[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]
PATENT REFORM:
PROTECTING AMERICAN INNOVATORS AND JOB
CREATORS FROM ABUSIVE PATENT LITIGATION
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
COURTS, INTELLECTUAL PROPERTY,
AND THE INTERNET
OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED FOURTEENTH CONGRESS
FIRST SESSION
__________
MARCH 25, 2015
__________
Serial No. 114-17
__________
Printed for the use of the Committee on the Judiciary
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Available via the World Wide Web: http://judiciary.house.gov
______________
U.S. GOVERNMENT PUBLISHING OFFICE
93-896 PDF WASHINGTON : 2015
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COMMITTEE ON THE JUDICIARY
BOB GOODLATTE, Virginia, Chairman
F. JAMES SENSENBRENNER, Jr., JOHN CONYERS, Jr., Michigan
Wisconsin JERROLD NADLER, New York
LAMAR S. SMITH, Texas ZOE LOFGREN, California
STEVE CHABOT, Ohio SHEILA JACKSON LEE, Texas
DARRELL E. ISSA, California STEVE COHEN, Tennessee
J. RANDY FORBES, Virginia HENRY C. ``HANK'' JOHNSON, Jr.,
STEVE KING, Iowa Georgia
TRENT FRANKS, Arizona PEDRO R. PIERLUISI, Puerto Rico
LOUIE GOHMERT, Texas JUDY CHU, California
JIM JORDAN, Ohio TED DEUTCH, Florida
TED POE, Texas LUIS V. GUTIERREZ, Illinois
JASON CHAFFETZ, Utah KAREN BASS, California
TOM MARINO, Pennsylvania CEDRIC RICHMOND, Louisiana
TREY GOWDY, South Carolina SUZAN DelBENE, Washington
RAUL LABRADOR, Idaho HAKEEM JEFFRIES, New York
BLAKE FARENTHOLD, Texas DAVID N. CICILLINE, Rhode Island
DOUG COLLINS, Georgia SCOTT PETERS, California
RON DeSANTIS, Florida
MIMI WALTERS, California
KEN BUCK, Colorado
JOHN RATCLIFFE, Texas
DAVE TROTT, Michigan
MIKE BISHOP, Michigan
Shelley Husband, Chief of Staff & General Counsel
Perry Apelbaum, Minority Staff Director & Chief Counsel
------
Subcommittee on Courts, Intellectual Property, and the Internet
DARRELL E. ISSA, California, Chairman
DOUG COLLINS, Georgia, Vice-Chairman
F. JAMES SENSENBRENNER, Jr., JERROLD NADLER, New York
Wisconsin JUDY CHU, California
LAMAR S. SMITH, Texas TED DEUTCH, Florida
STEVE CHABOT, Ohio KAREN BASS, California
J. RANDY FORBES, Virginia CEDRIC RICHMOND, Louisiana
TRENT FRANKS, Arizona SUZAN DelBENE, Washington
JIM JORDAN, Ohio HAKEEM JEFFRIES, New York
TED POE, Texas DAVID N. CICILLINE, Rhode Island
JASON CHAFFETZ, Utah SCOTT PETERS, California
TOM MARINO, Pennsylvania ZOE LOFGREN, California
BLAKE FARENTHOLD, Texas STEVE COHEN, Tennessee
RON DeSANTIS, Florida HENRY C. ``HANK'' JOHNSON, Jr.,
MIMI WALTERS, California Georgia
Joe Keeley, Chief Counsel
Heather Sawyer, Minority Counsel
(II)
C O N T E N T S
----------
MARCH 25, 2015
Page
OPENING STATEMENTS
The Honorable Darrell E. Issa, a Representative in Congress from
the State of California, and Chairman, Subcommittee on Courts,
Intellectual Property, and the Internet........................ 1
The Honorable Jerrold Nadler, a Representative in Congress from
the State of New York, and Ranking Member, Subcommittee on
Courts, Intellectual Property, and the Internet................ 2
The Honorable Bob Goodlatte, a Representative in Congress from
the State of Virginia, and Chairman, Committee on the Judiciary 4
The Honorable John Conyers, Jr., a Representative in Congress
from the State of Michigan, and Ranking Member, Committee on
the Judiciary.................................................. 7
WITNESSES
Mark Griffin, General Counsel, Overstock.com, Inc.
Oral Testimony................................................. 8
Prepared Statement............................................. 11
Kathryn G. Underwood, President and CEO, Ledyard National Bank,
Norwich, VT
Oral Testimony................................................. 17
Prepared Statement............................................. 19
Todd Moore, Founder and CEO, TMSoft LLC.
Oral Testimony................................................. 23
Prepared Statement............................................. 25
Bryan Pate, Co-Founder and CEO, ElliptiGO, Inc.
Oral Testimony................................................. 29
Prepared Statement............................................. 31
LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
Prepared Statement of the Honorable Bob Goodlatte, a
Representative in Congress from the State of Virginia, and
Chairman, Committee on the Judiciary........................... 5
APPENDIX
Material Submitted for the Hearing Record
Prepared Statement of the Honorable John Conyers, Jr., a
Representative in Congress from the State of Michigan, and
Ranking Member, Committee on the Judiciary..................... 64
Response to Questions for the Record from Kathryn G. Underwood,
President and CEO, Ledyard National Bank, Norwich, VT.......... 66
Prepared Statement of the American Hotel & Lodging Association
(AHLA)......................................................... 67
Letter from Steven K. Berry, President & CEO, Competitive
Carriers Association (CCA)..................................... 69
Letter from JUlie P. Samuels, Executive Director, Engine......... 71
Prepared Statement of the Financial Services Coalition........... 78
PATENT REFORM: PROTECTING AMERICAN INNOVATORS AND JOB CREATORS FROM
ABUSIVE PATENT LITIGATION
----------
WEDNESDAY, MARCH 25, 2015
House of Representatives
Subcommittee on Courts, Intellectual Property,
and the Internet
Committee on the Judiciary
Washington, DC.
The Subcommittee met, pursuant to call, at 10:04 a.m., in
room 2141, Rayburn Office Building, the Honorable Darrell E.
Issa (Chairman of the Subcommittee) presiding.
Present: Representatives Issa, Goodlatte, Smith, Jordan,
Poe, Marino, Farenthold, Collins, DeSantis, Nadler, Conyers,
Lofgren, Johnson, Chu, Deutch, DelBene, Jeffries, and Peters.
Staff present: (Majority) Vishal Amin, Senior Counsel; Eric
Bagwell, Clerk; and (Minority) Jason Everett, Counsel.
Mr. Issa. Good morning. The Subcommittee on Courts,
Intellectual Property, and the Internet will come to order.
Without objection, the Chair is authorized to declare recesses
of the Subcommittee at any time.
As a point of interest, at exactly 11:00, the Subcommittee
will recess for a Joint Session of Congress. I ask the audience
to be aware that this is a rule of the house and not negotiable
for us. Many Members will leave prior to that in order to get
seated prior to the start.
Today we welcome everyone to a hearing on ``Patent Reform:
Protecting American Innovators and Job Creators From Abusive
Patent Litigation.'' In 2011, the America Invents Act became
the most substantial reform in U.S. patent law since 1836. The
AIA reestablished the U.S. patent system on a global standard.
I was proud to be part of that effort, and I am proud to be
here today to continue our work to uphold the comprehensiveness
and competitiveness of the American patent system.
Our work, however, is not finished. I am convinced that
Congress must do its part to stop patent litigation abuse from
occurring. We stand ready to work with any and all stakeholders
that are interested in helping us improve the patent system.
Last Congress, the Innovation Act passed this Committee by a 33
to 5 margin, and went on to pass out of the House on a
bipartisan basis with 325 votes. Today I am confident that H.R.
9, the ``Innovation Act,'' will become the law and build on the
work of the AIA to protect the American patent system. But
before it does that, we want to take one more round of
opportunity to hear from stakeholders both publicly and
privately to see if, in fact, in every way possible we have
addressed the maximum benefit with minimum disruption of
existing systems that are working.
As anyone who has worked in patent litigation either as a
plaintiff or a defendant or has prosecuted patents themselves,
they know that for every patent troll, there is an independent
inventor who is inventing, but looks exactly like a troll. Our
challenge in this legislation is to make sure that we change
the behavior of trolls without overly changing the behavior of
those whose business models and real innovation are working to
help America today.
Today we will learn more about the cost to our economy by
those who engage in patent trolling here in America. This is
the land of opportunity. It is the land of innovation. I have
said often innovation is done by inventors everywhere, and
sadly it is done by lawyers in our court system. It has become
too easy for individuals seeking to exploit loopholes in the
patent system, bullying inventors and small businesses with
frivolous lawsuits that amount to litigation extortion.
Our work here is designed to address fundamental flaws in
the patent system, flaws that affect the system as a whole,
flaws that, quite frankly, devalue existing patents and hurt
innovators. Those who are trying to make it seem like we have
written a clumsy bill for the most part have had their say and
offered no solutions. It is important that if you come before
this Committee, either here or in private sessions, that, in
fact, you come with real plausible language. You can come to
Republicans. You can come to Democrats. As a matter of fact,
you can come to almost every person on the dais here today, and
they want to hear your suggestions of how to make this better.
My charge as the Subcommittee Chairman is, in fact, to work
with my Ranking Member to make sure that we exceed the 325
votes we had last year on the floor. I believe we can do that
by carefully making minor changes and putting in report
language that, in fact, will help define this bill in a way
that overcomes some of the areas of concern. I look forward to
doing that while, in fact, closing loopholes in our litigation
system.
The provisions of the Innovation Act will inject
transparency, fairness, and effectiveness into the system. That
is our goal. We want to work with good actors to make that
happen. And I clearly am pleased to have a panel today that
have real firsthand expertise. And with that, I recognize the
Ranking Member for his opening statement. Three hundred and
twenty-six or bust I am told. Thank you.
Mr. Nadler. Thank you, Mr. Chairman. Today we will continue
our discussion of how to address abusive patent litigation. I
continue to believe that we must pass legislation that will
address the scourge of patent trolls which continue to burden
businesses across the country. Abusive patent litigation has
become a problem not only for large corporations, but for small
and mid-sized companies as well.
Legitimate patent litigation is necessary, but too often
litigation or the threat of litigation is used as a tool to
extort settlements from defendants. Unfortunately, small and
medium-sized businesses are especially burdened by these
abuses.
Many of the witnesses here today will explain that
responding to demand letters and abusive litigation practices
decreases the amount of time and resources they can spend on
research and development. Most small and mid-sized businesses
cannot afford in-house counsel and cannot afford to keep a
high-priced attorney on retainer. They need to focus their
limited resources on creating what is hopefully the next great
innovative. That is what makes them so susceptible to vague,
but threatening, demand letters and frivolous, but costly,
litigation that prey on their fear of litigation and ignorance
of the legal system.
