originally was called Project Paperless and which
ultimately became known as MPHJ. Project Paperless engaged in a letter-
writing campaign demanding $1,000 per employee from their targets.\3\
An online project \4\ discovered that some of the partners in Project
Paperless's law firm likely had an ownership interest in the patents.
Soon after the revelation of this inconvenient truth, Project Paperless
dropped its lawsuits and sold the patents to another shell company
called MPHJ Holdings, after which threatening letters started coming
from a full alphabet soup of strangely named shell companies including
AccNum, AllLed, AdzPro, CalNeb, ChaPac, FanPar, FasLan, FulNer, GosNel,
and HunLos.
---------------------------------------------------------------------------
\3\ See Joe Mullin, Meet the nice-guy lawyers who want $1,000 per
worker for using scanners, arstechnica (Apr. 7, 2013), available at
http://arstechnica.com/tech-policy/2013/04/meet-the-nice-guy-lawyers-
who-want-1000-per-worker-for-using-scanners/ (last visited Nov. 4,
2013).
\4\ See Stop Project Paperless website--http://stop-project-
paperless.com/the-patents/ (last visited Nov. 4, 2013).
---------------------------------------------------------------------------
State attorneys general in Minnesota, Nebraska, and Vermont have
taken various actions against MPHJ to protect business and consumers in
their respective states from MPHJ's deceptive practices. For example
the Vermont attorney general's action against MPHJ lists MPHJ's lies
and abusive practices in gory detail including:\5\
---------------------------------------------------------------------------
\5\ Consumer Protection Complaint in Vermont v. MPHJ Technology
Investments, LLC, No. 282-S-13WNCV (Vt. Super. Ct.) (filed May 8,
2013), available at http://www.atg.state.vt.us/assets/files/
Vermont%20v%20MPHJ%20Technologies%20Complaint.pdf (last visited Nov. 4,
2013).
1. MPHJ entities sent threatening letters without doing any actual
---------------------------------------------------------------------------
investigation of whether their patents were being infringed.
2. MPHJ forced its targets to do the work of analyzing infringement
3. MPHJ deliberately targeted small businesses without ready access
to sophisticated representation
4. MPHJ told its targets that it had a successful established
licensing program when it fact it had signed very few licenses
with an average licensing fee of $900.
5. MPHJ's letters indicate that litigation would be imminent if a
license deal was not signed almost immediately yet MPHJ had
never actually filed suit.
Minnesota reached a settlement with MPHJ forcing them to cease and
desist from targeting Minnesota businesses.
Helferich
Cisco also is aware of another such entity, Helferich Patent
Licensing, LLC (``Helferich''). Helferich was founded in 2007 ``for the
purpose of commercializing, licensing, and enforcing'' patents relating
to delivery of content to a cell phone. Although Helferich had already
licensed its patents to cell phone manufacturers, it sought to double
dip by demanding payment from hundreds of companies who sent text
messages to those very same licensed cells phones.
Helferich's letters told its end user targets that companies that
paid up immediately would get a discounted rate but threatened that
this rate would go up if the target didn't pay up within 60 days.
Numerous companies entered into licenses, but the New York Times
and others decided to fight back. In the New York Times case, the
District Court found that the original license to the cell phone
manufacturers meant that no further license to the users was needed.
We can only hope that Helferich was exaggerating when it claimed
that over 100 companies already had signed licenses that it turned out
none of the companies needed.
USEI
Another example is an entity called United States Ethernet
Innovations, LLC (``USEI''). USEI purchased a group of patents that
were about to expire from 3Com prior to 3Com's acquisition by Hewlett-
Packard.
In addition to filing numerous lawsuits, USEI has sent licensing
threat letters to hundreds (or possibly thousands) of end user
businesses. USEI's letters assert that Ethernet technology is covered
by their patents and their technology ``is utilized in many day-to-day
business activities within corporations, including Internet
connections, data transmission, retail transactions, corporate
transactions, networked security system cameras, point of sale
information, and inventory management systems.''
The letters further warn that USEI has hired ``the largest and most
successful plaintiff's law firm in the world'' and has recently filed
infringement lawsuits, but that it was willing to offer a license to a
``select group'' of entities such as the letter target in order to
avoid ``protracted litigation.''
We understand that USEI has refused to provide its targets with
information that would help them determine whether they actually need a
license. For example, we understand that USEI has refused to disclose
to its targets what entities already are licensed, a disclosure that
would allow the target to determine whether the products it was using
already were licensed and thus for which the target user did not have
to pay. Targets of USEI's licensing campaign have included department
stores, markets and other end user businesses both large and small.
Cisco's customers have received licensing demands from many of
these shake down campaigns. In each case, the campaigns are inherently
deceptive. The patents are often invalid or irrelevant to their targets
or already licensed. The target end-users do not get a real picture of
the licensing history and the real likelihood of suit. The massive
deceptive letter writing campaigns are just a way for the scam artists
to get far more money than their patents are worth (if they are worth
anything at all) just like in any other scam.
Recommendations
Much of what we have said here is based on Cisco's own experiences
and what Cisco's own customers have told us about their experiences.
But we do not know the scope and extent of the deceptive practices
in which these entities are engaging. Our customers, the end user
consumers that these entities are targeting and which we are seeking to
protect, know even less. That is why your help is needed.
There are four simple steps that would make it much harder for
these scam artists to use deceptive letter writing schemes to extract
money to which they are not entitled from end user/consumer targets:\6\
---------------------------------------------------------------------------
\6\ My proposal is very consistent with the White House's
recommendations for reforming the patent system. See Fact Sheet: White
House Task Force on High-Tech Patent Issues (June 4, 2013), available
at http://www.whitehouse.gov/the-press-office/2013/06/04/fact-sheet-
white-house-task-force-high-tech-patent-issues (last visited Nov. 4,
2013).
---------------------------------------------------------------------------
First, require anyone sending patent demand letters to more than
ten entities who are NOT the manufacturers of the accused products to
file the letters in an on-line registry to be maintained by the FTC.
The public, the targets of the campaigns and the FTC need to know the
full picture.
Second, require anyone in that category to include in the letter a
list of products which are deemed to infringe, including the
manufacturer and model number, and informing them that they may have
the right to have the manufacturer defend the case, and providing
contact information for the manufacturer.
Third, require any such letter to include the names of the entities
which own the patents or benefit from their enforcement and any related
entities.
And fourth, require the letters to include a list of all previous
licenses granted for those patents, with a notice that if the recipient
of the letter is using the products or services of a licensed entity,
the recipient may require no further rights or permission from the
patent holder. Also, the letter should say if there is a relevant
licensing commitment to a standards organization.
By adding a basic level of transparency and accountability, these
simple steps will help protect innocent end users.
The paycheck I get every other week says ``Cisco'' on it, but every
cent comes from my customers. That is why I am passionate about making
sure my customers who trust us to supply them with products don't get
ripped off by these predators.
And when these predators are forced to come to me, I can guarantee
they will get a fair fight.
Thank you. Please let me know if you have any questions.
Senator McCaskill. Thank you, Mr. Chandler.
Ms. Samuels.
STATEMENT OF JULIE P. SAMUELS, SENIOR STAFF ATTORNEY, MARK
CUBAN CHAIR TO ELIMINATE STUPID PATENTS, ELECTRONIC FRONTIER
FOUNDATION
Ms. Samuels. Chairman McCaskill, Ranking Member Heller,
Senator Klobuchar, I am Julie Samuels from the Electronic
Frontier Foundation, and it is an absolute honor to be here
today.
EFF is a nonprofit civil liberties organization that has
worked for more than 20 years to protect consumer interests,
innovation, and free expression in the digital world. Today
we're here to talk about patent assertion entities and their
practice sending demand letters.
I'm going to tell you the problem we saw and we continue to
see, what we've done to fix it and why we still need your help.
The so-called patent troll problem is not a new one, but in the
past 18 months something shifted. We started hearing, sometimes
daily, from people who had received demand letters, often
vague, written in dense legalese, threatening litigation if the
recipient didn't pay up.
We heard from app developers, small business owners,
startup founders, people who ran their companies out of their
living rooms and garages. These victims didn't know what to do
or how to respond. They couldn't afford patent lawyers and,
frankly, they were scared.
Even worse, the vast majority of these people were being
accused of infringing a patent based on everyday technology:
online shopping carts; Wi-Fi routers; document scanners and the
like. I personally wanted to help everyone who called, but we
couldn't. I wanted to give them more information on who was
sending the letters but we didn't have it. I wanted to tell
them about patent law, what the letter meant, and reinforce
that they in fact had no legal obligation to respond to the
letter. But that alone would have filled up all of our time. We
couldn't represent everyone who needed our help.
Something we quickly learned is that these letters really
had nothing to do with patent law. They merely used the guise
of patent law as leverage to conduct, frankly, run-of-the-mill
extortion.
Two main problems we saw were lack of information and
underreporting. First, without simple facts about the threat it
faces, such as who is really behind the demands and if the
troll will ever actually sue, a recipient is unable to assess
its risk. It is left with a host of undesirable options: to
hire a lawyer; to pay the troll to go away; or to do nothing
and simply hope the troll disappears.
Second, because the vast majority of the deals entered into
between trolls and their targets are not public, the exact
scope and contours of the activity we're talking about are
frankly hard to understand. So we came up with a solution.
We've developed a website called Trolling Effects; a simple
database that allows people to post the demand they received
online, find letters received by others, and research who is
really behind the threats. Finally, and most importantly, all
of the information is freely available to anyone, period.
Our experience so far with Trolling Effects has taught us,
however, that many victims are often not willing or inclined to
publicly share their letters. This has to do in large part with
the public nature of the database and the fact that even with
redactions, it is virtually impossible to safely anonymize all
letter recipients.
Larger, more established companies fear that making these
demands public paints a target on their back while smaller
companies and individuals are often even more afraid to attract
attention from the trolls. That's why we're here today. To
really solve this problem, we need Congressional help.
Despite our best efforts, trolls continue to benefit from
the asymmetry of information in the marketplace. Certain
targeted legislative fixes could curb these abusive letter-
sending practices. Congress could create registries, similar to
what we are trying to do with Trolling Effects and what Mr.
Chandler also brought up. Legislation could require patent
owners to report on details of their demands at the Patent
Office, for instance. The Patent Office already has many kinds
of reporting requirements for patent holders, so this would be
nothing new. Making this information public would fundamentally
change the landscape. Armed with more facts, everyday consumers
will be better able to assess their options.
The FTC could also maintain a registry of those who send
demands and the scope of those demands. Registries, at either
the Patent Office or the FTC, would create additional
incentives for letter recipients to turn over information. At
the Patent Office, a certain amount of complaints regarding a
particular patent could lead to a sua sponte review of that
patent. And at the FTC, a certain number complaints could
trigger a Section 5 investigation. Both options create a value
proposition for letter recipients; the hope that, in exchange
for information, something might be done.
Legislation could also define certain practices such as
making false demands and failing to include certain basic
details in those demands as presumptively unfair or deceptive.
This would not only trigger existing Section 5 authority, but
also many state consumer protection statutes already on the
books. At least three states, including Nebraska, as Attorney
General Bruning testified, have already targeted this type of
behavior and we know that even more are interested.
The importance of today's hearing cannot be understated,
particularly because these trolls conduct the vast majority of
their business behind a veil of secrecy. But a business model
based on secrecy is antithetical to the entire patent system
and it's destructive to consumers and our innovation economy.
I thank you for your time and look forward to answering
your questions.
[The prepared statement of Ms. Samuels follows:]
Prepared Statement of Julie P. Samuels, Senior Staff Attorney, Mark
Cuban Chair to Eliminate Stupid Patents, Electronic Frontier Foundation
Chairman McCaskill, Ranking Member Heller, and members of the
Subcommittee, thank you for holding this hearing and inviting me to
testify today about deceptive practices by Patent Assertion Entities.
We are greatly encouraged by your interest in this important issue and
its impact on consumers.
I am a Senior Staff Attorney at the Electronic Frontier Foundation,
where I also hold the Mark Cuban Chair to Eliminate Stupid Patents. EFF
is a non-profit civil liberties organization that has worked for more
than 20 years to protect consumer interests, innovation, and free
expression in the digital world. Founded in 1990, EFF represents more
than 24,000 active members. Many of those members are small innovators
and tinkerers who often find themselves facing patent litigation or
demands. Through litigation, the legislative process, and
administrative advocacy, EFF seeks to represent those members'
interests and promote a patent system that facilitates, and does not
impede, what the Constitution defines as ``the Progress of Science and
useful Arts.''
PAEs use the threat of patent litigation to extort settlements in
the form of what they might call ``licensing deals.'' These ``licensing
deals,'' however, are not the kind of responsible technology transfer
that benefits consumers. These companies, also known as non-practicing
entities (NPEs) or, colloquially, as patent trolls, usually neither
make nor sell anything but use patents to sue, and threaten lawsuits
upon, unsuspecting businesses. As Judge Posner of the Seventh Circuit
Court of Appeals explains, patent trolls ``are companies that acquire
patents not to protect their market for a product they want to
produce--patent trolls are not producers--but to lay traps for
producers, for a patentee can sue for infringement even if it doesn't
make the product that it holds a patent on.'' \1\
---------------------------------------------------------------------------
\1\ Richard A. Posner, Why There Are Too Many Patents in America,
The Atlantic (July 12, 2012), http://www.theatlantic.com/business/
archive/2012/07/why-there-are-too-many-patents-in-america/259725/.
---------------------------------------------------------------------------
Patent trolls are causing enormous harm to innovators and
consumers, not to mention job creators. Companies that actually create
products, services, and jobs find themselves under siege by trolls who
purchase vague and overbroad patents to launch or threaten lawsuits. As
you know, the conduct surrounding those lawsuits, and solutions to curb
further abuse, are being considered in both chambers of Congress.\2\
The harm to consumers, however, does not only arise out of actual
lawsuits; instead, it also comes from dangerous and irresponsible
demand letter-writing campaigns. Indeed, as the White House found:
``The PAE business model is based on the presumption that in many
cases, targeted firms will settle out of court rather than take the
risky, time-consuming course of allowing a court to decide if
infringement has occurred.'' \3\
---------------------------------------------------------------------------
\2\ See, e.g., The Innovation Act of 2103 (H.R. 3309); The Patent
Quality Improvement Act (S. 866); and the Patent Abuse Reduction Act
(S. 1013).
\3\ Executive Office of the President, Patent Assertion and U.S.
Innovation, at 12, http://www.whitehouse.gov/sites/default/files/docs/
patent_report.pdf.
---------------------------------------------------------------------------
These demand letters are often vague, lacking basic detail of what
the recipient does to allegedly infringe the patent at issue. The
letters frequently list patent numbers without detailing which parts of
the patent--which typically comprises many pages of dense technical
content and legalese--are at issue. While the recipient of the letter,
most often an entrepreneur focused on building her business, has no
legal obligation to reply, she might not know that, and the senders
often include ``draft complaints'' and other enclosures in an attempt
to threaten real litigation, even though the patent holders may have no
intention of actually bringing a suit in court. And this is no wonder,
as the letters' targets are ever more frequently individuals and small
companies whose entire annual revenue would not cover the cost of a
lawyer's time to obtain the information necessary to respond to the
letter.
To understand the threat to consumers that irresponsible demand
letter practices pose, one first must understand the harms that flow
from current patent litigation trends. Since 2002, litigation at the
hands of patent trolls has grown from just five percent of total patent
litigation to a majority of all patent cases.\4\ Moreover, patent
trolls are targeting smaller companies, such as startups, that lack the
resources to defend against a patent suit (which can cost well over $1
million per side) and thus have no choice but to pay extortionate
settlement demands.\5\
---------------------------------------------------------------------------
\4\ James Bessen, Jennifer Ford and Michael Meurer, The Private and
Social Costs of Patent Trolls, (``Bessen 2011'') at 7, http://
papers.ssrn.com/sol3/papers.cfm?abstract_id=1930272; Colleen V. Chien,
Patent Assertion Entities, presentation to the December 10, 2012 DOJ/
FTC Hearing on PAEs, (``Chien Slides''), at slides 23-24, https://
papers.ssrn.com/sol3/papers.cfm?
abstract_id=2187314.
\5\ Colleen V. Chien, Startups and Patent Trolls (Santa Clara Univ.
Sch. of Law Legal Studies Research Paper Series, Accepted Paper No. 90-
12, 2012), (``Chien 2012''), http://papers.ssrn.com/sol3/
papers.cfm?abstract_id=2146251.
---------------------------------------------------------------------------
This explosion of patent troll litigation has been very costly. The
research shows that ``NPE lawsuits are associated with half a trillion
dollars of lost wealth to defendants from 1990 through 2010. [And]
during the last four years the lost wealth has averaged over $80
billion per year.'' \6\ The burden of patent troll litigation falls
particularly hard on small companies. Professor Colleen Chien recently
found that at least 55 percent of unique defendants in patent troll
suits have revenues under $10 million per year.\7\
---------------------------------------------------------------------------
\6\ Bessen 2011 at 2.
\7\ Chien 2012 at 1-2.
---------------------------------------------------------------------------
Of particular note, the patent troll problem is quite often a
software patent problem. Software patents serve as an attractive tool
for patent trolls because they are notoriously difficult to interpret--
giving unscrupulous patent owners the ability to claim that their
patent covers a wide range of technology.\8\ Thus, litigation involving
software patents has increased dramatically--from fewer than 200 per
year prior in 1997 to the current rate of over 1000 per year.\9\ Many
of these suits are brought by patent trolls. In fact, more than 80
percent of troll-filed suits assert high-tech patents, and more than 65
percent have software-related claims.\10\ For the same reasons that
software patents and their ``fuzzy boundaries'' result in an increase
in litigation, they too provide patent holders a dangerous tool to send
menacing demand letters.
---------------------------------------------------------------------------
\8\ In other words, ``software patents have `fuzzy boundaries':
they have unpredictable claim interpretation and unclear scope. . .and
the huge number of software patents granted makes thorough search to
clear rights infeasible, especially when the patent applicants hide
claims for many years by filing continuations. This gives rise to many
situations where technology firms inadvertently infringe.'' Bessen 2011
at 23.
\9\ James Bessen, A Generation of Software Patents, 18 B.U. J. Sci.
& Tech. L. 241, 259 (2012) (Figure 3).
\10\ See Brian J. Love, An Empirical Study of Patent Litigation
Timing: Could a Patent Term Reduction Decimate Trolls Without Harming
Innovators? (August 30, 2011), at 39, http://ssrn.com/abstract=1917709
(forthcoming in University of Pennsylvania Law Review).
---------------------------------------------------------------------------
Another dangerous demand-letter trend, too, has its roots in
litigation, but directly results in extraordinary harm to consumers
outside of the courtroom. PAEs now make a regular practice of targeting
those who use generally available technology. In fact, six of the top
ten largest patent litigation campaigns targeted end users and not the
manufacturers or suppliers of the supposedly infringing product or
technology.'' \11\ And the research shows that:
---------------------------------------------------------------------------
\11\ Colleen V. Chien and Edward Reines, Why Technology Customers
are Being Sued En Masse for Patent Infringement & What Can Be Done,
Santa Clara University School of Law Working Paper No. 20-13 (August
2013) (``Chien & Reines'') at 2, http://papers.ssrn.com/sol3/
papers.cfm?abstract_id=2318666.
The burden for these suits falls disproportionately on small
companies, and too often results in nuisance settlements based
on the high cost of defending a patent case, not the merits of
the claim.\12\
---------------------------------------------------------------------------
\12\ Id. at 4.
Even worse, many of these letter recipients are not what we
commonly think of as ``technology companies.'' Instead, they merely use
technology, as we all do. In fact, retail is ``among the most highly
pursued industries'' by PAEs.\13\
---------------------------------------------------------------------------
\13\ Id. at 8.
---------------------------------------------------------------------------
Because the use of technology is widespread, so is the harm from
these types of patent demands. ``Indeed, many businesses have stopped
adopting technology altogether to avoid patent infringement claims--for
example, scanning to a USB stick to avoid infringing a PDF machine
patent, not offering Wi-Fi to customers to avoid Wi-Fi patents, or, in
some cases exiting the business or business line.'' \14\
---------------------------------------------------------------------------
\14\ Id. at 12.
---------------------------------------------------------------------------
Even though a demand letter is not a legal complaint, and even if
it makes specious claims, the mere threat of litigation brings with it
serious costs. As one study found:
Patent demands can be costly to resolve, and particularly so
for small companies. The overwhelming majority of companies
said that resolving the demand required founder time (73
percent) and distracted from the core business (89 percent);
most experienced a financial impact as well (63 percent).
However, responses and the costs of these responses ran the
gamut; for example, 22 percent of those surveyed said they
``did nothing'' to resolve the demand.\15\
---------------------------------------------------------------------------
\15\ Chien 2012 at 10.
Mere threats can cause this harm because the costs of patent
litigation are, simply, outrageous. If taken to verdict, defending a
lawsuit can easily cost nearly $3 million.\16\ Even if the case is
dismissed early, legal costs will often run into the six and seven
figures.\17\ Thus, when facing a vaguely worded demand letter that
threatens immediate suit and the expensive and unpredictable world of
litigation, it is no wonder that so many recipients will merely pay the
troll, even when the PAE may have no intention of ever bringing a
lawsuit.
---------------------------------------------------------------------------
\16\ See http://news.cnet.com/8301-32973_3-57409792-296/how-much-
is-that-patent-lawsuit-going-to-cost-you.
\17\ Chien & Reines at 3.
---------------------------------------------------------------------------
These harms are not abstract. They affect real people everyday.
Like Mark Egerman, founder of Cover. Cover is a smartphone application
(``app'') that allows customers to easily split and pay their bills at
restaurants. According to Mr. Egerman,
When we launched in October, we were thrilled by the support we
got from restaurants and users. Unfortunately, the press
attention brought with it something else--our first patent
troll. Within days of launching we received a threatening
letter asking us to license a patent or else lawyers would get
involved. The patent doesn't address our product and yet we
find ourselves in the same unenviable position of hundreds of
other startups. Pay off the troll or face an unnecessary
lawsuit.
Another app developer, Gedeon P. Maheux, found himself in a similar
situation:
[We] and several other companies were threatened by a well-
known patent troll for a patent we (and thousands of other
software developers) supposedly violated dealing with in-app
purchases in iPhone apps. . . . At first we decided to use
legal means to fight the troll. We hired a lawyer who informed
us of our options. . . . The troll demanded payment by a given
date and unless we were prepared to go to court, we had to
comply. We're a small business and quickly found our mounting
legal fees becoming unreasonable. In the face of [the slow
legal system] and increasing costs dealing with the troll, we
decided as a group to take the license and pay the troll his
toll.
En masse, these threats wreak havoc on consumers. Take Innovatio, a
company that, ``using a portfolio of 31 patents directed at the 802.11
wireless communication standard (most of which are expired or lapsed).
. .has made demands of over 13,000 small and large end-users of wi-fi
technology using devices sold by Cisco, Netgear, Apple, and others.''
\18\ In less technical terms, this means that coffee shops, hotels, and
other small retailers who have bought a $40 router off-the-shelf at
their local retailer find themselves facing letters with ominous
warnings threating expensive litigation.
---------------------------------------------------------------------------
\18\ Id. at 19.
---------------------------------------------------------------------------
Or, MPHJ, a PAE that has sent letters to thousands of small
businesses around the country demanding steep license fees for the use
of standard office scanners.\19\ MPHJ's practices are particularly
egregious--it has created a series of shell corporations with
nonsensical names like AdzPro, GosNel, and FasLan, making them nearly
impossible to track. MPHJ demands approximately $1,000 per employee who
uses simple scanning technology--a claim that surely implicates office
workers across the country
---------------------------------------------------------------------------
\19\ Id. at 10.
