[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
TROLLING FOR A SOLUTION: ENDING ABUSIVE
PATENT DEMAND LETTERS
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON COMMERCE, MANUFACTURING, AND TRADE
OF THE
COMMITTEE ON ENERGY AND COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
SECOND SESSION
__________
APRIL 8, 2014
__________
Serial No. 113-138
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Printed for the use of the Committee on Energy and Commerce
energycommerce.house.gov
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COMMITTEE ON ENERGY AND COMMERCE
FRED UPTON, Michigan
Chairman
RALPH M. HALL, Texas HENRY A. WAXMAN, California
JOE BARTON, Texas Ranking Member
Chairman Emeritus JOHN D. DINGELL, Michigan
ED WHITFIELD, Kentucky Chairman Emeritus
JOHN SHIMKUS, Illinois FRANK PALLONE, Jr., New Jersey
JOSEPH R. PITTS, Pennsylvania BOBBY L. RUSH, Illinois
GREG WALDEN, Oregon ANNA G. ESHOO, California
LEE TERRY, Nebraska ELIOT L. ENGEL, New York
MIKE ROGERS, Michigan GENE GREEN, Texas
TIM MURPHY, Pennsylvania DIANA DeGETTE, Colorado
MICHAEL C. BURGESS, Texas LOIS CAPPS, California
MARSHA BLACKBURN, Tennessee MICHAEL F. DOYLE, Pennsylvania
Vice Chairman JANICE D. SCHAKOWSKY, Illinois
PHIL GINGREY, Georgia JIM MATHESON, Utah
STEVE SCALISE, Louisiana G.K. BUTTERFIELD, North Carolina
ROBERT E. LATTA, Ohio JOHN BARROW, Georgia
CATHY McMORRIS RODGERS, Washington DORIS O. MATSUI, California
GREGG HARPER, Mississippi DONNA M. CHRISTENSEN, Virgin
LEONARD LANCE, New Jersey Islands
BILL CASSIDY, Louisiana KATHY CASTOR, Florida
BRETT GUTHRIE, Kentucky JOHN P. SARBANES, Maryland
PETE OLSON, Texas JERRY McNERNEY, California
DAVID B. McKINLEY, West Virginia BRUCE L. BRALEY, Iowa
CORY GARDNER, Colorado PETER WELCH, Vermont
MIKE POMPEO, Kansas BEN RAY LUJAN, New Mexico
ADAM KINZINGER, Illinois PAUL TONKO, New York
H. MORGAN GRIFFITH, Virginia JOHN A. YARMUTH, Kentucky7
GUS M. BILIRAKIS, Florida
BILL JOHNSON, Missouri
BILLY LONG, Missouri
RENEE L. ELLMERS, North Carolina
Subcommittee on Commerce, Manufacturing, and Trade
LEE TERRY, Nebraska
Chairman
JANICE D. SCHAKOWSKY, Illinois
LEONARD LANCE, New Jersey Ranking Member
Vice Chairman JOHN P. SARBANES, Maryland
MARSHA BLACKBURN, Tennessee JERRY McNERNEY, California
GREGG HARPER, Mississippi PETER WELCH, Vermont
BRETT GUTHRIE, Kentucky JOHN A. YARMUTH, Kentucky
PETE OLSON, Texas JOHN D. DINGELL, Michigan
DAVE B. McKINLEY, West Virginia BOBBY L. RUSH, Illinois
MIKE POMPEO, Kansas JIM MATHESON, Utah
ADAM KINZINGER, Illinois JOHN BARROW, Georgia
GUS M. BILIRAKIS, Florida DONNA M. CHRISTENSEN, Virgin
BILL JOHNSON, Missouri Islands
BILLY LONG, Missouri HENRY A. WAXMAN, California, ex
JOE BARTON, Texas officio
FRED UPTON, Michigan, ex officio
C O N T E N T S
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Page
Hon. Lee Terry, a Representative in Congress from the State of
Nebraska, opening statement.................................... 1
Prepared statement........................................... 2
Hon. Janice D. Schakowsky, a Representative in Congress from the
State of Illinois, opening statement...........................
Hon. Jerry McNerney, a Representative in Congress from the State
of California, opening statement............................... 5
Witnesses
William Sorrell, Attorney General, State of Vermont.............. 6
Prepared statement........................................... 9
Answers to submitted questions............................... 103
Rheo Brouillard, President and CEO, Savings Institute Bank and
Trust Company, on Behalf of American Bankers Association....... 27
Prepared statement........................................... 29
Answers to submitted questions............................... 111
Dennis Skarvan, Deputy General Counsel, Intellectual Property
Group, on Behalf of Coalition for 21st Century Patent Reform... 35
Prepared statement........................................... 37
Answers to submitted questions............................... 114
Jason Schultz, Associate Professor of Clinical Law, New York
University School of Law....................................... 48
Prepared statement........................................... 50
Answers to submitted questions............................... 130
Mark Chandler, Senior Vice President and Chief Compliance
Officer, Cisco Systems Incorporated............................ 54
Prepared statement........................................... 56
Answers to submitted questions............................... 137
Michael Dixon, Ph.D., President and CEO, UNeMed Corporation...... 69
Prepared statement........................................... 71
Answers to submitted questions............................... 142
Submitted material
Material submitted by Mr. Terry.................................. 92
TROLLING FOR A SOLUTION: ENDING ABUSIVE PATENT DEMAND LETTERS
----------
APRIL 8, 2014
House of Representatives,
Subcommittee on Commerce, Manufacturing, and Trade,
Committee on Energy and Commerce,
Washington, DC.
The subcommittee met, pursuant to call, at 10:05 a.m., in
room 2123 of the Rayburn House Office Building, Hon. Lee Terry
(chairman of the subcommittee) presiding.
Members present: Representatives Terry, Lance, Olson,
McKinley, Kinzinger, Bilirakis, Johnson, Long, Schakowsky,
McNerney, Welch, Rush, Matheson, and Barrow.
Staff present: Charlotte Baker, Deputy Communications
Director; Kirby Howard, Legislative Clerk; Brian McCullough,
Senior Professional Staff Member, CMT; Paul Nagle, Chief
Counsel, CMT; Shannon Weinberg Taylor, Counsel, CMT; Graham
Dufault, CMT; Michelle Ash, Democratic Chief Counsel; and Will
Wallace, Democratic Professional Staff Member.
Mr. Terry. We are going to go ahead and start, and I want
to thank our witnesses. This is Paul's first time in the chair
replacing Gib Mullen, so, Paul, thank you for your good work. I
just want to let people know, or the witnesses, I appreciate
you coming here today, and one of them, extraordinary
circumstances, Mr. Brouillard, who actually could have attended
the NCAA final game last night, and is a UConn fan, and from
Connecticut. So that is a bigger sacrifice than we usually
encounter here.
Mr. Brouillard. I gave my tickets up to be here, Mr.
Chairman.
Mr. Terry. Yes. Now some of us are doubting your ability to
make good decisions. But we are thankful that you did that. And
I will introduce all of you before we actually start your
testimony, and so now I am going to start my opening statement.
OPENING STATEMENT OF HON. LEE TERRY, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF NEBRASKA
Mr. Terry. Good morning, and welcome, everyone, to today's
hearing, called, ``Trolling for a Solution, Ending Abusive
Patent Demand Letters''. As Thomas Edison once said, to invent
you need a good imagination and a pile of junk. That may be
true, but I would also add that you also need to fight for your
invention because, as Thomas Moore said, it is naturally given
to all men to esteem their own inventions best.
Now, in competition of ideas, whether we are talking about
a multinational company that spends $8 million per day on R and
D, or an inventor with a workshop in his basement, the
Constitution treats intellectual property equally. So let me
start by saying that we must respect the arrangement small
inventors need in order to enforce their patent rights. And
while we are at it, let us emphasize that not all patent
assertion entities are trolls. The role of patent assertion
entities is very important for small inventors who lack the
resources to enforce his or her own property rights. Taking
away or degradating the flexibility to assign enforcement
rights would do nothing less than encroach on an inventor's
constitutional right to exclude others from infringing their
property rights.
With that said, what we address today are instances where
bad actors extort money from innocent parties under the
pretense of asserting intellectual property rights. This kind
of activity belongs in the same family as other type of unfair
and deceptive trade practices. Our job is to separate it from
legitimate right assertions. In order to do so, we have here
today a diverse panel of witnesses whose testimony gives us a
variety of perspectives on the issue.
Already we are seeing a set of potentially conflicting
considerations. First, patent enforcement differs across
industries. According to UNeMed testimony, it considers listing
patent claims and demand letters to be standard procedure.
Caterpillar, on the other hand, would find it difficult in some
situations to list the exact claim at issue because it often
lacks access to the potentially infringing product.
Second, some argue that we should only address letters sent
to end-users of patents. Now, this may fail to address
situations like the one in UNeMed's testimony, where a small
inventor was slapped with an abusive demand letter just after
clearing an FDA approval process. Even so, the majority of
complaints on this issue appear to come from the end-users who
are not versed in patent law.
I will not exhaust the issues before us today, but I want
to clarify one thing. Some may say that legislative action to
curb abusive demand letters would devalue intellectual property
rights generally. I disagree. In fact, it remains that these
bad actors are arrogantly manipulating the intellectual
property system and getting away with it. Several state
Attorney Generals, including John Bruning of Nebraska, have
brought suits under their consumer protection statutes tools,
and thus have far proven difficult to use. As a result, many
states are working rapidly to update their laws.
There is something to be done here, and in order to get it
right we will need the assistance of all of the stakeholders
and witnesses here before us today, and I thank the witnesses
for being here.
[The prepared statement of Mr. Terry follows:]
Prepared statement of Hon. Lee Terry
Good morning, and welcome to our hearing today titled
Trolling for a Solution: Ending Abusive Patent Demand Letters.
As Thomas Edison once said, ``To invent, you need a good
imagination and a pile of junk.''
That may be true, but I would add that you also need to
fight for your invention-because, as Thomas More said, ``It is
naturally given to all men to esteem their own inventions
best.''
Now, in the competition of ideas-whether we are talking
about a multinational company that spends $8 million per day on
R&D or an inventor with a workshop in the basement-the
Constitution treats intellectual property the same.
So let me start by saying that we must respect the
arrangements small inventors need to make in order to enforce
their patent rights. While we're at it, let me emphasize that
not all ``patent assertion entities'' are ``trolls.''
The role of the Patent Assertion Entity (PAE) is very
important for a small inventor who lacks the resources to
enforce his or her own property rights. Taking away or
degrading the flexibility to assign enforcement rights would do
nothing less than encroach on inventors' constitutional right
to exclude others from infringing their property rights.