Abuses of the patent system can undermine confidence in the
entire system. I am a co-sponsor of H.R. 9, the ``Innovation
Act,'' because it is my hope that it will reduce and discourage
abusive litigation. The key word is ``abusive.'' I respect that
the vast majority of patent cases involve arguably valid
claims, but we want to reduce the effects of harmful actions by
bad actors. If there are situations where the patent system is
being abused, we should do everything we can to correct that
situation and make it better for all participants in the patent
system.
The Nation's economy depends on effective and enforceable
patent rights. The amount of abusive litigation has continued
to increase over the years and has now trickled down to small
and mid-sized businesses. As we examine ways to address the
problem, we must ensure that we limit unintended consequences
and provide protection for the enforcement of patent claims
brought in good faith.
I have heard from many stakeholders and businesses who have
given firsthand accounts of the burdens of abusive patent
litigation. I look forward to hearing from today's witnesses
about how patent trolls have harmed their businesses and
stifled innovation. For example, I would like to hear how small
businesses respond to demand letters and bogus lawsuits that
are filed against them. What kind of pressure do they feel to
settle rather than to fight the demands of patent trolls? I
would also like to hear how small businesses will benefit from
the proposed changes in the Innovation Act.
I remain a vocal advocate for a strong patent system, and
do not want a system that can be exploited by abusive tactics.
As we will hear today, the patent troll problem is real and is
having real consequences. Once we acknowledge that the problem
is real, we must address it. We must find ways to discourage
bad actors from filing case after case and gaining settlement
after settlement.
This hearing will provide some of the answers to the
questions I hear about why we need legislation to deal with
patent trolls. Patent trolls often take many businesses by
surprise because usually they have had no communications with
the plaintiffs prior to being served with the complaint. Surely
we can all agree that the system as currently structured needs
to be fixed. I look forward to working with colleagues on both
sides of the aisle to continue to improve the legislation to
ensure that it is fair to all parties and gets at the root
problem of abusive patent litigation. And I hope the
statements, stories, and explanations we will hear today will
further our efforts to deal with abusive patent litigation.
I thank the Chairman for holding this hearing. I look
forward to hearing from the witnesses. And I yield back the
balance of my time.
Mr. Issa. I thank the gentleman. The Chair now recognizes
the Chairman of the full Committee, Mr. Goodlatte, for his
opening statement.
Mr. Goodlatte. Well, thank you, Mr. Chairman. Addressing
abusive patent litigation, particularly the reforms set out in
the Innovation Act, are critical to our Nation's future
economic competitiveness. At today's hearing we will learn more
about the toll that abusive patent litigation has taken on our
economy. And I would like to put my statement into the record
and use my time to play a short video showing the stories of
folks that have faced this form of litigation abuse.
[Video shown.]
Mr. Goodlatte. Mr. Chairman, thank you very much. I
apologize for the volume, and we will also make it available on
our website.
[The prepared statement of Mr. Goodlatte follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
__________
Mr. Issa. Thank you, Mr. Chairman. It was a powerful
message. And with that, we go to the gentleman from Michigan,
Mr. Conyers, for his opening statement.
Mr. Conyers. Thank you, sir. I do not have a video, so I
apologize to everybody in advance. If you heard----
Mr. Issa. We can replay it.
Mr. Conyers. No, do not replay it. [Laughter.]
Thank you very much. A transcript might be better. One of
the important issues that I think should be considered is
legislative ways to stop abusive patent litigation because it
affects small businesses, and startups, and innovators more
profoundly than anybody else. And they rely, these small
businesses, on patents. They rely on patents for strong
intellectual property protections, and we must not weaken those
rights.
Our innovators, whether they create in their garage or
basements or as a group in an incubation hub, recognize their
patents and their ability to protect them through enforcement
in the courts is critical in determining whether their
businesses will succeed or fail. Indeed, some angel investors
and venture capitalists require ideas to be patented before
investment. And they may well be dissuaded from investing if
there is a risk that a court will not uphold the validity of
those patents or, at a minimum, that there will be substantial
litigation costs entailed. And this means that fledgling
entrepreneurs will never get off the ground and become a
flourishing business employing many Americans, sometimes even
thousands of Americans, such as Overstock, which is one of our
witnesses today.
Overly broad legislation could engender more, rather than
less, litigation and weaken patent enforcement protections,
thus discouraging investments in innovation. Instead, I think
we should take a cautious approach and not push solutions such
as H.R. 9, the so-called Innovation Act, that may end up doing
more harm than good to our startup ecosystem. And one way to
stop abusive patent litigations is to address the problem of
the use of demand letters, so I want the witnesses, and I hope
they will discuss how we can curb this demand letter problem as
I see it.
Patent litigation opportunists exploit the patent process
and the patent litigation system. In particular, they attack
patents of weak quality in order to obtain quick settlements,
or to bleed the alleged infringers. Individual inventors and
small businesses have to decide whether to risk incurring
potentially overwhelming litigation costs or enter into a
settlement which could make them liable to attack by other
abusive patent litigants.
So I look forward to our testimony from the witnesses, and
yield back the balance of my time. Thank you.
Mr. Issa. I thank the gentleman for his kind opening
statement. We now have a distinguished panel before us. The
witnesses' written statements will be entered in the record in
their entirety, and so you may summarize within 5 minutes
anything you would like to say. Before you, you have a set of
red, yellow, and green lights. This is an early innovation. We
all know that green means go, yellow means go faster, and I
will not get into what red means.
I would ask, though, that you stay within your 5 minutes as
close as possible. I would also further announce that after we
recess, we will reconvene promptly at 12 and take Members that
are back as soon as they are at least two Members on the dais.
Pursuant to the Committee rules, I would ask now that all
four of you please rise to take the oath. Please raise your
right hands.
Do you swear or affirm that the testimony that you are
about to give will be the truth, the whole truth, and nothing
but the truth?
[A chorus of ayes.]
Mr. Issa. Please be seated. Let the record reflect that all
witnesses answered in the affirmative.
It is now my pleasure to introduce our witnesses. Ms.
Kathryn Underwood is president and CEO of Ledyard--thank you.
Different opening statement. Okay.
In the correct order, Mr. Mark Griffin is general counsel
at Overstock.com. Ms. Kathryn Underwood is president and CEO of
Ledyard National Bank. Mr. Todd Moore is founder and CEO of
TMSoft LLC, an app manufacturer. And my constituent from Solana
Beach, Mr. Bryan Pate, the CEO of ElliptiGO, Inc. And you will
see here, I am sure as we go through here, Mr. Pate's very
innovative sort of bicycle product, when seen is very
memorable. And I would like to thank him for coming from
California today so that we would have a panel that included
some hometown favorites.
So with that, I will go down the aisle. Mr. Griffin,
please.
TESTIMONY OF MARK GRIFFIN, GENERAL COUNSEL, OVERSTOCK.COM, INC.
Mr. Griffin. Thank you, Chairman Goodlatte, and Ranking
Member Conyers, and Chairman Issa, and Ranking Member Nadler,
and Members of the Judiciary Committee. Thank you for the
opportunity to testify today on behalf of Overstock.com and
United For Patent Reform about patent litigation abuses.
Dr. Patrick Byrne, the founder of Overstock, recognized
that the internet presented some unique opportunities for
liquidating excess inventory, and in 1999 founded and launched
Overstock.com for that purpose. And at launch we provided
excess inventory to retail consumers at significant savings.
Since then, since 1999, we have grown from just a handful of
employees and suppliers and $1.8 million in revenue to today.
We now have 1,500 employees, and over $1.5 billion in revenues,
and 3,200 suppliers. The Overstock story exemplifies what is
best in the American innovative spirit.
We are a strong respecter of intellectual property. Let me
be clear. We own patents ourselves, and we spend much of our
annual budget in licensing intellectual property from
inventors. Innovation and intellectual property are at the
center of our business.
We know innovation, and we also know what abuse is of
innovation. It is patent trolls extorting money from productive
and profitable businesses by suing on weak patent claims.
Patent litigation defense is brutally expensive. The patent
trolls know that these excessive defense costs will lead many
of their victims to settle rather than fight. Despite the high
cost of defense, however, at Overstock.com, we believe that
feeding abusive trolls only attracts more trolls, so we follow
a spend and defend strategy. We would rather pay real dollars
and high defense costs than pay a single dime to a patent
troll.
Overstock has been sued 32 times for patent infringement,
and we have spent approximately $11 million in our defense.
Management and development teams have also spent countless
hours supporting our litigation teams instead of spending time
at their days jobs in creating innovation and more jobs. In our
history, we have settled a few abusive cases, but in doing so
we have been instructed that our fight strategy seems to be the
better of the two strategies.
While expensive, our fight strategy is a good investment.
Coming to understand our history and policy, patent trolls have
begun to realize that they need to simply dismiss their cases
when they discover that we will fight instead of settle. They
simply walk away. Last year when two of these trolls, Execwear
and Eclipse, walked away from us empty handed and a bit
bruised, our CEO, Patrick Byrne, said ``In abusive lawsuits, we
spend our legal budget in defense, not on unjust settlements.''
But many other retailers and others cannot afford to spend
tens of millions of dollars to scare off trolls off their
bridges. Moreover, a well-functioning patent system should not
impose this kind of tax on innocent operating companies.
Congress must intervene to restore balance. Overstock is proud
to be a member of United for Patent Reform, which is a broad
coalition of diverse American businesses which are pursuing
comprehensive solutions to abusive patent litigation. They are
businesses across many industries--realty, construction, auto
manufacturers, Main Street, and Wall Street alike. We would all
rather provide jobs and invest in innovation.
Multifaceted reforms like the following will help us cure
economic asymmetries that make patent trolls' extortionate
approach profitable. First, it is critical to raise the
pleading standards. Patent trolls should say what they are
suing over. Many defendants do not know until they have spent
hundreds of thousands of dollars to find out. Second, where
possible, it is imperative that claims of infringement proceed
first against the patent owner and a manufacturer before claims
are allowed to proceed between the patent owner and the
manufacturer's customers. Trolls often pick on users of
products rather than the manufacturers understanding that they
will not put up a vigorous defense, and they lack defense
information to put up a vigorous defense.
Third, trolls exploit the discovery process to drive up
defense costs to force settlements. Requiring patentees to
explain and judges to decide what a patent means at a markman
hearing before much discovery gets underway would certainly
drive early resolutions and avoid unnecessary costs. Fourth,
making patent trolls responsible for the costs of their
discovery requests that go beyond core documents will stop
unreasonable discovery demands made solely for negotiation
leverage.
And finally, we need better cost shifting options.
Defendants' fees to battle trolls in court range from $1 to $6
million. Trolls do not face such cost risks. They often use
contingency lawyers, and they often are set up to be precisely
judgment proof. Where a suit is not reasonably justified, the
defendant should be able to seek and be able to secure
reasonable reimbursement of its reasonable defense costs.