---------------------------------------------------------------------------
MPHJ sends demand letters (including letters with draft complaints
attached) without any apparent intent of ever suing; indeed, there is
no record that a single suit has been filed. MPHJ's practices have
drawn the attention of at least three states' Attorneys General. In
Vermont, the Attorney General sued MPHJ, claiming that its actions
demonstrate unfair trade practices in commerce and deceptive trade
practices in commerce.\20\ That suit is ongoing. Minnesota's Attorney
General reached a consent decree with MPHJ prohibiting the PAE from
sending correspondence to anyone in the state that seeks fees or
payments or threatens litigation in connection with intellectual
property infringement, unless MPHJ gives 60 days' written notice to the
Attorney General or obtains consent.\21\ And, finally, Nebraska's
Attorney General issued a civil investigative demand and cease and
desist letter to Farney Daniels, one of MPHJ's law firms, who also
represents another notorious PAE, Activision, in Nebraska.\22\ Farney
Daniels has sued over the propriety of the cease and desist order and
that litigation is ongoing.
---------------------------------------------------------------------------
\20\ See http://www.atg.state.vt.us/news/vermont-attorney-general-
sues-patent-troll-in-ground
breaking-lawsuit.php.
\21\ See http://www.ag.state.mn.us/Consumer/PressRelease/
130820StopPatentTrolling.asp.
\22\ See http://www.ago.ne.gov/resources/dyn/files/
1069520z2e735d6e/_fn/071813+Bruning+
Patent+Troll+Release+.pdf.
---------------------------------------------------------------------------
Massive PAE demand-letter campaigns like these lead to additional
problems surrounding the sharing of and reporting on information.
Because the demands by definition exist pre-complaint, they create no
public record. And once a license or settlement is signed, it most
likely will include a non-disclosure provision leaving the recipient
unable to share its experience. This causes two problems: asymmetry of
information and underreporting.
The asymmetry of information problem is simple: the PAE holds all
of the information surrounding its threat while the recipient is left
with almost none. Without simple facts about the alleged threat it
faces, such as who is really behind the demand and if the PAE's history
makes it likely to further pursue its threats, a demand recipient is
unable to assess its risk. It is left with a host of undesirable
options: to hire a lawyer, to pay the PAE to go away, or to do nothing
and simply hope the PAE disappears. In most instances, the PAE risk was
not one that the recipient bargained for when it bought the product at
issue or started its business, yet it finds itself with no choice but
to face it.
The second problem is underreporting. Because the vast majority of
the deals entered into between PAEs and their targets are not public,
the exact scope and contours of PAE activity is difficult for
policymakers and others to properly understand.
To combat these concerns, EFF, along with a broad coalition,
launched Trolling Effects, a database to collect demand letters.\23\
The site was officially launched on July 31, 2013. The site allows
demand letter recipients to post the documents online, find letters
received by others, and research who is really behind the threats. The
site also features comprehensive guides to the patent and additional
relevant information. Finally--and most importantly--all of the
information is freely available, not only to those who receive PAE
demands, but to academics, policy makers, and the general public.
---------------------------------------------------------------------------
\23\ See https://www.trollingeffects.org
---------------------------------------------------------------------------
Our experience thus far with Trolling Effects has taught us that
many demand recipients are often not willing or inclined to publicly
share their letters. This has to do in large part with the public
nature of the database and the fact that, even with redactions, it is
virtually impossible to safely anonymize letter recipients. Demand
recipients, both large and small, often chose to keep their identity
hidden.\24\ Larger, more established companies fear that making these
demands public ``paints a target on their back.'' Smaller companies and
individuals are often even more afraid. It appears that ensuring more
thorough transparency will require action from Congress.
---------------------------------------------------------------------------
\24\ Professor Robin Feldman came to a similar conclusion: ``for a
number of years, companies have been reluctant to speak to reporters or
researches, partly out of fear of retaliation by large players with
large patent portfolios.'' Robin Feldman, Patent Demands & Startup
Companies: The View from the Venture Capital Community (Oct. 29, 2013)
(``Feldman'') at 29, http://papers.ssrn.com/sol3/
papers.cfm?abstract_id=2346338.
---------------------------------------------------------------------------
Statutory Intervention is Necessary to Protect Consumers
While questions of patent law usually find themselves before the
Judiciary Committee, this Committee should consider and correct the
negative impact that demand letter-sending practices have on consumers.
Those practices can be regulated without disrupting the underlying
patent laws and without negative impact on responsible technology
transfer. Below, we set forth some potential targeted legislative
solutions.
A. Defining Relevant Practices that Violate Consumer Protection
Statutes
Section 5 of the FTC Act declares unlawful ``unfair methods of
competition in or affecting commerce, and unfair or deceptive acts or
practices in or affecting commerce.'' 15 U.S.C.A. Sec. 45(a)(1).
Abusive demand letters are both an unfair method of competition and a
deceptive practice. A law defining those practices as such would
trigger not just Section 5, but many similar state law provisions
already on the books.
There can be no doubt that PAE actions cause significant economic
harm. According to a congressional study, PAE activity cost defendants
and licensees $29 billion in 2011, a 400 percent increase over $7
billion in 2005, and the losses are mostly deadweight, with less than
25 percent flowing to innovation and at least that much going towards
legal fees.\25\ Moreover, a recent survey found that 74 percent of
venture investors ``reported that patent demands had either a highly
significant or a moderately significant impact on the companies that
received them, including distracting management, expending resources,
or altering business plans.'' \26\ The demand activity in these reports
is not limited to letters, of course. But the demand letters do extract
their toll, and make up a significant portion of those costs. For
instance, Professor Colleen Chien has reported that there are at least
100 demand threats for each filed lawsuit.\27\
---------------------------------------------------------------------------
\25\ Brian T. Yeh, Cong. Research Serv., R42668, An Overview of the
``Patent Trolls'' Debate, (2012) (``Yeh'') at Summary and 2, https://
www.eff.org/sites/default/files/R42668_0.pdf (citing James Bessen &
Michael Meurer, The Direct Costs from NPE Disputes 2, 18-19, (Boston
Univ. School of Law, Law and Economics Research Paper No. 12-34, 2012)
(``Bessen 2012'')), http://papers.ssrn.com/sol3/
papers.cfm?abstract_id=2091210
\26\ Feldman at 39-40.
\27\ Chien Slides at slide 25.
---------------------------------------------------------------------------
The FTC Act was enacted to protect consumers from the type of
demand-letter practices many PAEs have lately practiced. By statutorily
defining certain of those practices as ``unfair methods of
competition'' or ``unfair or deceptive acts or practices,'' Congress
could trigger existing Section 5 protections.\28\ For instance, the
following type of demand-sending behavior might be addressed:
---------------------------------------------------------------------------
\28\ FTC Chairwoman Edith Ramirez said in a recent speech she
believed Section 5 authority could reach certain PAE activities, such
as those ``that target small businesses with false claims made to
induce the payment of illegitimate licensing fees.'' Opening Remarks of
Chairwoman Edith Ramirez, Competition Law & Patent Assertion Entities:
What Antitrust Enforces Can Do (June 20, 2013) at 9 http://ftc.gov/
speeches/ramirez/130620paespeech.pdf.
Demands falsely threatening litigation;\29\
---------------------------------------------------------------------------
\29\ See, e.g., The Federal Fair Debt Collections Practices Act, 15
USC Sec. 1692(e), limiting the scope of threats that can be made in a
debt collection letter.
Demands sent without specifically listing the patents and
---------------------------------------------------------------------------
claims that are allegedly infringed;
Demands sent without listing the products and services that
allegedly infringe those patents;
Demands sent without any clear indication of who owns the
patent at issue;
Demands sent following a failure to perform any pre-demand
investigation into the recipient; and
Demands sent to businesses with the direct knowledge that
those businesses can neither afford to take a license or defend
themselves in Federal court.
PAEs routinely send demands that do all of these things. They leave
recipients without any meaningful information on how to mitigate and
manage their risk, and leave them oftentimes with little choice but to
take an unearned license. This is precisely the kind of behavior that
may and should be regulated by consumer protection statutes. As the
Commission itself has stated, it can target ``[c]onduct that results in
harm to competition, and in turn, in harm to consumer welfare, [which]
typically does so through increased prices, reduced output, diminished
quality, or weakened incentives to innovate.'' \30\
---------------------------------------------------------------------------
\30\ Statement of Commissioner Joshua D. Write, Proposed Policy
Statement Regarding Unfair Methods of Competition Under Section 5 of
the Federal Trade Commission Act (June 19, 2013) at 7, http://
www.ftc.gov/speeches/wright/130619umcpolicystatement.pdf.
---------------------------------------------------------------------------
Defining the types of practices that PAEs like MPHJ rely on as
unfair or deceptive practices would allow the FTC and various states
with statutes similar to Vermont's to take advantage of existing
statutory frameworks and end the dangerous PAE demand-sending
campaigns. Moreover, it would present no risk to companies who engage
in responsible licensing practices and technology transfer, who could
easily obtain the information necessary to conduct proper business.
B. Creating Public Registries of Relevant PAE Information
Because a patent is a government-granted monopoly, the government
may impose conditions on that grant. Indeed, it does that all the time
by requiring that certain conditions be met before a patent is granted
and that patent holders keep their records up-to-date by, for instance,
reporting on changes in ownership. Likewise, a patent holder should be
required to provide certain information to the Patent Office when it
asserts infringement of that patent in a letter.
Patent owners could be required to report information such as how
many demand letters have been sent regarding a specific patent;
identification of all parties who stand to benefit financially from any
resulting license; identification of any obligation to license the
patents at issue on fair or reasonable terms; and how many times the
holder has filed suit based on the patent at issue.
There are various reasonable triggers that could require such
reporting, such as a certain number of letters sent in a set period of
time or notification to the Patent Office of a threshold number of
letter recipients.
At a minimum, reporting this information to the Patent Office would
make it public (assuming the Patent Office provided it in a publicly-
accessible database, which it should be required to do). This
information would fundamentally change the unfair information asymmetry
facing demand recipients--armed with more facts, they will be better
able to assess their options.
Collecting the information might also assist the Patent Office in
initiating sua sponte review of certain patents. If the Office has
information regarding which patents are most often used as weapons by
PAEs, it might prioritize those for such review. Indeed, in a world
with literally millions of existing patents, it makes sense to focus
challenges on those that pose the greatest threat to consumers.\31\ It
is not until those patents are asserted in demands that we can
ascertain just which patents will cause harm. Requiring reporting to
the Patent Office will give the Office necessary knowledge to know
which patents make the most sense to target for additional review.\32\
(The potential for Patent Office review of existing patents may
likewise serve as an incentive for demand-letter recipients to provide
information as well.)
---------------------------------------------------------------------------
\31\ Dan L. Burk & Mark Lemley, Policy Levers in Patent Law, 89 Va.
L. Rev. 1575 (2003).
\32\ See Chien & Reines at 6.
---------------------------------------------------------------------------
It is not just the Patent Office who may decide to subject existing
patents to additional review (indeed, this is a very rare practice,
though there is no reason it cold not happen more). It also gives third
parties--including public interest groups like EFF--knowledge
surrounding which patents they might choose to challenge. EFF alone has
made more than 15 third-party patent challenges to patents and patent
applications, one as recent as October of 2013. These challenges
require significant resources, both financial and otherwise, and it is
of great benefit to know which patents pose the greatest threat to
consumers, end-users, and those who may not be in a position to put
forth such a challenge themselves.
In the alternative, the FTC could also house a similar registry of
patent demands. It already does this in various other contexts, such as
the Do Not Call Registry. When a certain threshold number of demands
are sent involving a particular patent, or from a particular sending
party, the FTC might initiate an investigation. Similar to a registry
at the Patent Office, one at the FTC might be made up of patent holders
self reporting or consumers submitting information on the demands they
receive. Given the FTC's expertise in consumer-facing issues, it would
be particularly equipped to house the latter type of registry; given
the Patent Office's expertise in dealing with patent owners, it might
focus on the former.
C. Increasing Public-Private Partnerships
In virtually every area of the law there has been a long history of
productive public-private partnerships. Patent law is no exception. The
Peer To Patent project \33\ serves as a telling example. Peer To Patent
provided the first ``governmental `social networking' Website designed
to solicit public participation in the patent examination process.''
\34\ After its first two years, Peer To Patent attracted more than
74,000 visitors; of those visitors, more than 2,600 went on the become
peer reviewers.\35\ Also in its first two years, the project
contributed relevant prior art in more than 25 percent of the
applications it handled.
---------------------------------------------------------------------------
\33\ http://www.peertopatent.org.
\34\ Peer To Patent Second Anniversary Report at 4, http://
dotank.nyls.edu/communitypatent/CPI_P2P_YearTwo_lo.pdf
\35\ Id. at 5
---------------------------------------------------------------------------
EFF envisions a similar partnership with our Trolling Effects site.
Trolling Effects may serve as a public-facing database for information
collected by the Patent Office or otherwise work with the government to
increase the reach and scope of that information. In combination with
statutory provisions providing for submission of information, Trolling
Effects or a project like it will serve as a powerful tool to curb the
current demand letter abuses.
Conclusion
In conclusion, EFF has grave concerns about the impact that PAE
activities are having on consumers. The importance of today's hearing
on those activities cannot be understated, particularly because PAEs
conduct the vast majority of their business behind a veil of secrecy.
Individual consumers, small start-ups, and ordinary Americans find
themselves facing patent troll threats everyday, yet even the most
basic information on those threats is often unattainable. Even just
having us here today to talk about this problem is a crucial step
toward solving it. We encourage you to continue this important
conversation and consider legislative proposals that would limit the
harm to consumers from PAE activity, particularly the direct harm that
comes from demand letters.
STATEMENT OF LARY SINEWITZ, EXECUTIVE VICE
PRESIDENT, BrandsMart USA ON BEHALF OF THE NATIONAL RETAIL
FEDERATION
Mr. Sinewitz. Sorry.
My name is Lary Sinewitz, and I am the Executive Vice
President of BrandsMart USA. BrandsMart USA is a consumer
electronics and appliance retailer in the Southeast. We have
ten retail stores and one clearance center in South Florida and
Georgia and a growing ecommerce presence at BrandsMartUSA.com.
We employ 2,000 people; that actually represent 2,000 families
throughout our business.
I'm here today on behalf of, not only BrandsMart, but also
the National Retail Federation and the Stop Patent Abuse Now
Coalition. NRF represents retailers of all types and sizes
including chain restaurants, industry partners from the United
States and more than 45 countries abroad. Retailers operate
more than 3.6 million U.S. establishments that literally
support one in every four U.S. jobs.
The SPAN Coalition represents the interests of retailers,
advertisers, advertising agencies and direct marketers,
increasingly targets of patent trolls' unfair and deceptive
patent infringement demand letters. Members of the NRF and the
SPAN Coalition appreciate the attention that the subcommittee
is paying attention to the issue of demand letter transparency
and the harmful effect patent trolls have on competitiveness
and innovation.
I'm just one retailer, but I really believe that my
experience receiving these patent troll demand letters is
fairly typical, not only of retailers but of also businesses
and not-for-profits of all types who are the end users of
technology.
Over the course of the last several years, my company alone
has received six patent troll demand letters. The scary thing,
though, is that BrandsMart's experience is not unique. For
example, in 2008, I received this short, two-paragraph letter,
from a law firm, which you have a copy of up there, stating
that it had come to their attention that my retail facilities
were using credit, debit and gift cards that were activated in
a manner that may raise issues with their client's patent.
To be clear, the technology at issue in the demand letter
is one that enables credit, debit and gift cards to read and
process information via the magnetic stripe on the back of the
card. Virtually, every retailer uses this type of technology.
So imagine my shock when some law firm sends me a vague letter
accusing me of patent infringement and trying to get me to pay
them some unknown sum of money for a license.
So I ask you to put yourself in my shoes, and the shoes of
retailers and other businesses across the country. You receive
a vague patent troll demand letter about some process you are
using to enable credit cards to be used in your stores. What do
you do? Do you consult a patent lawyer? Well, BrandsMart
doesn't have an in-house patent lawyer. They don't even have a
patent lawyer on retainer. So one can imagine, just to pick up
the phone to consult a patent lawyer, to determine the validity
of the infringement claim and evaluate the license demand,
costs tens of thousands of dollars.
Patent troll demand letters like this one puts the fear in
you that a costly lawsuit could be forthcoming. So what do you
do? You stop accepting credit, debit and gift cards? No way.
That would be the death of your business. So, a business like
mine either ignores the letter at their own peril, hopes the
harassment goes away, or we begrudgingly try to settle for as
little money as possible. And in every case, we've had to
choose the latter approach and pay.
Incidentally, we still incur the expense of consulting a
patent lawyer about this letter. And when BrandsMart informed
the PAE that we use a different technology to read cards, they
still demanded a settlement, but reduced the amounts. We ended
up paying this particular PAE five figures to settle, and our
legal fees were five figures as well. In all, BrandsMart has
spent a half a million dollars to settle patent infringement
claims and attorneys' fees.
We're a retailer trying to serve our customers and settling
with patent trolls takes away from our resources. We would
rather use those resources investing in our communities, our
stores, our employees and for newer innovation.
Patent trolls are increasingly harassing businesses and
not-for-profits of every size across a wide swath of industries
with demand letters. Retailers appear to be an easy prey
because they often do not have the technical expertise, operate
on thin profit margins, and lack the legal resources and
expertise to fight complex patent infringement claims. Ninety-
one percent of the retail companies operate with fewer than 20
employees and 95 percent of the retail companies operate just
one location. Most retailers do not have the time or the money
to engage in lengthy battles with patent trolls. Something most
be done to help the retailers and other businesses get out from
under the patent trolls' control.
NRF and SPAN Coalition members support legislative
proposals to have the Federal Trade Commission look into these
unfair or deceptive demand letters which are so effective
because they lack detail. And using their current consumer
protection enforcement powers, rein in bad actors that target
main street businesses.
Patent trolls should not have free rein to assert expired
patents, make repeated and false threats of litigation to
extort fees, and materially mislead the recipients of these
demands. At the very least, patent trolls should be required to
provide more details in their letters. It's imperative that
Congress act to give retailers and other businesses relief from
this escalating problem.
If I could just sum it up in one sentence or in a nutshell,
it's all about fairness. That's all that we're asking for. We
appreciate your attention to this issue. I thank you personally
and I look forward to any of your questions.
[The prepared statement of Mr. Sinewitz follows:]
Prepared Statement of Lary Sinewitz, Executive Vice President,
BrandsMart USA, on behalf of The National Retail Federation
Introduction and Background
Chairman McCaskill, Ranking Member Heller, and members of the
Subcommittee, I thank you for the opportunity to appear before you
today. My name is Lary Sinewitz, and I am Executive Vice President of
BrandsMart USA. Founded in 1979, BrandsMart USA is a consumer
electronics and appliance retailer in the Southeast. With 11retail
stores in South Florida and the Atlanta area and a growing ecommerce
presence at BrandsMart-USA.com, BrandsMart USA is the 8th largest
appliance retailer in the country. We employ 2,000 people.
I am here today on behalf of the National Retail Federation
(``NRF'') and the Stop Patent Abuse Now (``SPAN'') Coalition to testify
about the impact of demand letters sent by patent assertion entities
(``PAEs'') or ``patent trolls'' on small businesses and consumers.
Members of the NRF and the SPAN Coalition appreciate the attention the
Subcommittee is paying to this particular issue.
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 online retailers in the U.S. and more than 60
percent of the Internet Retailer Top 100 E-Retailers. The National
Council of Chain Restaurants, a division of the National Retail
Federation, has worked to advance sound public policy that serves
restaurant businesses and the millions of people they employ for over
40 years. NCCR members include the country's most respected quick-
service and table-service chain restaurants. 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.
The SPAN Coalition represents the interests of retailers,
advertisers, advertising agencies, and direct marketers who
increasingly are being targeted by patent trolls with unfair and
deceptive patent infringement demand letters.
BrandsMart's Experience with Patent Troll Demand Letters
You have invited me to testify about my company's experience with
unfair or deceptive demand letters. I am just one retailer, but I
believe my experience receiving patent troll demand letters is fairly
typical, not only of retailers, but also of businesses and not-for-
profits of all types who are the end-users of technology.
Over the course of the last several years, my company alone has
received six patent troll demand letters. For example, in 2008, I
received a short, two paragraph letter from a law firm stating that it
had come to their attention that my retail facilities were using debit
and gift cards that were activated in a manner that may raise issues
with their client's patent.
To be clear, the technology at issue in the demand letter is a
ubiquitous technology that enables debit cards and gift cards to read
and process information via the magnetic strip on the back of the card.
Virtually every retailer uses this type of technology. So imagine my
shock when some law firm sent me a vague letter accusing me of patent
infringement and trying to get me to pay them some unknown sum of money
for a license.
I do not believe this law firm did any due diligence truly to
ascertain whether BrandsMart was infringing its client's patent.
Rather, I believe, based on my conversations with other retailers in my
region, that the firm simply picked the 150 biggest retailers in the
Atlanta metropolitan area and sent the same vague demand letter to each
of them.
So, I ask you to put yourselves in my shoes--and the shoes of
retailers and similarly situated small businesses across the country.
You receive a vague patent troll demand letter about some process you
are using to enable credit cards to be used in your stores. What do you
do? Consult a patent lawyer? BrandsMart does not have in-house patent
lawyers, and we did not even have a patent lawyer on retainer. As one
can imagine, just to pick up the phone to consult a patent lawyer to
determine the validity of the infringement claim and evaluate the
license demand could cost tens of thousands of dollars. Moreover, the
cost of litigating the claim in court or going to the Patent Trademark
Office to challenge the patent could be prohibitive or imprudent to a
business such as mine.
Patent troll demand letters like this one put the fear in you that
a costly lawsuit could be forthcoming. So what can you do? Stop
accepting credit cards and gift cards? No way; that would be the death
of your business. So, a business like mine either ignores the letter at
our own peril (and hope the harassment goes away) or we begrudgingly
try to settle for as little money as possible. In every case, we have
chosen the later approach and paid.
Incidentally, we did incur the expense of consulting a patent
lawyer about this letter, and when BrandsMart informed the PAE that we
used a different technology to read cards, they still demanded a
settlement, but reduced the amount. We ended up paying this particular
PAE for five figures, and our legal fees were five figures as well. I
have submitted the redacted letter with my testimony today.
Regrettably, in the past ten years, BrandsMart has spent
approximately $500,000 consulting with attorneys on infringement claims
and settling with patent trolls.
BrandsMart's Experience with Patent Troll Demand Letters is not Unique
What NRF and the SPAN Coalition have learned is that BrandsMart's
experience with patent troll demand letters is not unique. Patent
trolls are increasingly harassing businesses and not-for-profits of
every size, across a wide swath of industries, with demand letters.
These letters come out of nowhere, and often allege that the mere use
of everyday technology violates the patent holders' rights. Further,
these questionable letters typically state vague or hypothetical
theories of infringement, often overstate or grossly reinterpret the
patent in question, and, in some cases, make allegations of
infringement of expired or previously licensed patents.
At their core, demand letters use the threat of litigation as
leverage to extract a ``licensing fee'' from the recipient business.
Businesses like BrandsMart often simply settle these nuisance claims
rather than run the risk of protracted litigation in Federal court. Put
simply, it is often much more expensive to hire a lawyer to review or
defend against a suspect claim than it is to pay the requested ``fee.''
This is the trolls' business model.
No one knows just how many thousands of patent-related demand
letters are sent out by trolls each year; statistics only track actual
patent infringement litigation in Federal courts. The troll has to
actually file a case in court before a judge is even made aware of the
infringement claim, therefore it is impossible to get an accurate
understanding of the full breadth of this problem.
End-user businesses such as retailers also appear to be easy prey
because they often lack the legal resources and expertise to fight
complex patent infringement claims. Many retailers do not even employ
legal counsel in-house, let alone a highly specialized patent attorney.