With that said, what we address today are instances where
bad actors extort money from innocent parties under the
pretense of asserting intellectual property rights. This kind
of activity belongs in the same family as other types of unfair
and deceptive trade practices-our job is to separate it from
legitimate rights assertion.
In order to do so, we have here today a diverse panel of
witnesses whose testimony gives us a variety of perspectives on
the issue. Already, we are seeing a set of potentially
conflicting considerations. First, patent enforcement differs
across industries. According to UNeMed's testimony, it
considers listing patent claims in demand letters to be
standard procedure. Caterpillar, on the other hand, would find
it difficult in some situations to list the exact claim at
issue because it often lacks access to the potentially
infringing product.
Second, some argue that we should only address letters sent
to end users of patents. This may fail to address situations
like the one in UNeMed's testimony, where a small inventor was
slapped with an abusive demand letter just after clearing an
FDA approval process. Even so, the majority of complaints on
this issue appear to come from end users who are not versed in
patent law.
I will not exhaust the issues before us today, but I want
to clarify one thing. Some may say that legislative action to
curb abusive demand letters would devalue intellectual property
rights generally. I disagree. The fact remains that these bad
actors are arrogantly manipulating the intellectual property
system-and they're getting away with it.
Several state attorneys general have brought suits under
their consumer protection statutes, tools that have thus far
proven difficult to use-and as a result, many states are
working rapidly to update their laws.
There is something to be done here and in order to get it
right we'll need the assistance of all stakeholders.
I thank the witnesses for being here today and providing
their valuable insights.
Mr. Terry. Have one minute. Does anybody want it? Hearing
none, I yield back my time, and recognize the Ranking Member of
our subcommittee, Ms. Schakowsky.
OPENING STATEMENT OF HON. JANICE D. SCHAKOWSKY, A
REPRESENTATIVE IN CONGRESS FROM THE STATE OF ILLINOIS
Ms. Schakowsky. Thank you, Mr. Chairman, for holding this
important hearing on patent assertion entities, also known as
patent trolls. And like you, I want to develop a solution to
this growing issue, and look forward to doing so in a
bipartisan manner.
Trolls assert that the patents they hold have been
infringed upon, sending vague and threatening letters to
hundreds, or even thousands of end-users of products, typically
small businesses or entrepreneurs. Those businesses are told
that they can pay the patent troll to continue using the
technology. Considering the cost and resources needed to vet
and fight a patent infringement claim, may small businesses
choose to settle the claim by paying the troll. Others
investigate and fight the claims, draining precious resources,
and stunting the growth of their businesses.
It costs patent trolls virtually nothing to send patent
demand letters, but it can be incredibly lucrative, and
business is booming. In 2011 patent troll costs U.S. businesses
an estimated $29 billion, and the number of defendants in
patent infringement lawsuits increased about 130 percent from
2007 to 2011, according to the Government Accountability
Office. At best, patent trolls are misleading. At worst, they
are extortionists. This is fundamentally a fairness issue. As
the subcommittee charged with protecting consumers and
promising fair business practices, we must take action to
reduce frivolous patent claims.
I am glad that the FTC, the Federal Trade Commission, is
using its existing authority to better understand the nature of
patent assertion entities, and the demand letters that they
issue. I look forward to the commission's analysis, which I
believe will be instructive as we decide how to curb trolling.
Nonetheless, while we wait for the FTC review, there are
steps that we can, and should, take now to combat patent
trolls. I believe there should be more transparency and minimum
standards established for patent demand letters. There are many
ideas about how to increase transparency, including proposals
to require the public disclosure of egregious patent demand
letters. There are also suggestions as to the minimum
information that should be included in a patent demand letter,
including the patent allegedly infringed, and the technology
used that allegedly infringes on the patent.
However, it is vitally important that we approach this
issue with the recognition that many patent infringement claims
are reasonable efforts to protect intellectual property. We
also need to be careful to make sure that universities,
research institutions, and others that develop and hold
patents, but may not develop products for sale, are not labeled
as trolls. In fighting trolls, we shouldn't undermine the
ability of innovators to develop and defend their patents.
While our witnesses today come at this issue from a wide
variety of perspectives, it was interesting to read in their
prepared testimony that each believes that this is an issue in
need of attention. The details of whatever legislation this
committee puts forth will be incredibly important, but the fact
that our witnesses unanimously agree that we have a problem is
an important start. I look forward to hearing their perspective
about how legislation should be structured to make sure that
patent demand letters are more fair and transparent moving
forward.
Again, thank you for holding this hearing today, Mr.
Chairman. I yield the remainder of my time to Mr. Welch.
Mr. Welch. Thank you very much. I am getting the
opportunity to introduce our Attorney General in Vermont, and
we are very proud of Bill Sorrell for the leadership that you
have provided, and also the other panelists too. This is an
incredible issue, and Bill Sorrell was very responsive to a lot
of the folks, that range from businesses that got these
unbelievable stick-up letters, to non-profits, where these
parents had raised money in the community to set up a group
home for disabled kids, and next thing you know, their
threadbare budget is being threatened by these letters,
demanding payment for--they couldn't figure it out.
And, Bill, you worked with Jerry Tarrant and others with
our legal community there. It was very responsive, and you are
working with your fellow Attorney Generals. Mr. Chair, our
Attorney General was the former head of the Attorney Generals.
He has received numerous awards. I am not going to bore
everybody with what they are, but I will tell you they are
good, and a lot of us wish we had them as well. Leader in
tobacco legislation, Humane Society issues, champion for kids,
taking the fight about prescription drug medication abuse, and
abuse of drugs in our state. So it is great to have Bill
Sorrell here, and it is great to have you on the patent troll
issue, and we look forward to working together to try to deal
with this. Thank you. I yield back. Thank you, Ranking Member
Schakowsky.
Ms. Schakowsky. And I yield back.
Mr. Terry. All right. Does anyone on the Republican side
want time? I have to talk slow to draw this out. Anybody want
to talk about the game? All right. Seeing none, no one taking
our time, then, Mr. McNerney, you are our resident patent
holder. Would you like the minority's time?
Mr. McNerney. I sure would.
Mr. Terry. But you are the only one. You are the expert.
Mr. McNerney. I thank you, Mr. Chairman.
Mr. Terry. You are recognized for 5 minutes.
OPENING STATEMENT OF HON. JERRY MCNERNEY, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF CALIFORNIA
Mr. McNerney. I appreciate your calling this hearing. You
know, if you hang around here for long enough, you see the
advertisements in the Hill rags about patent trolls taking more
and more money over time, and those will get your attention. If
you take the Metro, you see, every so often at the Metro stops,
big advertisements, so this is clearly an issue. The fact that
the so-called patent trolls are demanding stick-up letters, as
my friend from Vermont said, it is an issue. We need to address
it. There is a general understanding that this is a problem,
and I am glad to see this come up in a hearing so that we can
hear your inputs, how we can move forward together, how we can
best address this issue.
As the Chairman said, I have patents. One of them is a Fat
Wire patent, and the other a software patent, so I kind of
understand where we could be with this issue. I understand, as
a small patent holder, how difficult it would be to assert your
rights against a large corporation, if that comes to that.
So there is a place for patent assertion entities. I want
to see that preserved, but we want to see that the sort of
stick-up nature of this is curtailed, so it is a balance. It is
important to have a well thought out and meaningful bipartisan
discussion, and I think, on this particular issue, we have a
good desire to work on a bipartisan basis.
So we have an opportunity to make it better, and I am
hoping to be a part of that. I am hoping that your testimony
can help guide us on the decisions that we need to make. So,
with that, I am going to yield back, Mr. Chairman.
Mr. Terry. Anyone else? All right. So Mr. Schultz----
Ms. Schakowsky. Would either of the other members of the
committee--no? OK. Mr. Matheson or Mr. Barrow? No? OK. Thank
you.
Mr. Terry. Gentlelady yields back, and so I want to
introduce our panel now. Bill Sorrell is one of our resident
expert witnesses from the AG's office, and we appreciate you
being here today. For those of you who haven't testified before
us, we go stage left to right, so, Mr. Sorrell, as Attorney
General of Vermont, will go first.
Then we now have Mr. Bouillard, the person who gave up his
tickets last night to be here, and your sacrifice is massive,
and well appreciated. You represent the Savings Institute Bank
and Trust Company on behalf of the American Bankers
Association. Then, next to him, Mr. Skarvan is Deputy General
Counsel, Intellectual Property for Caterpillar. Appreciate your
appearance.
Then Mr. Schultz, or as we call him, Jason ``Just In Time''
Schultz, Associate Professor of Clinical Law, New York
University School of Law, and we understand it has been a
difficult morning for you, and we appreciate that you undertook
these heroic efforts to get here today. Thank you.
Then we have Mr. Mark Chandler, Senior Vice President and
Chief Compliance Officer of Cisco Systems, who has great
experience with these type of demand letters.
Then, last, Mr. Michael Dixon, Ph.D. Dr. Dixon is President
and CEO of UNeMed Corporation, University of Nebraska's holding
business of all of the patents generated by the University.
So, at this time, Mr. Sorrell, you are recognized for your
5 minutes.
STATEMENTS OF THE HONORABLE WILLIAM SORRELL, ATTORNEY GENERAL,
STATE OF VERMONT; RHEO BROUILLARD, PRESIDENT AND CEO, SAVINGS
INSTITUTE BANK AND TRUST COMPANY, ON BEHALF OF AMERICAN BANKERS
ASSOCIATION; DENNIS SKARVAN, DEPUTY GENERAL COUNSEL,
INTELLECTUAL PROPERTY GROUP, ON BEHALF OF COALITION FOR 21ST
CENTURY PATENT REFORM; JASON SCHULTZ, ASSOCIATE PROFESSOR OF
CLINICAL LAW, NEW YORK UNIVERSITY SCHOOL OF LAW; MARK CHANDLER,
SENIOR VICE PRESIDENT AND CHIEF COMPLIANCE OFFICER, CISCO
SYSTEMS INCORPORATED; AND MICHAEL DIXON, PH.D., PRESIDENT AND
CEO, UNEMED CORPORATION
STATEMENT OF WILLIAM SORRELL
Mr. Sorrell. Thank you, Mr. Chairman, Ranking Member
Schakowsky, members of the subcommittee. Thank you much for the
opportunity to appear today and speak about an issue that is of
great importance to the Nation's Attorneys General, as
evidenced by the fact that 42 offices signed on to a sign-on
letter that we sent to the Senate drafted by General Buling and
myself in February on these issues. Much of the work in the
House and in the Senate on assertions of patent infringement
have related to abusive litigation tactics, but the truth of
the matter is that is just the tip of the iceberg, and I want
to talk some today about the iceberg, the roughly as much as 99
percent of cases that don't result in the filing of a civil
complaint.