Legitimate patent holders should not fear this standard.
One solution will not solve the problem. We need a
multifaceted solution. Overstock appreciates the opportunity to
come and testify, and I welcome your questions.
[The prepared statement of Mr. Griffin follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
__________
Mr. Issa. Thank you.
Ms. Underwood?
TESTIMONY OF KATHRYN G. UNDERWOOD, PRESIDENT AND CEO, LEDYARD
NATIONAL BANK, NORWICH, VT
Ms. Underwood. Chairman Issa, Ranking Member Nadler, and
Members of the Subcommittee, my name is Kathy Underwood, and I
am president and CEO of Ledyard National Bank in Norwich,
Vermont. And I testify today on behalf of ICBA and the more
than 6,000 community banks they represent, and I welcome the
opportunity to share my bank's experience with an abusive
patent troll and to discuss legislative solutions to the
problem.
Ledyard is a $400 million asset community bank with seven
branches in New Hampshire and Vermont and just over 100
employees. We are primarily a small business lender, though we
are active in mortgage and consumer lending also. We are an
integral part of our economic life in the communities we serve.
In 2011, we received a letter from a patent troll's lawyer
informing us that he filed a complaint against us in the
District Court of Vermont. The complaint, which was 2 inches
thick, asserted that our nine ATMs were infringing on his
client's patent. However, the troll was willing to settle the
litigation on ``exceptionally favorable terms'' if we responded
within 2 weeks. This is a fairly typical demand letter. Similar
letters have targeted hundreds and perhaps thousands of
community banks.
On its face, the claim was absurd. The patent covered a
process of connecting an ATM to the internet. Ledyard's ATMs
being older models connect to the bank via closed circuit
telephone. Infringement was impossible. We informed the troll
of this fact through our lawyer, but he was not interested. His
sole interest was enticing a costly settlement from Ledyard and
other community banks.
Our lawyers advised us that defending ourselves in patent
litigation could be very costly, in excess of a million
dollars. We ultimately chose to settle for a significantly
smaller amount. Settling was a painful decision that violated
my basic sense of fairness. On the other hand, I had to
consider the best interests of my shareholders, employees,
customers, and the communities that we serve, and I felt it was
my duty to view it as a simple economic decision.
Litigation is risky and uncertain, and the costs in terms
of dollars and staff time can run much higher than estimated.
The settlement demand was a known cost. The risk could be
monetized and quickly put behind, allowing us to get back to
serving our customers. Sadly, this is exactly the calculation
that the patent troll counted on us making. Vaguely-worded
demand letters wreak havoc on small businesses where every
dollar counts. And to put it plainly, patent trolls practice a
legal form of extortion.
Apart from the hard-dollar cost of litigation and
settlement, the drain on our management's time, the opportunity
costs are also significant. Unchecked, demand letters will
deter banks like mine from using new technologies at all. The
technologies that support customer access and keep us
competitive with other banks--ATMs, online and mobile banking,
remote check deposit just to name a few--have become common
targets for demand letters. Community banks have to decide
whether they are worth the risk, and if not, our customers
lose.
ICBA recommends that this Committee prioritize three
solutions that will provide relief for community banks. First,
demand letters. Demand letters often lack specific information
about the patent, such as the owner and what exactly has been
infringed. This Committee can ensure that demand letters
contain greater detail. Enhanced transparency will help curb
frivolous and abusive lawsuits. ICBA supports legislation that
will provide that if a demand letter does not contain clear,
detailed, and accurate information about the patent, any civil
action brought later would be dismissed.
Second, the covered business model, or CBM Program, should
be made permanent. It has proven to be a successful, low-cost
alternative to litigation of covered business method patents.
In fact, there are several CBM proceedings currently underway
that could benefit banks and credit unions of all sizes. The
director of the PTO should have discretionary authority to
waive the filing fee for the CBM Program, and this would ensure
that institutions of all sizes have access to the program to
invalidate dubious business method patents.
Third, end users of technologies, such as community banks,
should not be on the hook for the infringement claims of
trolls. In our case, the vendor assured us that their contracts
protected them from an infringement suit against us. Because
the vendor develops the product and is best positioned to
refute the infringement claims, Congress should ensure that
vendors provide appropriate warranties and indemnification to
protect the end users.
Thank you, and I look forward to your questions.
[The prepared statement of Ms. Underwood follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Issa. Thank you.
Mr. Moore?
TESTIMONY OF TODD MOORE, FOUNDER AND CEO,
TMSOFT LLC.
Mr. Moore. Good morning. I am Todd Moore. I am a mobile app
developer, and my small company is TMSoft. We published the
White Noise app that is available for your smartphone and is
helping millions of people sleep better at night. It is
important to note that I am a named inventor on four patents,
but I am here today to tell you my story of being attacked by a
patent troll, and speak out about the critical importance of
the Innovation Act and how it can help app developers like me
and startup innovators nationwide.
I founded my company in 2008 to create smartphone apps. I
worked nights and weekends on different ideas while keeping a
full-time job to pay the bills. Finally, my White Noise app
gained traction and became the number one app on iTunes. It
allowed me to quit my job, focus on my startup full time, and
hire employees. I was living the entrepreneur's dream, but I
never dreamed my biggest danger in my business would be a
patent troll.
In 2011, Lodsys sent me a demand letter claiming my app was
infringing its patents. Lodsys is a patent monetization firm
that does not make any products. The demand letter included
White Noise screen shot showing a webpage inside the app with a
button that linked to the internet, essentially a hyperlink. I
assumed this was a mistake because hyperlinks are common
technology. They are the building blocks of the web. Later I
discovered numerous other app developers had received similar
demand letters. Lodsys wanted us all to pay a licensing fee, or
they would sue for patents infringement.
In 2013, Lodsys did sue me and many other app developers.
Although the lawsuit was clearly frivolous, I was forced to
defend myself. Patent litigation usually costs millions. I did
not have that sort of money, and the patent troll knew it.
Lodsys was quick to offer me a way out. If I just wired $3,500
to an overseas bank account and agreed not to speak publicly
about it, they would dismiss the lawsuit.
Most companies would take that deal, but companies that
settle with patent trolls risk catching the attention of other
patent trolls to make a quick buck. Thankfully, a non-profit
group agreed to defend my company pro bono. Once Lodsys
understood we had a free lawyer who would challenge the
patent's validity and that we would never pay, it dropped the
lawsuit. Trolls are not interested in asserting valid patents
and obtaining fair royalties. They are interested in easy
settlements and quick paydays that will fund their next set of
lawsuits.
Some may testify that weak patents, like the Lodsys patent,
would not be approved by the PTO today, but we cannot wait 20
years for thousands of weak patents to expire. Patent quality,
however, is not the only issue. Frivolous litigation can be
initiated by trolls that unjustly assert infringement when an
activity is way outside the scope of the patent. Congress
should encourage courts to crack down on this behavior.
The patent troll business is low risk and high reward
because patent trolls get free lawyers, and they hide their
junk patents in shell companies. They are destroying small
businesses while offering society absolutely no benefit. The
problem is not with patent licensing, it is with patent abuse.
I have license technology from many companies, and in
return we get something useful that improves our own products.
That is how legitimate companies use patents to build value. In
contrast, with patent trolls you do not get useful technology.
You get an agreement that they will not sue you. That is not
how our patent system is supposed to work.
Finally, I have heard claims that patent reform legislation
will harm small inventors. This is nonsense. I risked my
capital to build a business and intent great apps. I support
reforms that promote legitimate patents, legitimate licensing,
and legitimate enforcement. I am a small innovator, and what
harms me is that litigation opportunists are exploiting the
patent system. The only way to protect true inventors with real
inventions is for Congress to reform the system so it works as
intended.
What patent trolls are doing to small businesses like mine
is simply wrong. We need common sense reform, like the
Innovation Act, that will force patent trolls to think twice
about bringing baseless and frivolous lawsuits. The problem is
serious, but it is also solvable. Please, shut down the patent
troll racket and let small businesses like mine get back to
innovating, creating jobs, and building great products that
people love.
Thank you.
[The prepared statement of Mr. Moore follows:]
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Mr. Issa. Thank you.
Mr. Pate?
TESTIMONY OF BRYAN PATE, CO-FOUNDER AND CEO, ELLIPTIGO, INC.
Mr. Pate. Thank you, Mr. Chairman, Mr. Nadler, and Members
of the Subcommittee. It is an honor to be here today to share
my views on protecting American innovators with you. I am an
American innovator. I have spent the last 10 years of my life
in a concerted effort to create and build a new industry here
in America.
ElliptiGO introduced the first elliptical bicycle to the
world in 2010. A photo of our product is on the screen. We
currently employ 15 people in our Solana Beach, California
headquarters, and we have additional employees in Virginia,
Illinois, and New York. Over the past 5 years, we have sold
more than 10,000 ElliptiGO cycles, generated more than $20
million in revenue, and in 2013 we were named the sixth most
innovative fitness company in the world by Fast Company
magazine.
From the beginning, we knew that while our idea was novel,
overseas manufacturers could easily copy it and destroy our
market by flooding it with cheap, poor quality knockoffs.
Indeed, there are a number of Chinese manufacturers who have
already replicated our product and are currently advertising it
for sale on Alibaba.com and other websites. Photos of them,
their factories, and their listings on the screens. They area a
real threat, and it is only a matter of time before these
knockoffs will hit our shores. Once that happens, the only
viable weapons we will have to stop them from destroying the
market are our patents.
As an entrepreneur, I am by definition a risk taker and an
optimist. Few things scare me. Since learning of H.R. 9, I have
spent a significant amount of time trying to understand how it
could impact my business. I am here today because there are
parts of the bill that scare me. I believe if the bill passes
as written, it will have the unintended consequences of
adversely impacting American innovators, while perversely
protecting unscrupulous competitors.
It appears that in an attempt to address one form of
abusive patent litigation, H.R. 9 will create new ways for
infringers to abuse the patent system. I will touch on each of
my concerns briefly now in hopes of a fuller discussion with
you.
Customer stay. I agree that we should stay litigation
against innocent end users of an infringing product. However,
H.R. 9's stay provision is much broader than that. In fact, it
should be called the ``manufacturer, trading company, supplier,
seller, and end user stay,'' because it protects all of these
actors equally, innocent or not.
Shockingly, the very factories in China that are making
exact replicas of our product today and anyone who profits from
importing or selling these blatantly infringing copies of our
patent and invention here in the U.S. are considered customers
and could be protected. I say ``protected'' because in practice
the stay provision permits the companies who profit from
manufacturing and selling infringing products to shield
themselves from ever being held accountable. This is the
provision I fear the most for my business because it presents
an enormous risk to companies like mine. I hope we get to
explore it in more detail today. The bottom line is that if the
stay provision was law in 2005, I would not have started
ElliptiGO.