Ninety-one percent of retail companies operate with fewer than 20
employees and 95 percent of retail companies operate just one
location.\1\ Further, most retailers also do not have the time or money
to engage in a lengthy battle with patent trolls. The average cost of
fighting a patent troll is around $2 million and takes about 18
months.\2\ Patent trolls knowingly exploit their targets' tactical
disadvantages, often pricing a settlement demand (which may still be in
the millions) just below the cost of litigation, effectively
blackmailing a retailer into settlement. This is an abuse of the
system.
---------------------------------------------------------------------------
\1\ 2007 Economic Census, thisisretail.org.
\2\ Mark Gibbs, ``A Patent Troll Wants to Charge You for E-mailing
Your Scans,'' Forbes.com, January 5, 2013.
---------------------------------------------------------------------------
Trolls' claims not only affect e-commerce applications and the
everyday use of technology, but also affect the storefront operations
of traditional ``brick and mortar'' retailers, like BrandsMart. Some
real world examples of the latter are claims that purport to cover
point of sale and inventory control equipment, including; scanning
barcodes, printing receipts, the sale of gift cards, and the connection
of any product, such as a computer or printer, to an Ethernet network.
Today, too many businesses like BrandsMart are diverting precious
capital resources to settle with or fight patent trolls. This is
capital that they could otherwise use to invest in their businesses and
in their communities, including; creating jobs, fostering innovation,
and maintaining their stores. Because the retail industry contributes
$2.5 trillion to our Nation's annual GDP, loosening the grip of patent
trolls on retailers and others will allow innovation and growth to
flourish, and undoubtedly benefit the overall U.S. economy.
NRF and SPAN Coalition members support legislative proposals to
have the Federal Trade Commission (``FTC'') look into these unfair or
deceptive demand letters and, using their current consumer protection
enforcement powers, rein in bad actors that target main street
businesses. Patent trolls should not have free reign to assert expired
patents, make repeated and false threats of litigation to extort fees,
and materially mislead the recipients of these demands. At the very
least, patent trolls should be required to provide more details in
their letters. Currently, the letters are so effective because they
lack specificity. Requiring greater and truthful disclosure will
provide greater certainty to businesses, saving them time and money as
they investigate the person or entity asserting the patent and
determine the overall merits of the infringement claim.
Combating the rise of patent trolls is a top priority for retailers
and the SPAN Coalition as a whole. We look forward to discussing
meaningful legislative solutions and demand letter relief as patent
litigation reform legislation moves forward this year. We appreciate
the Subcommittee's attention to this issue, and look forward to
continuing our work together.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Senator McCaskill. Yes, Mr. Mossoff.
STATEMENT OF ADAM MOSSOFF, PROFESSOR OF LAW,
GEORGE MASON UNIVERSITY SCHOOL OF LAW AND
SENIOR SCHOLAR, CENTER FOR THE PROTECTION OF
INTELLECTUAL PROPERTY
Mr. Mossoff. Chairman McCaskill, Ranking Member Heller, and
members of the Subcommittee, thank you for this opportunity to
speak to you today.
There certainly are bad actors, deceptive demand letters
and frivolous litigation in the patent system. The important
question though is whether there is a systemic problem
requiring further systemic revisions to the patent system.
There is no answer to this question and that is the case for
three reasons.
First, the calls to rush to enact systemic revisions to the
patent system are being made without scientifically established
evidence that there is in fact systemic harm to innovation, let
alone any harm to the consumers that Section 5 authorizes the
FTC to protect. As the Government Accountability Office found
in its August 2013 report on patent litigation, the frequently
cited studies claiming harms are actually ``nonrandom'' and
``non-generalizable,'' which means that they are unscientific
and unreliable. These anecdotal reports and unreliable studies
do not prove that there is a systemic problem requiring a
systemic revision to the patent licensing process.
Of even greater concern, is that the many changes to the
patent system Congress is considering, including extending the
FTC's authority over demand letters, would impose serious costs
on real innovators and thus do actual harm to America's
innovation economy and job growth. From Charles Goodyear and
Thomas Edison in the 19th century, to IBM and Microsoft today,
patent licensing has been essential to bringing patented
innovation to the marketplace, creating economic growth and a
flourishing society. But expanding FTC authority to regulate
requests for licensing royalties under vague evidentiary and
legal standards only weakens patents and creates costly
uncertainty. This will hamper America's innovation economy,
causing reduced economic growth, lost jobs, and reduced
standards of living for everyone, including the consumers the
FTC is charged to protect.
Second, the Patent and Trademark Office and courts have
long had the legal tools to weed out bad patents and punish bad
actors. And these tools were just massively expanded 2 years
ago with the enactment of the America Invents Act. This is
important because the real concern with demand letters is that
the underlying patents are invalid. No one denies that owners
of valid patents have the right to license their property or to
sue infringers, or that patent owners can even make patent
licensing their sole business model as did Charles Goodyear and
Elias Howe in the mid-19th century.
Now, there are too many of these legal tools to discuss in
my brief remarks, but to name just a few: recipients of demand
letters can sue patent owners in courts through declaratory
judgment actions and invalidate bad patents, and the PTO now
has four separate programs dedicated solely to weeding out bad
patents.
For those who lack the knowledge or resources to access
these legal tools, there are now numerous legal clinics, law
firms and policy organizations that actively offer assistance,
often times for free. Again, further systemic changes to the
patent system are unwarranted because there are existing legal
tools with established legal standards to address bad actors
and their bad patents.
Last, Congress is being driven to revise the patent system
on the basis on rhetoric and anecdote, instead of objective
evidence and reasoned explanation. Now there are certainly bad
actors in the patent system as we have heard, but terms like
patent assertion entity or patent troll constantly shift in
meaning and there is no settled definition for them. These
terms have been used to cover anyone who licenses patents,
including universities, startups, companies that engage in R&D,
and many others.
Classic American innovators in the 19th century like Thomas
Edison, Charles Goodyear and Elias Howe would be called patent
assertion entities or patent trolls today. In fact, they and
many other patent owners, some of them secondary owners who
just license their patents, made royalty demands against
thousands of farmers, dentists and other end users in the 19th
century.
Congress should exercise restraint when it is being asked
to enact systemic legislation or regulatory changes on the
basis of pejorative labels that lead us to condemn or
discriminate against classic innovators like Thomas Edison who
have contributed immensely to America's innovation economy.
In conclusion, the benefits or costs of patent licensing to
the innovation economy is an important empirical and policy
question, but systemic changes to the patent system should not
be based on rhetoric, anecdotes, invalid studies and incorrect
claims about the historical and economic significance of patent
licensing.
As former PTO Director, David Kappos stated just last week
in his testimony before the House Judiciary Committee, ``we are
reworking the greatest innovation engine the world has ever
seen almost instantly after it has just been significantly
overhauled. If there was ever a case where caution is called
for, this is it.''
Thank you.
[The prepared statement of Mr. Mossoff follows:]
Prepared Statement of Adam Mossoff, Professor of Law, George Mason
University School of Law and Senior Scholar, Center for the Protection
of Intellectual Property
Chairman McCaskill, Ranking Member Heller, and members of the
Subcommittee:
Thank you for this opportunity to speak with you today about
patented innovation and the impact that licensing and threatened
litigation have on our innovation-driven economy.
Today, two propositions define the American patent system and yet
they stand in stark contrast to each other. On the one hand, patented
innovation plays a central role in the United States in creating a
prosperous economy. It drove the Industrial Revolution in the
nineteenth century with the cotton gin, sewing machine, railroads,
steam engines, and many other inventions, and it is driving the Digital
and Biotech Revolutions today with engineered drugs, wireless
communication, tablets, smart phones, and more inventions still. As
former U.S. Patent & Trademark Office (PTO) Director David Kappos
recently remarked, the U.S. patent system is ``the greatest innovation
engine the world has ever known.'' \1\ On the other hand, the ``smart
phone wars'' and related patent litigation issues, as well as the
commercial and legal activities of patent licensing companies, have
lead many to believe that the ``patent system is broken,'' a mantra one
reads almost daily on the Internet, in newspaper reports, and in op-
eds.\2\
---------------------------------------------------------------------------
\1\ Innovation Act of 2013: Hearing on H.R. 3309 Before the Comm.
on the Judiciary, 113th Cong. _ (Oct. 29, 2013) (statement of David J.
Kappos, Partner, Cravath, Swaine & Moore LLP), p. 2, available at
http://judiciary.house.gov/hearings/113th/10292013/Kappos%20
Testimony.pdf.
\2\ See Adam Mossoff, The Trespass Fallacy in Patent Law, Florida
L. Rev. (forthcoming 2013), p. 1 n. 1-2, available at http://ssrn.com/
abstract=2126595 (reviewing examples).
---------------------------------------------------------------------------
It is without a doubt that the patent licensing business model and
patent litigation have become a flashpoint of controversy. One area of
concern, the topic of today's hearing, is the impact of demand letters
sent by patent licensing companies, which are widely referred to as
``patent assertion entities'' (PAE), ``non-practicing entities'' (NPE)
or by the more fashionable and inflammatory term, ``patent trolls.''
\3\ For reasons that I will discuss shortly, I prefer instead to refer
to these companies by their actual business model: patent licensing.
Unless one works at a law firm, litigation (or threats of litigation)
is not a business model; rather, the business model is licensing, in
the course of which it can be necessary to threaten to sue or sue
recalcitrant licensees. Since the early nineteenth century, many
inventors and companies have licensed or sold their patents, rather
than manufacture the technology. This has achieved tremendous
efficiencies through the division of labor, and thus has been essential
to America's flourishing innovation economy.
---------------------------------------------------------------------------
\3\ As will be explained later, this term lacks an agreed-upon,
objective definition and thus it should not be used by lawyers,
commentators or scholars who care about precision and accuracy in
discussions of patent law and policy. See Adam Mossoff, The SHIELD Act:
When Bad Economic Studies Make Bad Laws, CPIP Blog (March 15, 2013),
http://cpip.gmu.edu/2013/03/15/the-shield-act-when-bad-economic-
studies-make-bad-laws/.
---------------------------------------------------------------------------
Nonetheless, terms like ``patent troll'' have easily captured the
public's imagination. This has happened in part because it is
undeniable that there are some rent-seeking patent owners who
strategically exploit poor quality patents and the high costs of
American civil litigation. Such bad actors exist in every legal system,
and in fact have always existed--in the nineteenth century, the popular
rhetorical epithet for these patent owners was ``patent shark.'' \4\
But whether such bad actors exist in large enough numbers today to
cause a breakdown in the patent system requiring a systemic
intervention via legislation or regulation is an entirely different
question--and it is a question that remains largely unanswered.
---------------------------------------------------------------------------
\4\ See Earl W. Hayter, The Patent System and Agrarian Discontent,
1875-1888, 34 Miss. Valley Hist. Rev. 59 (June 1947); Earl W. Hayter,
The Western Farmers and the Drivewell Patent Controversy, 16
Agricultural Hist. 16 (Jan. 1942). See also Dan Mitchell, When Patent
Trolls Were Simply Sharks, Fortune (June 7, 2013), http://
tech.fortune.cnn.com/2013/06/07/when-patent-trolls-were-simply-sharks/.
---------------------------------------------------------------------------
Unfortunately, in addition to the mistaken empirical claims about
patent litigation based on what the Government Accountability Office
(GAO) has recognized as ``nonrandom and nongeneralizable'' studies,\5\
mistaken claims abound about patent licensing and its longstanding
historical role in making patented innovation a commercial reality.
Scholars and commentators claim that the patent licensing business
model arises from a ``patent marketplace [that] is a relatively new
secondary market.'' \6\ The inference is clear: this new commercial and
legal activity requires new legislation and new regulations to address
allegedly new problems.\7\ Rote repetition in scholarship, blogs, op-
eds and newspaper articles, has solidified these claims into
conventional wisdom among policy and legal elites. This conventional
wisdom in turn is driving numerous legislative and regulatory proposals
to address the allegedly systemic problems caused by the allegedly new
patent licensing business model.
---------------------------------------------------------------------------
\5\ Government Accountability Office, Intellectual Property:
Assessing Factors that Affect Patent Infringement Litigation Could Help
Improve Patent Quality 26 (Aug. 2013), http://www.gao.gov/assets/660/
657103.pdf.
\6\ Anne Kelley, Practicing in the Patent Marketplace, 78 U. Chi.
L. Rev. 115, 117 (2011).
\7\ Judge Richard A. Posner, for instance, has called for the
adoption of a new legal rule ``that barred enforcement of a patent that
was not reduced to practice within a specified time after the patent
was granted.'' Richard Posner, Patent-Trolls--Posner, The Becker-Posner
Blog (July 31, 2013), http://www.becker-posner-blog.com/2013/07/patent-
trollsposner.html.
---------------------------------------------------------------------------
This conventional wisdom (like much conventional wisdom) is
profoundly mistaken. We are racing to revise the patent system, a mere
two years after the largest revision to the patent system since
1836,\8\ on the basis of rhetoric and anecdote instead of objective
evidence and reasoned explanations. Even worse, the proposed
legislative or regulatory interventions will not fix the unproven
systemic problems they purport to address, but instead will cause
actual damage to the dynamic innovation that the patent system promotes
and secures. In the rush to enact legislation to revise the patent
system, there is too little regard for the harm to innovation that will
result from the weakening of patent rights and the increased legal
hurdles that make it harder to license patents and enforce these
patents against infringers. As David Kappos stated in his testimony
before the House Judiciary Committee last week: ``we are reworking the
greatest innovation engine the world has ever known, almost instantly
after it has just been significantly overhauled. If there were ever a
case where caution is called for, this is it.'' \9\
---------------------------------------------------------------------------
\8\ See Richard Maulsby, President Obama Signs the America Invents
Act, Inventors Eye, vol. 2, issue 5 (Oct. 2011), http://www.uspto.gov/
inventors/independent/eye/201110/america
inventsact.jsp (referring to the America Invents Act of 2011 as ``the
most significant reform of the U.S. patent system since 1836'').
\9\ Kappos, supra note 1, at 2.
---------------------------------------------------------------------------
In this testimony, I will provide a brief overview on two important
issues regarding the patent licensing business model and the assertion
of these licensed patents that have gone largely unrecognized by those
calling for legislative or regulatory changes. First, the patent
licensing business model, and even the litigation of patents owned by
these companies, has long been an essential feature of the American
patent system, reaching back to the early nineteenth century and
playing a key role in the commercial distribution of patented
innovation. Second, aside from anecdotes and deeply flawed studies,
there is no evidence yet of systemic harm to innovation caused by
patent licensing companies requiring legislative or regulatory
intervention. Even more important, such intervention carries serious
risk of overreach that could harm the dynamic innovation that the
patent system promotes and secures.
What is a Patent Assertion Entity or ``Patent Troll''?
As a preliminary matter, it is necessary to address a fundamental
problem in the patent policy debates today--the terminology used in
these debates is deeply confused and has produced misleading claims and
arguments that have proliferated widely among scholars and laypersons
alike. This hearing concerns the assertion of patents via demand
letters by PAEs or patent trolls. The FTC has defined PAEs as ``firms
whose business model primarily focuses on purchasing and asserting
patents,'' \10\ but this is not the accepted definition among all
commentators or necessarily even among the witnesses testifying today.
In fact, there is no settled, agreed-upon definition of a PAE or patent
troll that is universally adopted by scholars and commentators alike.
---------------------------------------------------------------------------
\10\ Fed. Trade Comm'n, The Evolving IP Marketplace: Aligning
Patent Notice and Remedies with Competition 8 n.5 (Mar. 2011),
available at http://www.ftc.gov/os/2011/03/110307patentreport.pdf.
---------------------------------------------------------------------------
Many commentators equate a PAE or patent troll with an NPE, another
term that even the critics of these commercial entities recognize has
yet to be objectively defined.\11\ Aside from the strange locution of
identifying the active commercialization of a property right in the
marketplace as ``non practicing''--it is tantamount to saying that
landlords are ``non-practicing'' owners of their property rights
because they do not live on their real estate parcels--this term is
applied in inconsistent ways. For example, one of the first widely
condemned NPEs in the high-tech industry was NTP, which successfully
sued RIM (the maker of the Blackberry) after RIM refused to license
NTP's patents on wireless e-mail communication.\12\ Prominent scholars,
such as Mark Lemley and Carl Shapiro, among many others, have called
NTP a ``patent troll.'' \13\ But NTP was a holding company formed by
the inventor, Thomas Campana, Jr., and who did so only after numerous
failed attempts at producing the technology.\14\ It seems strange that
knowledgeable scholars and commentators are condemning inventors as
``patent trolls,'' when almost everyone regards inventors as rightly
excluded from such pejorative labels (and especially when Campana's
patents were upheld as valid through repeated reviews both in court and
under re-examination at the PTO).
---------------------------------------------------------------------------
\11\ See, e.g., James Bessen & Michael J. Meurer, The Direct Costs
from NPE Disputes, p. 11, available at http://ssrn.com/abstract=2091210
(``There is no consensus among researchers on the proper definition of
NPE.'').
\12\ See NTP, Inc. v. Research in Motion, Ltd., 418 F.3d 1282 (Fed.
Cir. 2005).
\13\ Lemley & Shapiro, Patent Holdup and Royalty Stacking, 85 Tex.
L. Rev. 2008-09 (2007) (discussing NTP as an example of how ``patent
trolls [can] hold up defendants by threatening to enjoin products that
are predominantly noninfringing''); Gerard N. Magliocca, Blackberries
and Barnyards: Patent Trolls and the Perils of Innovation, 82 Notre
Dame L. Rev. 1809, 1809-10 (2007) (observing that the BlackBerry
litigation ``was brought by a `patent troll,' which is a derogatory
term for firms that use their patents to extract settlements rather
than license or manufacture technology''); Bruce Sewell, Troll Call,
Wall St. J., Mar. 6, 2006, at A14 (criticizing NTP as a patent troll).
\14\ See Barrie McKenna et al., Patently Absurd, Globe and Mail,
Jan. 28, 2006, at B4 (discussing how Campana attempted to manufacture
his patented invention but was unsuccessful, and thus NTP was formed in
1992 only after his earlier firm, Telefind, went bankrupt in 1991).
---------------------------------------------------------------------------
The PAE, NPE and patent troll terms thus have many different
definitions such that they sometimes cover and sometimes exclude
universities,\15\ startups, firms that both manufacture and license,
firms that engage in research and development and then license this
patented innovation, and even individual inventors--including classic
American inventors like Thomas Edison, Elias Howe (the inventor of the
lockstitch in the 1840s), and Charles Goodyear (the inventor of
vulcanized rubber in the late 1830s).\16\ One oft-cited study that has
played a significant role in the patent policy debates concluded that
NPEs/patent trolls imposed $29 billion in costs on defendants in
2011.\17\ This study has been rightly criticized by scholars and by the
GAO for many methodological and substantive failings,\18\ and one of
these problems is its extremely broad definition of an NPE/patent
troll. The authors defined an NPE/patent troll as covering almost every
person, corporation, or university that sues someone for infringing a
patent that it is not currently being used to manufacture a product at
that moment, including even manufacturing companies that sue on patents
deemed to be ``well outside the area in which they make products.''
\19\ The scope of this definition is breathtaking. What patent owner
isn't currently or potentially an NPE under this definition, especially
given that the innovation industries are extremely heterogeneous and
constantly evolving, with companies like IBM and Nokia shifting their
business models, product lines and commercial activities?
---------------------------------------------------------------------------
\15\ The University of Wisconsin has been called a ``patent
troll.'' See Erin Fuchs, Tech's 8 Most Fearsome ``Patent Trolls,''
Business Insider (Nov. 25, 2012 2:01PM), http://www.business
insider.com/biggest-patent-holding-companies-2012-11?op=1.
\16\ Cf. Joshua D. Wright, What Role Should Antitrust Play in
Regulating the Activities of Patent Assertion Entities (Apr. 17, 2013),
p. 3, available at http://www.ftc.gov/speeches/wright/
130417paespeech.pdf (``The entities qualifying as NPEs are wide-ranging
and heterogeneous: they include all universities, which certainly do
not manufacture or sell patented inventions, but also start-up
companies, semiconductor design houses, and even some large,
established commercial firms, like IBM. Thomas Edison would have been
called an NPE, if that term existed 100 years ago . . .'').
\17\ See Bessen & Meurer, supra note 11.
\18\ See Government Accountability Office, supra note 5; David L.
Schwartz & Jay Kesan, Analyzing the Role of Non-Practicing Entities in
the Patent System, 99 Cornell L. Rev. (forthcoming 2013), http://
ssrn.com/abstract=2117421 (identifying serious methodological and
substantive flaws in patent litigation study by Bessen and Meurer). Cf.
Christopher A. Cotropia, Jay P. Kesan & David L. Schwartz, Patent
Assertion Entities Under the Microscope: An Empirical Investigation of
Patent Holders as Litigants (Oct. 28, 2013), available at http://
ssrn.com/abstract=2346381 (finding from publicly available data
substantially less litigation rates than those found by Bessen and
Meurer in a study using secret, proprietary data from RPX).
\19\ Bessen & Meurer, supra note 11, at 10.
---------------------------------------------------------------------------
Even the more restrictive definition of a PAE that limits it to
companies who ``purchase and assert'' patents is still not applied as
evenly as it may first appear. Again, ``assertion'' in patent law means
filing a lawsuit, but the actual business model of the majority of
companies who purchase patents is licensing, not litigation. Moreover,
the real-world firms to which this term has been applied are more
complex and heterogeneous than is often acknowledged. For instance, one
company that is widely alleged to be a PAE, Intellectual Ventures,
employs hundreds of inventors who engage in research and development,
and the company licenses this homegrown patented innovation along with
the other patents it purchases from third-party inventors and
companies. In a recent presentation on Capitol Hill, Nathan Myhrvold,
the founder of Intellectual Ventures, stated that his firm is a top-ten
filer for new patents in the U.S., and that he personally has received
about 1200 patents.\20\ Again, inventors and companies that produce
patented innovation are being swept up in the terminology of PAE, NPE,
and patent troll.
---------------------------------------------------------------------------
\20\ See ``The Future of Invention--What's at Risk?,'' available at
http://youtu.be/4IlNBhu7a_E.
---------------------------------------------------------------------------
Given the variance and lack of clarity in these basic terms in the
patent policy debates about patent licensing and patent litigation, I
prefer instead to refer to these individuals and companies by their
actual business model: patent licensing. This avoids the misleading
shading of meaning that comes from loose rhetoric about mythical beasts
or unverified litigation practices, and instead focuses the discussion
on what these companies actually do in terms of their business model.
By focusing on the business model of patent licensing, it also brings
into sharper focus the historical pedigree of patent licensing, which
inventors and companies have long employed to bring new patented
innovation to market.
Patent Licensing as a Longstanding and Essential Feature of the
American Patent System
Contrary to many claims today about PAEs or patent trolls, however
they are defined, the patent licensing business model is not a new
phenomenon in the commercialization of patented innovation in the
marketplace. As award-winning economist Zorina Khan has explained,
licensing has long been an essential feature of America's unique patent
system, which secured property rights in innovation to both inventors
and to the marketplace actors who commercialized this innovation.\21\ I
have also explained in my scholarship how early American legislators
and judges defined patents as property rights--specifically as civil
rights securing fundamental property rights \22\--and that this had
profound implications in securing the free alienation of patents in the
nineteenth-century marketplace.\23\ Here, I can only briefly summarize
some of this research and highlight its relevance to the concerns about
patent licensing entities and their litigation practices.