And so I want to talk about, for example, Lincoln Street,
Inc., a small nonprofit in Springfield, Vermont with 16 direct
care workers, 12 or 13 administration and support staff, that
provide home care to developmentally disabled Vermonters. In
the fall of 2012, Lincoln Street received a letter from one of
the roughly 40 shell subsidiary corporations of a parent
corporation by the name of MPHJ Technology Investments, LLC.
Paraphrasing, the letter says, we own patents X and Y, we
believe you are in violation of them, and that you are scanning
documents and sending those in e-mail through a computer
network. Please be in touch with us within 2 weeks and prove to
us that you are not infringing our patent, or talk to us about
resolving this, and paying licensing fees to us. We have had a
very positive response around the country from the business
community, many companies agreeing to pay us $1,000 per
employee.
A couple weeks later, a second letter comes, this time from
a Texas law firm by the name of Farney Daniels says, we have
been retained because you didn't respond to the first letter.
This is serious. We hope that we don't have to get to
litigation, but unless you are in touch with us forthwith and
resolve this amicably, it is going to be trouble, please take
this serious. And then there is the third letter a couple weeks
later, also from Farney Daniels. This one attaches a draft,
Federal Court Complaint, against the recipient of the letter,
and says that, if you don't resolve this with us within 2
weeks, we will,``be forced to file a complaint against you.''
If you are not in touch with us in 2 weeks, ``litigation will
ensue otherwise.''
Well, it wasn't just Lincoln Street that received that
letter in the fall of 2012. We ultimately learned that 75 small
businesses and nonprofits in the state received letters from
one or other of the shell subsidiaries. And when we filed the
first of its kind in the nation lawsuit in the spring of 2013
against MPHJ, as of that time, not one lawsuit had been filed
in Vermont, nor had, to our knowledge, a lawsuit been filed by
MPHJ, or any of its shell subsidiaries, anywhere in the
country. The Federal Trade Commission, in a draft complaint
against MPHJ, has looked outside Vermont, and in its draft
complaint says that one of the 80 or more shell subsidiaries of
MPHJ sent demand letters to 16,450 small businesses and
nonprofits in all 50 states in this country.
So that is part of the iceberg. Rest of the iceberg, or
other parts of the iceberg, are demand letters to smaller
financial institutions saying, your ATMs use the web, they are
in violation of our patent. Others go to local coffee houses
that have free Wi-Fi, we have patents, you are in violation of
those, please pay up.
We filed our lawsuit in State Court. We were immediately
removed to Federal Court, and MPHJ has said, one, we are
totally pre-empted, because this is a patent matter. You can't
be enforcing your State Consumer Protection Acts against us.
And, second of all, you lack personal jurisdiction over us
because all we have simply done is asserted patent
infringement, and that doesn't subject us to personal
jurisdiction.
We also enacted in Vermont a statute on bad faith
assertions of patent infringement at the request of various
well known Vermont companies, and Utah, Virginia, Wisconsin,
and Oregon have followed suit and adopted their own statutes.
There are many others considering it. We hope that the Congress
will take action, have more transparency in this arena, and
evidence at the time of the assertion of patent infringement of
any other proceedings or court matters that have ruled upon the
patents in question. We want express statements that the states
are not pre-empted, and that we have personal jurisdiction for
those that blanket our states with these assertions of patent
infringement.
I have got 21 seconds left, but--sorry, I read it wrong.
Thank you very much.
[The prepared statement of Mr. Sorrell follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Mr. Terry. Thank you, Bill.
Mr. Brouillard, you are now recognized for your 5 minutes.
STATEMENT OF RHEO BROUILLARD
Mr. Brouillard. Thank you, Mr. Chairman, and Ranking Member
Schakowsky. Thank you again for giving us the chance to come
and present our information to you today. My bank is a $1.3
billion community bank that has been established since 1842. We
serve Connecticut, and parts of Rhode Island.
Obviously, the U.S. has a robust patent system which
protects the rights of legitimate patent holders, and we
believe those rights should continue to be protected. Patent
trolls, however, as we have heard, abuse this system, and are
serious threats to small businesses, banks, and credit unions
throughout the country.
For the cost of postage, a little stationary, and some
time, these trolls use unscrupulous tactics to extort licensing
fees from companies too small to pay the cost to defend
themselves. The claims are often intentionally vague, and based
on shaky legal standing. However, when confronted with threats
of expensive litigation, many banks, especially smaller ones,
find that their only option is to settle, rather than paying
the millions of dollars it may cost to defend against extortive
claims of patent infringement.
I have seen this firsthand at my bank. In January 2013 a
patent troll targeted my bank with a very vague letter, one
page, claiming that they had conducted an investigation, and
that our ATMs operated in a way that infringed upon their
patents. Their letter included an exhibit which listed 13
patent numbers, purported to be patent numbers. So we had a
list of 13 seven digit numbers. That was the extent of the
information provided. They demanded a sublicensing agreement,
and, as Attorney General Sorrell indicated, we had 2 weeks to
comply. Thirty other banks in Connecticut received that same
vague notice, one of which included a bank that did not even
have any ATMs, so there was obviously no investigation ever
conducted.
The pattern of these trolls is to send demand letters,
threaten, or even file, lawsuits, and require a response within
a short period of time. By forcing these settlements, they use
these actions to intimidate their other targets. In fact, 2
years before we received our demand letter, this same troll
brought suits in other New England states, and, because of fear
and lack of resources, over 100 banks quickly settled. The
following year, 80 letters were sent to Maine and Massachusetts
banks. They too ultimately settled.
All of these letters were mailed, in fact, after a Federal
Circuit Court upheld a lower court ruling invalidating the
primary patent. Many of these banks ended up settling and
paying their so-called sublicensing fee, as opposed to
contesting the issue, because of the cost. In some respect, in
Connecticut, we were lucky. We had learned about the troll
having done its work earlier in the other New England states,
and we also had the advantage of hearing about some of the
rulings that were coming out of the courts against this
particular troll.
For my bank, the cost would have been $27,000, which at the
time represented about 10 percent of monthly earnings for the
bank. For the 30 Connecticut banks targeted, had we paid
together, the amount would have been in excess of $300,000.
Even though the courts have invalidated the patents, this has
not stopped this particular troll from sending demand letters,
and bringing legal action against other banks in other states.
I am aware that there have been additional suits filed even
this year in New York and New Jersey. We thank Congress for
seriously addressing this issue, and commend the House for
passing H.R. 3309, the Innovation Act, which begins to address
the issue, but we feel this is just the first step, and more
can be done.
Chief among these is to require transparency in all
allegations of a patent infringement, including details about
the patent, how the target firm is infringing on it, who the
real owner of the patent is, and whether the patent has
expired, or been invalidated. This would help put an end to
some of the abuses, while protecting legitimate patent holders.
Other requirements we recommend include a registry of demand
letters, and requiring bad actors to reimburse the small
businesses for all fees and costs, including the costs to
defend themselves.
Vendors who supply technology and equipment should be made
to defend their products against patent infringement claims.
Many contracts today specifically exclude such a role, and
small businesses are often not in a position to force changes
in that language.
In summary, the problem with patent trolls is widespread
and getting worse, while the number of demand letters rises
sharply each year. Fighting these trolls has a real cost, and
we certainly urge Congress to take action to stop patent
trolls, and protect small businesses from the enormous cost of
abusive lawsuits. Thank you.
[The prepared statement of Mr. Brouillard follows:]
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Mr. Terry. Thank you.
Mr. Skarvan, you are now recognized for your 5 minutes.
STATEMENT OF DENNIS SKARVAN
Mr. Skarvan. Thank you, Mr. Chairman, Ranking Member
Schakowsky, and members of the subcommittee. I am testifying
today on behalf of the Coalition for 21st Century Patent
Reform, or 21C, a broad and diverse group of nearly 50
corporations, including 3M, Caterpillar, Eli Lilly, General
Electric, Proctor and Gamble, and Johnson and Johnson. For more
than 100 years, our coalition's companies have played a
critical role in fostering innovation. We invest billions of
dollars annually on research and development to create American
jobs and improve lives. Caterpillar alone has more than 14,000
patents worldwide, either awarded, or in the approval process.
Caterpillar is a company of innovation. We spend $8 million a
day on R and D.
Let me say at the outset that we believe bad faith demand
letters are a problem, and we support crafting a balanced
solution. Notification of patent rights are routinely presented
in business to business communications to provide early notice
of a patent that otherwise may not be known to the recipient.
Patent demand communications can also start the clock running
on patent damages. Recipients take these letters seriously in
the design and development of new products and technology,
oftentimes designing around the patent to avoid knowingly
infringing another party's rights.
In many instances, the primary goal of the sender is simply
to prevent copying, and ensure product differentiation within
an industry. This is best accomplished by providing early
notice, before monies are committed to substantial design and
manufacturing investment, so that design-arounds are more
readily accomplished. Thus, legitimate patent demand
communications serve an important role in advancing
technologies, providing consumers more choices, and ensuring
the efficient self-policing of patent rights, preventing patent
suits before they happen.
We believe that legislation on patent demand communications
should address three areas of concern.
One, sanctions should be limited to those who send
objectively false and misleading patent demand letter to large
numbers of end-users to extort settlements. Routine business to
business communications should not be swept in.
Two, clear rules of the road, with objective guidance as to
what such communications should and should not contain, not a
list of vague and subjective good faith and bad faith factors
for a court to weigh in determining what constitutes a bad
faith patent demand letter.
And finally, three, a safe harbor should be provided that
clearly states what all patent owners remain free to do. By
safe harbor, I mean a provision clearly informing all patent
owners that they may: one, safely advise others of their
ownership of, or right to license, or enforce a patent; two, to
safely communicate to others that a patent is available for
license or sale; three, to safely notify another, with
reasonable specificity that they infringe a patent; or, four,
to safely seek compensation for past or present infringement,
or for a license to the patent. An appropriately crafted safe
harbor will also help to insulate any legislation from
challenge on Constitutional grounds as intruding on protected
free speech.
Clearly, the sending of large numbers of objectively false,
misleading, and deceptive demand letters needs to be stopped.
The key here is objectivity. A laundry list with a large number
of subjective good faith or bad faith factors to judge whether
a demand letter crossed the line must be avoided. Such lists
provide no meaningful guidance to the sender of a patent demand
communication. Such subjective factors will spawn unnecessary
litigation, and are not likely to pass constitutional muster.