Joinder. If the joinder provision was law in 2005, I likely
would not have been able to start ElliptiGO. Small technology
companies like ElliptiGO not only need founders, they also need
investors, employees, and, in our case, a licensor to get off
the ground. The joinder provision exposes all these individual
to personal liability. That is right, personal liability, if
the company they support loses a patent enforcement action and
is unable to convince the judge that their position was
justified. We could not have guaranteed anyone back in 2005 or
in 2015 for that matter that this will not happen.
Even if my co-founder and I were willing to take this risk,
I know for certain that we would not have been able to secure
our patent license, and it would have been incredibly difficult
to find investors and employees willing to get involved. At the
time, we were pitching these people, Brent worked out of his
garage, and I worked in a storage shed. Our only non-human
assets were a pending patent and some prototypes. If the folks
we were pitching believed that they could end up losing their
house because of a future patent litigation involving our
company, there is no way our licensor would have licensed his
patents to us, and it is very unlikely we would have found
enough investors and employees to launch the company. It is one
thing to lose $50,000 in an investment you have made on a
small, promising company. It is another thing to lose your
house because of that investment.
Finally, the fee shifting provision and the heightened
pleading standards add complexity to patent enforcement and
raise the stakes of patent litigation, making patent
enforcement more expensive and protracted. I believe this
change disproportionately impacts small companies, and I hope
we get to explore these sections as well.
As written, H.R. 9 introduces several incalculable and
entirely new risks to the startup ecosystem. I believe that the
few people who are willing to take the risks of investing their
money, skills, and ideas into a startup today will choose
differently if H.R. 9 becomes law. American innovators cannot
succeed without these people, so I strongly urge you to address
these issues with H.R. 9 before moving it forward.
Thank you for your consideration of these issues, and I
look forward to discussing them further.
[The prepared statement of Mr. Pate follows:]
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__________
Mr. Issa. Thank you. Thank you all. I am going to recognize
myself first, and there are a great many items there that do
bear some looking at. Mr. Pate, I am going to use some of your
examples and play off of it since apparently it is a 3-to-1,
three like it, you have not yet come around to liking it. But
we are going to get you here. You know, if you want someone's
vote, first you have to get them on your bill, so there is a
little of that.
Scott, I want you to remember that this is close your
district, too. He could have employees in your district.
Voice. I am sure we do.
Mr. Issa. Yes, listen hard. Mr. Griffin, the amazing thing
about this is the provision that I am most concerned about, and
I think, Ms. Underwood, it affects you, is, in fact, the idea
that a stay on the customer is somehow preventing Mr. Pate from
having effective litigation. Ms. Underwood, in your case if the
manufacturer had weighted in your nine ATMs, could you give us
a range on what this troll was willing to settle for for your
products that were not connected to the internet in a patent
that required it be connected to the internet?
Ms. Underwood. The range of the settlement was in the mid-
four figure range to settle for those nine ATMs for which we
were not violating the patent.
Mr. Issa. So for me, mid-four figures is $50 grand?
Ms. Underwood. No, in the $6 to $7,000.
Mr. Issa. Oh, one more down.
Ms. Underwood. Yes.
Mr. Issa. So basically they wanted a nuisance amount that
was probably less than you had already spent just having a
conversation with your counsel and getting the advice of a
patent attorney.
Ms. Underwood. Exactly, and that was the decision we had to
make at that time.
Mr. Issa. Okay. And, you know, I was in business a long
time, and Mr. Moore made a different decision for certain
reasons. But it is not uncommon as long as they offer you a
settlement cost that is less than your cost of calling your
lawyer, you often end up doing it. Mr. Griffin, your company
has chosen not do that, not to make these settlements by and
large, but you deal with 3,200 manufacturers.
Mr. Griffin. 3,200 manufacturers who manufacture probably
over a million products that we offer, any component of which
could be subject to patent infringements.
Mr. Issa. And if there were a stay, knowing that ultimately
if your manufacturer lost, did not defend the case properly,
you would find yourself at a greater disadvantage, how would
you handle that? Let us just assume that a manufacturer under
the law, H.R. 9, if the manufacturer agreed to it and you were
stayed, how would that affect your participation in the case
and your willingness to just forget about it and let it go to
the manufacturer? I just want to make sure we get the practical
part of what really happens.
Mr. Griffin. As a practical matter, we are usually willing
to run the risk. It depends on the situation, but these stays
have happened. Judges do stay cases where a manufacturer has
agreed to the indemnification, has come in and defended fully
the actions. And my understanding is that the legislation calls
for that type of situation. Where there are two cases going on,
why should we litigate both? Let the manufacturer that has the
best defenses take it.
Mr. Issa. Now, one quick follow-up because, Mr. Pate, I
want to make sure that he has a fair chance to be involved in
this, too. If the legislation required that the manufacturer
have at least one additional customer, I mean, in other words,
if you are the exclusive customer, you would not get a stay.
Would that bother you in your situation if you are literally
the only customer, the exclusive customer?
Mr. Griffin. I do not think it would bother us all that
much. Some relief is better than none, and we think that it is
a good thing to have the manufacturer take the defense.
Mr. Issa. Well, is it not true, to your understanding,
that, in fact, in common law, these stays are already part of
the process? The legislation is simply codifying what in the
Southern District of California, San Diego, already is the
practice?
Mr. Griffin. Yes. Yes.
Mr. Issa. So to your knowledge, do most places around the
country grant these stays anyway, let us just say, with the
possible exception of the Eastern District of Texas and
Delaware?
Mr. Griffin. With the possible exception of the Eastern
District of Texas.
Mr. Issa. Okay. Mr. Pate, I want to be fair to you, but I
do want to mention to you that if you go before Judge Moskowitz
in the Southern District, Barry is going to grant that stay in
all likelihood because that is common law and it is commonly
done in most parts of----
Mr. Pate. That is great, and I am really glad we get to
talk about this because there is a huge nuance here that I
think is being missed. What everyone here on the panel has
talked about is being an end user of a product that was the
accused infringing product.
Mr. Issa. Well, Overstock is a seller and distributor.
Mr. Pate. But actually his testimony, sir, was about being
an end user, and all the demand letters have been related to
being an end user. For things that he sells, he typically has
an indemnification agreement with the manufacturer, and I think
that is what he was referring to at the end.
The reality, though, is the end user that is getting these
demand letters is very different from the Chinese manufacturer
of knockoff goods in my mind. Those are two very different
actors. If I buy these glasses and get a demand letter that
says whoever made these glasses was infringing on a patent,
that is a problem. If I make these glasses as an exact rip-off
of Hugo Boss or whoever makes these glasses, and then Hugo Boss
tries to sue that manufacturer, the Chinese manufacturer, and
then that manufacturer is entitled to a stay of the lawsuit?
That is where I think the problem is.
Mr. Issa. So in a nutshell, you are okay if I am using a
Wi-Fi or some other product as an end user being stayed.
Mr. Pate. Yes.
Mr. Issa. Okay.
Mr. Pate. If you are the mom and pop coffee shop, yes. But
what my challenge is, as you saw on the screen, there are
factories in China with my product on their walls ready to come
to the U.S. They are going to get imported. They are going to
get distributed to a seller. The person I want to collect from
is really everybody in the chain making profits, but in
particular the seller.
Mr. Issa. Okay. And I have got to go to the Ranking Member,
and we are going to have a full discussion on this. Just one
quick question. Have you been to the ITC, which is the venue
that deals with overseas entities and can give you injunctive
relief where, in fact, the courts cannot give you injunctive
relief?
Mr. Pate. Well, I believe the courts can give me injunctive
relief.
Mr. Issa. Rarely.
Mr. Pate. That is part of the patent----
Mr. Issa. Under eBay, you are not likely to get it. You
will get reasonable royalties.
Mr. Pate. That is an arguable point, sir. But the reality
is an injunction is still a part of the monopoly provision of a
patent, and the damages provision is attractive. And there are
U.S. potential manufacturers----
Mr. Issa. My time has expired. I just had one question if
you could give me a yes or no.
Mr. Pate. Sure.
Mr. Issa. Have you explored the International Trade
Commission, the ITC?
Mr. Pate. I have looked into it. I have not gone----
Mr. Issa. Okay. So you have not gone to the only court that
effectively deals particularly with overseas companies that are
offshore and outside the reach of Article 3 courts.
Mr. Pate. That is correct.
Mr. Issa. Okay, thank you. Mr. Nadler?
Mr. Nadler. Thank you. Let me start by saying that in this
whole area, I find myself in an unusual situation. I normally
react rather negative to talk about abusive litigation and
abusive lawsuits because I am normally in a situation where I
believe that lack of access to Federal courts at variable costs
to the little guy is the real problem, that the courts have
shut off access, narrowed class actions, et cetera. But here in
this field of patent trolls, I think the weight is on the other
side, and so I talk about abusive litigation and dealing with
it.
But I am concerned about some of what Mr. Pate has said,
and I want to continue on this end user business. Now, clearly
the end user ought to be protected.
Mr. Pate. Absolutely.
Mr. Nadler. But you are saying that we cannot get at the
guy in China, the Chinese manufacturer.
Mr. Pate. I cannot get at anyone in the supply chain.
Mr. Nadler. Why can you not get----
Mr. Pate. They all are entitled to a stay.
Mr. Nadler. You cannot jurisdiction in an Article 3 court
against them?
Mr. Pate. No. It is because the way the customer is defined
in H.R. 9, it applies to anyone who can be subject to a patent
infringement lawsuit.
Mr. Nadler. Could you think of a way that we could define
the customer in this bill?
Mr. Pate. Yes, sir.
Mr. Nadler. In this bill in a way that would do what we
wanted to do----
Mr. Pate. Yes, sir.
Mr. Nadler [continuing]. And we protect the end user. I
mean, the whole point really is if I make a new chip and I
invent something in the new chip and I get patent on it, and
that chip gets put into a bigger chip, which gets put into a
device, which gets put into a different device, which gets put
into a car or into a jukebox--jukebox, that shows my age--in
the restaurant. [Laughter.]
In the restaurant or in the iPhone, you should not sue the
guy at the restaurant.
Mr. Pate. Exactly.
Mr. Nadler. Nor should you sue the guy who put in the car,
nor this one, nor that one. You should sue the guy who
infringed the patent in the chip. How can we do that without
subjecting it to the problems that you are saying?
Mr. Pate. I think the key is to focus on the end user. Who
do we think of as a customer? I mean, when we say ``customer
stay,'' we think of end user, and everybody here is an end user
of a lot of things. And I believe all the demand letters that I
have read----
Mr. Nadler. If we said only the end user, what about the
guy four steps down the chain who is not infringing on
anybody's patent. He is putting an iPhone in the car, you know,
let us say. And we are not talking about the guy who buys the
car. We are talking about the guy who manufacturers the car.
But the guy who infringed the patent was the guy who made the
chip that was then put into a device that was put in an iPhone
that was put in the car. Should we be able to sue the car
manufacturer?