---------------------------------------------------------------------------
\21\ See B. Zorina Khan, The Democratization of Invention: Patents
and Copyrights in American Economic Development, 1790-1920, at 9-10
(2005) (``The analysis [in this book] emphasizes the role that patents
and copyrights played in the securitization of ideas through the
creation of tradeable assets: intellectual property rights facilitated
market exchange, a process that assigned value, helped to mobilize
capital, and improved the allocation of resources. . . . Extensive
markets in patent rights allowed inventors to extract returns from
their activities through licensing and assigning or selling their
rights.'').
\22\ See Adam Mossoff, Who Cares What Thomas Jefferson Thought
About Patents? Reevaluating the Patent ``Privilege'' in Historical
Context, 92 Cornell L. Rev. 953 (2007).
\23\ See Adam Mossoff, Exclusion and Exclusive Use in Patent Law,
22 Harv. J. L. & Tech. 321, 349-60 (2009); Adam Mossoff, A Simple
Conveyance Rule for Complex Innovation, 44 Tulsa L. Rev. 707, 711-20
(2009).
---------------------------------------------------------------------------
In more recent scholarship, Professor Khan and other economists
have shown that there was an active commercial market in both selling
patents and licensing patent rights in the nineteenth century.\24\ Many
early American inventors (and third parties) embraced this market to
sell, purchase, and license patented innovation.\25\ For instance,
Edison certainly meets the definition of an ``NPE,'' as he sold and
licensed his patents, especially in his early invention-intensive
career.\26\ He also assigned outright some of his later patents, such
as transferring his patented innovation in incandescent light bulbs to
the General Electric Company.\27\ Even earlier in the nineteenth
century, inventors sold and licensed their patent rights. Charles
Goodyear, the inventor of vulcanized rubber in 1839,\28\ never
manufactured or sold rubber products, and instead made all of his money
by selling the rights to manufacture, license, sell, and use his
patented innovation.\29\ As the archetypical obsessive inventor,
Goodyear was not interested at all in manufacturing or retail sales of
his patented innovation.
---------------------------------------------------------------------------
\24\ See, e.g., B. Zorina Khan, Trolls and Other Patent Inventions:
Economic History and the Patent Controversy in the Twenty-First
Century, _ George Mason Univ. L. Rev. _ (forthcoming 2014) (draft
available at http://cpip.gmu.edu/wp-content/uploads/2013/09/Khan-
Zorina-Patent-Controversy-in-the-21st-Century.pdf); Naomi R. Lamoreaux,
Kenneth L. Sokoloff, and Dhanoos Sutthiphisal, Patent Alchemy: The
Market for Technology in U.S. History, 87 Business Hist. Rev. 3 (Spring
2013).
\25\ See Lamoreaux, Sokoloff & Sutthiphisal, supra note 24, at 20.
Classified ads in nineteenth-century issues of Scientific American
establish that patents and patent rights were actively offered for sale
and purchased. See, e.g., Scientific American 383 (Aug. 12, 1854);
Scientific American 143 (Aug. 28, 1869) [PDFs on file with author].
\26\ See Lamoreaux, Sokoloff & Sutthiphisal, supra note 24, at 6
(explaining how Edison sold 20 of his early patents to third parties in
order to fund his ongoing research and development).
\27\ Randall E. Stross, The Wizard of Menlo Park: How Thomas Alva
Edison Invented the Modern World 165 (2008).
\28\ U.S. Patent No. 3,633 (issued June 15, 1844).
\29\ See Charles Slack, Noble Obsession: Charles Goodyear, Thomas
Hancock, and the Race to Unlock the Greatest Industrial Secret of the
Nineteenth Century (2002); Harold Evans, They Made America: From the
Steam Engine to the Search Engine: Two Centuries of Innovators 92-100
(2004).
---------------------------------------------------------------------------
Even more relevant to today's policy debates, Goodyear and his
assignees and exclusive licensees filed many, many lawsuits against
individual end users, commercial firms, and manufacturers.\30\ End-user
lawsuits in particular were a prominent tool in their litigation
strategy. Moreover, these end-user lawsuits were commonplace. As legal
historian Professor Christopher Beachamp has discovered in his
research, over a thousand patent infringement lawsuits were filed just
in the Southern District of New York in 1883 and almost all of these
were against farmers for infringing a single patent on well drilling
technology.\31\ These end-user lawsuits were brought by a company that
Professor Beachamp recognizes as falling within the definition today of
a NPE--a firm engaged solely in patent licensing.\32\ In fact, given
its extensive litigation practice, this firm would likely be classified
as a PAE as well. Professor Beachamp found similar litigation practices
against end users of sewing machines, cheese frames, barbed wire, and
other patented innovation reaching back to the 1840s.\33\
---------------------------------------------------------------------------
\30\ For a few examples of the extensive litigation surrounding
Goodyear's patent, see Adam Mossoff, Who Cares What Thomas Jefferson
Thought About Patents? Reevaluating the Patent ``Privilege'' in
Historical Context, 92 Cornell L. Rev. 953 (2007) (cases cited in
footnotes 174, 183, 188, and 192-194); Adam Mossoff, A Simple
Conveyance Rule for Complex Innovation, 44 Tulsa L. Rev. 707, 711-20
(2009) (cases cited in foonotes 50 and 55).
\31\ Professor Beachamp discusses his ongoing research into this
issue in the panel, ``End-User Lawsuits in Patent Litigation: A Bug or
a Feature of Patent Law'' (Aug. 29, 2013), available at http://
cpip.gmu.edu/events/teleforum-panel-end-user-lawsuits-in-patent-
litigation-a-bug-or-a-feature-of-patent-law/.
\32\ Id.
\33\ Id.
---------------------------------------------------------------------------
The inventor of the lockstitch in the 1840s,\34\ Elias Howe, Jr.,
also licensed his patented innovation for most of his life. In fact,
Howe engaged in ex post licensing: making royalty demands and suing
retailers and manufacturers after discovering that they were infringing
his patent rights. He also used ads to threaten liability for all
purchasers of unlicensed sewing machines.\35\ One historian identified
Howe's ``main occupation'' in the early 1850s as consisting entirely of
``suing the infringers of his patent for royalties.'' \36\ His demands
caused much ire. In fact, Howe's assertion of his patents against
noncompliant infringers refusing his licensing offers precipitated the
very first ``patent war''--called, at the time, the Sewing Machine
War.\37\
---------------------------------------------------------------------------
\34\ U.S. Patent No. 4750 (issued Sept. 10, 1846).
\35\ See Mossoff, The Rise and Fall of the First American Patent
Thicket: The Sewing Machine War of the 1850s, 53 Ariz. L. Rev. 165, 185
(2011) (quoting one of Howe's advertisements that ``You that want
sewing machines, be cautious how you purchase them of others than
[Howe] or those licensed under [Howe], else the law will compel you to
pay twice over.'').
\36\ Ruth Brandon, A Capitalist Romance 71-72 (1977).
\37\ See generally Mossoff, supra note 35.
---------------------------------------------------------------------------
Even more important for understanding the practices of patent
licensing and patent litigation, Howe's litigation practices were
similar to many practices today. For instance, Howe was destitute and
found investors to provide third-party financing for his patent
infringement lawsuits.\38\ Ultimately, after being a principal legal
pugilist in the Sewing Machine War, Howe joined the Sewing Machine
Combination of 1856. This was the first patent pool in American
history, which ended the Sewing Machine War and successfully licensed
the patents in the sewing machine.\39\ Moreover, similar to the end-
user lawsuits by Goodyear's assignees and other patent owners, when
Howe first sued Singer and many other retailers and manufacturers,\40\
these companies were the equivalent of today's ``mom and pop stores''
or ``start up'' companies.
---------------------------------------------------------------------------
\38\ See id. at 183.
\39\ See id. at 194-202.
\40\ See, e.g., id. at 189 (noting how ``Howe quickly filed
lawsuits in Boston against firms selling Singer Sewing Machines, and,
as before, he sought preliminary injunctions'').
---------------------------------------------------------------------------
This brief survey establishes that the patent licensing business
model has not only existed from the early nineteenth century, it has
long served a significant function in the commercialization of patented
innovation in the United States. Other famous early nineteenth-century
inventors also extensively assigned and licensed rights in their
patented innovation, including William Woodworth (planing machine),
Thomas Blanchard (lathe), and Obed Hussey and Cyrus McCormick
(mechanical reaper),\41\ and many others. Such commercial practices
continued into the twentieth century and up through today, with such
innovative firms as Bell Labs,\42\ IBM,\43\ Apple,\44\ Microsoft,\45\
Research in Motion (Blackberry),\46\ and Nokia,\47\ among others, using
this long-established, successful method of patent licensing to
commercialize patented innovation in the marketplace.
---------------------------------------------------------------------------
\41\ See Lamoreaux, Sokoloff & Sutthiphisal, supra note 24, at 8.
\42\ See Jon Gertner, The Idea Factory: Bell Labs and the Great Age
of American Innovation chpt. 6 (reprint ed. 2013) (discussing how Bell
Labs licensed the transistor to any individual or firm willing to pay
the $25,000 licensing rate).
\43\ See David Kilpatrick, The Future of IBM. Lou Gerstner seems to
have pulled off a miracle. Sam Palmisano will have to be at least as
good, Fortune (Feb. 18, 2002), http://money.cnn.com/magazines/fortune/
fortune_archive/2002/02/18/318158/index.htm (``Throughout the Gerstner
years IBM has been the world leader in new patents; it earns well over
$1 billion a year licensing those patents.'').
\44\ See Tom Haubert, The Troubled Life of Patent No. 6,456,881:
Tracing the Tortured Legal Trail of a Simple Smartphone Patent, IEEE
Spectrum (Apr. 23, 2013), http://spectrum
.ieee.org/at-work/innovation/the-troubled-life-of-patent-no-6456841
(describing patent purchased from Mitsubishi by Apple, and then Apple
sold the patent to a ``patent acquisition and licensing company'' that
brought patent infringement lawsuits against many high-tech companies
(but not against Apple)).
\45\ See Rakesh Sharma, Six Answers About Rockstar's Suit Against
Google, Forbes (Nov. 1, 2013 6:21PM), at http://www.forbes.com/sites/
rakeshsharma/2013/11/01/six-answers-about-rockstars-suit-against-
google/ (discussing the patent licensing entity, Rockstar Consortium,
which is backed by Apple, Microsoft, Sony, Ericsson, and Research in
Motion).
\46\ Id.
\47\ See Dan Levine, Why Nokia Didn't Sell Its Patents to
Microsoft, Reuters (Sep. 3, 2013 7:05PM EDT), http://www.reuters.com/
article/2013/09/03/us-nokia-microsoft-patents-idUS
BRE9820ZZ20130903.
---------------------------------------------------------------------------
Moreover, the litigation practices of these patent owners,
including suing numerous defendants, suing end users, and receiving
third-party financing for lawsuits, among others, have been common
features of the patent litigation landscape since the early nineteenth
century. It is simply untrue that these commercial and legal strategies
are novel developments in recent years that require novel legislative
or regulatory changes. While there are certainly some bad actors,
Congress must be cautious in making systemic revisions to the
longstanding legal rules governing how patented innovation is
commercialized and litigated. This is especially the case when such
revisions are based more on rhetoric about particular types of patent
owners than evidence of systemic problems that are clearly harming
innovation.
The PTO and Courts Have the Tools to Address Bad Actors in the Patent
System
It is significant that the commercial and legal practices about
which commentators and scholars today express extensive concern have in
fact been longstanding features of both the American patent system and
the Federal courts. The commercialization of patented innovation and
resulting economic growth has occurred throughout every historical
``patent war'' and periods of extensive litigation against
manufacturers, retailers, and end users. The creation of patented
innovation and the resulting economic growth continue today because the
PTO and courts already have the tools to separate the bad actors from
the legitimate patent licensing companies. Even more important, the
America Invents Act of 2011 (AIA), a product of a six-year policy
debate and rightly recognized as ``the most significant reform of the
U.S. patent system since 1836,'' \48\ vastly expanded these tools as
well.
---------------------------------------------------------------------------
\48\ Maulsby, supra note 8.
---------------------------------------------------------------------------
The concern about patent licensing companies demanding royalties
from or even suing alleged infringers is that many people believe that
the patents are invalid. In other words, the policy concern that needs
to be addressed is the validity of the underlying property right, as an
owner of a valid patent has every right to demand licenses from
unauthorized users and to seek relief in court against recalcitrant
infringers. There have long existed many legal tools, and even more
exist today, for challenging and weeding out such bad patents.
Consider two historical examples (among the many that exist).
First, potential defendants have long had the right to bring
declaratory judgment actions in Federal court to invalidate patents
that might be asserted against them in a future lawsuit, and the
Supreme Court recently liberalized the rules even further for when
someone can bring a declaratory judgment action in its 2007 decision in
Medimmune v. Genentech.\49\ Second, defendants or potential defendants
have long had access to the PTO to challenge improperly issued patents.
Singer instigated a lengthy proceeding at the Patent Office in 1850 in
attempting to invalidate Howe's patent, for instance, and defendants in
all of Howe's lawsuits repeatedly argued (and reargued) in Federal
court that Howe's patent was invalid as well.\50\ Like any newly
created asset or valuable resource, all commercially significant and
valuable patents are always heavily disputed as to their validity, both
in courts and at the PTO. This explains the historical prevalence of
the patent wars that have occurred with every major technological leap
forward.\51\
---------------------------------------------------------------------------
\49\ MedImmune, Inc. v. Genentech, Inc., 127 S. Ct. 764 (2007).
\50\ See Mossoff, supra note 35, at 187-89.
\51\ See Adam Mossoff, Patented Innovation and Patent Wars: Some
Historical Perspective, A Smarter Planet Blog (Jan. 11, 2013 8:00AM),
available at http://asmarterplanet.com/blog/2013/01/patented-
innovation-and-patent-wars-some-historical-perspective.html.
---------------------------------------------------------------------------
Today, such legal mechanisms continue to exist in the PTO and in
the courts, which serve as a check on both bad actors and bad patents.
In the courts, the Judicial Conference's Committee on Rules of Practice
and Procedure has officially published proposed revisions to the
pleading requirements in patent lawsuits, one of the sources of the
much maligned minimal notice requirements in patent infringement
complaints.\52\ Additionally, the Supreme Court recently granted cert
in two cases that will likely result in liberalizing the rules on the
issuance of sanctions in patent cases.\53\ Such legal changes will
necessarily change the calculus of individual patent owners who are
bluffing in demand letters, because those bluffs may now be called and
courts will both make it harder to bring the actual lawsuits and will
punish bad-faith assertions.
---------------------------------------------------------------------------
\52\ See Committee on the Rules of Practice and Procedure of the
Judicial Conference of the United States, Preliminary Draft of Proposed
Amendments to the Federal Rules of Bankruptcy and Civil Procedure (Aug.
2013), available at http://www.uscourts.gov/uscourts/rules/preliminary-
draft-proposed-amendments.pdf; see also Honorable Katherine O'Malley,
Key Note Speech at Intellectual Property Owners Association Annual
Meeting (Sep. 17, 2013), p. 9, available at http://www.ipo.org/wp-
content/uploads/2013/02/IPO-Annual-Meeting-Keynote-Speech-09-17-13.pdf
(discussing this process).
\53\ See Octane Fitness, LLC v. Icon Health & Fitness, Inc., No.
12-1184, 2013 WL 1283843 (U.S. Oct. 01, 2013); Highmark Inc. v. Allcare
Health Mgmt. Sys., No. 12-1163, 2013 WL 1217353 (U.S. Oct. 01, 2013).
---------------------------------------------------------------------------
Even more important, at the PTO, the many new, AIA-created review
proceedings are just beginning to be implemented and to produce
results.\54\ And there are more reforms that can and should be adopted,
such as securing full funding of the PTO to ensure complete and timely
examination of patent applications. Full funding of the PTO will also
ensure proper implementation of the many new administrative review
programs created by the AIA to weed out invalid and vague patents that
clog the innovation economy.
---------------------------------------------------------------------------
\54\ See generally Kappos, supra note 1.
---------------------------------------------------------------------------
And for those who lack the knowledge or wherewithal to navigate
these processes, there are many law firms and policy organizations,
such as Public Patent Foundation, Electronic Frontier Foundation (EFF),
the Berkman Center for Internet and Society, and others who are
offering assistance.\55\ For instance, the App Developers Alliance has
created the ``Law School Patent Troll Defense Network,'' which involves
law school clinics providing legal services to individuals or small
businesses receiving demand letters or complaints.\56\ Moreover, two
weeks ago, EFF joined with the Berkman Center to file an inter partes
review of the widely known and notorious ``podcasting patent,'' which
has been the subject of thousands of demands letters being sent to
individuals, small companies, and large companies.\57\ In a world in
which Internet searches easily and effortlessly produce such
information, it is becoming harder to maintain that recipients of
demand letters lack the resources and capabilities to respond
effectively.
---------------------------------------------------------------------------
\55\ On behalf of individual women lacking the funds to pay for
expensive DNA testing (and thus lacking the funds to bring a lawsuit),
the Public Patent Foundation brought the challenge to the patents on
the BRAC1 and BRAC2 genes, which correlated with breast cancer. The
Public Patent Foundation ultimately won before the Supreme Court. See
AMP v. Myriad Genetics, 133 S. Ct. 1747 (2013).
\56\ See Law Schools Join App Developers Alliance to Fight Patent
Trolls (Oct. 10, 2013), available at http://www.ipwatchdog.com/2013/10/
15/law-schools-join-app-developers-alliance-to-fight-patent-trolls/.
\57\ See EFF Files Challenge With Patent Office Against Troll's
Podcasting Patent: Massive Crowdsourcing Effort Leads to Strong
Petition Before the USPTO (Oct. 16, 2013), available at https://
www.eff.org/press/releases/eff-files-challenge-patent-office-against-
trolls-podcasting-patent.
---------------------------------------------------------------------------
The Harm to Dynamic Innovation from Legislative or Regulatory
Overreach
It is against this backdrop that Congress must assess any proposal
to intervene via commercial regulation in patent licensing and patent
litigation practices. First, there is too much rhetoric and too many
``nonrandom and nongeneralizable'' studies in the policy debates,\58\
and too little actual evidence definitively establishing that more
revisions to the patent system are needed. Second, while there are
certainly bad actors, there are a number of existing legal mechanisms
at the PTO and in the courts to address them, especially after the
enactment of the AIA just two years ago. Third, and certainly not
least, there is too little regard for the serious costs that regulatory
overreach imposes on the individuals and businesses who create the
real-world innovative products and services that have become basic
commodities of modern life.
---------------------------------------------------------------------------
\58\ Government Accountability Office, supra note 5, at 26.
---------------------------------------------------------------------------
While many pay lip service to the importance of promoting
innovation, there has been too little regard given to the benefits of
strong and certain patent rights and the costs of lost innovation when
these rights become uncertain. In contrast to the many studies done on
the alleged ``costs'' imposed by patent licensing companies on
defendants and manufacturers, there has not been a single statistical
study done on either (1) the costs imposed on patent owners in either
licensing or enforcing their legal rights, or (2) the costs, especially
the error costs, that further legislative or regulatory changes to
patent licensing and litigation practices will impose on legitimate
owners of valid patents--the modern-day Edison, Howe, and Goodyear.
This is striking and reinforces the concern that proposed
legislation and regulation is being driven today more by rhetoric than
by a dispassionate, reasoned consideration of all sides of the policy
equation. If there is objective harm established by the knowing abuse
of invalid patents via demand letters--such as, for example, cognizable
harms in lost production and lost business opportunities via in
terrorem threats--then such harm must first be proven via established
empirical methodologies and assessed according to known legal
standards.\59\ If Congress intends to direct a regulatory agency to
punish the licensing and litigation activities of certain types of
patent owners, then such a radical alteration to the patent system
should at least be supported by definitive evidence justifying such
systemic changes. Otherwise, the in terrorem effect runs the other way,
sweeping legitimate inventors and companies into an arbitrary
regulatory environment that makes the licensing and enforcement of
their patented innovation prohibitively costly.\60\ As a recent letter
submitted by several Senators and Representatives to Chairwoman Edith
Ramirez stated:
---------------------------------------------------------------------------
\59\ See Commissioner Joshua D. Wright, Proposed Policy Statement
Regarding Unfair Methods of Competition Under Section 5 of the Federal
Trade Commission Act (June 19, 2013), available at http://ftc.gov/
speeches/wright/130619umcpolicystatement.pdf.
\60\ See Donald Rosenberg, First Rule of Patent Reform: Do No Harm,
Wall St. J. (Sep. 10, 2013 6:54PM), (``How will the proposed changes
that make it harder and more expensive to enforce these patents affect
small inventors, universities and companies that legitimately seek to
protect their intellectual property rights? New legislation must take
care not to sacrifice their rights or those of other inventors.'').
The absence of clear parameters for the FTC's Section 5
authority based on empirical and economic justifications
engenders uncertainty in the business community. This
uncertainty acts as a deterrent to innovation and creativity,
which are critical drivers of the American economy and vitally
important in today's challenging economic environment.\61\
---------------------------------------------------------------------------
\61\ Letter from Chairman Bob Goodlatte, House Comm. on the
Judiciary, Ranking Member Charles Grassley, Senate Comm. on the
Judiciary, Chairman Spencer Bachus, House Comm. on the Judiciary
Subcomm. on Regulatory Reform, Commercial, and Antitrust Law, and
Ranking Member Mike Lee, Senate Comm. on the Judiciary Subcomm. on
Antitrust, Competition Policy, and Consumer Rights, to Chairwoman Edith
Ramirez, Fed. Trade Comm'n (Oct. 23, 2013).
Such concerns are endemic in any legal intervention into patented
innovation.\62\ As Commissioner Joshua Wright has similarly observed in
his previous academic scholarship, after a careful review of the
economic literature to date:
---------------------------------------------------------------------------
\62\ See Mossoff, A Simple Conveyance Rule for Complex Innovation,
supra note 23, at 120-30 (identifying inherent difficulties in
assessing or predicting commercial innovation and the high error costs
this portends for commercial regulation).
Our economic knowledge regarding innovation itself, conduct
affecting innovation, and how to assess competitive outcomes
involving tradeoffs between product market competition and
innovation are far less impressive than our knowledge in a
purely static setting. The costs of false positives leading to
a chilling of pro-competitive innovation are significant.\63\
---------------------------------------------------------------------------
\63\ Joshua D. Wright, Antitrust, Multi-Dimensional Competition,
and Innovation: Do We Have an Antitrust-Relevant Theory of Competition
Now?, in Regulating Innovation: Competition Policy and Patent Law under
Uncertainty 230 (Geoffrey A. Manne & Joshua D. Wright eds., 2010).
This is not to diminish the existence of individual bad actors and
the particular harms they might be imposing via improper demand
letters. But anecdotes alone do not justify legislative or regulatory
action. Given the lack of an established and proven connection between
these individually harmful acts and systemic harm to innovation, the
lack of cognizable legal standards for acting in this area, the
preexisting tools at the PTO and in courts to address the problems, and
the ever-present threat of causing even greater harm to the innovation
economy through legislative or regulatory overreach, this is an issue
on which Congress should exercise restraint.
Conclusion
Contrary to popular myth today, the patent licensing business model
has long played an essential role in distributing patented innovation
through the marketplace. These commercial activities reflect the basic
economic principle of the division of labor that Adam Smith famously
recognized as essential to a successful free market and flourishing
economy--in this context, it is the division of labor between inventors
and businesspersons.\64\ This fundamental economic principle is just as
applicable to patented innovation as it is to any other economic
activity; as Henry Ford famously said of his friend and business
partner, Edison was ``the world's greatest inventor and the world's
worst businessman.'' \65\ Thus, it is significant, as Commissioner
Wright has observed, that ``[t]he PAE is a specialist in licensing and
enforcing patent rights.'' \66\
---------------------------------------------------------------------------
\64\ See Adam Smith, The Wealth of Nations Book I Chpt.1 (1776).
\65\ Stross, supra note 27, at 165. Ford knew of which he spoke,
because he provided Edison a total $1.2 million in business loans, and
some of which he was forced to forgive. Id. at 253.