Reasonable, clear, objective rules of the road are needed to
guide normal business activities, rules that will not overreach
and chill legitimate patent communications.
We have seen a variety of bills working their way through
the states. We have seen legislation covering what I will term
legitimate patent demand communications, legislation not
limited to end-users, legislation without safe harbors, and
legislation with vague worded factors that could sanction a
perfectly legitimate patent demand communication. These
differences in state legislation make it difficult, if not
impossible, to provide clear guidance regarding what form of
patent demand communications will be permissible nationally.
In conclusion, the public will benefit from the adoption of
clear, balanced, and uniform guidance regarding the patent
demand letters that constitute unfair or deceptive trade
practices. This can be accomplished by the adoption of
exclusive Federal legislation pre-empting state law directed to
patent demand letters. Private enforcement under state Unfair
or Deceptive Trade Practices laws should also be pre-empted,
and limited to Attorney General enforcement.
Thank you, Mr. Chairman. I will be pleased to answer to
any----
[The prepared statement of Mr. Skarvan follows:]
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Mr. Terry. Thank you, Mr. Skarvan.
Mr. Schultz, you are now recognized for your 5 minutes.
STATEMENT OF JASON SCHULTZ
Mr. Schultz. Thank you, Chairman Terry, and Ranking Member
Schakowsky, and members of the subcommittee. And, again,
apologies for my delay getting here.
At NYU Law I run a law and technology policy clinic, and
for some people that is a bit of a confusion. They are like,
what do you mean? What is a pro bono clinic doing in the law
and technology area? Well, one of the things we do is we get a
lot of e-mails and phone calls from some of these people who
have received demand letters and can't afford to hire a patent
attorney, and they want to know what to do.
And I can tell you from my experience, now over 10 years
generally, but specifically 7 years running pro bono clinics
such as these, that, when I look at the letter, if it is some
vague letter that doesn't actually specify what the accusations
of infringement are, sometimes what all the patents are, and
the claims at issue, it is hard for me to tell. It is hard for
me to tell them anything. It is hard for my students, who I am
supervising, and trying to teach to be lawyers, to tell them
anything. And that is why I think this issue is very important,
and I am very glad the subcommittee is taking it up, because
this is not just about the shakedown. This is not just about
the end-user or the small business who receives a letter, but
it is also about helping them, if they can find help, to have
the attorneys be able to advise them.
It is one thing to defend a patent litigation, and we have
seen a lot of statistics about how many millions of dollars
that takes, but sometimes you can resolve these issues in good
faith, if you have enough information. So I just want to
highlight that this is about an intermediate step, as much as a
final step, in sort of looking at this problem broadly.
Now, who are the people who receive demand letters? You
have heard about a number of folks who are in very precarious
situations when they receive these letters. My clinic and my
students, we often will advise very small entrepreneurs in
terms of the size of their operation. These will be application
developers who are just writing something for the iTunes or
Google App store. They will be mom and pop Web sites who are
trying to develop their own content. Some of these patents
actually cover content, and the use of content, and how it
interacts with technology. And some of them will be community
projects. We have seen a lot of work right now developing civic
technology to try and improve roads, to try and improve use of
data, and look at the environment, improve water quality. They
are all receiving patent demand letters too, many of them just
as vague as the ones you have been hearing about.
So in this role, there are sort of two problems that I
think this committee could address. One is, as we have heard,
that there are these vaguenesses that in some ways can even be
deceptive when they are being asserted as a guaranteed
infringement. So the patent owner will send a letter, say, you
infringed this patent, but won't explain why, when I don't
think even the patent owner knows, because this will be part of
a campaign of general assertion, not specific to any individual
or entity, but just, we believe this whole group of people out
there somehow infringed. And they assert it as if it is the
truth, but they don't even know, and that, to me, is deceptive.
And the second is, as we have heard, when they have no
intention to sue whatsoever, that the threats made are
intimidating, and put the recipients in a position where they
don't actually know what their options are.
So when looking at this, I think we have just started to
collect information about the problem, and I just want to say
that efforts to try and collect more demand letters, such as
trollingeffects.org, have been somewhat successful, but I would
like to see more information so we can understand the scope of
the problem.
But turning to the solution, I think that, for me, these
letters should be required to have specific allegations and
information in them so that the recipient can look at them and
assess what is actually going on, what are they being accused
of? Several of the small entrepreneurs, and coders, and
developers that I have talked to, they are actually technical
people. They could actually try and figure this out, but they
look at the letter, and they say, I have no idea what they are
talking about.
And part of that is not just because the patent is vague,
but because there is no information about what that patent
owner things that this small coder did, or what the application
that they put up on the iTunes store does that they think
infringes. And so that information would be extremely helpful,
and to require that, to require the patent owner to do their
homework, to look at what this recipient has done, would be
extremely helpful for the people that my students and I help.
I think it would also help those who are recipients of good
faith demand letters as well, because let us say you do
actually infringe the patent. Well, you should then figure out,
are you going to design around it? Are you going to pay the
license? Are you going to fight the patent because you believe
it is invalid, even though you might actually fall into the
claims? Those are legitimate decisions, and, again, more
information early on helps resolve this at the lower cost.
The other thing is that our public patent system is a
public notice system. And I just want to reinforce that, as my
final point, to say that it is as much about what the patent
says when it is published at the Federal Register, but also
when a patent owner is asserting it, they are asserting a
public grant to them of a property right. And I think that the
meets and bounds of that assertion, and when you trespass on
it, should be as clear as anything else. Thank you.
[The prepared statement of Mr. Schultz follows:]
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Mr. Terry. Thank you.
Mr. Chandler, you are recognized for 5 minutes.
STATEMENT OF MARK CHANDLER
Mr. Chandler. Thank you, Chairman Terry, Ranking Member
Schakowsky, members of the subcommittee. My name is Mark
Chandler. I am General Counsel of Cisco Systems. I am here
today to describe our experience with a new kind of scam. I am
talking about a rip-off that is based on a formula that is as
old as the hills, but dressed up as patent infringement and
innovation protection. The scam artists, as you have heard,
send out thousands of letters not to me, but to my small
business customers, and they file lawsuits in the hope of a
payday not based on the merits of the case, but on the fears of
victims who just want a problem to go away. These victims, mom
and pop stores, community banks, hospitals, car dealers,
restaurants, aren't manufacturers of products. I do that. They
are simply users, like you and me in our private lives.
As Cisco's chief legal officer, I want to defend my
customers, but we need your help in bringing some light, some
sunshine, to these nefarious practices. Cisco was founded 30
years ago to build products so incompatible computer systems
could talk to each other. Today we are the world's largest
manufacturer of Internet equipment, from backbone switches, to
phone and video systems. Our annual revenue is about $50
billion, and we directly or indirectly provide jobs to hundreds
of thousands of Americans. Our products are used literally by
billions of people around the globe, and are in tens of
millions of American homes and businesses. We spend more than
$7 billion a year on research and development. We hold over
10,000 individual U.S. patents. We believe in a strong patent
system.
Now let me tell you a story which, unfortunately, is not
unique. The story is not about patents. It is about using
patents as the cover for a scam. Our story begins when a lawyer
named Noah Whitley bought patents related to Wi-Fi from a great
American chip maker, Broadcom, and created an entity that I
think the somewhat cynically named Innovatio. Broadcom, for its
part, didn't want the patents anymore, since they were near
expiration, had been broadly cross-licensed to other chip
companies, and were subject to binding contracts requiring
licensing on fair terms.
But Whitley wasn't deterred by that. He and his lawyers
sent 14,000 letters to small businesses, cafes, bakeries, inns
and hotels, a children's health clinic, basically anyone that
might use Wi-Fi in their place of business. Did he tell them
what specific products they had might infringe, might have? Not
even a list of types of products? No. Instead, his lawyers just
wrote, ``I represent an individual who has suffered injuries as
a result of your company's business,'' and 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, and therefore no more could
legally be collected on those patents? No. Instead, he told
them that almost a billion dollars had been collected in
royalties on those patents, that thousands of companies had
paid, without letting on that almost all those royalties were
exclusively collected by Broadcom in cross-licenses that had
little or nothing to do with these 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
per location.'' This for patents that a court later determined
were worth pennies per chip, and equipment that these
businesses had spent, at most, a few hundred dollars to buy.
And did they tell them that manufacturers, like my company,
were eager to defend them? No. Instead, they wrote that
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 who had the temerity to resist, they
enumerated thousands of pages of documents that they said
needed to be reviewed, meaning a mountain of legal fees. Now,
sadly, this isn't an isolated incident, as General Sorrell, Mr.
Brouillard, and others in the panel can tell you, but a
dangerous trend.
Let me close by suggesting four simple steps that would
make it much harder to carry out these schemes. First,
requiring anyone sending more than 10, or some other number of
patent demand letters to someone who is not a manufacturer or
re-seller of the product to file the letters in an online
registry, so they are easy to find. Second, require them to
include a list of model numbers which they believe infringe,
the fact that the manufacturers may be required to defend, and
contact information for the manufacturers. Third, require any
such letter to 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 industry standards.
While the FTC can already investigate and sue the most
egregious patent scam artists, these simple steps will provide
a basic level of transparency to protect innocent end-users.
Requiring full disclosure about what is being offered for sale
doesn't violate anyone's free speech. I stepped into that case,
and I spent $13 million of my company's money to put a stop to
this. The paycheck I get every other week says Cisco on the top
of it, but every cent of it comes from my customers. That is
why I am here today. That is why I am 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, Mr. Chairman, 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:]
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Mr. Terry. Thank you.
Dr. Dixon, you are now recognized for your 5 minutes.
STATEMENT OF MICHAEL DIXON
Mr. Dixon. Thank you, Chairman Terry, Ranking Member
Schakowsky, and members of the subcommittee. I appreciate the
opportunity to come here today. My name is Michael Dixon. I am
president and CEO of UNeMed Corporation. We are the technology
transfer and commercialization entity for the University of
Nebraska Medical Center, so my testimony today will focus on
preventing illegitimate and deceptive patent demand letters
without modifying the U.S. patent system, or restricting
university technology transfer offices.
Universities are uniquely positioned here because we work
with innovators at the university level, as well as downstream
partners that are trying to commercialize our discoveries. I am
going to have three main points today. One, universities have
an enormous economic impact. Two, strong and forceful patents
must be preserved. And three, ambiguous, vague patent demand
letters are the lifeblood of patent trolls, and using a tool
like the FTC makes much more sense than modifying patent law
for a second time in two years.