Mr. Pate. I mean, that is a great question. I make
bicycles, so my world is a lot simpler than that.
Mr. Nadler. Well, one day you may want to put an iPhone on
your bicycle.
Mr. Pate. I may, but it seems to me the fundamental
philosophy should be whoever is making a profit off of my
invention should not be able to do so without a license from
me.
Mr. Nadler. But wait a minute. You are the end user. You
are making a profit.
Mr. Pate. No, no, no, the ElliptiGO. So we have 23 patents.
We invented this bike.
Mr. Nadler. No, no, but the mom and pop restaurant that has
a modern iPhone or radio or whatever in the restaurant is
making a profit off that. You do not want him sued?
Mr. Pate. No. So maybe it is the profit on the sale of the
item. If it is a mom and pop coffee shop using a Wi-Fi router
and selling the router as part of their business----
Mr. Nadler. All right, but let us assume it is the guy who
made the router, but he is three steps down from the guy who
infringed----
Mr. Pate. Can we not cover that with indemnification? Can
we not use the indemnification process to cover that? I mean, I
have not thought deeply about it because I make bicycles and it
is a different situation. We have Chinese knockoffs that are
going to flood the retailers----
Mr. Nadler. Let me ask Mr. Griffin what you would say to
the same question.
Mr. Griffin. We are an end user. The same question. I
believe--I believe--that it is structured right in this
legislation where there is a manufacturer in a lawsuit. We are
talking about a separate situation where he cannot reach a
manufacturer. That is different. I do not think that is covered
by this bill. This is a situation that requires that there be a
manufacturer in the lawsuit. In other words, some court has
jurisdiction. Why not stay it against the sellers, against the
end users, and all down the line? I do not think it goes as far
as Mr. Pate believes it does.
Mr. Nadler. Mr. Pate, if we were to put in some sort of an
exemption or a carve out here for foreign manufacturers in
terms of the stay because the courts do not have jurisdiction
over them, do you think we could handle your problem that way?
Mr. Pate. I think the challenge is for all the companies
that could be knocked off by U.S.-based companies. The issue in
my mind for tangible goods that are going to flow through the
supply chain, I need to be able to enforce my patents here in
the U.S. against a real company in the U.S. And the challenge
when you deal with the Chinese companies is there are a lot of
shell companies. So they can file a declaratory judgment action
against me on the patent, create a lawsuit, and then the real
party in interest actually gets to stay it. And there could be
30 of those companies over in China that qualify under the
language of H.R. 9.
Mr. Nadler. Thank you very much. My time has expired, and
we have to----
Mr. Issa. For all Members, it is now 10:59 and 45 seconds.
Mr. Nadler. Fifteen seconds to get to the chamber.
Mr. Issa. I will gavel in about 15 seconds. So we will
return promptly at 12:00, and I commend to all of you whatever
you would call a lunch, it will be served right around the
corner in the basement. Thank you.
[Recess.]
Mr. Issa. The Committee will come to order. It is now my
pleasure to yield time to the Chairman of the full Committee,
Mr. Goodlatte.
Mr. Goodlatte. Well, thank you, Mr. Chairman. I appreciate
the hearing, and I appreciate the witnesses' testimony, and I
have a question for all of them. First of all, a yes or no
question. Do you believe that an inventive company that has
patents, employees, builds a product, and sells it to consumers
would be considered a shell company? We will start with you,
Mr. Griffin.
Mr. Griffin. No.
Mr. Goodlatte. Ms. Underwood?
Ms. Underwood. I would guess not.
Mr. Goodlatte. Mr. Moore?
Mr. Moore. No.
Mr. Goodlatte. Mr. Pate?
Mr. Pate. No.
Mr. Goodlatte. Okay. The good news for you, Mr. Pate, is
that as a result of that, your concerns about the joinder
provisions in this bill should be eased considerably because
unless you are a shell company, you are not going to be able to
be concerned about that joinder provision.
Mr. Pate. Can I respond to that?
Mr. Goodlatte. Sure.
Mr. Pate. Great. There are two elements about it. I think
the joinder provision is particularly damaging to companies in
their very early, early stages. So when we secured our very
first license to a patent----
Mr. Goodlatte. If you have got some parts in the garage
that you are going to start assembling, you are not a shell
company. If you have got an idea that you are working on
yourself, you are not a shell company.
Mr. Pate. Where is this shell company language if I can
ask, because I do not recall that.
Mr. Goodlatte. Well, the Innovation Act's fee shifting----
Mr. Pate. Is it in fee shifting or joinder?
Mr. Goodlatte. Both. The bill's joinder provisions only
apply to a plaintiff who has no substantial interest in the
subject matter at issue other than asserting such patent claim
in litigation. So if you have anything beyond the interest in
asserting a patent claim in litigation, you do not have a
concern about the joinder provision.
Mr. Pate. So what happens if my operating entity goes
bankrupt, and 2 years later my holding company that has all my
intellectual property seeks to enforce the patents?
Mr. Goodlatte. You are still not a shell corporation
because you have an interest in perfecting that product.
Mr. Pate. What is my interest?
Mr. Goodlatte. Your interest is in being remunerated for
the idea that you have advanced and you have perfected.
Mr. Pate. So even though my operating company no longer
exists, I would still not fall under the joinder provision?
Mr. Goodlatte. Well, you would fall under the joinder
provision in those circumstances, but not an entity that is
ongoing. And if you are simply an entity advancing something
like that, then you have got to be able to stand behind your
product. And then, bear in mind here is the other important
part about this. As long as your claim, and basically what you
are talking about is a claim based upon your patent that you
obtained and you perfected. That claim is only going to be
resulting in attorney's fees being awarded against you if your
claim has no reasonable basis in law or in fact.
So this is designed to help protect companies like yours,
not harm them. And that is why lots of small businesses,
including lots of app developers, lots of internet startup
companies and so on, want this protection because the flip side
of that is that if that shell company that you are trying to
describe for me only acquired something from somewhere somehow
and is trying to advance it in ways to garner funds that go way
beyond what the validity of the patent is, and may, in fact, be
why it is a company in bankruptcy because it does not have
anything of significant value. That is a situation in which
then you the developer of another that is being sued by an
entity like that has the protections here.
Mr. Pate. But I do not think the protections are that
valuable to a company like mine, the fee shifting, because if I
win a patent case, I am going to win big.
Mr. Goodlatte. Yes, but you are going to be more likely to
win if your opponent knows that they have no reasonable basis
in law or fact for the defense that they are asserting against
you, and, therefore, they are going to be subject to attorney's
fees? And by the way, both joinder and attorney's fees, they
exist in current law already, and all this bill does is provide
greater certainty.
And when you are talking about investors, and when you are
talking about inventions, and you are talking about small
businesses, the more certainty you can bring to the table, the
better off your business is going to be. You have a much, much
better ability to determine what the liabilities are and a much
greater ability to assert a valid claim and not have to assert
it as aggressively or as expensively because somebody is not
going to hang around if they are going to have to pay not only
their attorney's fees, but yours as well, because they have no
reasonable basis in law or fact for the defense that they are
asserting.
Mr. Pate. I agree with that. I think certainty is a
fantastic thing, and the more certainty we can get, the better.
The challenge here is that patent litigation, in my opinion, by
definition is very uncertain. What appears obvious to some
people is novel to others.
Mr. Goodlatte. We do not disagree with you. That is why we
are doing this bill, and that is why this bill is called the
Innovation Act, to bring greater certainty to patent
litigation. That is the purpose of this legislation.
Mr. Pate. But I think the certainty goes, in a way, against
a legitimate company like mine----
Mr. Goodlatte. I do not think so.
Mr. Pate [continuing]. In enforcing for a patent.
Mr. Goodlatte. I do not think so. For all the reasons I
just cited, I think it creates greater certainty.
Mr. Pate. And I think----
Mr. Goodlatte. My time has expired, so I am going to yield
back to the Chairman. But I would be delighted to work with you
further on this because we want to create the kind of certainty
that you desire.
Mr. Pate. Great.
Mr. Goodlatte. We think, in fact, that is what this bill
does.
Mr. Pate. Great. Thank you, sir.
Mr. Issa. Lively discussion. I thank both of you. We now go
for a lively discussion to the Ranking Member of the full
Committee, Mr. Conyers.
Mr. Conyers. Thank you, Mr. Chairman. I wanted to welcome
again and thank the witnesses, our general counsel, Ms.
Underwood, Todd Moore, and Mr. Pate. Let me ask you, Mr. Moore,
would you have succeeded if H.R. 9, as you understand it, had
been the law when you started out?
Mr. Moore. I think if H.R. 9 was already passed, there is a
highly likely chance that my company, my small company, would
not have been targeted. I truly believe that my small business,
as you know, we do not have the means to fight these litigation
battles and these frivolous lawsuits.
Mr. Conyers. Okay. All right.
Mr. Moore. So I believe that I would have been able to
focus on my business.
Mr. Conyers. What say you, Mr. Pate?
Mr. Pate. Well, again, I think that the two biggest
concerns I would have had back in 2005 when I thought of this
elliptical bicycle was I am going to get knocked off, so I have
got to be able to defend my market, and number two, I have got
to be able to raise money, attract employees. And at the time
we figured out there was another inventor who had a patent that
already issued, so we had to license it from him.
And my concern with the first issue is at the end of the
day, if someone is making profits off of my invention here in
the U.S., that is wrong. And I should be entitled to seek
relief from them, injunctive and damages. And I think the
customer stay provision I believe would prohibit me from doing
that, and I do not think in 2005 I would have had the
confidence to move forward and take all this risk if I did not
think I had a very good chance of being able to defend it here
in the U.S.
Mr. Conyers. Let me ask you about the demand letter. How
would that have impacted or even addressed abusive patent
litigation in your view?
Mr. Pate. Well, I think the demand letter is a great place
to focus just listening to the conversation and reading the
testimony. It still seems to be the crux of where these
extortion settlements come from, and it seems to be an unfair
business practice. It is like false advertising or bait and
switch. We just had a back and forth with a dealership we were
trying to buy a vehicle from and they pulled a bait and switch
on us. And I looked at the code for their State, and there was
a bait and switch law about it, and it was an unfair business
practice. And it seems like if there are businesses out there
using fraudulent tactics to extort money from other businesses,
it should be able to be handled by the FTC and the courts
through an unfair business regime.
Mr. Conyers. I agree with you. Now, how would the joinder
provision have impacted the creation of your company and other
startups? It seems that it might have made somebody less likely
to want to invest.
Mr. Pate. That is my second biggest concern and why I do
not think we would have been able to get off the ground is
because to your point, all we had at the time was a pending
patent and a prototype. And so, to convince investors,
employees, and a licensor to back us was really, really hard.