\66\ Wright, supra note 16, at 5.
---------------------------------------------------------------------------
Of course, the twenty-first century innovation economy is
incredibly different from that of the nineteenth century. The exogenous
market and technological variables at work in this economy are
different as well. But it is still wrong to claim that the patent
licensing business model and secondary markets are novel practices
today. It is equally wrong to call for legislative or regulatory action
based on the admittedly potent mix of mistaken historical claims,
undefined and inflammatory rhetoric, the disregard of existing legal
mechanisms addressing the concerns, and with little regard for symmetry
of costs and benefits.\67\ Whether there are benefits or harms from
specific commercial and legal practices in the innovation economy is an
important empirical and policy question, but such benefits or harms
should no more be based on rhetoric, anecdotes, and incorrect claims
about historical practices than they should be based on ``nonrandom and
nongeneralizable'' studies.\68\ Congress should exercise restraint,
avoid ``[a]ttempting to label and then discriminate based on
identity,'' and be cautious in accidentally killing ``the goose laying
our golden egg.'' \69\
---------------------------------------------------------------------------
\67\ See Lamoreaux, Sokoloff & Sutthiphisal, supra note 24, at 4
(``To many critics, there is something new and unethical about
profiting from intellectual property by marketing the rights rather
than using it in production.'').
\68\ Government Accountability Office, supra note 5, at 26.
\69\ Kappos, supra note 1.
Senator McCaskill. Thank you, Mr. Mossoff.
You know, I don't think anybody, at this hearing anyway--
this is not the Judiciary Committee. We're not talking about
systemic changes to the patent law system. We're talking about
bottom feeders. We're talking about scam artists and my
question to you, Mr. Mossoff, is how would we ever know
anything other than anecdotal if these guys are completely
free? And if you go on Ms. Samuels' website, which I took a
moment to do while she was testifying, I think you can clearly
see that. I know you're a smart guy, and you know this area of
the law very well. You're not going to sit there and tell me
you don't think these letters are scams.
Mr. Mossoff. Well, thank you, Senator.
I mean, it's an excellent question about to what degree
patent owners and even secondary owners of patents are
deceptively asserting demand letters and are deceptively
asserting invalid patents. The problem is that we don't have
any established statistical evidence in comparison to the
entire patent system that tells us that this is actually a
systemic problem. The types of regulations that would be
adopted at the FTC or the type of legislation that would be
adopted would effect a systemic change that all patent owners
who license their patents and send royalty requests would be
affected by.
Senator McCaskill. Well, how about if we just, to get
beyond anecdotal, if we just--I don't think Edison would have
been offended if he would have been asked just to file the
letter that he was sending that clearly states what patent he's
asserting and his bases for doing it.
I mean, isn't the registry a way we would get past
anecdotal? How in the world would we get past anecdotal if we
let these scam artists, these bottom feeders, operate in the
shadows without--I mean, how do we ever do anything other than
you saying we have anecdotal?
How do we get at the problem?
Mr. Mossoff. Again, Senator, these are excellent questions
and you're right. Anecdotes are a type of evidence, but when
you're talking about adopting a legal regime that will be
applied to all patent owners, that's a systemic change. And
then we have to determine whether there is actually a systemic
problem that justifies a great systemic change because costs
are always symmetrical.
And, yes, while we need to be concerned about the costs of
inappropriately sent demand letters to retailers and other end
users, we need to be aware of and sensitive to the cost that
additional regulations or legislation impose upon companies
working within the innovation industries.
Senator McCaskill. Well, I got a good idea. We have
somebody on the panel that owns a bunch of patents.
Mr. Chandler, how many patents do you own?
Mr. Chandler. We have about 10,000 issued U.S. patents.
Senator McCaskill. Does anybody else own patents on the
panel?
All right, let's talk to the expert.
You own 10,000 patents. If you were going to send a letter
asserting your patents, would you find it something that would
really negatively impact your business if you had to file them
on a registry with no other requirement other than you had to
file them?
Mr. Chandler. I'm conscious in being called an expert, that
I'm always mindful of the fact there are people on my staff who
have the word intellectual in their title and I don't.
Senator McCaskill. Right.
Mr. Chandler. You know, we have no issue; we generally
don't assert our patents. Our position on standards bodies, for
instance, is that not only do we license freely but we license
for free because we believe in disseminating standards and
encouraging the adoption of technology; that happens to be our
personal policy.
I propose a registry, whenever anyone is sending a letter
to more than ten end users, and I'd have no problem complying
with that myself were I going to be in that business.
Senator McCaskill. The other part of your testimony, Mr.
Mossoff, that I found interesting was that there are plenty of
legal clinics out here for these small businesses. I don't know
how in touch you are with the legal community right now. They
have suffered through this recession like all other
communities. And one of the reasons probably a lot of these
bottom feeder firms have popped up is that everyone is
scrambling for legal business.
Now I don't know what legal aid is like in your state,
Senator Heller, but ours is on life-support. They are
overwhelmed with desperately poor people trying to assert even
basic rights.
I'm not aware of any entities that are funded well in my
state that any small business--that a local coffee shop that
wasn't a franchise--could call and say, hey, ``I got a letter
today that they're threatening to sue me if I don't pay them
$3,000. What should I do?'' I know no where that small
businesses in Missouri can call.
Are you aware of some burgeoning legal clinic, free pro
bono services, that I don't know, or should we just give them
your phone number?
Mr. Mossoff. That would be excellent, and thank you,
Senator----
Senator McCaskill. Don't say that would be excellent,
because you don't know me.
[Laughter.]
Senator McCaskill. I'll give them your phone number.
Mr. Mossoff. Well, you should give them my phone number
because it gives me the opportunity to expand upon this point
and I know exactly where to send to them. The App Developers
Association has announced that it is now working with law
schools and they have created six law school clinics and the
announcement indicated that more are coming at law schools
throughout the country that are specifically dedicated to
assisting individuals. And I assume that the individuals that
they would be most directing their services to are end users
and small businesses who receive letters or become defendants
in lawsuits.
Thus, there appear to be private organizations that are
working with law schools and providing them the funds to better
assist in the provision of defense for the actual deceptive
practices that you've heard about. As well, there are some
organizations and law firms that actually are filing actions in
the new administrative review procedures at the patent office.
Thus, I am certain that Julie Samuels can tell us about the
work that EFF has done in recently filing a challenge in the
Inter Partes Review Program at the Patent Office to address the
notorious podcasting patent.
Senator McCaskill. I'll save, for my next round, some of my
questions about civil claims against the trolls and criminal
behavior and for you, General Bruning, about your activity. And
now, I will turn it over to Mr. Heller for questioning.
Senator Heller. Thank you, Mr. Chairman. And I certainly do
appreciate everybody being here, spending time and sharing your
stories with us. I think the message is loud and clear, what's
going on out there, and for that, I can't thank you enough.
We've heard all the words; this practice is deceptive, it's
wrong, it's harassment, there's fear. I think unfair is a
clear, descriptive word of how this practice has impacted small
businesses and the economy.
But, Jon, out in Nebraska, I just want to ask you: When you
deal with this, is anything that's going on there, this
practice, is it actually illegal?
Mr. Bruning. We believe it's illegal on two fronts. Our
consumer protection statutes, which I enforce as Attorney
General, because these patent trolls, number one, don't have
any intent to sue and number two, don't have any evidence that
the recipient of the extortion letter has actually violated
their patent, we believe it's a violation of our consumer
protection statutes to send the letter. So before you send that
extortion letter, you have to have knowledge that there has
been some violation of the patent. They don't have any
knowledge. They don't know anything about Eldon Steinbrink;
they just got his name off a list somewhere. And they don't
actually have any intent to sue. MPHJ has never sued anybody,
other than us. We alleged that in court and they said, well, we
have sued somebody--we sued you, Mr. Attorney General. And they
did sue us. But they never actually sued an alleged infringer.
So, we think it's a violation for that reason. We're actually
looking into the criminal statutes as well. We have a RICO
statute in Nebraska we've modeled after the Federal RICO
statute and we're considering whether or not that's applicable
as well.
So, we're looking at this from all fronts. We consider this
very similar to just garden variety extortion, where the mafia
walks in, says, it's nice that your front window hasn't been
broken out. For $50 a month, I can make sure it never gets
broken. That's essentially what this is, in our opinion.
Senator Heller. How much of your time do you deal on this
issue?
Mr. Bruning. Well, we've been spending a lot lately, and
I've got my chief deputy and one of my top lawyers with me. We
have four or five of our top people. But we're trying to get a
national coalition group formed. Met with Mr. Chandler earlier
and we're very interested in having some of the top legal minds
in the business community aid our coalition. We think we're on
the side of the angels on this one, and I'm very grateful that
you Senators have called this hearing, because this is very,
very important. As I think was mentioned by Ms. Samuels
earlier, in the last 18 months, this has exploded. These
letters now are going to individuals and non-profit
organizations. That choir in Omaha? I mean, they must have $300
in their checking account for robes. They get a letter? I mean,
how on earth can they be alleged to have violated someone's
patent? They were simply culled off a list that these
fraudsters have gathered from somewhere.
Senator Heller. Why do you think this has exploded in the
last 18 months? Is it economically driven?
Mr. Bruning. I think there's no question. What has happened
is, they have--these patent trolls have kind of run to the end
of the line with Mr. Chandler in Cisco that actually has in-
house patent lawyers. They've realized that Mr. Chandler's
going to fight. He's willing to spend tens of millions of
dollars. He's gotten to the point where he says, I'm not going
to put up with it anymore. Because what America's larger
businesses have realized is as soon as you pay out and you pay
out again, they'll come back for more. It's a typical extortion
scheme. If you pay the first time, they're going to come back
again and again. So they've run to the end of their rope with
the big boys and now they're going after the little guy who
can't fight back because they don't have a patent lawyer,
they've never had one, and when they call one, it's $20,000 up
front and $500 an hour to get that person in gear.
Senator Heller. Ms. Samuels--your Trolling Effects website;
what kind of activity do you get on that?
Ms. Samuels. Thanks for the question, Senator Heller. We
get less than we would like and that we would have hoped. I
think we've had somewhere in the neighborhood of only 30
submissions. And we launched a couple months ago and it made a
lot of news, so it's not for lack of people knowing.
We've held meetings with people from large companies, in-
house attorneys from large companies and we've talked to a lot
of smaller individuals. And pretty much across the board,
everyone we've talked to says, we'd like to submit our letters,
but we're afraid to. We're afraid to make it public. And we
think that our website only has value if it's public because
we're really worried about the small individuals that get these
letters and have no idea what to do when they get them. I mean,
no clue whatsoever.
So we want to create a space where they can go and Google
the name of who sent it, Google the patent number, end up at
our site, say, oh, well you know, this person sent out
thousands of letters and they only sued twice; maybe I'll just
ignore it. Or say, wow, this person sues all the time; maybe I
do need to find a way to hire a lawyer. Understand what their
options are; I mean, have the most basic facts. But, you know,
the problem is, again, that people are afraid, which is why I
think we need some Congressional help to give those companies
some cover so that they're more willing to share the data.
Senator Heller. Very good. Thank you.
Senator McCaskill. Thank you. Senator Klobuchar.
STATEMENT OF HON. AMY KLOBUCHAR,
U.S. SENATOR FROM MINNESOTA
Senator Klobuchar. Well, thank you very much, Chairman
McCaskill and Senator Heller, for holding this important
hearing.
I'm on the Judiciary Committee and chair the antitrust
subcommittee. Many of you remember we had a hearing related to
this--Senator Lee and I did. And I also wrote to the FTC asking
them to examine the abusive assertion tactics and to bring
enforcement actions if they violate the FTC prohibition on
false and deceptive practices. I've heard a lot about this in
my state. I actually got interested in this because what was
happening to many of our companies who--we're home to many
innovative companies and are proud of that. We brought the
world everything from the pacemaker to the Post-it note in
Minnesota, so we care a lot about patents.
And I know, Mr. Chandler, that this subcommittee, under
Chairman McCaskill's great leadership, is focused on protecting
consumers from not only deceptive practices but also market
inefficiencies. And using your case as an example, how did the
demand letters drive up cost or negatively impact consumers?
Mr. Chandler. Well, I think it's clear that that's what the
goal ultimately is. Interestingly, just last week, one of the
leading lawyers in Texas who represents patent assertion
entities spoke at a conference in Austin and actually referred
to the Innovatio case specifically and the fact that the judge,
when he looked at it, found that all of the technology related
to these patents was embodied in chips that were sold to
companies that built routers and that as a result, the chips
were worth $5 a piece and this particular technology had a
value of about $.10 a chip. And he bemoaned that result and
described driving from Dallas to Austin and seeing signs for
free Wi-Fi. And he said the reason Wi-Fi is free at all of
these places is because the judiciary isn't putting enough
value on patents and allowing people, like in Innovatio, to
collect the money they want to collect.
So I think it's--I viewed that statement last week as a
gift in preparation for this hearing.
Senator Klobuchar. I imagine you did.
Mr. Chandler. But what has gone on--and the answer to the
question that was asked a moment ago is, we have a very vibrant
and liquid market for patents in the country. And I think that
ultimately is a good thing in general for a patent system; when
it is leveraging litigation games, though, as opposed to
underlying intrinsic economic value of patents, it runs amok.
And, because of this liquid market, big companies often will
have patents that no longer have economic value in their
businesses like these Broadcom patents. But people who can
exploit the litigation system can buy them up and rely on cost
asymmetry to send letters to thousands of people and know that
some of them will pay, either because they don't know better or
because it's cheaper than hiring a lawyer, as the Innovatio
people pointed out.
And that's really what has driven it over the last 18
months is big companies selling patents to people who will go
do this, then, and take advantage of people.
Senator Klobuchar. Thank you.
Attorney General Bruning, if I could. I have limited time,
and then maybe at the end we'll come back if the Chairman will
allow me.
Attorney General Bruning, I'd first like to note: I
wondered if you watched the Nebraska-Minnesota game where the
Gophers----
[Laughter.]
Senator Klobuchar. I know that the Chairwoman already
brought up football, but I just wanted to make sure.
[Laughter.]
Mr. Bruning. I was there, yes, thank you.
Senator Klobuchar. You were there? I was there, too.
Mr. Bruning. Yes.
Senator Klobuchar. I had a lot of fun.
[Laughter.]
Senator Klobuchar. Really great. And I had a bet the last
time with Senator Nelson, and so I had to call him afterwards
to say that I bet the wrong year. But this was the time, so
anyway.
Mr. Bruning. Congratulations.
Senator Klobuchar. Thank you very much.
[Laughter.]
Senator Klobuchar. But now to some more serious questions.
We've heard compelling testimony about abusive use of
demand letters. But as we consider the issue, we need to also
be mindful of the importance of intellectual property rights
and the correspondence that takes place each and every day
among patent owners and innovators to assert their patent
rights in good faith.
How do we ensure that any potential solutions to the
problems of abusive demand letters do not adversely impact
generally accepted licensing practices, which could include
demand letters or other similar types of correspondence?
Mr. Bruning. Senator, I thank you for the question.
And I think, generally, the answer to that is, more
disclosure, whether it's a registry for a minimum number of
letters, whether it's a registry for each individual letter,
whether it's disclosure of the owner of the patents. Remember
at MPHJ, that I talked about in my testimony in particular,
they have a whole series of alphabet soup shell companies that
they use that are registered in Delaware. We can't even get to
who owns this thing, who's asserting the patent. It's MPHJ
through Accuver, whoever that is; we don't even know. So this
seems to be, by all accounts, a simple scheme. And so
disclosure--if somebody stands up and says, I'm John Smith, I
own the patent, even if they bought it on the open market,
that's OK, but explain who they are. That's the first thing.
The second thing is, explain how the person receiving the
letter or the organization receiving it violated the patent.
Right now, they don't even have to assert that. They simply say
in these letters, you have to prove that you didn't violate our
patent; that you didn't infringe on our patent, which is a very
topsy-turvy way to go about it.
So Eldon Steinbrink, the 80-year-old gentleman in Phelps
County, Nebraska, he gets this 20-page letter and it says, Mr.
Steinbrink, we think you violated our patent. We have no
evidence to prove that, but you have to prove to us that you
didn't. And that's a very perverse result, where it's simply
extortion dressed up using the patent system.
Your attorney general--if I may, Senator? Your attorney
general in Minnesota, Attorney General Swanson, effectuated a
settlement with MPHJ where MPHJ agreed not come into Minnesota.
I haven't talked to her yet, but I'm very interested in the
terms of that, how she got that done.
I want to protect all Americans, but, of course, I want to
protect Nebraskans. How did she figure out to keep these people
out of Minnesota? I don't know.
Senator Klobuchar. Maybe it's the cold weather.
[Laughter.]
Mr. Bruning. She's very smart. Good for her.
Senator Klobuchar. OK. Could I just follow up? I know, Mr.
Mossoff----
Senator McCaskill. Sure.
Senator Klobuchar.--you wanted to, if that's all right. You
wanted to respond.
Mr. Mossoff. Well, thank you, Senator, because I just
wanted to have the opportunity to expand a bit upon Mr.
Chandler's comments because I worry that what patent lawyers
call the secondary market, the buying and the selling of patent
rights from inventors to other commercial entities, is being
perceived in some sort of pejorative sense. That large
companies are unloading patents to small companies that then
exploit these for deceptive or inappropriate purposes.
In fact, a vibrant market in the sale of patents and of
patent rights has existed from the very early 19th century.
People then bought and sold patents in classified ads. The end
of Scientific American issues were littered with offers to buy
and sell patents and patent rights. And this was important for
the efficiencies achieved by the American patent system from
the very beginning because it permitted the division of labor
to be embraced; for inventors to focus on inventing, for
business persons to focus upon business; for manufacturers and
retailers and others, etc. And it was a key to why the American
patent system ultimately gave birth to an explosive growth in
the economy in the 19th century. We were surpassing other
countries--England and other countries--by the mid-19th
century. And they were marveling at us and recognizing that it
was our patent system that was bringing this innovation
economy.
Fundamental to this innovation economy was the secondary
market in patents. And so, it wasn't just Thomas Edison and
Charles Goodyear, the inventors; there were also people who
were buying and selling patents and were embracing what I call
the patent licensing model, which involved sending royalty
letters and making demands upon infringers. One historian found
in 1883 that a thousand cases were filed in the Southern
District of New York just that year, and almost all of them
were involving a single patent--a well-drilling technology--and
almost all of those lawsuits were filed against farmers. Well,
the farmers were infringing, and this entity was going to these
farmers and saying, we think you're infringing, please pay us a
royalty. And they did not, so they were required to enforce
their patent rights in order to legitimately recoup the
investment that they had in their property.
Senator Klobuchar. Thank you.
Senator McCaskill. Thank you.
Let me take a moment on the record to say how much we would
welcome whistleblowers that work in any of these factories that
are churning out these letters.
Speaking of algorithms that are well-known to people in the
tech world, clearly there's a financial algorithm that has
being used. You're going to get an average of ``x'' dollars for
every letter you send; let's cast a wide net; you know, the
chances of there being any negative consequences to casting a
wide net are very low; the chances of driving up what you
receive per letter are very high. Someone is working in one of
these ``law firms''--I put ``law firm'' in quotes because I
don't consider this legal work--and we would welcome a whistle-
blower that is inside one of these entities. And we are very
used to, in my office, protecting whistleblowers because we've
done so much work in the contracting area, where we have done
great oversight work with contracting. So I wanted to put that
on the record, that your identity and where you work will be
protected if you can give us a dirty inside glance as to how
this actually--how they're figuring out what lousy patents to
buy, how they're figuring out who to send the letters to, where
they're getting the list, how much they're receiving. Maybe
that would get us beyond anecdotal if we could pull back the
curtains and see what's actually going on behind the scenes.
Let me ask you this: Are any of you aware of anyone who has
turned the tables and brought a civil cause of action for
damages against these entities? It seems to me, there's a
great--I think it would be really fun for somebody to get a
really good class action going against one of these law firms.
And, you know, I'm not a class action lawyer, but it seems to
me that there's a class here.
Yes.
Mr. Chandler. We brought a RICO claim against these
individuals at Innovatio based on the deceptive letters that
they were sending, their fraudulent purpose in doing so, and
the conspiracy among the individuals to do it. And that
approach failed in a ruling by Judge Holderman, the Chief Judge
in the Northern District of Illinois. And the reason it failed
was that our Constitution protects the right of citizens to
petition the government for redress of grievances and
litigation is considered a form of petitioning with an
exception where the litigation is deemed a sham. And since they
sent 13,000 letters and we felt that since they knew that a
huge proportion, if not a majority of devices were already
licensed, that that was a sufficient sham to take action under
RICO. And the judge said, no, that's not a sufficient sham to
shut off their ability to litigate or to hold their actions in
litigating to be actionable under RICO.
And I understand the ruling. I felt differently, which is
why I brought the case. On the other hand, it brings me to this
hearing and to the fact that I think some action to shed some
light on this to create a registry to get the data to force
them to tell end users who the manufacturers are will go a long
way toward resolving the most abusive problems that are out
there.
So yes, we did take an action. It happened to fail, but I
think that brings it back to all of you.
Senator McCaskill. Mr. Potter.
Mr. Potter. On two counts. One is, there's a company called
Find the Best in California which is a member of ours. We
brought them to D.C. last week and, in fact, I think they're
coming back next week. They have sued the plaintiff on a RICO
action. They have counterclaimed, essentially against the so-
called inventor and their so-called law firm and their eight or
ten or twelve shell corporations that they pass it through so
that this guy and this woman in Connecticut won't be found out
and uncloaked as, essentially, people who pushed through
patents at the patent office and then go around and sue people.
I want to reiterate. I want to respond to two other points,
if I might, Madam Chairman.
Senator McCaskill. Sure.
Mr. Potter. Number one, the Application Developers Alliance
has launched the Patent Troll Defense Network with six law
schools around the country. We're pleased, we're proud, and
we're doing the darn best we can. We now have 12 or 13 law
students, while they're not in class and while they're not
always studying for the bar and while they're not trying to get
some sleep, to----
Senator McCaskill. That's a lawyer I want.
[Laughter.]
Senator McCaskill. No, just being a little sarcastic.
[Laughter.]
Mr. Potter. They have made one or two students available to
us for a certain number of hours per week at these law firms
and we're figuring it out. To say that they're ready, willing
and able to fight arm-in-arm with highly trained, aggressive
litigators who are around the country--is a sham. And it's just
pathetic.
Number two, let me reinforce what Julie said about the
fear. We brought, I think, 15 companies to D.C. two or three
weeks ago, maybe 6 weeks ago, to meet with members and staff
and talk about their experiences. And some of them I talk about
in my testimony. If you go to our website and you look at that
CEO on our website who the video's on, his face is pixelated
and his voice is changed. And it's done that way because he's
afraid. He's been funded by substantial brand-name venture
capitalists who don't want him to go public. The idea that
anecdotal evidence isn't good enough is preposterous.
Senator McCaskill. Yes.
Ms. Samuels. Thank you for the question.
And while Jon and Mark have talked about going into court
to go after these bad actors, I think EFF is probably one of
the organizations in the country that has the most experience
trying to challenge bad patents. You know, knock off one-by-
one, protect consumers. And I briefly just want to tell you
that that's incredibly hard work. It is incredibly resource-
intensive. We do it on a one-by-one basis and we recently, as
Mr. Mossoff just said earlier, have challenged a patent that is
being asserted against podcasters, and it took help from
students at Harvard, pro bono help from a giant law firm, and
we had to still pay more than $30,000 in fees.
This is not an easy thing to do. And that's why we need
more help.
Senator McCaskill. Transparency is what sounds like we
need.
Senator Heller.
Senator Heller. Thank you.