I would like to start by offering a bit of background on
the scope of the University of Nebraska research and technology
transfer. We are a proud member of the Big Ten, and have a very
active research enterprise. Over the last 3 years we have
invested $1.1 billion in research. Three quarters of that
funding comes from Federal sources, such as NIH, NSF, and DOD.
In that time, 625 new inventions were created, and that led to
more than 150 licenses to companies. So that is 150 companies
that are going to invest more money to bring these discoveries
to life, and make the world a better place.
Furthermore, 20 of those companies were created in
Nebraska, creating economic development and jobs for Nebraskans
in high growth, valuable companies. This licensing generated
more than $37 million in revenue for the University of
Nebraska, and that mean more money for research, and more
discoveries. Now, we are just one of many universities that
undertake this. Last year, as a total, U.S. universities filed
over 22,000 patents. They executed more than 5,000 licensing
agreements, and generated $2.6 billion in revenue. According to
the Association for University Technology Managers, they added
$385 billion to the U.S. GDP. This is a very big economic
force.
The economic impact is primarily based on patents.
Companies are only interested in investing the millions or
billions of dollars to bring these technologies to market if
there is strong patent protection available. Quick story from
our med center, as I mention in the testimony, the LeVeen
needle electrode was invented at UNMC, and our industrial
partner, Boston Scientific, brought it to the market. However,
as the product neared FDA clearance, they found that it was
necessary to enforce the licensed product against competitors.
The parties both followed the appropriate protocol, worked out
their differences through a patent infringement suit.
At the end, there was a cross-license, some payments, and
the products were successfully brought to the marketplace. The
system worked appropriately. The take-home message here is that
any action must preserve patent rights, and to continue to
provide incentives for both large and small businesses that
invest in technology that makes our lives better.
There is a common theme with patent demand letters, and
that is ambiguity. We have heard it already, bad actors are
trying to scare, deceive, inappropriately extort money under
the guise of patent enforcement, and they often use a shotgun
approach, peppering the industry with hundreds of letters,
often lacking in detail. As a technology transfer office, not
only do we work with startup companies who have received these
letters, but we have also been on the other side, and we have
had to enforce our patent rights. When we make that important
decision to send a demand letter, we find it is critical to
provide detailed information for the recipient. In addition to
a reasonable standard, it allows the recipient to make informed
decisions.
In my written testimony, I offered seven items that we have
in a demand letter. Items three through seven of this are often
missing, as we have heard before, in demand letters. And I will
say that, as a university, we are very conservative. We don't
take litigation lightly. When we send a demand letter, we are
going to go do our homework. And so, for us, it is very
important that the recipient know what claims they are
infringing, and that we identify specifically what product it
is that is infringing those claims.
We want to make sure that the recipient knows who is suing
them. Again, legitimate organizations don't hide behind shadow
entities. If someone is infringing our patent, we want them to
know who we are, and what our patent claims. Our goal is to
settle the disagreement and provide as much information as is
critical for that to occur. Some trolls use marketing entities
that have no subject matter expertise, and cannot answer simple
questions relayed in the demand letter. This, coupled with a
shell entity, leads to a series of deadends and frustration for
small businesses with limited resources as expenses mount with
no answers.
Another quick story from one of our partners. They received
a demand letter from a patent troll last month. While the
letter identified the patent being infringed, it did not give
the owner of the patent, the role of the organization
contacting the company, a knowledgeable point of contact, or
adequate time to respond. In fact, the point of contact turned
out to be a marketing firm that was just established to send
these letters through a shell company. The take-home message
here is reduce the ambiguity associated with patent demand
letters, and you will reduce the power of the patent trolls.
Thank you very much for your time. I look forward to any
questions.
[The prepared statement of Mr. Dixon follows:]
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Mr. Terry. Thank you very much. And, I am sorry, Ranking
Member Schakowsky has a meeting, so we are going to let her go
out of order and ask the first set of questions. So, Ms.
Schakowsky, you are now recognized for your 5 minutes.
Ms. Schakowsky. I appreciate that, Mr. Chairman. Is there
anyone on the panel who thinks that it would be inappropriate
for Federal legislation, not getting into specifics, is there
anybody who thinks that Federal legislation is unnecessary? OK.
Attorney General Sorrell, you made a point of mentioning
the issue of pre-emption in your testimony. I wondered if you
could talk about that, though, on protecting whatever states
do.
Mr. Sorrell. We are currently in litigation under our state
Consumer Protection Act for unfair and deceptive acts and
practices in commerce against this MPHJ Technology Investment
LLC. And as soon as we filed that action under our so-called
UDAP statute, MPHJ removed the case to Federal Court, and
promptly said two things. One, that since this was in the
patent arena that the lawsuit is not only frivolous, and filed
for political purposes, but that we are totally pre-empted
because patents are exclusively within the province of the
Federal government, and, secondarily, that we lack personal
jurisdiction over them for simply asserting patent infringement
by sending these letters.
And that is why we are asking the Congress, if the Congress
takes action here, to state clearly that AGs have legitimate--
they are not pre-empted when there are unfair and deceptive
acts and practices in the guise of an assertion of patent
infringement, and that states are able to, without being pre-
empted, enact statutes that prohibit bad faith assertions of
patent infringement. So we are fighting that in Federal Court,
U.S. District Court, in Vermont right now. And, given the fact
that Nebraska, Minnesota, New York have already----
Ms. Schakowsky. You said Wisconsin?
Mr. Sorrell. Wisconsin hasn't yet, but Wisconsin has just
enacted a statute on bad faith assertions of patent
infringement, but the AGs of those other states have taken
action, and in virtually each case been run up against this
argument, you don't have any business here, you are pre-empted,
because this is patent----
Ms. Schakowsky. Forty-two AGs you said, right?
Mr. Sorrell. Forty-two AGs signed a letter to Senate
leadership about matters that are, actually just this week,
moving forward in the Senate.
Ms. Schakowsky. OK. Let me just go through a list of things
we have heard from a number of you, things that should be in
these letters, in the demand letters. If anyone thinks that
they should not be in a demand letter, let me know. Raise your
hand. Identification of the patent being infringed,
identification of the owner of the patent, contact information
for a person who can discuss resolution, identification of each
claim of the patent being infringed, identification of the
infringing device, method, or service. OK, which one was that?
Identification of each claim?
Mr. Skarvan. Yes, identification----
Ms. Schakowsky. OK.
Mr. Skarvan [continuing]. Of each claim. I think it was
referred to earlier that, certainly, on behalf of the 21C, a
number of the members have extremely large equipment not
readily accessible. Information is not readily accessible
regarding that piece of equipment. We usually rely on trade
shows, and perhaps advertising, regarding certain features, or
possible benefits that seem to look like something we have a
patent on. So when I am asked to provide analysis, or identify
a claim against a product, I simply can't comply with that
level of detail. I am not in possession of that information.
Ms. Schakowsky. OK. It is on the record. Thank you.
Identification of the infringing device, method, or service, a
description of how the device, method, or service infringes,
identification of entities, other than the patent owner, who
may benefit from enforcement, identification of all entities
that had been granted--go ahead.
Mr. Skarvan. I think you just have to be clear, when you
talk about benefit from enforcement, that, I think, this
additional detail is forthcoming, because there have been a
number of proposals talking about how to identify that.
Ultimately you are looking for somebody that, you know, in a
lawsuit, their damages, if there is a fee paid, they would take
and participate in that reward.
Ms. Schakowsky. Identification of the parent company of the
patent.
Mr. Skarvan. I will say, the devil is in the details. On
the face, that looks simple. I have heard other companies
state, for example, Intellectual Property Owners' Organization,
that that in itself can be difficult to ascertain and provide
correctly.
Ms. Schakowsky. OK. Identification of all entities that
have been granted a license to the patent.
Mr. Skarvan. Again, I think you start to get into a little
bit of a burdensome situation with a company with tens of
thousands of patents to understand exactly the entire licensing
spectrum regarding that patent.
Ms. Schakowsky. OK.
Mr. Dixon. Also, on that one, I will say, from the
university standpoint----
Ms. Schakowsky. OK.
Mr. Dixon [continuing]. If you are looking at non-exclusive
licensing, sometimes those lists get very long, and sometimes a
company's trade practices, they request some confidentially
that they, in license, that technology for competitive
advantages. So that may become a little difficult.
Ms. Schakowsky. OK. This is helpful. Notice to the
recipient that they may have the right to have the manufacturer
defend the case.
Mr. Skarvan. I am sorry, could you repeat that?
Ms. Schakowsky. Notice to the recipient that they may have
the right to have the manufacturer defend the case. And, last,
some factual basis for the licensing fee, or settlement amount
demanded, if any.
Mr. Skarvan. Well, again, I come back to, I think, the very
basic elements. These all require additional, I think,
discussion and explanation, because these concepts can be very
complex. I think when you come to the very basic elements that
should be the content of a patent communication representing a
demand on something, the identity a person or entity with a
right to enforce the patent or patents forming the base of the
demand, and identification with at least one product, service,
or technology. Those, I think, are the key elements. When you
add to those elements, I think you are getting into some very
definitional and perhaps burdensome, complex disclosures that,
really, at the point in time, are benefitting the assertion.
Ms. Schakowsky. OK. My time is expired. I appreciate that.
So, we can inquire among all of you in writing responses to
these suggestions, or just proposals. Yes. Thank you. I hear
you on the burdensome issue.
Mr. Terry. All right. Well, first of all, I think the
nature of Ms. Schakowsky's questions were pretty similar to
what I was going to ask, but it shows that if we are going to
do, and I would say it is likely that we would draft something
sometime in the near future. What we are trying to figure out
is what, if we draft a bill, needs to be in there, and it
appears to us that we need to itemize, or be prescriptive, in
what has to be in a demand letter. So that is why Ms.
Schakowsky did a list of things that have been discussed that
should be in there.
Let me ask you just more generally, starting with you, Mr.
Sorrell, or AG Sorrell, what are the characteristics that
should be in a valid patent demand letter?
Mr. Sorrell. It shouldn't be any question of who is
asserting the infringement. There should be evidence of
investigation, or in depth analysis of this particular
recipient's use of the technology that is allegedly violative
of the patent. It should be clear if there are others with an
interest in this assertion of patent infringement, and who they
are. There should be legitimate addresses, contact information,
for those asserting the infringement. If this patent has been
the subject of a final decision, administrative decision, or a
judicial case against the patent that is being asserted, that
information should be reflected, at least for starters, and the
demand should give a reasonable amount of time for the person
to respond. And there shouldn't be this undue burden thrown to
the recipient of a letter to prove your innocence, if you will.
Mr. Terry. Right. As quickly as possible, Mr. Brouillard--
--
Mr. Brouillard. Yes, sir.