And if we had to tell them that if they give us money, or if
they join our company, or if they give us a license to a
patent, and we enforce our patent, which is really the only
thing we would have at that point, and we lose, then they could
be personally liable, lose their house, I do not think we would
have gotten investments. I know we would not have gotten the
license to the patent. I do not think I would have taken that
risk candidly, and I do not think my wife would have let me
take that risk.
Mr. Conyers. Well, what about the discovery limitations in
the bill, H.R. 9? When you limit discovery, you are actually
starting a suit without getting all the information that you
need. And it seems to me that that is not the best way to go
about going into a courtroom.
Mr. Pate. The way I see it is when I go to enforce our
patents, which we are going to do because we are going to get
knocked off, the more information I can have about what the
products are, who is doing it, how they are going about selling
it, how much money they are making, the better from my
perspective. I see my role as trying to defend our company, so
the more information I can get at the outset, the better off I
am.
Mr. Conyers. Now, is heightened pleading going to help you
any? The Supreme Court is likely to sign off on this somewhere
between now and the end of the year. What do you think? Will
that help or hurt in terms of small business?
Mr. Pate. I think the current level of pleading at the
Twombly standard is reasonable for patent filings. The level to
which disclosure is required up front in H.R. 9 I think would
cause more lawyers' fees and just sort of dotting I's and
crossing T's out of the gate, and is not necessary. I feel like
I could deliver a complaint that has the salient requirements
without having to get quite as specific as within----
Mr. Conyers. Thank you for your discussion.
Mr. Pate. Thank you.
Mr. Conyers. Thank you, Mr. Chairman.
Mr. Issa. Thank you, Mr. Conyers. The gentlelady from
California, Ms. Chu, is next.
Ms. Chu. Ms. Underwood, your experience is a familiar story
for so many small entities throughout our country. I know of
credit unions in Southern California who were targeted because
of certain features on their websites, and they have to settle
given the high cost of litigation. I understand that your bank
had to settle, but you know of other community banks that chose
to litigate in court and were successful. Despite these losses
in court, why do you think the patent troll that targeted you
continued to send out demand letters to other parties?
Ms. Underwood. We were one of the first small community
banks in our market to be targeted, and we had not heard of
this trolling because it had not hit our State. And there were
only four of us that were targeted initially, and we were all
very, very small banks. And when we talked to our attorney and
he told us what the cost was going to be, could be, in the
millions of dollars, in our mind there was no need to begin the
process.
I do know that other banks months later after many banks
that had been identified were successful in fighting this. But
there were a lot of settlements that were far greater than ours
afterwards also.
Ms. Chu. And even though they lost in court, they continued
to send demand letters out. Why do you think they do that?
Ms. Underwood. Because they were becoming successful.
Ms. Chu. Because of those large settlements with the
others.
Ms. Underwood. When you weigh the costs of the attorney's
fees versus the settlement, it is, as my kids would call it, a
no-brainer in making that risk decision. And I think they
recognize that, that banks my size cannot afford to fight. And
so, the more that they were successful, and their settlements
did increase as time went on, it was worth continuing.
Ms. Chu. You also hold up the Covered Business Method
Program at the Patent and Trademark Office as a low cost
alternative to litigation. You state that there are several CBM
proceedings that are underway at the PTO that can be helpful to
banks and credit unions of all sizes. Could you describe how
they would benefit?
Ms. Underwood. How they are benefitting? Well, I think the
fact that they are reviewing the patent outside of the suit
process certainly does go to benefit the smaller banks. And the
fact that many of these patent reviews are being brought by
larger organizations who can afford to pay to get the process
going does benefit the community banks. As a matter of fact,
there is one very well-known DataTreasury patent process that
is currently being reviewed, and the list of banks that are
involved run from the very large to the very small. And there
are many banks that are members of the ICBA that are involved
in that that will benefit from that process at the end of the
day.
Ms. Chu. Mr. Griffin, Overstock.com is no stranger to
patent infringement suits. You have been sued over 30 times in
the last 10 years, and it sounds like your company is
developing a reputation in which you are known to fight back.
In fact, 12 patent trolls abandoned their cases against you
when they realized you would pursue litigation. Can you talk
about how this strategy is turning out to be a good investment?
Mr. Griffin. It has turned out to be a good investment
because we count on our brand as being a fighter in these
cases, such that we become an unappetizing target. A lot has
been said about demand letters today. Demand letters in my mind
are in a different silo than full-blown litigation with a
troll. For example, we do see demand letters, but frequently
they are unsuccessful and they are not followed by a suit. Many
of the trolls who sue us do not file any kind of a demand
letter because they know that we might attempt to gain
jurisdiction by a declaratory action in our own jurisdiction
rather than a favorable venue for the troll.
So for me, these two issues are separate. Yes, we should
have more disclosure in demand letters, but it is not any kind
of manageable line to correct the problem with patent
litigation abuses that we see today.
Ms. Chu. Thank you. Well, actually could I ask----
Mr. Issa. The gentlelady, please continue.
Ms. Chu. And you won a large case in 2011 where the patent
in question was invalidated. Could you give us some details on
that case, and what was the effect of that case?
Mr. Griffin. It is a case that we were litigating in the
Eastern District of Texas. The demand was for millions of
dollars. We were litigating patents that were dating from 1998.
In fact, I remember one of the jurors, who wound up being the
foreman, stood up in jury selection process and said, ``I
cannot imagine any patent from 1998 being applicable to the
internet today,'' and that held to be true. The technology was
completely inapplicable to what we were doing, and the jury saw
it. We were fortunate in that case.
Ms. Chu. Thank you. I yield back.
Mr. Issa. I thank the gentlelady. We now go to the
gentlelady from Washington, Ms. DelBene.
Ms. DelBene. Thank you, Mr. Chairman, and thanks to all of
you for being here with us today. We appreciate it. One of the
most frequent complaints that we hear is that companies are
shelling out large amounts of money to lawyers to defend
themselves from abusive patent litigation, and that is just to
get through discovery. In your testimony, Mr. Pate, you said
that discovery limits may put patent holders at a disadvantage
against infringing companies, making a patent suit riskier for
patent holders. And in many cases, the patent holder requires
lengthy discovery to learn the details of the infringer's
product and business. The first question, have you ever been a
party to patent litigation yourself?
Mr. Pate. No, I am not.
Ms. DelBene. Okay. So I am going to ask you this maybe a
little bit theoretically. But first, could you elaborate on why
it is so difficult to put together a more detailed claim? And
then second, could you comment on how you would react to
another company making extensive demands from you to share
specifics about your products in business if you one day find
yourself on the receiving end of a patent lawsuit?
Mr. Pate. Those are great questions. On the filing a
detailed claim, I think we all agree that Form 18 is too wide
open, and that there is no reason patent litigation should not
be at the same level of notice pleading as every other Federal
litigation where you have to actually state a claim that you
can show you deserve relief from. And I think for patent
litigation, that should include what the patent is and what
products appear to be infringing.
The issue I have with H.R. 9 is I just look at it and think
to myself, there are a lot of attorney's fees, and crossing T's
and dotting I's, and is there going to be a little side
litigation about did we fill the complaint out correctly? I
mean, it just seems very enumerated.
And when I see things that are very different enumerated, I
think of lawyers, you know, finding ways to show that you
screwed up the way the enumerations were done. And I think that
is a problem. I do not think the philosophy of bringing patent
litigation to the level of where all other Federal litigation
is in terms of a complaint is a problem. I just think the
specificity can get abused, especially if you are a small
company.
And if it takes me 4 months to get my complaint in order
because my attorneys are not that good or whatever the case may
be, I just see that as unnecessary. It is an unnecessary hurdle
for me to have to jump over.
Ms. DelBene. And, Mr. Moore, could you give me your view as
well on both of those, on either side, if you are on either
side of litigation?
Mr. Moore. Yes. So my company, you know, was very small
when it got sued. We were three people. So when that happens,
you are faced to make some difficult decisions, and you reach
out to a lot of people in the community, other CEOs, and
everyone tells you the same thing. They go, I know how you are
feeling and you want to fight back, but let me tell you, they
are going to bleed you dry, and there is no way you can win.
And when I got a pro bono lawyer, which is unheard of, I was
ready to go all the way through the entire process, discovery,
all the way to the end.
But my lawyer actually convinced me, because I wanted to
recover his fees, and I wanted to fight. And he said, well, it
is going to take years of time. It is a very intrusive process.
You are going to have to open up your bank records, everything,
files, emails. You have got to realize what you are committing
to, and I will tell you this. I have won awards before, and I
have not gotten paid.
So when he said that, it infuriates you. As an engineer you
want to solve problems, and you want to fix things, and it does
not seem like we can do that on our own, and that is why
Congress really needs to help and fix this broken system we
have.
Ms. DelBene. But on discovery, in particular, whether you
are the one who has a patent litigation against you, but what
if you were also trying to defend patents of your own? Do you
feel the same way about the discovery provisions?
Mr. Moore. Yes. I believe that if you have good patents, I
do not believe you are going to be affected by this bill. In no
way does it say that you are not going to be able to go after
people that are infringing on your intellectual property, and I
am someone who is listed on numerous patents. So I can tell you
I have worked with the patent system, and I think it is
valuable, I really do. But I see it today, especially with my
company, how it can be abused.
Ms. DelBene. Thank you. Mr. Chair, I yield back.
Mr. Issa. Thank you. We will now go to a second round. Mr.
Pate, you made some statements, and I want to try to elaborate
because I want the record to be clear. In your experience, you
have been a law clerk, right, for a Federal judge?
Mr. Pate. That is correct.
Mr. Issa. So you have seen what Federal judges go through
trying to move cases along, right?
Mr. Pate. Yes, sir.
Mr. Issa. Did you ever clerk while the judge was doing a
patent case?
Mr. Pate. No, sir.
Mr. Issa. But a similar white collar----
Mr. Pate. Many.
Mr. Issa [continuing]. Civil tort claim normally is broken
into two major parts. Did you or did you not do something
wrong, and if so, what are the damages, right?
Mr. Pate. That is correct.
Mr. Issa. And then the second part, we will take down the
did you do wrong. It is do you have the ability to pay? What
are the assets? How do we get them? What should the judgment
read? And we all understand that.
So you mentioned something that concerned me, which is you
said you have not actually sued anyone under your patent, but
you said you want all the information. And because this is part
of the Innovation Act, should not the plaintiff is interested
in proving that the patent is, in fact, valid and being
infringed, should not the discovery to the greatest extent
possible in the shortest period of time get to that question?
In other words, as Mr. Griffin, I believe, said in the opening,
the markman. Is your patent and their product a match or vice
versa. Would you not agree?
Mr. Pate. I am probably not educated enough on the actual
flow of a patent litigation, but I think that sounds
reasonable.
Mr. Issa. Okay, thank you. And the reason I ask that is,
and I will go to Mr. Griffin or any of the other folks that
have been mugged by a patent troll. Normally the troll presents
an extensive amount of discovery--who are your investors, what
are your contracts, who do you buy from, who do you sell to. In
other words, a lot of information that might be interesting,
but it does not have anything to do with do you infringe or
not.