Mr. Mossoff, listening to you, I'm trying to get a
description of your testimony that you discuss the need for
objective evidence--reasoning explanation before legislative
steps are taken. I'd assume that's a fair description of what
you said.
Mr. Mossoff. Yes.
Senator Heller. And also that your concern is that
legislation enacted could weaken patent rights or increase
legal hurdles.
Mr. Mossoff. Yes.
Senator Heller. That could be a burden on innovation.
Is that also a fair description?
Mr. Mossoff. Yes.
Senator Heller. OK.
Have you seen any specific proposals out there? Any
specific proposals that address these demand letters that would
weaken patent right?
Mr. Mossoff. Well, the concern is over the proposal that
we're discussing here before this committee about authorizing
the FTC to regulate and punish the sending of demand letters
because under Section 5 the authorization is to protect
consumer welfare. The inferential leaps that one has to go from
receipt of demand letter to, ultimately, the impact upon
consumer welfare is significant. I'm not saying that it may not
necessarily be proven, but it would have to be shown. And it
would have to be established through evidence that there is
actually existing harm to consumer welfare that would then
establish the basis for having definitive legal standards that
would not increase uncertainty for legitimate companies and
owner of legitimate patents. Because I think the concern here
is we have to get clear on what the underlying problem is, and
that's why we need more evidence. Because I don't deny, and one
can't deny, that there are bad actors. But there are over 3,000
lawsuits filed every year in this country in Article 3 courts.
And if the majority of the demand letters that are being sent
are being sent by 10 or 12 bad actors, then that's not a
significant impact within the patent system relative to the
people who are filing legitimate patent lawsuits and will have
increased burdens imposed upon them because costs are always
symmetrical.
And so, the increased ability to punish under vague legal
standards the sending of demand letters in one context can be
exploited by a real infringer of a legitimate patent in another
context. And that's something that we have to be aware of,
understand and investigate as well.
Senator Heller. Mr. Sinewitz, do you want to respond?
Mr. Sinewitz. You know, I'm listening to organizations and
I'm listening to all the other testimony. At the end of the
day, maybe I come from a little bit of a different angle
because we're just a small company. And the answer, very
simply, is when I call a patent attorney and he tells me I can
settle something for $50,000 or $60,000 and probably $50,000 in
his fees, or I can take this to court and it's going the cost
me $2 million, it's just not happening. And even though I'm a
small company compared to somebody who has a coffee shop, or
somebody who only owns one little location, I mean, I'm huge
compared to them.
We had a call--or actually, a letter, just a week ago from
a company called Red Star. Red Star owns the patent to DVD
players and the ability to read the DVD players. And in it was
a very detailed, very explicit letter explaining to us that we
had a machine on our floor that came from China that had not
paid the North American Philips patent. Within 15 minutes, I
pulled every one of those machines off the shelf, contacted the
manufacturer, or the person who imports them, and told them
that I wanted a return authorization to send these back.
Because they did identify the product, because they did make it
very clear, and they were very specific as to where they felt
this thing was being infringed, we were able to react to that.
I will also probably tell you that at the end of the day,
they will now pay that fee. They'll pay for the royalties of
that fee. And that's what we're really here for. You know, I
said in my testimony that really the bottom line here is
fairness, OK? We can get involved in all the websites you want,
we can get involved in all the legal things that happened in
the 1800s and 1900s; that's really great. Today, technology is
moving so quickly and there are so many more new things that
are coming out and things are so much more broad and so much
different than worrying about drilling rights and farmers.
Today, every single day, some new technology is showing up. You
know, as the Senator saw when her Apple wasn't able to read and
she had to go back to paper--the world changes every 24 hours
for us in the electronics world. And the bottom line's going to
be is that if the consumer wants to continue to participate in
this kind of technology and everything else, then yes, we have
to protect the people who are inventing things.
Senator Heller. Thank you.
Mr. Sinewitz. I don't think anybody wants to argue that.
Senator Heller. Ms. Samuels, do you want to comment?
Ms. Samuels. I have two brief points to make.
First, just to be clear, we're not talking about regulating
all demand letters, ever. We're talking about regulating
certain bad behavior. And it can be limited. And I think that's
really important because there is a place for responsible
technology transfer in this country and I don't know anyone who
would disagree with that statement.
Senator Heller. Do you believe the FTC has the authority to
act?
Ms. Samuels. I actually believe the FTC already has the
authority to act. My understanding is the FTC also believes it
already has the authority to act but, you know, a little nudge
maybe wouldn't be the worst thing in the world.
And the second point I'd like to make, and I'll try and be
brief here, on this whole, you know, anecdotal versus real, let
me just quickly tell you some things we do know. And this is in
my written testimony.
We do know that troll lawsuits are associated with half a
trillion dollars of lost wealth to defendants from 1990 through
2010. Academics and economists average that patent trolls in
2011 imposed a direct cost of $29 billion to companies. And
while, you know, we're talking, of course, about mainly
litigation costs because that's the data we have, Innovatio's a
great example.
Eighteen thousand letters, did you say?
Mr. Chandler. Thirteen.
Ms. Samuels. Thirteen thousand letters and about 30
lawsuits.
Another professor, Colleen Chien, has said that she
estimates there are about 100 demands per a single lawsuit. So
to the extent the data we have surrounds lawsuits, when you
extrapolate it, then that's something.
And finally, I would just say one business that goes out of
business because of a patent troll is one business too many.
Thank you.
Mr. Mossoff. Senator, may I just quickly note, if I may,
that the studies and figures that she's citing are exactly the
studies and figures that were identified by the Government
Accountability Office as being ``non-random and non-
generalizable.'' They were taken from proprietary, secret data
owned by companies and firms with a real policy interest and
financial interest in these issues. No one has any access to
the data to test whether these claims are legitimate or not.
And follow-on studies from publicly available data have
actually shown that these figures are actually heavily
inflated, including a study that was just placed up on the
Internet this week by professors Jay Kesan, David Schwartz, and
Chris Cotropia.
Thank you.
Senator McCaskill. Just as a note, it sounds like to me
that, honestly, the more you testify, Mr. Mossoff, the more I
believe we need the registry, because then we will no longer
have to worry about whether or not we've got real data.
Senator Klobuchar.
Senator Klobuchar. Thank you very much.
Mr. Sinewitz, Minnesota is also--I mentioned some of our
innovative companies. We're also a big place for retailers. As
you know, the retail industry contributes $2.5 trillion to our
Nation's annual GDP. We're the home of companies in Minnesota
like Target and Best Buy as well as being the home to the Mall
of America--the biggest retail space in the country, which I
suggest everyone visit during the holidays.
[Laughter.]
Senator Klobuchar. Mr. Sinewitz, how much do retailers end
up paying out because of demand letters, either in settlement
or in litigation?
Mr. Sinewitz. I'm not sure I can answer for either Best
Buy's or Target which are two of the, obviously, large firms
that are based in Minneapolis. But I can tell you that we've
spent a half a million dollars already either in settlements
and legal fees. And a half a million dollars for a small
company our size is outrageous.
Senator Klobuchar. And do you see this--has it been
exponential in terms of the increase? What were you seeing, you
know----
Mr. Sinewitz. It has been----
Senator Klobuchar.--ten years ago?
Mr. Sinewitz.reasonably steady, it's, like, one a year that
we're getting. I will tell you that I sit with both of those
companies on the Florida Retail Federation and on the Georgia
Retail Association, where I have stores. Both of those
companies are every bit as concerned about this as I am. And to
be perfectly honest, one of the suits that we got hit with,
they just took every major retailer in Atlanta and they nailed
us. And they were both nailed in that same process because both
of them have stores in Atlanta.
So the reality of it is, is that if they win--and, you
know, to answer the other question of a second ago about
wanting to come out, I have real problems bringing you guys
letters because when I settle these things, I have to settle
non-disclosures. And it opens me right back up to getting sued
again.
Senator Klobuchar. By someone else.
Mr. Sinewitz. By the same people.
Senator Klobuchar. The same?
Mr. Sinewitz. I mean, the same people that I gave them
$50,000----
Senator Klobuchar. Oh, because they'll sue you because of
your violation of the non-disclosure agreement.
Mr. Sinewitz. Because they gave me non-disclosures as part
of settlement. Because they surely don't want me to go out
there and tell people what I've done.
Senator Klobuchar. Were you in this business 20 years ago?
Or is it----
Mr. Sinewitz. Oh, I've been with my company for 32 years.
Senator Klobuchar. So you've seen it change over time?
Mr. Sinewitz. For us, this is in the last six, seven years
that we have seen this kind of a problem.
Senator Klobuchar. But you have numbers because you know
your bottom line.
Mr. Sinewitz. Yes, I do have that. I mean, I can tell you
I've given the Committee the eight letters--heavily redacted,
unfortunately--but I did give the Committee all eight letters
that we had to settle on. I will tell you that that isn't the
only letters that we've gotten. And I will tell you again that
when we see one and it's legitimate, I don't think there's
anybody that wouldn't want to honor that.
Senator Klobuchar. And speaking of these trends, since
there have been some issues raised--you know, I kind of believe
my constituents when they tell me this stuff and then when I
hear it about 15 times, I know it's real. But there were some
issues raised by Mr. Mossoff about whether this is truly a
problem.
And Ms. Samuels, when did the trend switch from primarily
legitimate use of demand letters--from your perspective,
largely to manufacturers--to more deceptive letters that go to
all end users?
Ms. Samuels. Thank you for the question, Senator Klobuchar.
I will tell you my personal experience. It was about 18
months ago that it really was noticeable, and it started with a
troll called LODSYS, L-O-D-S-Y-S, who started targeting app
developers for using technology that's provided to them by
Apple and Google. You know, when they put their apps in the
smartphone marketplaces. And, you know, I literally got to work
one morning and my phone was ringing and I had a bazillion e-
mails from these app developers who'd gotten these scary
letters. There was one who is somewhere in Western Europe and
the little FedEx package he had gotten, you know, the receipt
showed how much it cost to send it. And it cost more to send a
package to him than he'd ever made on his app.
You know, these people did not know what to do. And that
was kind of--from my perspective that was the tipping point.
But since then it has really just been a torrent.
Senator Klobuchar. Mr. Chandler, just one last question
here. As I mentioned before, I urged the FTC to approve a 6(b)
study--and Chairwoman Ramirez testified at our hearings--and
the Commission has taken the first steps now to begin this
study.
Do you think this study is enough, or should the FTC take
additional action? Should it put out an interim report, for
instance, to highlight the findings so far so the market sees
what they're looking at? And should it bring enforcement
actions against the senders of the demand letters? It's really
a two-part question. Should they do some kind of interim report
and then should they do something with enforcement?
Mr. Chandler. Senator, thank you for your leadership on
this issue, not just here but also in your other life on the
Judiciary Committee.
Senator Klobuchar. That is another life.
[Laughter.]
Mr. Chandler. The FTC study is a very broad one that looks
at the entire universe of non-practicing entities including
large patent aggregators who license portfolios to operating
companies such as Cisco, all the way down to individual non-
practicing entities that pursue this type of activity.
So it's a very broad study. I think it will take a long
time to bring forward. I think an interim report would be a
very good step, so I would urge the FTC to consider issuing an
interim report and ask you to use your good offices with them
to encourage that step as well.
I do think more is needed sooner, given the trend that
we're seeing. And I don't think the FTC today has been very--
and historically--has not used its very unique rulemaking
capability to pursue issues like this very effectively. They do
enforcement. On some occasions, the Congress has asked them,
such as in the Child Online Privacy Act, to adopt specific
rulemaking to pursue particular problems. And I think that's a
step that this committee could begin, to ask the FTC to create
a registry like this and to collect information and to allow
manufacturers like me to then step in and help our customers
deal with these. Because for the customers, when they're told
do you want to pay $2,000 to avoid spending $10,000 to solve a
problem, they will pay the $2,000 even if the thing they're
paying for is worth $.10. If the manufacturers can get
involved, we can aggregate it and deal with it.
I spent $13 million dealing with Innovatio, but I'm proud
of every cent, and I'm a guy who packs my lunch every day.
[Laughter.]
Senator Klobuchar. Very good.
Well, I think that I saw a lot of nodding heads and I know
we have a new colleague here, so I'll ask the questions later
on the record to get your ideas. Because I think how we move
forward is just as important as identifying the problem.
So thank you, everyone.
Senator McCaskill. Senator Ayotte.
STATEMENT OF HON. KELLY AYOTTE,
U.S. SENATOR FROM NEW HAMPSHIRE
Senator Ayotte. Thank you very much, Madam Chairwoman.
I wanted to first of all say to my former colleague,
Attorney General Bruning, it's great to have you here today.
And let me just ask you based on your testimony, you said the
time is ripe for Federal and state authorities to work in
concert to address this issue and stem the tide of patent
trolling nationwide.
What do you view the role of state attorneys general, state
authorities, on this issue versus cooperation with Federal
authorities on how to address these problems? Often people
think that Washington is the answer to everything, but the
state AGs and state authorities are much closer on the ground
level.
What role do you think they can play and how can we help
consumers on this issue?
Mr. Bruning. Well, thank you for the questions, Senators.
Very nice to see you as well. I always look forward to
seeing you when I'm in Washington. I'm glad to be before the
Committee today.
I would say it's a two-pronged effort. One, the attorneys
general, as you recall, would gather, you know, in concert.
Tobacco is an example that's very well-known, in 1999, where
the attorneys general pursued Big Tobacco. I would say this is
a case where the collective action of the attorneys general is
warranted. We can use our consumer protection statutes. These
are fraudulent actions; they have no intention of suing, they
have no knowledge of any of these individuals actually
violating their patents. So I think it violates Nebraska's
consumer protection statutes. I think it probably violates most
states' consumer protection statutes.
For those of us that also have concurrent criminal
authority--which is, you know, 35 or so attorneys generals, to
my recollection--we have to analyze that because this is fraud;
is it a criminal fraud? And certainly, our office is analyzing
that. That's a higher bar to get over, but we're analyzing
whether or not we should use our criminal statutes as well.
And at the Federal level, I certainly think the power of
the FTC and the national scope of the FTC and the subpoena
power of the U.S. Senate to lift the curtain on these folks, we
can't even figure out who's behind MPHJ. Who are these people?
Who is this? There's some guy right now at his country club in
Austin, Texas or Atlanta, Georgia and everybody thinks he's a
great, successful business guy, and what he is is a fraudster.
And I want to see the U.S. Senate lift the curtain on it and
say, here you are. And I want to see Steve Kroft at 60 Minutes
standing on the guy's driveway with a microphone----
[Laughter.]
Mr. Bruning.--saying, why is it you held hostage these
voices for--you know, this choir in Omaha that got this letter?
Or this 80-year-old man with Alzheimer's in Holdrege, Nebraska
that got this letter? I want to see those national news people
standing on the driveway of this guy that everybody thinks is a
preeminent business man; I want to see him exposed. And you can
do that with your subpoena powers.
And I think a small tweak in the statutes or in the rules
at the FTC to require registration of these letters, I think
there seems to be some agreement that that may be useful.
Senator, I think you've said it extremely well. I mean, as
we listen to Mr. Mossoff, perhaps registration is one way to
lift the veil. We just need to have openness in this process.
Legitimate patent holders, none of us have any problem with
them enforcing their rights using the court system, but this
isn't about patents; this is about fraud. This is about
extortion. This is about fear with little companies that Mr.
Potter represents, little app developers that it's their life
or death. Some guy that has invested his last $100,000, this
letter will take him down.
Senator Ayotte. Right.
Mr. Bruning. And so, I think that's how--I know I went far
afield there, Senator, but I think there is a role for each of
us to play.
Senator Ayotte. Great. I appreciate it. Thank you.
And this is something that I'm concerned about. We're
blessed, in this country, to have incredibly great innovators.
Many of them start out of their garages. So in New Hampshire,
we have a great one--Dean Kamen. So when I was preparing for
this hearing, we reached out to him and he rightly raised the
issue that I want to hear from you on, which is--and I think
Mr. Chandler, you can help me with this. You think about
Cisco's revenue, so much of it comes from small businesses. And
how do we make sure that by trying to address the patent
trolls, we aren't harming or decreasing the value of legitimate
small innovators? These people who start out of their garage
and have such great ideas--and that is what America is all
about.
So when we address this problem, we've got to get that
right to make sure that we are not hurting these wonderfully
brilliant individuals who just have a great idea in America.
So can you comment on this, Mr. Chandler? And can you also
comment on it, Mr. Mossoff?
Mr. Chandler. You know, I think that's a very, very
important concern and I've testified on a panel together on
patent reform with Dean and have a huge amount of respect for
his contributions. And I know that when he has concerns about
infringement, he doesn't send letters to individual Segway
users asking them to send $10 each and don't look too closely
at the patent. So he knows exactly how to enforce his patents
in an effective way. And there are issues related to how the
patent litigation system works and what's fair and not. And I
think those are being appropriately dealt with at the Judiciary
Committee.
I think what we're looking at today is something that is
not something that flows into the way Dean Kamen goes about
conducting his business and enforcing his patents, and that is
making sure people who are targeting end users who buy a
product that incorporates someone else's technology aren't
victimized when there's a huge cost and information asymmetry,
but that the information is out there and there's some
transparency so they know who to go to in order to get help and
solve their problems. And that's something that I would be arm-
in-arm with Dean Kamen in supporting. And I'd be surprised if
he would want a business model where he was out sending
thousands of letters to people using counterfeit Segways.
Senator Ayotte. I would agree.
Mr. Mossoff. Thank you, Senator.
I think you raise a very, very important point. In fact, at
a conference this past September here in D.C., Dean Kamen spoke
and he spoke out on the issue of patent trolls. And he actually
said, the phrase applies to me. In fact, he said, I am Trolls-
R-Us. And he was very proud of that, he said, because I needed
investors when I came up with my inventions when I was still
working in my parents' basement when I created my first
inventions. And he said, so I embraced that division of labor
where I was the inventor and there were business persons and
other experts and lawyers who could commercialize and enforce
my patents for me. And thus, that's why he refers to himself as
a troll. And it shows you the difficulties and problems with
the labels that we're using and the rhetoric that we're using
because it covers lots of different actors in a very complex
and heterogeneous innovation economy.
And as you mentioned, small businesses and individual
inventors need very strong patent rights. And it's individual
inventors and small businesses, who are oftentimes not
manufacturing yet, who in negotiating with large companies, are
essentially told sue us. If you think we're infringing, then
sue us. And in fact, one transactional attorney who testified
at the FTC/DOJ workshop last December actually stated that he
hears that a lot from his clients and in deals that he
negotiates. That small businesses and individuals are told when
attempting to negotiate licenses with large companies: sue us.
And then those small companies and businesses are immediately
painted as ``patent trolls'' that are attacking these large
companies who are painted as innovators.
And so this is a real concern because small businesses and
inventors actually do need very strong patent rights--patent
rights that are necessarily weakened by additional burdens that
will be imposed upon them, both in trying to license their
inventions as well as in trying to enforce them, which is
always the backstop that makes licensing possible.
And in this respect, to go back to Attorney General
Bruning's comments and Senator McCaskill's--your comments about
a registry--I think we also need to be aware of the existing
legal tools and the implementation of regimes that actually
address the issues of disclosure. The Patent Office is about to
issue rules following notice and comment on transparency of
ownership following President Obama's Executive Orders last
June 4.
And so, we have to always hold in context that the
discussion that we're holding here is part of a very large and
vast discussion about revising the patent system. And something
that I really hope that we hold in context--that another
massive revision of the patent system just 2 years after the
America Invents Act, which was also a massive revision to the
patent system, creates a lot of uncertainty. And that's an
uncertainty that effects and makes it much more costly not just
for large companies to implement innovation into the
marketplace, but also small businesses and individuals who are
much more sensitive to cost, as Mr. Sinewitz has been reminding
us about.
Senator Ayotte. Thank you, Mr. Mossoff.
Senator McCaskill. Thank you, Senator Ayotte.
Let me reassure you, Mr. Mossoff. This committee doesn't
have the jurisdiction or the appetite for any massive change to
the patent system. We're talking about end users and consumer
protection--is what we're talking about.
So, I know, Ms. Samuels--I'm not going to take my full time
because we're going to have two votes at 11:45 and I want to
make sure that if either Senator Heller or Klobuchar or Senator
Ayotte has anything else to add to the record, they have an
opportunity.
I just want to follow up with something you said. I believe
you stated that the FTC has authority now, which is correct for
end users that are consumers of products in terms of fraud
being committed upon them, but I don't believe they currently
have the authority to establish a registry----
Ms. Samuels. Correct.
Senator McCaskill.--of these letters or require
transparency in the letters as to who owns the patent and what
patent is actually being asserted in the demand letters.
Ms. Samuels. Thank you, Senator.
That is actually what I meant, that the authority the FTC
already has extends to what it can do under Section 5, not the
registry.
Senator McCaskill. Thank you.
Ms. Samuels. Thanks for clearing that up.
Senator McCaskill. Senator Heller, do you have anything
else for the record?
Senator Heller. I don't.
Senator McCaskill. Senator Klobuchar, do you have anything
else for the record?
I want to thank all of you very much. We will leave the
record open for any submissions.
I especially want to thank you, Mr. Sinewitz, for traveling
as far as you have.
And those of you from California, thank you for coming
across the continent, and, certainly, thank you, General
Bruning, for taking time away from Nebraska to come and talk
with us. I hope you continue to educate your fellow attorneys
general across the country about this opportunity we have.
You know, I'm old-fashioned about this. I'm not a big fan
of Federal law enforcement. I'm a big fan of local law
enforcement. I'm a local prosecutor by my background, and I
think that a lot of this work can be done on a state-by-state
basis much more effectively than we can do from Washington. So
good for you and your work, and I look forward to hearing that
many of your colleagues across the country have joined your
important crusade to protect innocent consumers from these
kinds of scams.
Thank you all for being here, and the hearing is adjourned.
[Whereupon, at 11:38 a.m., the hearing was adjourned.]
A P P E N D I X
Response to Written Questions Submitted by Hon. Claire McCaskill to
Hon. Jon Bruning
Question 1. At the hearing, we heard about several policy proposals
that could help protect consumers and small businesses from harmful
demand letters. One potential idea widely discussed was the
establishment of a demand-letter registry--whether at the Federal Trade
Commission (FTC) or at the U.S. Patent and Trademark Office (PTO)--that
would increase transparency and facilitate better data on the problem's
extent. What protections for consumers and small businesses would such
a registry provide that would address the current harms inflicted on
them by demand letters?
Answer. The creation of a demand letter registry would add much-
needed protection for consumers and small businesses who too frequently
find themselves targeted by unscrupulous patent trolls. The simple
knowledge that ``someone is watching'' can serve as a valuable
deterrent to a patent troll who may otherwise feel free to send demand
letters scattershot to hundreds of targets around the country without
first performing some basic due diligence as to whether those targets
actually merit contact.
As it stands now, patent trolls can fairly view the demand letter
process as a regulatory ``Wild West.'' Demands can be made and license
fees extracted more or less in the shadows. Even if nothing else is
done to address this problem, this relatively simple first step should
be implemented, because it would provide valuable sunlight on those who
are targeting so many of our constituents with unfair and deceptive
patent enforcement demand letters.
Question 1a. Do you have an opinion about whether it would be more
effective to house such a registry at the PTO or the FTC? Please
explain why.
Answer. Though I am not fundamentally opposed to the housing of a
demand letter registry at the PTO, I believe the problem of unfair and
deceptive demand letters is, primarily, one of consumer protection.
Accordingly, the creation of a Federal demand letter registry would
best take place within the FTC as the Federal agency best equipped to
engage in consumer protection activities.