Mr. Terry [continuing]. What points should be in a demand
letter?
Mr. Brouillard. I would agree. I think it is obvious you
can't receive a letter that simply says, A, we did an
investigation, and found that you used our technology, and here
is a list of numbers. It needs to be clearly identified as to
what is being asserted, what investigation was conducted, how
do you know that we are violating your patents? And, obviously,
for someone like myself, who is totally ignorant of this issue
until this all came up about a year and a half ago, there has
to be something more than simply a list of numbers. To me, I
don't even know if those numbers were legitimate patent
numbers.
Mr. Terry. OK. More----
Mr. Brouillard. More specificity in the claims that are
being made.
Mr. Terry. Mr. Skarvan, I am going to ask you the same
question, but ask a little bit more clarity, because it does
seem like you can identify what is being infringed. If you saw
something at a trade show or an advertisement, you at least
have a pretty good hunch that there may be an infringement. So
it----
Mr. Skarvan. I can suspect, because I obviously can't see
inside, and I am stuck with advertising. I do want to bring up
a point that we discussed a few things, and I want to
differentiate a bit, if you don't mind, the difference between
business-to-business communications, and the egregious actions
I have heard here were end-users that are being targeted. And I
will just say, in business-to-business communications, and
patent demand letters, I think, generally under the law, the
way it plays out, less is more, and let me explain that.
The number one concern prior to all this legislation that I
had when I sent out a patent demand letter, or any member of
the 21C sends out a patent demand letter, is does that contain
enough information that the recipient feels immediately
threatened, and they now have potential jurisdiction, they call
it declaratory judgment jurisdiction, to say, look, this entity
has threatened me. I cannot continue on with my investment
without some certainty here on this issue. They brought the
threat, I want it determined now. And all of a sudden you are
in a patent lawsuit under what they call a DJ action.
And so when we send out letters, they tend to be a first in
a series of letters. And when people point to a specific patent
demand letter, all I can think of is, I have a series of
letters to go out, none of them are the same. And they
generally have these three things, but they don't have to,
because I have different target audiences I am sending this
letter to. So I just want to make sure that this kind of
correspondence, which I think less is more, keeping it out of
the courts, doesn't include a lot of these details.
And so, in answer to your question, I don't always have
access to the information. I don't have that detail, nor may I
want to even put that level of detail or threat in my letter if
it ends up inviting a DJ action, and brings a patent suit in
court.
Mr. Terry. All right. The other three witnesses probably
will have to submit that answer in writing, and I apologize
that my time has run out.
So, at this point, Mr. Welch, you are recognized for 2 \1/
2\ minutes. No, Mr. McNerney, you are recognized for 5 minutes.
Mr. McNerney. Thank you for the full 5 minutes, Mr.
Chairman. I think it was really good testimony. I thank you all
for coming this morning. One of the things that I think was a
matter of disagreement among the witnesses is how to enforce
this. I mean, there is a pretty good agreement that the letters
should have a degree of specificity, but, as Congress, can we
write a law that is flexible enough that it will be effective,
that the patent trolls won't be able to get around, and so on,
or should invest the FTC with the authority to do that in a way
that would be effective?
Mr. Dixon, I think you had mentioned that you thought the
FTC. How would we empower them, or do you believe they already
have enough authority in the existing statute?
Mr. Dixon. I believe the FTC does have some authority here,
and it would be wise of Congress to remind them that they do
have some authority on some unfair trade practices. I think
giving a little more teeth to the FTC, and allowing them to
look at these broad, vague patent demand letters, while still,
I agree, allowing business to business communications to still
occur, and for business to transact that way, and not having
that fall under this FTC action, is very important. But I think
giving them a little more authority would allow business to
still go on, and for these legitimate actions to still take
place, while not affecting general patent law itself, which is
the lifeblood of many of our businesses.
Mr. McNerney. OK. Mr. Chandler, would you like to comment
on that?
Mr. Chandler. Yes. I would make one distinction. Mr.
Skarvan referred to business-to-business, and I think what we
are referring to here is letters addressed to end-users. The
end-users may, in fact, be small businesses, and I am not sure
that some of the issues that Mr. Skarvan had with some of
Ranking Member Schakowsky's enumerated proposals would apply in
the case of an end-user communication, as opposed to when you
are dealing with a competitor who is also a manufacturer, and
where you have this dance that goes on in dealing with
potential infringement allegations.
In looking at the end-user situation, I think the space
where Federal legislation would be very helpful would be to
establish clearly that it is an unfair business practice, in
those types of communications to end-users, to not include
certain types of information.
The FTC today can go after egregious misbehavers who are
misleading and deceptive, but once you set a very clear set of
standards, and also require transparency on those letters,
manufacturers like me can step in. It almost becomes self-
enforcing once you put some sunshine on these activities. And
that is why there is a great opportunity to get something done
here without creating a regulatory structure around it. What is
really needed is daylight.
Mr. McNerney. So you feel that Cisco can do a good job in
defending your customers, if you have the right tools to do
that?
Mr. Chandler. If we know this is going on, we can step in
and do it. And if it is visible what is going on, these people
will be forced to stop because the group of people who are
being attacked can also band together and take action, as Mr.
Brouillard has pointed out. But sometimes it takes some
daylight before you know that this is actually happening. So
transparency is really almost a solution in itself here.
Mr. McNerney. Thank you. Mr. Skarvan, one of the things you
recommended was that sanctions be imposed on bad actors.
Wouldn't it be just easy for them, a bad actor, to put up
another banner and continue on? Even though the first label is
sanctioned, they can go to another label and carry on their
activities?
Mr. Skarvan. Well, I think what you stated is correct. It
is very, very difficult to capture some of these actors, and I
think it is very difficult in capturing them with a single
demand letter that does or does not meet, if you want to say,
the requirements set forth in legislation. What I think works
more effectively is to capture their behavior. And the behavior
we are seeing, I think it has been said today, is that these
hundreds and thousands of letters go to end-users.
And that is where you have got to really focus in on, and
begin asking questions, because now you have got the behavior,
and the business model I think people here are objecting to,
these hundreds and thousands, I think it was 16,000----
Mr. McNerney. Yes.
Mr. Skarvan [continuing]. Letters nationwide. And that is
where I think the FTC, uniform laws, and certainly uniform
enforcement by the Attorney General, they act as a clearing
house to identify this rampant behavior. And once you can see
that behavior, now I think it is pretty easy to begin the
inquiry into the entities engaging in that behavior.
Mr. McNerney. Thank you. Thank you, Mr. Chairman.
Mr. Terry. Thank you. Now recognize Vice Chairman of the
Committee, Mr. Leonard Lance. You are recognized for 5 minutes.
Mr. Lance. Thank you, Mr. Chairman. As I understand it,
there are five or so existing state laws on this issue, and
several other bills are awaiting signature by a governor, and
there are as many as 19 bills pending in state legislatures.
Given this situation, I would be interested in the panel's view
as to whether Federal legislation is needed. Attorney General?
Mr. Sorrell. Yes, Federal legislation is needed, and
hopefully included in that legislation would be an express
statement that the states are allowed to enact their own
statutes against bad faith assertions of patent infringement,
and/or to enforce their standard Consumer Protection Acts.
Mr. Lance. Thank you. Others on the panel?
Mr. Brouillard. Yes, I agree. I think that U.S. patent law
is Federal legislation, and I think that anything that can be
done to strengthen that legislation should be. In addition, I
think to get back at the Congressman from California's comment,
it is going to take a concerted effort on both the Federal and
state level, in some cases, to do that. And the last point I
would make is that if you had Federal legislation, then it is
more uniform across all states, rather than a hodgepodge for
companies that operate in multi-states to try to deal with.
Mr. Lance. Thank you. Others on the panel?
Mr. Skarvan. And I agree, and I am glad you brought that
up, because not only is Federal legislation needed, but we need
uniform legislation that provides the same, if you want to say,
rules of the road across the states. States certainly can
enforce through the AG, but as far as having different state
statutes to provide different rules of the road, different, if
you want to say, private causes of action, some have safe
harbor, some have no safe harbor. I mean, looking for a little
bit more uniformity.
Mr. Lance. Thank you.
Mr. Schultz. I would like to just add two things. One is
that the patent system is an incentive system, and the Congress
is in a great position to sort of balance those incentives. So
if you want patent owners to do more to make sure that certain
recipients get the information they need, you are giving them a
patent, and you can require them to do things. I think that is
a nice balance there that doesn't preclude states, but it kind
of gives you that power.
The other thing is this bottom-feeder model, this model
where they just send out thousands of letters, is premised on
the idea that they don't have to be specific to the individual
recipient, and I think that really needs to be in there
someone, that core specificity, else they will just re-draft
the letter in some other way.
Mr. Lance. Thank you. Others on the panel?
Mr. Skarvan, you referenced safe harbor language in your
comments, and in your testimony you suggest that safe harbor
language be included. Do you have a specific idea what type of
model you would like regarding safe harbor? Is there a
provision in one of the state statutes that we might examine,
and, if not, what would be an appropriate safe harbor
provision, from your perspective?
Mr. Skarvan. I think the most recent state that enacted a
safe harbor, and worked through some of the language
difference, was Illinois----
Mr. Lance. Illinois, yes.
Mr. Skarvan [continuing]. Statute, and when you look at the
safe harbor, I think it is helpful to look at it in combination
with the cause of action being limited to those letters sent to
the end-users, and----
Mr. Lance. Yes.
Mr. Skarvan [continuing]. Have a good definition for end-
users, including businesses, not for resale, in that statute.
And they also have, not the subjective fact, but very clear
false behaviors, along with very clear requirements of the
patent owner, the patent number, and the general product or
service it covers.
Mr. Lance. So, from your perspective, we might examine the
Illinois provision as a model for a Federal provision?
Mr. Skarvan. Yes. We have suggested that to other states.
Mr. Lance. Thank you. Others on the panel on whether there
should be a safe harbor provision, and if so, what it should
look like? No? Thank you, Mr. Chairman. I yield back the 37
seconds.
Mr. Terry. Thank you. At this time I recognize gentleman
from Vermont to ask questions to another gentleman from
Vermont----
Mr. Welch. Well, and others as well.
Mr. Terry [continuing]. Mr. Welch.
Mr. Welch. Thank you. I actually wanted to start with
Professor Schultz. What options does a small business or
startup company currently have when they receive one of these
vague threatening demand letters?
Mr. Schultz. So I think that, if they are taking a rational
approach, they want to think about this as, you know, first, as
we doing what they say? Are we infringing some patent? And then
they have a couple of options. One is they can challenge that
assertion, right, in that they can get an attorney, if they
could afford one, or get pro bono counsel.