So I would open it up to each of the witnesses that has
some experience about what the discovery process was like to
the extent, and I would start with Mr. Griffin because you got
the most of it.
Mr. Griffin. We have litigated a lot. Let me just tell the
Committee that we have had several cases in which a patent suit
was dismissed after markman, but only after we spent hundreds
of thousands of dollars in discovery to get to that point. So
it makes sense to kind of flip that because that is a legal
determination that can precede the discovery.
Mr. Issa. And for all the audience and people that are
trying to understand the record, a markman is determined
exclusively by the judge who interprets what the real meaning
of the patent is. Is that correct?
Mr. Griffin. That is correct. That is correct. And so, that
the facts of the case can then be applied, it makes sense to do
that before because then the discovery can be focused, and the
parties know what they are doing. We had a case recently in
which we received 39,000 pages of infringement contentions that
were photo shots that simply came out. And so, even after these
very light and thinly-developed complaints are filed, we have
enormous allegations.
Why could they not have been more specific to start with?
And that particular case was narrowed down to only two claims
by the time we got to trial. That is the extent of the work
that a defendant has to do to discharge his discovery
obligations under current law.
Mr. Issa. Ms. Underwood, in your case, had you gotten to
markman on your case, an element of the patent as you told us
was internet connectivity, and you did not have it, right?
Ms. Underwood. Exactly.
Mr. Issa. Did your attorneys tell you that you probably
would have been able to get the judge to dismiss the case at
that point based on not having an element of the patent?
Ms. Underwood. The attorney's opinion was, yes, that
eventually it probably would be dismissed, but after the
attorneys' costs exceeded what the costs were to settle.
Mr. Issa. It was financially reasonable on behalf of your
stockholders to settle even though you failed to have an
element that in an early markman would have determined that you
did not fall under the patent.
Ms. Underwood. Exactly. There was no research done. The
demand letter was very unclear, and clearly just mass mailed.
Mr. Issa. Mr. Moore?
Mr. Moore. We never reached that point. As soon as they
found out that I had a pro bono lawyer, they were very quick to
dismiss the case.
Mr. Issa. I guess we need more pro bono lawyers.
Mr. Moore. That would solve a lot----
Mr. Issa. Anyone in the audience that wants to contact
their friends, Washington has no shortage of lawyers. It is the
pro bono that is hard to get. Let me just briefly make some
people aware of something, and I mentioned my good friend,
Judge Moskowitz. I had such a case early on in the 90's at a
time in which markmens were new, and the judge did his markman
essentially as we were impaneling a jury. And one element of
the claim was it had to have a normally open relay that closed
in order to do X, Y, and Z. That was my industry. And I only
had one relay on the board, and it was normally closed.
But to be honest, the plaintiff in this case--I was a
defendant--had my entire customer list, had deposed all of my
staff, including my sales staff, not just engineering, had
detailed schematics of all my products. And, in fact, the
judge, and I do not believe this was incompetence, told me
after the fact that once he had made his markman, he knew we
had won. He just felt bad not letting it go to the jury, and I
am paraphrasing.
That is the reason that I asked you this question is part
of the Innovation Act is to try to streamline the process to
lower for both the plaintiff and the defendant if, in fact, the
plaintiffs believe they really do have a patent that is being
infringed, and the defendant quite frankly may really believe
that they are innocent, to get to that determination. And, Mr.
Griffin, because you have had this experience and you have
undoubtedly worked with other people, is it not true that even
in the Eastern District of Texas, markmens often make cases
settle because either the defendant realizes that they are
going to lose, or, quite frankly, the plaintiff realizes they
do not have a case?
Mr. Griffin. That is true. That is true. And certainly it
narrows the focus of discovery if discovery happens after the
markman hearing.
Mr. Issa. And I will rest my case with that, and yield. We
have no other Democrats at this time, so I yield back and go to
the Chairman of the full Committee, Mr. Goodlatte. I will not
only yield, I will yield the Chair.
Mr. Goodlatte [presiding]. The Chair recognizes the
gentleman from Texas, Mr. Farenthold, for his questions.
Mr. Farenthold. Thank you very much, Mr. Chairman. I
appreciate you all being here and say thanks for sharing your
experience. One of my concerns with the Innovation Act is that
it weakens one of the best tools for weeding out patents, the
interparty review and post-grant review process, by replacing
the Patent and Trademark Office standard of the broadest
reasonable interpretation of the patent claim with the district
court construction. Mr. Griffin, as someone who has been
directly attacked by weak patents, does this change concern
you?
Mr. Griffin. In the cases that we have been involved in so
far, we have not used that provision.
Mr. Farenthold. Mr. Moore, do you want to weigh in on that
at all?
Mr. Moore. I am not a lawyer, so I will leave it to Mr.
Griffin to answer that one.
Mr. Farenthold. All right. So, Mr. Moore, one of the more
disturbing parts of your testimony is the patent troll case you
were in, you were asked to send thousands of dollars by wire
transfer to an overseas bank account. I mean, this sounds like
one of these scams you get in your spam email, not like the
American patent system at work. Is this something that happens
regularly and that you have heard about, and can you tell me a
little bit more about how that happened?
Mr. Moore. Yes, absolutely. The patent troll instructed my
lawyer that the reason was to wire to an international, and it
was a different bank account overseas. It was a different
company, so we were paying an entirely different company, not
the company that was suing my company. He said the reason was
to avoid U.S. taxes. He said if we were going to pay
domestically through a regular transfer that we would have to
pay the taxes.
Mr. Farenthold. That seems like a scam, which kind of
brings me to the overall demand letter issue. You have seen a
lot of small businesses sue and settle under these demand
letters, as Ms. Underwood's bank does. At some point you start
to wonder, or at least I start to wonder, if we are going to
run out of small business to sue, and we get into the end user.
Obviously we have talked about the end user stay provisions and
moving it up exhaustively during this hearing.
But you get to the point of you can beat the rap, but you
cannot beat the ride, and that is really a good description I
think of a lot of litigation, and what the patent trolls rely
on. All right, it is going to be hundreds of thousands if not
millions of dollars to hire a lawyer. I can beat the rap, but I
am going to end with a million-dollar ride.
So let us talk a little bit about demand letter forms. One
of the things that we want to do is actually be able to from
the demand letter determine the scope of the appropriate and
who the true parties are. And I think there is some
misunderstanding about the intent. It is not so much to get at
the investors, as Mr. Pate has talked about. It is to actually
know who the inventors are and what the grounds of the patents
are. How do you feel about tightening up on demand letters, Mr.
Pate?
Mr. Pate. So I think there is some confusion in terms of
where the investors come in as through the joinder and fee
shifting as opposed to the demand letter.
Mr. Farenthold. But the idea behind the demand letters is
you want to know who is really behind this. And some argue that
this is going to chill investors in small businesses. If that
business is sued for patent, do they end up having to be, you
know, wrapped up in the process even beyond joinder at the
demand letter level.
Mr. Pate. So I have not thought deeply about that. My focus
on investors and personal liability has always been tied to the
joinder provision.
Mr. Farenthold. And do any of the other panelists want to
weigh in on the reform of the demand letters? Ms. Underwood?
Ms. Underwood. I think reforming the demand letter process
is key to stopping most of these frivolous attempts to extort
money from small businesses. And I think if the letters were
more transparent, if they had more detail about the particular
patent that was being violated, and identify where or how, what
grounds that they have to begin this process----
Mr. Farenthold. So you can make some intelligent
decisions----
Ms. Underwood. Exactly.
Mr. Farenthold [continuing]. Even possibly before a lawyer.
One last question with the investors with Mr. Pate. So there is
a study out that 55 percent of trolls target small businesses
that do not have the resources to fight back. I think that is
the reason we got a letter up on the Hill from 140 venture
capitalists actually in support of patent reform. This week it
came to us.
Since their interests are specifically in the growth and
success of small businesses across the country, it seems like
venture capitalists should be concerned on both sides of that.
It seems at odds with your testimony today. Even though you may
not have already been targeted by bad acting plaintiffs, could
you help me understand what kind of small business or inventors
are targeted by bad actors in the current system and why they
are targets?
Mr. Pate. Sure. So venture capital is an interesting thing.
I know the National Venture Capital Association is actually
opposed to the bill, and I am not sure the number of members
they have. I know it is in the multi-hundreds. And a lot of
independent companies, large companies have their own venture
capital arm, so Intel has a venture capital arm, Google has a
venture capital arm. And so that arm may be acting to take a
position that is beneficial to the overall organization and not
necessarily beneficial to the venture capital wing of the
organization. So it will be interesting to see who those
venture capital firms actually were.
I think the element that is so concerning for the investors
is the personal liability piece in the sense that no investor
in my company thinks they have personal liability for anything.
And so, to introduce potential personal liability to investors
in my company I think is a huge issue. To introduce it for me
is a huge personal issue. I am not personally guaranteed
anything in my company anymore. I like that. I do not want to
go back to a position where I could lose my house because I do
something stupid with my company.
Mr. Farenthold. All right. I see I am out of time. Thank
you for your indulgence, Mr. Chairman.
Mr. Goodlatte. Thank you very much. The Chair recognizes
the gentleman from Florida, Mr. Deutch.
Mr. Deutch. Thank you, Mr. Chairman. And I thank the
witnesses for their testimony, and thanks for sticking around
so that we could come back and continue this. I just want to
say this. I have the same visceral reaction to your stories
that I think my colleagues have. And it is clear that too many
small businesses and developers have been targeted by
intimidating letters, with bogus claims, about vague patents
that would not stand scrutiny today. Would not stand scrutiny
already.
The media has documented many examples from entities
claiming they own patents on shipping confirmation emails, for
the online purchases, to the concept of online shopping carts.
We get it, and that has to be addressed. Patent trolls send
demand letters to hundreds of small businesses, as you have
already pointed out, that some of their targets will pay up
instead of defending themselves in court.
But unfortunately for them, but thankfully for all of us,
some of those targeted by patent trolls have actually had their
day in court, and as a result, many of the problems that H.R. 9
claims to address are actually being resolved now by the court
system and at the U.S. Patent and Trademark Office. And my
concern today about this entire hearing and a lot of this
debate all together has been the sense that we have two
choices. We have a system where patent trolls are able to do
damage to innovators, and creators, and small businesses on the
one hand, or we have this bill on the other, and that you would
have to choose. I think all of us, including Mr. Pate, would
absolutely agree we have to do something about patent trolls.
I would say Florida, not unlike the Chairman's home State,
Chairman Issa's home State, is home to world class research
institutions who rely on patents to turn their innovations into
life-saving and profitable products. Last year in my home
district, Florida Atlantic University entered into a licensing
agreement with PortNexus and AT&T to bring a professor's
technology to market that will disable texting functions in
cell phones when a car is in motion and in the driver's seat.