However, I believe there is a role for state consumer protection
authorities to play on this proposal, as well. In Nebraska, we are
currently drafting legislation which would include a requirement that
any person who sends demand letters to a certain number of Nebraskans
over a specified period of time must notify the Attorney General's
Office. Such a notification requirement would do nothing to burden the
lawful enforcement of a legitimate patent, but would enable my office
to know in real time when such campaigns are underway. That way, if we
observe evidence of unfair or deceptive practices in the sending of
such demand letters, we can take appropriate action.
Question 2. Another potential idea from the hearing was to require
certain baseline disclosures in demand letters to provide recipients
with more useful information and to help stem the large numbers of
demand letters being sent. Do you believe such mandatory disclosure
requirements would protect consumers and small businesses from the
current harms inflicted on them by demand letters? Would mandatory
disclosure requirements provide a more effective consumer protection
solution than a registry?
Answer. Absolutely and I do not view it as an either-or
proposition. Mandatory disclosure requirements and the creation of a
registry should go hand-in-hand.
Many of the demand letters patent trolls send to targeted small
businesses and consumers are heavy on threats but light on specifics.
Given the one-sided nature of patent litigation, it is inevitably
extremely expensive for a target to defend itself, or even to simply
determine whether the ``specifics'' exist. This creates strong
incentives for targets to settle or pay license fees, which in turn
keeps the patent trolls' business model profitable and worth
continuing. Requiring more detail in demand letters would work to level
the playing field between trolls and targets, and likely reduce the
most egregious examples of demand letter abuse.
Question 2a. Please detail, specifically, the types of information
that should be required in demand letters to achieve the goal of
improved consumer protection.
Answer. At minimum, every demand letter should include the name,
address, and contact information of the owner of the patent, the patent
number, an admonishment to seek counsel from an attorney and specific
factual allegations regarding how the target has infringed or is
believed to have infringed on the patent. The fourth item is perhaps
most important given how little research so many patent trolls perform
before sending demand letters. If enforcers of patents were required to
inform a target of why they were targeted, those targets for which
there is no substantive evidence of infringement would likely not
receive demand letters in the first place. This shifts some of the due
diligence responsibility back to the patent enforcer, which is
appropriate.
Question 3. We also discussed whether current law would allow
effective implementation of the various policy proposals to protect
consumers and small businesses from unfair or deceptive demand letters.
Do you believe the FTC--under its existing Section 5 authority to
prevent unfair and deceptive practice or any other statutory
authority--has the ability to effectively carry out any of the proposed
solutions that you have proposed or that were discussed at the hearing,
such as establishing a demand-letter registry or including mandatory
disclosure requirements? Please specify which potential solutions the
FTC would or would not be able to implement.
Answer. I believe the FTC already possesses the authority to
implement either a demand letter registry or specific disclosure
requirements. I note that FTC officials have commented publicly on the
need to address the problem of patent trolls and that the agency is
currently considering launching a broad investigation into the
practices, composition, and structure of patent trolls nationwide. The
implementation of certain rules to limit demand letter abuse seems a
logical next step and entirely consistent with the FTC's consumer
protection mission and statutory mandate.
I would also note that I believe states possess the authority under
their own consumer protection laws to address this problem. To prevent
bad actors from using unfair or deceptive demand letters to extort
license fees from legally unsophisticated small businesses and
consumers is indisputably a consumer protection problem. Our authority
to combat such violations is not and should not be limited by Federal
pre-emption of any type.
______
Response to Written Questions Submitted by Hon. Richard Blumenthal to
Hon. Jon Bruning
Question 1. Demand letters are often sent to people who will never
see the inside of a courtroom. They will settle--often they will feel
that they must settle--before a case is even filed. In your opinion,
are the reforms being considered in pending legislation targeted at
what happens during litigation adequate to fully address the problem
with demand letters?
Answer. I believe there are provisions in the bills currently
pending in both the Senate and House which contain valuable increased
protections against bad faith demand letters. Furthermore, the
provisions in those bills which clarify the FTC has the authority to go
after the ``worst of the worst'' abusers of the patent demand letter
process are commendable. I also believe that, though not specifically
related to consumer protection, addressing the structural issues within
our patent system which have allowed patent trolls to thrive is
necessary. The pending Senate and House bills each contain provisions
which would structurally level the playing field between trolls and
their targets. More can be done, however.
Question 1a. Are there additional reforms Congress should consider
specifically targeted at the issue of demand letters?
Answer. Yes. I touched on several of them above. Though I believe
the FTC is already empowered to create a demand letter registry,
Congress should expressly provide for it to ensure it happens in a
timely and effective manner. Additional demand letter specificity
requirements, such as those discussed above, should be included.
Finally, it should remain expressly clear that state consumer
protection authorities possess the requisite powers to address unfair
or deceptive demand letter abuses which violate consumer protection
laws. The states and Federal government must work as partners on this
issue, never as competitors.
Question 2. As a former Attorney General, I believe that the states
have an important role to play in protecting consumers. Do you agree
that states have a role to play in protecting consumers from abusive
demand letters?
Answer. Absolutely. In fact, my office has already initiated
consumer protection investigations into several entities which have
undertaken coordinated demand letter campaigns within Nebraska over the
past year. We have engaged in active litigation related to one of those
investigations and are preparing patent troll-specific legislation to
be introduced in our Legislature's upcoming spring session.
I view consumer protection as being among my office's top
priorities. I view the use of unfair or deceptive demand letters to
extract costly license fees from small businesses and consumers as
clear consumer protection violations. Accordingly, I believe it is my
obligation as Nebraska's chief law enforcement officer to aggressively
pursue those violations to protect consumers.
Question 3. Are there advantages to state enforcement in this area?
Answer. Yes. Though, as summarized above, I believe there are
important steps the Federal government can and should take, there are
distinct advantages to state enforcement against unfair and deceptive
demand letter practices.
First, my office is invariably going to be more responsive to and
aware of consumer protection violations within our state. This is
simply a matter of proximity and recognition of the fact that our
resources can more quickly be marshalled to address a problem as it
arises than the Federal government can.
Second, we have already made the determination that our existing
consumer protection laws provide us the tools to go after patent
enforcement abuse. Understandably, it may take the Federal government
some time longer to come to a point at which it is actually taking
enforcement action. Meanwhile, the harm to targets of patent trolls
continues unabated and state authorities, especially our nations
Attorneys General, are ideally suited to addressing the problem head
on.
Question 4. Should Congress take action to allow states to protect
their citizens?
Answer. See answer to question [5].
Question 5. What kind of action would be helpful?
Answer. I will answer questions [4] and [5] together. First, I do
not believe Congress needs to take any specific action which would
``allow states to protect their citizens.'' We already have a variety
of consumer protection tools at our disposal. To the extent patent
troll-specific legislation is useful at the state level, states are
already free to pursue such statutes. Vermont has already done so and,
as stated above, we plan to follow suit in Nebraska.
Congress should ensure that any action it takes complements state
efforts and enables state consumer protection authorities and the FTC
to work in concert against patent trolls. The magnitude and complexity
of this issue necessitates that we work as partners and not ever engage
in jurisdictional turf battles. Accordingly, I would ask that Congress
continue to allow for concurrent jurisdiction between the states and
the FTC to address unfair or deceptive demand letters from a consumer
protection standpoint.
______
Response to Written Questions Submitted by Hon. Claire McCaskill to
Jon Potter
Question 1. At the hearing, we heard about several policy proposals
that could help protect consumers and small businesses from harmful
demand letters. One potential idea widely discussed was the
establishment of a demand-letter registry--whether at the Federal Trade
Commission (FTC) or at the U.S. Patent and Trademark Office (PTO)--that
would increase transparency and facilitate better data on the problem's
extent. What protections for consumers and small businesses would such
a registry provide that would address the current harms inflicted on
them by demand letters?
Answer. A demand-letter registry would be very beneficial to
consumers and small businesses. Today, one of the primary reasons that
consumers and small businesses pay extortionist license fees to trolls
is because the fees--though unjustified--are significantly less than
the cost of determining the validity of the asserted patent and its
associated claims and determining whether one has actually infringed
the patent. Paying these extortionist licensing fees is also, though
unjustified--extraordinarily less than the cost of defending an
infringement litigation. A publicly accessible and easily searchable
demand-letter registry would enable victims of demand-letter scams to
contact each other and to act collectively in their common interests.
Groups of letter recipients are more likely to stand strong against the
abuses of patent trolls, as they will be better able to collectively
finance challenges to patents' validity, and collectively challenge the
patent assertions as fraudulent. Knowing that one does not have to
fight alone is beneficial; the ability to develop collective strategies
and responses will be empowering.
Question 1a. Do you have an opinion about whether it would be more
effective to house such a registry at the PTO or the FTC? Please
explain why.
Answer. The PTO has extraordinarily qualified staff and surely is
capable of developing this database. But the PTO is also
extraordinarily burdened with many new programs and modernization
efforts, and to my knowledge has not had the opportunity to build
publicly accessible databases like the proposed registry.
In contrast, I understand that the FTC has developed registries
like this, and done so successfully.
Regardless of where the registry is housed, the PTO should be
willing to consider evidence of fraudulent, abusive or otherwise
questionable demand-letter tactics that registry analysts uncover, and
should use this evidence in its consideration of director-initiated re-
examinations and petitions to waive fees associated with re-
examinations and post-grant reviews.
Question 2. Another potential idea from the hearing was to require
certain baseline disclosures in demand letters to provide recipients
with more useful information and to help stem the large numbers of
demand letters being sent. Do you believe such mandatory disclosure
requirements would protect consumers and small businesses from the
current harms inflicted on them by demand letters? Would mandatory
disclosure requirements provide a more effective consumer protection
solution than a registry?
Answer. Mandatory disclosures aid consumers and small business by
reducing the cost of responding substantively to a demand/assertion
letter. Lowering the cost of substantive responses reduces the
likelihood of unjustified settlements that are due solely to the costs
of responding and fighting.
Mandatory disclosure requirements provide needed transparency to
each recipient of a patent assertion/demand letter, and they are a
necessary supplement to a registry that provides transparency to all
recipients. Neither is effective individually, but in combination they
are very helpful.
Question 2a. Please detail, specifically, the types of information
that should be required in demand letters to achieve the goal of
improved consumer protection.
Answer. Five types of information should be required in demand
letters:
1. The number of the patent being asserted.
2. The specific claims of each patent that are alleged to have been
infringed.
3. The specific technology, functionality or activity, that the
defendant is employing or doing, that triggers or implicates
each assertion of infringement.
4. The basis of a proposed license amount if any specific license
amount is proposed.
5. The names of all other entities that have been sent assertion/
demand letters relating to the specified patents.
Question 3. We also discussed whether current law would allow
effective implementation of the various policy proposals to protect
consumers and small businesses from unfair or deceptive demand letters.
Do you believe the FTC--under its existing Section 5 authority to
prevent unfair and deceptive practice or any other statutory
authority--has the ability to effectively carry out any of the proposed
solutions that you have proposed or that were discussed at the hearing,
such as establishing a demand-letter registry or including mandatory
disclosure requirements? Please specify which potential solutions the
FTC would or would not be able to implement.
Answer. I am not an expert on the FTC's Section 5 authority, but my
initial concern is that the FTC's authority is limited to (a)
investigational authority; and (b) enforcement authority with respect
to specific actions and actors. Thus, I am not certain that FTC Section
5 authority is sufficiently broad to regulate either (a) the form or
content of demand letters, or (b) to require that demand letters be
uploaded into an online registry.
______
Response to Written Questions Submitted by Hon. Richard Blumenthal to
Jon Potter
Question 1. Demand letters are often sent to people who will never
see the inside of a courtroom. They will settle--often they will feel
that they must settle--before a case is even filed. In your opinion,
are the reforms being considered in pending legislation targeted at
what happens during litigation adequate to fully address the problem
with demand letters?
Answer. Ninety percent of patent assertions are resolved prior to
litigation, but the bills currently being considered by the Congress do
not fully address the problems with abusive pre-litigation demand
letters. Specifically, these bills do not (a) authorize the FTC to
define what data points must be included in a demand letter; (b)
require that the FTC use its enforcement authority against unfair and
deceptive demand letters; or (c) impose self-executing penalties
against those who send abusive demand letters.
Question 1a. Are there additional reforms Congress should consider
specifically targeted at the issue of demand letters?
Answer. Five additional reforms should be considered:
1. The Director of the Patent & Trademark Office should be required
to consider Director-initiated re-examinations and post-grant
reviews when there is evidence of demand letter abuse by a
patent owner or its agent.
2. Demand-letter abuse should be punishable by permanent elimination
of the patent owner's right to heightened damages, e.g., for
willful infringement, or by elimination of all enforcement
authority with respect to that patent.
3. Demand-letter abuse should be punishable by a lower-standard for
fee-shifting by courts.
4. Upon an administrative holding that a patent owner has sent
demand letters abusively (either by asserting a substantively
overbroad interpretation of a patent), that patent owner should
pay for the costs of the administrative proceeding and should
pay a remedial penalty directly to all recipients of the
abusive demand letters.
5. Demand letters should be required to include a certification of
honesty and good faith with regard to the patent's validity,
its interpretation as asserted in the letter, and the
infringement that it asserts.
______
Response to Written Questions Submitted by Hon. Claire McCaskill to
Mark Chandler
Question 1. At the hearing, we heard about several policy proposals
that could help protect consumers and small businesses from harmful
demand letters. One potential idea widely discussed was the
establishment of a demand-letter registry--whether at the Federal Trade
Commission (FTC) or at the U.S. Patent and Trademark Office (PTO)--that
would increase transparency and facilitate better data on the problem's
extent. What protections for consumers and small businesses would such
a registry provide that would address the current harms inflicted on
them by demand letters?
Question 1a. Do you have an opinion about whether it would be more
effective to house such a registry at the PTO or the FTC? Please
explain why.
Answer. While Cisco has first-hand experience with the harms of
deceptive demand letter practices, the full scope and extent to which
deceptive practices are taking place, and the harm it is inflicting on
small businesses and consumers, is not known because much of it is not
publicized, and it is difficult for recipients of such letters to
coordinate and collect the information on their own. A registry would
call attention to the magnitude and scope of demand letter campaigns,
and make it easier for recipients of letters to gather and disseminate
information regarding the demands against them. It would also give
everyone the full picture. For example, a demand letter recipient may
be more likely to learn that the asserted patents are RAND-encumbered,
that certain accused products are already licensed and do not infringe,
or that manufacturers have stepped up and initiated litigation to
defend their products. A registry would therefore discourage deceptive
and unfair practices, while adding a basic level of transparency and
accountability that will help protect innocent end users.
Question 2. Another potential idea from the hearing was to require
certain baseline disclosures in demand letters to provide recipients
with more useful information and to help stem the large numbers of
demand letters being sent. Do you believe such mandatory disclosure
requirements would protect consumers and small businesses from the
current harms inflicted on them by demand letters? Would mandatory
disclosure requirements provide a more effective consumer protection
solution than a registry?
Question 2a. Please detail, specifically, the types of information
that should be required in demand letters to achieve the goal of
improved consumer protection.
Answer. In addition to a registry, it is important that demand
letters provide adequate notice to the recipients concerning what is
being accused, as well as other critical information from which a
demand letter recipient can either reach out to the appropriate
supplier[s] of infringing technology, or better understand its rights
and the patent holder's obligations. At a minimum, demand letters
should disclose:
a list of products which are deemed to infringe, including
the manufacturer and model number, and informing them that they
may have the right to have the manufacturer defend the case,
and providing contact information for the manufacturer;
the names of the entities which own the patents or benefit
from their enforcement and any related entities; and
a list of all previous licenses granted for those patents,
with a notice that if the recipient of the letter is using the
products or services of a licensed entity, the recipient may
require no further rights or permission from the patent holder,
as well as whether there is a relevant licensing commitment to
a standards organization.
Question 3. We also discussed whether current law would allow
effective implementation of the various policy proposals to protect
consumers and small businesses from unfair or deceptive demand letters.
Do you believe the FTC--under its existing Section 5 authority to
prevent unfair and deceptive practice or any other statutory
authority--has the ability to effectively carry out any of the proposed
solutions that you have proposed or that were discussed at the hearing,
such as establishing a demand-letter registry or including mandatory
disclosure requirements? Please specify which potential solutions the
FTC would or would not be able to implement.
Answer. The FTC presently has the authority to under Section 5 to
prohibit unfair or deceptive acts or practices, and this includes
deceptive or unfair demand letter assertions. However, specific
legislation requiring a registry and that demand letters include
specific information would be helpful in curbing deceptive demand
letter practices.
______
Response to Written Questions Submitted by Hon. Mark Pryor to
Mark Chandler
Question 1. I have heard reports that some foreign governments have
formed, or announced intentions to form, state-sponsored patent
assertion entities (PAEs). According to these reports, it is unclear
how these PAEs might assert their patent holdings in the future and to
what extent. Are state-sponsored PAEs something your company is aware
of? If so, how would you characterize the nature of such organizations?
Question 1a. Has your company had any experience in dealing with a
state-sponsored PAE? If so, could you please describe the nature of the
interaction?
Question 1b. Would you please describe any other role, be it
positive or negative, you believe state-sponsored PAEs may play in the
technology sector?
Question 1c. Do you see a need for Congressional action with
respect to state-sponsored PAEs? If so, please describe.
Answer. State-sponsored PAEs have already filed suit against Cisco
and other American companies. For example, we have been sued by CSIRO,
an agency of the Australian government and our customers have been sued
by TR Labs from Canada. These entities are exploiting the imbalances of
the American system against American companies.
Furthermore, a new form of large scale well-funded state-sponsored
PAE is now emerging in some foreign countries. We have not yet directly
interacted with them but are aware that they are accumulating large
amounts of capital to purchase large numbers of patents including U.S.
patents. In many ways we expect them to function like other PAEs but
due to state sponsorship these are unusually large and well-funded.
They also are intended to serve national economic objectives in taxing
our industries to generate a return for their industries. They will
likely harm U.S. companies and consumers but it will be a harm that we
have inflicted upon ourselves by having an imbalanced patent
enforcement system in the United States. The solution is to reform our
own system so that foreign entities cannot exploit it against us.
______
Response to Written Questions Submitted by Hon. Richard Blumenthal to
Mark Chandler
Question 1. Demand letters are often sent to people who will never
see the inside of a courtroom. They will settle--often they will feel
that they must settle--before a case is even filed. In your opinion,
are the reforms being considered in pending legislation targeted at
what happens during litigation adequate to fully address the problem
with demand letters?
Answer. Legislative reforms to patent litigation and proposals to
specifically address demand letters are complementary solutions to the
problems of meritless patent assertions. Because demand letters often
seek an amount that is so low--a few thousand dollars--that litigation
is unlikely, the current legislative proposals directed to litigation
do not fully address the harm caused by deceptive demand letter
campaigns. Also, hundreds of demand letter recipients may pay for a
license before a single case is litigated, at which point the damage to
such innocent end users is already done. Demand letter reform would
therefore address problems not addressed by litigation reform.
Question 1a. Are there additional reforms Congress should consider
specifically targeted at the issue of demand letters?
Answer. Congress should pass legislation directed to the problem of
demand letters. For example, in my testimony I called for the
establishment of a repository at the FTC. Everyone who sent more than
ten letters to end users would have to log their letter into the
repository and the letters would have to include, among other things,
complete information on ownership, the basis for the infringement
accusation, and the licensing history of the patents. Making this
information broadly available will allow us as suppliers to give the
patent assertion entities a fair fight.
______
Response to Written Questions Submitted by Hon. Claire McCaskill to
Julie P. Samuels
Question 1. At the hearing, we heard about several policy proposals
that could help protect consumers and small businesses from harmful
demand letters. One potential idea widely discussed was the
establishment of a demand-letter registry--whether at the Federal Trade
Commission (FTC) or at the U.S. Patent and Trademark Office (PTO)--that
would increase transparency and facilitate better data on the problem's
extent. What protections for consumers and small businesses would such
a registry provide that would address the current harms inflicted on
them by demand letters?
Answer. Such a registry would provide protection by supplying
information--something that the system currently woefully lacks. For
instance, if a consumer finds him or herself facing a threat, he or she
will often have no idea how to respond. Hire a lawyer? Call the sender?
Ignore the letter? Hiring a lawyer to navigate the process is not
cheap; often costing well into the thousands of dollars just to
understand the scope of the threat and how it relates to the technology
at issue. Take the now infamous troll, MPHJ (otherwise known as the
``scanner troll''). MPHJ created a series of shell companies with names
constructed of random letters,\1\ making it nearly impossible to google
the letter's sender and understand the scope of the threat. A robust
database would give consumers basic information about who is sending
the letter and what kind of threat that entity poses. Does it often sue
its targets? If so, it might be worth hiring a lawyer. Does it rarely
so? If so, the best advice might be to ignore the letter.
---------------------------------------------------------------------------
\1\ See http://arstechnica.com/tech-policy/2013/01/patent-trolls-
want-1000-for-using-scanners/
---------------------------------------------------------------------------
A registry could also include additional crucial content, such as
basics on the patent system and resources for how to understand and
respond to the immediate threat. (This is something we've tried to do
at Trolling Effects at https://trollingeffects.org/learn and something
that the President has already instructed the Patent Office to do; we
understand the Patent Office is currently working on education
materials in response to that request.)
A registry would also protect consumers by chilling dangerous
trolling activities. We believe that trolls target ordinary consumers,
end-users, and non-patent-sophisticated parties because of the
asymmetry of information problem and the ability of those trolls to
hide behind shells. Simply, it is cheap and easy for a party to send
out hundreds or even thousands of demand letters and see what kinds of
payments come back. In fact, a letter sender need not even be an
attorney. A registry's ability to lift this veil of secrecy would solve
the asymmetry of information problem, thus making the patent troll
``business model'' a less attractive one. Will certain bad actors still
exploit the system and target consumers? Probably. But we believe at a
much slower rate. We also believe emboldening consumers with
information will increase the instances of those consumers fighting
back, another important element that will help squelch the trolls'
dangerous actions.
Question 1a. Do you have an opinion about whether it would be more
effective to house such a registry at the PTO or the FTC? Please
explain why.
Answer. I strongly believe the most important thing is to have a
publicly available, easily searchable registry. To that end, I believe
one held at either FTC or PTO would be effective and efficient. That
said, each has unique benefits, which I will discuss in turn.
The FTC has valuable experience in hosting public-facing
registries, such as the Do Not Call Registry. While the Do Not Call
Registry's submissions are not public facing, the educational materials
and outreach are directed to everyday consumers and citizens, the same
class of people who would most benefit from a demand letter registry.
Moreover, the FTC could monitor submissions and, upon receiving a
certain number involving a particular patent or patent holder, could
begin an investigation under 15 U.S.C. Sec. 45. Finally, and arguably
most significantly, the FTC has experience defending consumer
interests, unlike the Patent Office, whose sole relevant experience for
the most part has been dealing with patent owners.
The PTO, on the other hand, has valuable experience navigating and
compiling information on the patent system. It keeps voluminous files
on every patent--from application and through its lifecycle. Those
databases are notoriously hard to navigate and are not user-friendly,
however, which is something that should be considered. Simply put, the
PTO is an agency that, for the majority of its life, has been tasked
with growing the patent system. However, the PTO has recently shown
aptitude and interest in making its site more user friendly and in
reaching out to and working with third parties who are not necessarily
patent applicants.
Finally, the PTO (not unlike the FTC) could monitor submissions and
chose to sua sponte reexamine certain patents. To my knowledge, the PTO
has only done this once (for a method of swinging on a swing, of all
things \2\), yet there is no reason to believe it could not institute
similar reexams in the future.
---------------------------------------------------------------------------
\2\ U.S. Patent No. 6,368,227 at http://www.google.com/patents/
US6368227
Question 2. Another potential idea from the hearing was to require
certain baseline disclosures in demand letters to provide recipients
with more useful information and to help stem the large numbers of
demand letters being sent. Do you believe such mandatory disclosure
requirements would protect consumers and small businesses from the
current harms inflicted on them by demand letters? Would mandatory
disclosure requirements provide a more effective consumer protection
solution than a registry?