The second is they can decide to change what they are
doing, or design around that, and that is where the specificity
really helps them. If they realize that it is only one small
piece of whatever they are designing or doing, they can maybe
change that, and then maybe settle a little bit, but move
forward.
And then the third is they can simply just pay to get out
of the way, which what so many of these are doing. So I think
we want to give them valid choices, and the only way to do that
is to have the specific information.
Mr. Welch. And then what is a remedy if there is an absence
of specificity?
Mr. Schultz. You mean in terms of what?
Mr. Welch. For the receiver of that letter.
Mr. Schultz. I mean, they are really stuck in a kind of
quandary, because they don't know what to do. They can't
explore those other choices. They don't know how to change what
they are doing. They don't know whether to challenge it,
because the allegations aren't there, so the only rational
choice left is to pay off the sender.
Mr. Welch. OK. I want to go back to Mr. Sorrell, and have
you think about this question too, because I might want to get
your point of view. But you have been really advocating that
this is a consumer protection issue, and that there has to be
some role for the states, and it would be a mistake for the
Federal government to pre-empt. Just elaborate on that a little
bit.
Mr. Sorrell. These efforts are so widespread that there is
plenty of work for both Federal regulators and state
regulators. If you look at it from the drug trafficking
analogy, the Federal authorities typically take, you know, the
cartels and the large dealers, and they leave the street
dealers to the states. If we are looking at assertions of
pattern infringement, I believe the FTC does have authority,
but it can't police this spectrum entirely, and there is a role
for the states.
Mr. Welch. Professor Schultz, do you think that makes
sense, in terms of a practical way to protect innocent victims,
like the Lincoln Street example? You know, a small nonprofit,
and those options you laid out, I think for them, mainly, they
are just terrified, and they can't make that phone call to the
lawyer because they know the meter is running once that
happens. And they hope it goes away, and it doesn't.
So it seems to me that what General Sorrell is suggesting,
that there be a consumer protection element, a local ability of
local consumer protection division, and an Attorney General's
office closer to the scene to be able to protect, I should say,
the rights of some of these small businesses.
Mr. Schultz. Absolutely. I think that is an essential
component. But I do think that, since the patent law is
Federal, it is also worth looking at the incentive systems, and
allowing the option that you could provide consequences in the
Federal system too. Because----
Mr. Welch. Right.
Mr. Schultz [continuing]. Some of these things do go to
court, and when they go to court, there are consequences to
whether the letter was sent, and what it said.
Mr. Welch. So if we provided consequences at the Federal
level, I mean, I like what you are saying about the incentives,
that makes a lot of sense to me, would we want the benefit of
local enforcement of those standards that we have established
here at the Federal level?
Mr. Schultz. Absolutely. I think both can coexist, and, in
fact, contribute to the same goal.
Mr. Welch. OK. By the way, do patent holders, I will stay
with you, Professor Schultz, other than the trolls, routinely
target end-users, and could there be any legitimate reasons to
send demand letters to end-users?
Mr. Schultz. So I will say generally no, except that this
term end-user, I think we have to be careful, because these are
very clever lawyers, right, who run these companies, these
trolls. And so if you define something too specifically, in
terms of one protected group, you know, they will try and find
a way around it.
So I just want to be careful, because, again, a lot of the
folks who call my clinic, and are looking for pro bono
assistance, are people who develop apps. And they are, like,
two or three small, you know, it is a small business, two,
three people, just trying to create something to put on the
iTunes or Google store, or whatever. They are not end-users in
a sense, except they are the end-users of the Internet.
Mr. Welch. Yes.
Mr. Schultz. Right. So I just want make sure that if we are
going to cover people who are using standard technology, it is
not just only the physical stores, but it is also anyone who
kind of is using a product or service from someone else.
Mr. Welch. So I will ask the whole panel, is there--I have
only got 18 seconds.
Mr. Terry. Yes.
Mr. Welch. Well, I guess I won't. Well, the question I was
going to ask, but then I will yield before there is an answer,
is what evidence do we have about the effect of patent trolls
on suppressing innovation?
Mr. Terry. All right. That would be a great answer for a
written question----
Mr. Welch. All right.
Mr. Terry [continuing]. That we will submit. At this time--
--
Mr. Welch. I yield back.
Mr. Terry. Thank you. Gentleman yields back. Recognize the
gentleman from Texas, Mr. Olson, for 5 minutes.
Mr. Olson. I thank the Chair. And, first of all, I don't
like the term patent trolls. These aren't patent trolls. They
are patent bullies, like the bully on the playground in 3rd
grade, the bully every Monday who comes to school, threatens to
beat you up if you don't give him his lunch. I mean, these are
patent bullies.
And, thinking out of the box on how we stop this behavior,
in my home State of Texas, again, not directly applicable, but
they did something in 2011 called basically loser pay. My state
Senator, Joan Huffamn, got that thing passed. It has been going
on for about 3 years now, and what they have done, not so much,
again, in patent protection, but just sort of legal protections
for some of these frivolous lawsuits, they basically empowered
the judge, the trial judge, to say, this is garbage, throw it
out. He gets the initial filing, say, frivolous, done.
If that doesn't work, OK, how about I send it up to--they
are going for the home run. We know it is really bad, but we
want to take that shot, maybe knock that thing out of the park.
And if that is the case, I can send it straight from my court
to the Appellate Court, get this taken care of quickly, so,
again, the aggrieved party is not paying legal bills on, and
on, and on. Also, for the small guys, it was less than
$100,000, you know, expedited civil action procedure.
And so, to ask all the panelists, is that something we
should look at? I mean, I know there are lots of pros and cons,
more Federal involvement, pre-emption, that type of stuff, but,
again, how can we take this ham away from these patent bullies,
not patent trolls?
Mr. Brouillard. If you don't mind, I will take the first
shot at it. I certainly believe that part of the legislation
should include some opportunity for the party that has been
aggrieved in this situation to have their costs reimbursed. I
suspect if I got a letter from Caterpillar, I would pay
attention. But when I get a letter from an entity I don't know
that just lists a whole bunch of numbers clearly, for someone
like us, or any small business, to defend, we have been told it
is a million dollar cost to defend a patent lawsuit. We are
certainly not in a position to do that, and I really do believe
that if a patent troll, or if a patent bully, ran the risk of
having to reimburse someone, they would think twice about doing
it in the first place.
Mr. Olson. General Sorrel, any comments, sir? And my
parents are voters in Vermont.
Mr. Sorrell. In the Vermont statute, it allows for awarding
attorney's fees. But, again, to recover, you have to establish
that there was a bad faith assertion of patent infringement.
And I think some of the concern about AGs getting involved in
this arena is, are we going to sort of muddy the waters?
Speaking for myself, and pretty comfortably for the rest of
the AGs, we do not want to try to get in the middle of a fair
fight between two companies, where it is a reasonable fight as
to whether this patent exists, and what it controls. We are
really trying to deal with the bottom-feeders, and we think
that the current Federal standard of the awarding of fees in
patent cases ought to be eased so that they are awarded more
frequently. I am not prepared to say that theloser pays in
every case. That might be an overreach there.
Mr. Olson. Mr. Skarvan?
Mr. Skarvan. Well, I would just say that some of these
concepts, I think they can work, conceptually. Generally they
fall down if you try to apply them just to one side of the
coin, so they have to be available, similar to bonding, to both
parties, because they are pre-determining that somebody
actually is the bully ahead of time. It all comes down to what
actually is going on. Certainly wouldn't want to be one-sided
and attach that type of penalty to a legitimate patent
communication.
Mr. Olson. Yes, suddenly the bullied becomes the bully,
maybe, in that situation.
Professor Schultz, any comment, sir?
Mr. Schultz. Yes. So I do think that many of the efforts
that are being supported in Congress right now, I think, are
comprehensively looking at the problem, and I think that
linking them together, and making sure they all fit well
together, is good. So I think that, for instance, the type of
demand letter, or the kind of information that is or is not
shared, and how vague, and how deceptive it is may well be
appropriate factors to pay into a fee award, right, or to say
an adjustment of whether damages are available for willful
infringement or not. These kind of things, I think, are linked,
and are important. But I do think that the whole problem needs
to be dealt with on a couple different levels.
Mr. Olson. OK. Mr. Chandler, I have got time, sir. You have
got one more swing to take it out of the park?
Mr. Chandler. You know, the Innovation Act that passed the
House with overwhelming bipartisan support includes a provision
for some cost-bearing when a case is completely unreasonable.
In this particular type of problem that we are talking about
today, though, it is unclear how that plays out, because these
things don't generally go to litigation, because they get
settled, because you have someone who is using Wi-Fi in their
business, and is told you can spend hundreds of thousands, or
millions of dollars to defend this, or you can just pay us
$2,000. So I think----
Mr. Olson. Yes, the bully.
Mr. Chandler [continuing]. The promise of that might be a
looser rate. I don't call them trolls because I don't like to
demonize my adversaries. I would just say they are like rats
running through a maze, and we need to take the food away at
the end, and then they will stop going through the maze. And
that is a systemic issue that we can address that won't result
in a lot of litigation and awards at the end.
Mr. Olson. Thank you. My time restrictions are very brief,
sir.
Mr. Terry. Thank you----
Mr. Olson. Mr. Chair----
Mr. Terry [continuing]. Mr. Olson. Now recognize the
gentleman from Illinois, Mr. Rush, for----
Mr. Rush. Well, thank you, Mr. Chairman, and it has been
quite interesting. I want to thank the witnesses for appearing
before this subcommittee. Earlier, when Congressman McNerney
asked about the FTC's authority, and Dr. Dixon mentioned that
the FTC already has authority, and could be encouraged to use
that authority. Perhaps, Mr. Chairman, we should encourage the
FTC to be more aggressive on the issue of patent trolls, be
they bullies, or rats, or however you want to define them.
However, I am interested in understanding what additional
authorities the FTC could use in this space. For example,
General Sorrell, the FTC does not have authority currently to
collect civil penalties under Section V for unfair and
deceptive practices. General Sorrell, shouldn't the FTC be able
to bring cases for more than just injunction relief, and also
hitting these bad actors, be they rats or trolls, directly in
the pocketbook? And also, are there other authorities that
would be helpful, such as ACA rulemaking, on declaring certain
actions to be, ``per se, deceptions''? For example, if a demand
letter does not include the patent number, or numbers, couldn't
they just be, based on that, declared, per se, deceptions? Or--
--
Mr. Sorrell. Thank you. In my view, the Federal Trade
Commission does have authority in this arena right now, and
that is in part evidenced by the fact that MPHJ Technology,
that when the Federal Trade Commission started investigating
MPHJ Technology, it turned right around and it sued the Federal
Trade Commission to halt the investigation. That being said, I
would suggest that there be a communication to the Federal
Trade Commission about the other issues that you raised,
whether they think that the Congress might underscore or
enhance the authority that they currently have.