Texting while driving makes crashes 23 times more likely. And
the licensing of this technology will help bring in revenue for
the university. It will create jobs, and, most importantly, it
will save lives.
And the abuses that we have been speaking about, that I
spoke of earlier, against developers and businesses by patent
trolls have little in common with legitimate patent disputes
that are vital to universities, that are vital to inventors,
and they are vital to researchers. And yet it is those
patenting innovations across every brand of technology and life
sciences who are going to be dragged into court and into this
over broad litigation reform in H.R. 9.
If we go forward with something that is too broad, then
that will, I believe, as Mr. Pate said, scare off investors, in
this case from investing in the next great discovery like at my
own university or universities around the country. Tipping the
scales too far in a justified, but overbroad, attempt to stop
patent trolls runs the serious risk of undermining one of the
great strengths of the American economy.
So I would just ask this question of panel. Is the problem
how our entire litigation system works not just for the
violator rights of legitimate patent holders, or is the problem
bad actors who abuse the system by taking advantage of obscure,
overly broad patents that PTO, we all now know, regrets
awarding in the first place and would never issue under today's
standards? And if the problem is patent trolls, why would we
target these bad actors in abusive behaviors with procedural
changes that will wind up harming innovators who rightfully
expect to be able to defend their property rights in court? Mr.
Griffin?
Mr. Griffin. I would love to answer that question. That is
a good question. The difference is in the tactics. There are
abuses that are exploited because of the existing state of
procedures in the law, and I disagree that these provisions are
overly broad. These are narrowly tailored to take care of the
abuses.
Mr. Deutch. I am sorry. I just realized I do not have a lot
of time. I agree completely that trolls should not be able to
hide behind shell corporations, and I introduced legislation to
address that. There are provisions that I think everyone
believes can address that, and we ought to. Likewise, I
absolutely think that this idea that a patent troll can send a
demand letter and expect to pressure a developer or small
business into paying up is also problematic.
But this legislation does not address that at all. There is
legislation that addresses the demand letter issue. This does
not do it. This only refers to demand letters once we are in
litigation.
Mr. Griffin. This is more substantive.
Mr. Deutch. It is not more substantive. It only addresses--
--
Mr. Griffin. I believe it is more substantive.
Mr. Deutch. The concern with demand letters is that they
are sent--before we get to that point, I just would suggest,
Mr. Chairman, that I would urge the Chairman, and I would
strongly urge the community that cares so much about these
issues that this does not need to be either/or. It does not
need to be a current system which has abuses that must be
addressed for the benefit of our economy, or a bill that goes
so far in the other direction that it will stifle innovation,
and that it will prevent the kinds of investments, and will
prevent the creators in this country from being able to defend
their intellectual property through the patents that they own.
And I would yield back.
Mr. Goodlatte. Well, I thank the gentleman, and I share his
concern. That is why we are doing this bill. But I do want to
give Mr. Griffin an opportunity to answer the question that you
asked him. So we will give him an opportunity to do that right
now.
Mr. Griffin. Thank you, Mr. Chairman. No, this is a
comprehensive thing. The issue of the demand letters, it seems
to me that certain people are focusing altogether too much on
demand letters. Demand letters are a problem, and that problem
should be fixed. But they are not nearly the universe of
problems associated with patent troll litigation abuses.
The economics are all skewed toward the plaintiff, and the
defendant is burdened with a lot of costs that are escalated in
the manner of the litigation. I think that defending against 30
different actions entitles me to say that. It is very difficult
to defend under the current system of litigation that we have.
I have seen complaints that are only 6 pages long with no
specificity whatsoever, leaving us to try to discover what is
going on.
We spend hundreds of thousands of dollars before we can get
to a markman hearing. That is simply wrong. A markman hearing
that says that this patent does not apply to our processes.
That is unfair, and that eats up jobs, it eats up development
costs. It eats up innovation in this country. $29 billion are
spent annually in this type of abusive litigation. To say this
is a demand letter problem is understating the problem.
Mr. Deutch. I agree completely. Can I just ask a follow-up,
Mr. Chairman?
Mr. Goodlatte. Sure, go ahead. Go ahead.
Mr. Deutch. I agree completely. I am not suggesting for a
moment that that is the only problem. What I am suggesting,
just to focus on the issue of discovery, if a change is made
that prevents any discovery, that prevents the patent holder
from learning in discovery that not a patent troll, but an
infringer not in a patent troll case, but in a real case where
the patent holder's patent is being infringed upon, why would
you shut off the possibility of having that patent holder go
forward with a claim when something comes up during discovery
that they were unaware of because the infringer hid it from
them and because it was not apparent? Why would you take that
away from the patent holder?
Mr. Griffin. The answer is that in a markman hearing, the
determination of what the patent covers is a legal
determination. And if the patent does not cover the process
that is in question, then the defendant ought to be entitled to
dismiss that case before irrelevant discovery takes place, as
it does now, over millions of pages of discovery that is
unnecessary. Trolls do this to ramp up the costs of the
defendants so that they will settle before going trial.
Mr. Deutch. I am sorry, Mr. Chairman. I would love to
continue this conversation, Mr. Griffin, in my office. I would
suggest when we talk about the steps that this legislation goes
that are just a bit too far, barring the discovery of
electronic communications, for example, strikes me as something
that will make it more difficult, again, for the patent holder,
a patent holder who is trying to protect his property from
upholding that patent against an infringer. But I would welcome
the opportunity to discuss it.
Mr. Goodlatte. And I would love to join in that
conversation. There is nothing in this bill----
Mr. Deutch. Let us do it in the Chairman's office.
Mr. Goodlatte. There is nothing in this bill that bars the
discovery of electronic communications.
Mr. Deutch. We will look forward to having that
conversation.
Mr. Goodlatte. Sure. While we are at it, I am going to ask
Ms. Underwood to address another subject here that is of
interest. One of the major sources of abusive patent litigation
stems from the Federal court's 1998 State Street decision,
which opened the door to dubious business method patents, a
decision that has brought real harm to our patent system. In
recent years, the Supreme Court has helped to repair this
damage and reverse the tide of such weak patents through its
Bilski and Alice decisions.
Can you speak more to the importance of the American
Invents Act transitional program for covered business method
patents, and also talk about the amount of capital that
community banks invest in startups and small businesses in
America, and the real costs of abusive patent litigation on
investment in those communities?
Ms. Underwood. The Covered Business Method Program has been
a great program for the banking industry, but clearly for all
industries, as you know. It covers any financial transaction,
and it has addressed a number of the very large patent suits.
And our position is that it would be wonderful to see that
become a permanent program available to us, and it would be
wonderful to have the PTO have the opportunity to waive any
fees so that the community banks could take further advantage
of that program.
Mr. Goodlatte. Thank you. And, Mr. Griffin, are the
problems surrounding patent trolling the result of certain
plaintiff friendly judicial districts, and what can Congress do
to help rebalance the scales so venue is no longer a weapon of
choice for those engaging in patent trolling?
Mr. Griffin. I think that is a difficult issue. There are
certain dockets that are known to have more patent troll type
litigation in them. It might be a good idea to study that to
see how many cases are filed. The process, as you know, Mr.
Chairman, the judges, and they have local districts and rules
that make these districts, I think, more favorable to the
patent bar. And that is why we get sued occasionally in remote
districts.
But I think these narrow changes that are in the Innovation
Act, these targeted things will be useful not only to the
courts in those jurisdictions to follow the law, but also to
the court of appeals that reviews these decisions. I think that
Congress needs to make statutory some of the changes about fee
shifting and other things to make this more palatable to these
local judges and to specify and give some certainty to a
defendant who may wind up spending $1, $2, $3 million to defend
a case that was unjustified in the first place, to be able not
only to get an order for those fees, but also to be able to
recover them at the end of the day, because one without the
other is no good.
Mr. Goodlatte. And that implies conversely your company is
probably most often in the position of defending these cases,
but there are people with legitimate patent claims who would
want those same principles applied to them when they are trying
to perfect and protect their intellectual property rights.
Mr. Griffin. And my understanding since the Supreme Court
had clarified in the Octane Fitness case this whole idea of fee
shifting and other things. My understanding is that 30 of those
cases, of the 30 cases that have been filed, actually the
orders were 30 percent for plaintiffs. So plaintiffs do recover
for unjustified defenses.
Mr. Goodlatte. As well they should.
Mr. Griffin. As well they should.
Mr. Goodlatte. And finally, I had a dialogue with Mr. Pate,
and my time ran out. I want to give you an opportunity to
respond to some of his concerns with regard to the joinder
provisions in the legislation, and my point that unless you are
essentially a shell corporation, you do not have reason to fear
the joinder provisions because they will not apply to you.
Mr. Griffin. I think your point is correct that, in
essence, the current business and favored business model of
trolls is to have a shell corporation that has no other
business other than litigation. As long as we have that
distinguishing feature, Mr. Pate should not be concerned. I
cannot tell him what his investors ought to be concerned about,
but my experience in innovation, and technology, and investors,
and everything else is like a law of nature. If there is
something to be eaten, there will be something there to eat it.
And someone will be interested in funding a company that might
have to enforce its patents.
I do not think that it is only one quality, a fearful
venture capitalist that will do something on a wonderful
product like his. I am going to go out and buy one.
Mr. Goodlatte. They do it right now, and, in fact, it does
not happen with the frequency that I would like to see, and
that is why we have this industry of patent trolling. But the
courts have the authority right now to pierce the corporate
veil and do these things right now.
Mr. Griffin. Yes, they do. Yes, they do.
Mr. Goodlatte. Thank you very much. Does anything prompt
any further questions from the gentleman from Florida?
Mr. Deutch. No, thank you.
Mr. Goodlatte. Thank you, and I want to thank all the
witnesses for their testimony today. I think this has been a
very helpful hearing. Get the magic words here to end it. And I
want to invite all of you to continue to have dialogue with not
Mr. Deutch, but other Members of the Committee and the
Committee staff. This has been a very open and transparent
process for about 2 years now that we have produced this
legislation. And it is a very strongly bipartisan legislation
that has been transparent in its formation. And it is, I think,
important that we keep it that way as we work our way through
the process.
We are going to proceed with this legislation. The Senate
will proceed with theirs. We will have to work out differences,
and then we will work with the Administration as we have, by
the way, throughout this whole process. The President endorsed
this bill as it came out of this Committee in the last
Congress. And that is how you get bipartisan legislation, which
is really the only kind of legislation that gets signed into
law.
So this concludes today's hearing. I thank all the
witnesses for attending. And without objection, all Members
will have 5 legislative days to submit additional written
questions for the witnesses or additional materials for the
record.
And this hearing is adjourned.
[Whereupon, at 1:02 p.m., the Subcommittee was adjourned.]
A P P E N D I X
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