Answer. I believe certain mandatory disclosures would protect
consumers and small businesses from the current harms inflicted by
demand letters for many of the same reasons I believe a registry would
help. First, such disclosures would provide valuable information to
consumers and small businesses who need it to make informed decisions.
Second, it would discourage the worst actors who use the guise of the
patent system to extort funds from consumers.
I believe that a combination of mandatory disclosures and a
registry would be the most effective solution to the problem. That
said, if I had to chose just one, I would have a slight preference for
a demand letter registry. It is a longer-term solution, which would
provide valuable information not just to consumers and small
businesses, but to academics and policymakers and others who try to
understand the scope of the problem. Also, if constructed properly, it
provides a better safeguard against the actions taken by current letter
senders to get around disclosure requirements. In short, the registry
would impact all bad actors, the disclosure requirement would only
impact the bad actors who don't provide enough information. While this
is an incredibly dangerous subset of letter senders, it is still only a
subset.
Question 2a. Please detail, specifically, the types of information
that should be required in demand letters to achieve the goal of
improved consumer protection.
Answer. The types of information include:
Every party that has an ongoing financial interest in the
patent(s) at issue.
The specific patent(s)--and claims of those patent(s)--at
issue.
The products or services that allegedly infringe those
claims.
Any obligations to license the patent(s) on reasonable
terms.
Any current instances of reexaminations of the patent(s) at
the PTO or any ongoing litigation surrounding the patent(s).
If any of the above information is not included, the sender
must include a statement explaining why it was not accessible,
and what efforts it made to find that information.
Question 3. We also discussed whether current law would allow
effective implementation of the various policy proposals to protect
consumers and small businesses from unfair or deceptive demand letters.
Do you believe the FTC--under its existing Section 5 authority to
prevent unfair and deceptive practice or any other statutory
authority--has the ability to effectively carry out any of the proposed
solutions that you have proposed or that were discussed at the hearing,
such as establishing a demand-letter registry or including mandatory
disclosure requirements? Please specify which potential solutions the
FTC would or would not be able to implement.
Answer. I believe the FTC, under its existing Section 5 authority,
could target certain entities currently sending letters for unfair and
deceptive practices. However, legislation would be helpful in defining
certain practices--such as failure to include certain information in a
demand letter--as per se deceptive or unfair.
As to an FTC registry, legislation is likely necessary for its
creation, not unlike 15 U.S.C.A. Sec. 6101, et al, which authorizes the
Do Not Call registry.
______
Response to Written Questions Submitted by Hon. Richard Blumenthal to
Julie P. Samuels
Question 1. Demand letters are often sent to people who will never
see the inside of a courtroom. They will settle--often they will feel
that they must settle--before a case is even filed. In your opinion,
are the reforms being considered in pending legislation targeted at
what happens during litigation adequate to fully address the problem
with demand letters?
Answer. Certain legislative proposals would help the demand letter
problem, but those proposals contain provisions that are directed
specifically at letter sending, not litigation. The more traditional
litigation reforms that largely currently make up the Innovation Act
(H.R. 3309) that is quickly moving through the House would help the
demand letter problem insomuch as they would chill the so-called
``troll business model.'' So the short answer to the question of
whether the pending litigation reforms would ``fully address'' the
demand letter problem must be no.
To be fair, other proposals, such as Sen. Leahy's Patent
Transparency and Improvement Act (S. 1720), do directly address the
demand letter problem. For instance, that bill's current Section 5,
entitled Bad-Faith Demand Letters, would define certain practices
(``widespread'' sending of letters that, for example, make false
threats) as violations of existing Section 5. The Patent Transparency
and Improvement Act also contains a so-called savings clause that
explicitly says it is neither an expansion nor a reduction of its
existing Section 5 authority.
Question 1a. Are there additional reforms Congress should consider
specifically targeted at the issue of demand letters?
Answer. The reforms I believe Congress should consider that would
specifically and successfully address the demand letter problem
include:
Legislating the creation of demand letter registries at
either the FTC or PTO (see answers above for details).
Mandating that certain information be included in demand
letters, and when that information is not included the letter
sender must detail why.
Defining certain practices as per se violations of existing
FTC Section 5 authority, which would also have the added
benefit of triggering state statutes already on the books in
various states.
Question 2. Congressional action specifying when the use of demand
letters constitutes an unfair or deceptive act or practice could
actually limit FTC authority by defining the standard against which the
FTC must operate. In your opinion, would such Congressional action
constitute an expansion or contraction of FTC authority?
Answer. Such Congressional action could be done in a way to neither
expand nor contract current FTC authority. Ideally, legislation could
define certain practices as per se deceptive or unfair (some examples
would be making false threats or purposely hiding information on who
retains an interest in the patent(s) at issue). The legislation should
explicitly not preclude the FTC from finding other unlisted practices
as violating Section 5.
Of course, by listing certain activities as per se deceptive or
unfair, the legislation merely makes the FTC's job a little easier by
reducing the amount of elements it needs to prove in the most egregious
cases.
Question 2a. Could Congressional action in this area give companies
that are not engaged in wrongdoing greater certainty as to what does
and what does not constitute unfair or deceptive conduct? Could this
greater certainty actually facilitate licensing activity that is legal,
reasonable, and appropriate?
Answer. Congressional action could help shape and create public
guidelines about practices that are and are not unfair and deceptive.
At a minimum, it could delineate what is per se unfair and deceptive.
Resulting FTC rulings, which we believe would be issued more quickly
following legislation, would help create even additional certainty.
To be certain, there is undoubtedly a place for legal, reasonable,
and appropriate licensing activities. Not only could legislative action
help define what that looks like, but it would also push the bad actors
out of the market, leaving more space for those acting responsibly.
Question 3. As a former Attorney General, I believe that the states
have an important role to play in protecting consumers. Do you agree
that states have a role to play in protecting consumers from abusive
demand letters?
Answer. Without a doubt. States like Nebraska, Minnesota, and
Vermont have been leaders in the fight against abusive patent troll
practices.
Question 3a. Are there advantages to state enforcement in this
area?
Answer. States are closer to their own business communities and
will be able to more quickly assess the entities that pose the greatest
risk. The current economic climate also dictates that states are
competing to be pro-business. One way to do this is to protect local
businesses from threats posed by demand letter abuses. Congress should
help incentivize states to continue this trend.
Question 3b. Should Congress take action to allow states to protect
their citizens?
Answer. I believe Congress should take action that would allow
states to protect their citizens.
Question 3c. What kind of action would be helpful?
Answer. First, as discussed above, Congress could define certain
actions as per se unfair or deceptive. This act of defining alone would
trigger statutes already on the books in many states.
Second, Congress should make clear that any action it takes will
not preempt the efforts of state Attorneys General to bring consumer
protection actions based on patent demand letters. Moreover, Congress
should confirm that states do indeed have the right to bring such
actions.
Third, Congress should clarify that sending unfair and deceptive
patent infringement letters into a state satisfies the due process
requirement for personal jurisdiction.
Finally, the creation of a registry at FTC or PTO would also
benefit the states who want to bring consumer protection actions.
States would be able to investigate who is sending letters and to whom,
making their job deciding which entities to focus on easier.
______
Response to Written Questions Submitted by Hon. Claire McCaskill to
Lary Sinewitz
Question 1. At the hearing, we heard about several policy proposals
that could help protect consumers and small businesses from harmful
demand letters. One potential idea widely discussed was the
establishment of a demand-letter registry--whether at the Federal Trade
Commission (FTC) or at the U.S. Patent and Trademark Office (PTO)--that
would increase transparency and facilitate better data on the problem's
extent. What protections for consumers and small businesses would such
a registry provide that would address the current harms inflicted on
them by demand letters?
Answer. Most retailers do not have the resources to litigate a
patent infringement lawsuit, let alone the legal fees to assess
purposely vague, unfair, and deceptive demand letters. As such,
Congress ought to provide the FTC with more statutory guidance on what,
under its existing unfair and deceptive trade practices authority,
should be in a demand letter to make them more transparent to the
recipient. Consumers and small businesses would benefit greatly from
such transparency because it will allow businesses to make more
efficient, economical decisions as they investigate the claim. In
conjunction with such a provision, an appropriately-scaled demand
letter registry could assist small businesses and their counsel, along
with public interest groups, in discerning and exposing patterns of
demand letter abuse.
Question 1a. Do you have an opinion about whether it would be more
effective to house such a registry at the PTO or the FTC? Please
explain why.
Answer. If, as requested above, Congress provides the FTC with more
statutory guidance as to what should be in a demand letter, it might
make sense to include such a registry at the FTC, as it might assist
the FTC in discerning targets for enforcement.
Question 2. Another potential idea from the hearing was to require
certain baseline disclosures in demand letters to provide recipients
with more useful information and to help stem the large numbers of
demand letters being sent. Do you believe such mandatory disclosure
requirements would protect consumers and small businesses from the
current harms inflicted on them by demand letters? Would mandatory
disclosure requirements provide a more effective consumer protection
solution than a registry?
Answer. Yes, as described above, disclosure requirements would
provide more effective consumer protection than a registry. Disclosure
in demand letters is a critical component to reform because it will
allow businesses to make more efficient, economical decisions as they
investigate the claim. They will also be able to spend less money on
patent attorneys' fees because the claim will be better laid out.
Question 2a. Please detail, specifically, the types of information
that should be required in demand letters to achieve the goal of
improved consumer protection.
Answer. At a minimum, disclosure should include: Requiring the
letter to identify the owner of the patent, the specific patent alleged
to be infringed, and the reasons for the good faith belief that the
patent in being infringed.
Question 3. We also discussed whether current law would allow
effective implementation of the various policy proposals to protect
consumers and small businesses from unfair or deceptive demand letters.
Do you believe the FTC--under its existing Section 5 authority to
prevent unfair and deceptive practice or any other statutory
authority--has the ability to effectively carry out any of the proposed
solutions that you have proposed or that were discussed at the hearing,
such as establishing a demand-letter registry or including mandatory
disclosure requirements? Please specify which potential solutions the
FTC would or would not be able to implement.
Answer. Yes, we believe the policy solution proposed above (i.e.,
giving the FTC additional guidance on demand letters) could be
implemented by the FTC since it well comports with the FTC's existing
authority under Section 5. In fact, the FTC recently stated that it
already has authority under Section 5 to pursue patent assertion
entities for unfair methods of competition or false or deceptive acts
or practices.
______
Response to Written Questions Submitted by Hon. Richard Blumenthal to
Lary Sinewitz
Question 1. Demand letters are often sent to people who will never
see the inside of a courtroom. They will settle--often they will feel
that they must settle--before a case is even filed. In your opinion,
are the reforms being considered in pending legislation targeted at
what happens during litigation adequate to fully address the problem
with demand letters?
Answer. Most retailers do not have the resources to litigate a
patent infringement lawsuit, let alone the legal fees to assess
purposely vague, unfair, and deceptive demand letters. As such, in
addition to litigation reforms (which we generally support), Congress
also ought to focus on pre-litigation issues and provide the FTC with
more statutory guidance on what, under its existing unfair and
deceptive trade practices authority, should be in a demand letter to
make them more transparent to the recipient. Consumers and small
businesses would benefit greatly from such transparency because it will
allow businesses to make more efficient, economical decisions as they
investigate the claim. We would note that Section 5 (``Bad Faith Demand
Letters'') of the Leahy-Lee ``Patent Transparency and Improvement Act
of 2013'' represents a very meaningful approach to the problem, and we
look forward to working the Senate Commerce Committee on this issue.
Question 1a. Are there additional reforms Congress should consider
specifically targeted at the issue of demand letters?
Answer. In conjunction with an FTC provision (discussed above), an
appropriately-scaled demand letter registry (perhaps housed within FTC)
could assist small businesses and their counsel, along with public
interest groups, in discerning and exposing patterns of demand letter
abuse.
______
Response to Written Questions Submitted by Hon. Richard Blumenthal to
Adam Mossoff
Question 1. Demand letters are often sent to people who will never
see the inside of a courtroom. They will settle--often they will feel
that they must settle--before a case is even filed. In your opinion,
are the reforms being considered in pending legislation targeted at
what happens during litigation adequate to fully address the problem
with demand letters?
Answer. As a preliminary matter, it is important to recognize that
there are no reliable, scientifically valid studies that have
definitively proven that there is in fact a systemic problem with
demand letters requiring legislation making systemic changes to how all
patent-owners license their property or assert their property against
infringers. The policy debates thus far are defined almost entirely by
nonobjective rhetoric, such as the term, ``patent troll,'' \1\ and what
the Government Accountability Office has described as ``nonrandom and
nongeneralizable'' studies, which means that the studies done thus far
are unscientific and unreliable.\2\ Thus, there is no definitive proof
yet that there is a widespread, systemic problem with the issuance of
demand letters, as opposed to merely a few bad actors who are
requesting royalties for potentially bad-quality patents.
---------------------------------------------------------------------------
\1\ See Demand Letters and Consumer Protection: Examining Deceptive
Practices By Patent Assertion Entities: Hearing Before the Subcomm. on
Consumer Prot., Prod. Safety, and Ins. of the S. Comm. on Commerce,
Sci. and Transp,, 113th Cong. 67 (Nov. 7, 2013) (statement of Adam
Mossoff, Professor of Law, George Mason University School of Law) p. 3-
5, http://www
.commerce.senate.gov/public/?a=Files.Serve&File_id=c5cc328a-af61-4f12-
bea7-e2ae6fb42ce3
\2\ Government Accountability Office, Intellectual Property:
Assessing Factors that Affect Patent Infringement Litigation Could Help
Improve Patent Quality 26 (Aug. 2013), http://www.gao.gov/assets/660/
657103.pdf.
---------------------------------------------------------------------------
In fact, the real concern about the demands for royalties or even
threats of lawsuits is that many people believe that the patents are
invalid. In other words, the policy concern that needs to be addressed
is the validity of the underlying property right, as an owner of a
valid patent has every right to demand licenses from unauthorized users
and to seek relief in court against recalcitrant infringers. For this
reason, the pending legislation that proposes significant changes to
litigation practices still does not address the real policy concern--
the validity of the underlying property right--and instead imposes
substantial legal burdens and additional costs on legitimate owners of
valid patents.
In recognizing that the real policy concern that animates the many
complaints about demand letters is the invalidity of the underlying
patents, one can then focus on the proper legal tools that are
necessary to address this entirely valid and legitimate concern. In
fact, the concern about bad actors improperly using bad patents to
squelch legitimate commercial activity in the marketplace is not new;
Congress, the courts and the U.S. Patent & Trademark Office (PTO) long
ago created many legal tools, and even more exist today, for
challenging and weeding out these bad patents. Even more important, the
America Invents Act of 2011 (AIA), a product of a six-year policy
debate and rightly recognized as ``the most significant reform of the
U.S. patent system since 1836,'' \3\ vastly expanded these tools as
well.
---------------------------------------------------------------------------
\3\ Richard Maulsby, President Obama Signs the America Invents Act,
Inventors Eye, vol. 2, issue 5 (Oct. 2011), http://www.uspto.gov/
inventors/independent/eye/201110/americainvents
act.jsp.
---------------------------------------------------------------------------
Consider two longstanding examples of such legal tools (among the
many that exist). First, potential defendants have long had the right
to sue patent owners in Federal court to invalidate patents that might
be asserted against them in a future lawsuit. It is a special type of
lawsuit called a declaratory judgment action. The Supreme Court
recently liberalized the rules for when someone can bring a declaratory
judgment action in its 2007 decision in Medimmune v.
Genentech,\4\making it even easier for retailers or consumers to
initiate proceedings against patent owners when they receive improper
demand letters. Second, defendants or potential defendants have long
had access to the PTO to challenge improperly issued patents. In 1850,
for instance, Isaac Singer instigated a lengthy proceeding at the
Patent Office in attempting to invalidate Elias Howe's patent on the
lockstitch following Howe's demand that Singer pay him royalties, and
defendants in all of Howe's lawsuits repeatedly argued (and reargued)
in Federal court that Howe's patent was invalid as well.\5\
---------------------------------------------------------------------------
\4\ MedImmune, Inc. v. Genentech, Inc., 127 S. Ct. 764 (2007).
\5\ See Mossoff, The Rise and Fall of the First American Patent
Thicket: The Sewing Machine War of the 1850s, 53 Ariz. L. Rev. 165,
187-189 (2011).
---------------------------------------------------------------------------
Today, such legal mechanisms continue to exist in the PTO and in
the courts, which serve as a check on both bad actors and bad patents.
Such legal tools necessarily affect the calculus of individual patent
owners who are bluffing in demand letters, because those bluffs may
called and courts will make it harder to bring the actual lawsuits and
will punish bad-faith assertions. Thus, in the courts, the Judicial
Conference's Committee on Rules of Practice and Procedure has
officially published proposed revisions to the pleading requirements in
patent lawsuits, one of the sources of the much maligned minimal notice
requirements in patent infringement complaints.\6\ Additionally, the
Supreme Court recently granted cert in two cases that will likely
result in liberalizing the rules on the issuance of sanctions in patent
cases.\7\
---------------------------------------------------------------------------
\6\ See Committee on the Rules of Practice and Procedure of the
Judicial Conference of the United States, Preliminary Draft of Proposed
Amendments to the Federal Rules of Bankruptcy and Civil Procedure (Aug.
2013), available at http://www.uscourts.gov/uscourts/rules/preliminary-
draft-proposed-amendments.pdf; see also Honorable Katherine O'Malley,
Key Note Speech at Intellectual Property Owners Association Annual
Meeting (Sep. 17, 2013), p. 9, available at http://www.ipo.org/wp-
content/uploads/2013/02/IPO-Annual-Meeting-Keynote-Speech-09-17-13.pdf
(discussing this process).
\7\ See Octane Fitness, LLC v. Icon Health & Fitness, Inc., No. 12-
1184, 2013 WL 1283843 (U.S. Oct. 01, 2013); Highmark Inc. v. Allcare
Health Mgmt. Sys., No. 12-1163, 2013 WL 1217353 (U.S. Oct. 01, 2013).
---------------------------------------------------------------------------
Even more important, at the PTO, the many new, AIA-created review
proceedings for eliminating improperly issued patents are just
beginning to be implemented and to produce results.\8\
---------------------------------------------------------------------------
\8\ See generally Innovation Act of 2013: Hearing on H.R. 3309
Before the Comm. on the Judiciary, 113th Cong. _ (Oct. 29, 2013)
(statement of David J. Kappos, Partner, Cravath, Swaine & Moore LLP),
available at http://judiciary.house.gov/hearings/113th/10292013/
Kappos%20
Testimony.pdf.
---------------------------------------------------------------------------
And for those who lack the knowledge or wherewithal to navigate
these PTO or court processes, assistance is now provided by many law
firms and policy organizations, such as Public Patent Foundation,
Electronic Frontier Foundation (EFF), the Berkman Center for Internet
and Society, and others.\9\ For instance, the App Developers Alliance
has created the ``Law School Patent Troll Defense Network,'' which
involves law school clinics providing legal services to individuals or
small businesses receiving demand letters or complaints.\10\ Moreover,
EFF recently announced that it joined with the Berkman Center in filing
an inter partes review at the PTO of the notorious ``podcasting
patent,'' which has been the subject of thousands of demands letters
being sent to individuals, small companies, and large companies.\11\
---------------------------------------------------------------------------
\9\ On behalf of individual women lacking the funds to pay for
expensive DNA testing (and thus lacking the funds to bring a lawsuit),
the Public Patent Foundation brought the challenge to the patents on
the BRAC1 and BRAC2 genes, which correlated with breast cancer. The
Public Patent Foundation ultimately won before the Supreme Court. See
AMP v. Myriad Genetics, 133 S. Ct. 1747 (2013).
\10\ See Law Schools Join App Developers Alliance to Fight Patent
Trolls (Oct. 10, 2013), available at http://www.ipwatchdog.com/2013/10/
15/law-schools-join-app-developers-alliance-to-fight-patent-trolls/.
\11\ See EFF Files Challenge With Patent Office Against Troll's
Podcasting Patent: Massive Crowdsourcing Effort Leads to Strong
Petition Before the USPTO (Oct. 16, 2013), available at https://
www.eff.org/press/releases/eff-files-challenge-patent-office-against-
trolls-podcasting-patent.
---------------------------------------------------------------------------
In a world in which Internet searches easily and effortlessly
produce such information, it is hard to maintain that recipients of
demand letters lack the resources and capabilities to respond
effectively. The Internet also makes it easier for law firms and
organizations to provide this assistance. During the November 7
hearing, for instance, Julie Samuels of EFF stated that filing the
inter partes review proceeding at the PTO against the podcasting patent
cost ``$30,000 in fees'' and that it was ``incredibly resource
intensive,'' \12\ but she failed to mention that EFF raised over
$77,000 in just 10 hours in its fundraising campaign on the
Internet.\13\ It bears emphasizing the significance of this fact: EFF
raised in less than one-half day more than double the $30,000 it needed
to file an inter partes review of one of the patents underlying many
improper demand letters being sent to consumers and retailers--the
podcasting patent.\14\ This certainly proves that there are existing
resources and legal tools to address the very problems with improper
patents about which EFF and others are complaining.
---------------------------------------------------------------------------
\12\ See Demand Letters and Consumer Protection: Examining
Deceptive Practices By Patent Assertion Entities: Hearing Before the
Subcomm. on Consumer Prot., Prod. Safety, and Ins. of the S. Comm. on
Commerce, Sci. and Transp, 113th Cong. _ (Nov. 7, 2013) (statement of
Julie Samuels, Senior Staff Attorney, EFF) p. 67 of draft transcript of
hearing.
\13\ See https://supporters.eff.org/donate/save-podcasting (``Wow.
In under 10 hours, you met and exceeded our funding goal to bust the
bogus, overbroad patent being used to threaten podcasters!'').
\14\ Id. (stating that the funding goal was $30,000).
---------------------------------------------------------------------------
It is against this backdrop that Congress must assess any proposals
to intervene via legislation or regulation in patent licensing and
patent litigation practices. First, there is too much rhetoric and too
many ``nonrandom and nongeneralizable'' studies in the policy
debates,\15\ and too little actual evidence definitively establishing
that more revisions to the patent system are needed. Second, while
there are certainly bad actors, there are a number of existing legal
mechanisms at the PTO and in the courts to address them, especially
after the enactment of the AIA just two years ago. Third, and certainly
not least, there is too little regard for the serious costs that
legislative and regulatory overreach imposes on the individuals and
businesses who create the real-world innovative products and services
that have become basic commodities of modern life.
---------------------------------------------------------------------------
\15\ Government Accountability Office, supra note 2, at 26.
Question 1a. Are there additional reforms Congress should consider
specifically targeted at the issue of demand letters?
Answer. As discussed above, the real policy concern is the quality
and validity of the patents underlying the offers of licenses or
threats of litigation being sent to retailers and consumers. Congress
should consider reforms that will address this legitimate policy
concern by securing full funding of the PTO to ensure complete and
timely examination of patent applications. Full funding of the PTO will
also ensure proper implementation of the many new administrative review
programs created by the AIA to weed out invalid and vague patents that
clog the innovation economy.
As former PTO Director David Kappos recently remarked in testimony
before the House Judiciary Committee, the U.S. patent system is ``the
greatest innovation engine the world has ever known.'' \16\ He rightly
cautioned that Congress should exercise restraint and be cautious in
accidentally killing ``the goose laying our golden egg.'' \17\ Thus,
Congress should ensure that the PTO and the courts have the financial
resources to deploy the preexisting tools specifically directed at any
low-quality patents, as these are the real scourge of innovation and
economic growth.
---------------------------------------------------------------------------
\16\ Kappos, supra note 8, at 2.
\17\ Id.
---------------------------------------------------------------------------