My concern is that, if legislation just speaks to enhanced
authority for the Federal Trade Commission, and you don't speak
to the states' authority to enforce our statutes, it will be
argued that you were consciously trying to cut the states out
of the equation.
Mr. Rush. And are there any other witnesses who want to
comment on increasing the authority of the FTC? Mr. Chairman,
thank you, I yield back.
Mr. Terry. Thank you, Mr. Rush, and I appreciate your
input. Now recognize the gentleman from Ohio, Mr. Johnson.
Mr. Johnson. Thank you, Mr. Chairman, and I appreciate the
panel being with us today.
For all of you, and you can answer in whatever order you
would like, what role should the Federal Trade Commission have
regarding patent demand letters? Anybody want to comment?
Mr. Sorrell. I think I just answered that question, so I
pass it down the line.
Mr. Schultz. I will just add one thing, which is that I do
think this question of understanding the problem, I think we
have a pretty good handle on it, but I think, for instance, one
of the questions is, what are the subpoena powers of the FTC,
in terms of getting access to the letters that a particular
entity might have sent out that they are not aware of, things
like that. And I do think that, if we are going to support the
FTC investigating, or state AGs as well, that they do need to
understand the problem, and they do need to see the letters
that have gone out, and the practices of the entities. So I
think that information collection is an important aspect.
Mr. Johnson. OK. Mr. Chandler?
Mr. Skarvan. Can I speak to the----
Mr. Johnson. I am sorry, go ahead, Mr. Skarvan, yes.
Mr. Skarvan. Thank you. I speak to just the consistency and
uniformity, and ensuring that consistency and uniformity, and
providing that clearinghouse function to identify the bad
behaviors, and giving comfort to the company that sends a
handful of demand letters that they won't be brought into a
private cause of action at the state level by perhaps a
recipient who wants to play mischief.
Mr. Johnson. OK. Mr. Chandler?
Mr. Chandler. Thank you. I think the FTC has the authority
today to go after, for unfair business practices, the most
egregious cases. The opportunity that you have on legislating
on this is to set some very, very clear standards for what a
demand letter to end-user or a small app developer would have
to include so that you have an immediate step that the
commission can take to try to demand transparency.
So rather than creating a regulatory structure around the
ultimate enforcement action for the underlying acts, by making
very clear what a demand letter has to have, I think you stop
automatically a lot of this activity, because these entities
that are doing this can't stand to have the sunshine expose
what is going on. And just setting that standard for needs to
be in the letter I think will go a long way toward solving the
problem itself.
Mr. Johnson. OK. Mr. Dixon, in your testimony you
distinguished between letters with allegations of infringement
seeking compensation, versus letters marketing inventions,
seeking investment.
Mr. Dixon. Yes.
Mr. Johnson. How are these letters different from each
other, and what do you say that distinguishes them? Or what do
the letters say that distinguishes them?
Mr. Dixon. So I think this really gets back to the business
communications that we would have as a university. When we are
trying to market our technologies, we are trying to incentivize
investment. But oftentimes within these letters, we are
identifying intellectual property that we own, and we are
letting a company know that they may be interested. For
example, I have got a cancer vaccine. I know Eli Lilly works in
cancer. I am going to send them a letter saying, would you be
interested in developing this technology? I think the major
difference here is that patent demand letters will contain the
threats of litigation, and often require that license.
Now, as has been stated earlier, these trolls are very
bright, and so one of the things, I think, that will be
difficult is to craft the right legislation that will prevent
the troll-like activity, while not stopping these typical
business communications that are vital for us to continue on.
Because universities and companies need to send letters to one
another identifying potential IP that we might want to cross-
license, or develop together, we want to make sure that that
does not get caught in any sort of FTC regulation that slows
the pace of innovation and development.
Mr. Johnson. OK. All right. Mr. Skarvan, you stated you
want a safe harbor to preserve your rights to put companies on
notice. What is the difference between the manner in which you
communicate your patent rights, and the manner in which a
patent troll communicates his alleged patent rights?
Mr. Skarvan. Well, I think there is a whole spectrum of,
again, using the word patent trolls, but maybe better word in
sum of this, of using the patent demand system, or patent
demand letter. I think any patent holder who is engaging in
good faith communications is entitled to those safe harbor
rights. When you start talking about an abuser, and somebody
that is acting in bad faith, objectively bad faith, false
statements, then that person is not entitled to those safe
harbor rights, because they are not acting in good faith.
And so the difference really isn't so much the label of the
person exercising the patent right, it is whether or not they
have engaged in this abusive behavior. Then they are not
entitled, because they have been acting in bad faith to those,
if you want to say good faith rights that everybody has.
Mr. Johnson. OK. All right. Thank you, Mr. Chairman. My
time has expired.
Mr. Terry. Thank you. Now recognize the gentleman from
Illinois, Mr. Kinzinger, for 5 minutes.
Mr. Kinzinger. Well, thank you, Mr. Chairman, and thanks
for holding the hearing, and to all of you, thank you for
coming out. Especially nice to see the folks from CAT here. It
is a good home state company. I am grateful for the panel's
insight on these issues of the abusive patent demand letters.
In my office, we have heard from several consumer groups,
realtors, credit unions, and banks, and they share a common
message, which is patent demand letters are often deceptive,
confusing, and intimidating.
It is certainly concerning that some entities are purposely
misusing patent demand letters. These tactics hurt job
creation, hinder innovation, and place a significant financial
toll on consumers, businesses, nonprofits, and other actors
within the economy. As we consider these abusive tactics, as we
have had a lot of discussion today, it is important to keep in
mind that demand letters do serve a legitimate purpose in the
patent system, and any reform should ensure legal patent
holders' rights are protected. With these considerations in
mind, I have a few questions I would like to ask.
I will start with Mr. Skarvan. You probably know the
Illinois bill better than I do, but could you tell me any
shortcomings that the Illinois bill has, and then where the
Federal government would have a role in, in essence, pouring
cement over that in order to protect the rights of companies?
Mr. Skarvan. Shortcomings? I actually applaud Illinois for
coming up and crafting a compromised solution.
Mr. Kinzinger. Well, I guess let me rephrase shortcomings.
Instead of saying where would you believe that in Illinois the
Federal government then would need to step in after Illinois
has done what it has done?
Mr. Skarvan. Well, looking at the Illinois language, if I
am answering the question correctly, I would like to see any
Federal legislation, any rules put in place, to be consistent
with the Illinois language, because I think everybody agrees it
is those communications that are sent widespread, hundreds and
thousands to the end-users, that are clearly the abusive
practices that people seem to be keying in on. So that language
in the Illinois, I think, is pretty key, and I think people
have mentioned that. Definitional language is important to
understand that. And when questions have come up on the
Illinois legislationit is----
Mr. Kinzinger. Right.
Mr. Skarvan [continuing]. Usually around the definition of
consumer, and person, and not for resale type language that is
inherent in that bill.
Mr. Kinzinger. So, then, for the whole panel, with all your
stakeholders, Illinois has its language, let us say
Pennsylvania comes up with its language, Iowa comes up with its
own, what is the concern with how you practice your craft, in
terms of states that have all kinds of different languages not
consistent with, for instance, Illinois, or no Federal
provision? We could start on the very left, sir, if you want to
go, if you guys have any thoughts on the varying state
proposals.
Mr. Sorrell. The Vermont statute is for bad faith
assertions of patent infringement. I am not familiar with the
specifics of the Utah, Virginia, Oregon, and Wisconsin laws,
nor the others that are being considered. But to the extent
that the standard is bad faith, then I am not of the view that
companies that make good faith assertions of patent
infringement have a problem.
Mr. Kinzinger. OK.
Mr. Brouillard. Yes. Clearly, I think, from our point of
view, patent law is Federal law. And so, as I mentioned
earlier, I think it is important that there not be a hodgepodge
of legislation at state level that starts to countermand things
that would be good practices for companies that do operate on a
multi-state, or multi-national basis, such as we have heard
today from Caterpillar, and Cisco, and others.
Mr. Kinzinger. Yes. Mr. Skarvan, if you could talk to
specifically how it would affect your company if you have
varying state laws?
Mr. Skarvan. Well, I actually asked that question
specifically with the folks in my group, and with that wide
variety, we literally have to have a spreadsheet to hang over
your desk, and understand what states cover what, and what the
penalties are. And, at the same time, you would have to have an
understanding of exactly what states are in play, because, you
know, many recipients in our line of business are multifaceted
state participants. In the end, I think it would absolutely
kill our ability to send out any communication.
And I just wanted to reinforce, there isn't a magical
patent demand letter that suddenly appears at some point in
time in the conversation between business to business. It is a
series of communications where you are trying to invite
dialogue, and trying to address this issue, and get more
information, find out more, and move toward a solution, all
outside the court system.
Mr. Kinzinger. Thanks. Thank you. And any of the other
three gentlemen, I only have 40 seconds, if any of you three
have anything to add, please do.
Mr. Dixon. I had a really quick comment. I think one of the
dangers here is putting back on the states the requirement of
determining what is legitimate and who is lying, because within
this there is a pretty gray spectrum of entities that are maybe
stretching what their patent claims may actually be, and so
that is what the Federal Court system is designed for. And I
agree, the bad faith need to be taken care of, but there
becomes a gray zone, and we don't want the state Attorney
Generals having to do patent claim charts all of a sudden.
Mr. Kinzinger. Right.
Mr. Dixon. We want that done in Federal Court.
Mr. Kinzinger. OK. With that, Mr. Chairman, thank you, I
yield back.
Mr. Terry. Thank you, Mr. Kinzinger, and we have no other
witnesses, so I have to do a little business here before I can
adjourn this. And so we have statements for the record, and I
ask unanimous consent to insert into the record these papers
and letters from Span Coalition, Credit Union National
Association, Independent Community Bankers of America, National
Association of Federal Credit Unions, and National Retail
Federation. This has been vetted on both sides. So, hearing no
objection, so ordered into the record.
And I want to thank all of you for being here. It was a
very narrow, intellectual discussion, and I think it was a
really good discussion, and very helpful to us. And I really
appreciate all of your efforts and sacrifices to be here today
to help us now, as we will sit down and start figuring out how
to draft a bill. You are now adjourned. Thank you.
[Whereupon, at 11:44 a.m., the subcommittee was adjourned.]
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