[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]


 
                   LITIGATION AS A PREDATORY PRACTICE 

=======================================================================

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                         INTELLECTUAL PROPERTY,
                     COMPETITION, AND THE INTERNET

                                 OF THE

                       COMMITTEE ON THE JUDICIARY
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                               __________

                           FEBRUARY 17, 2012

                               __________

                           Serial No. 112-79

                               __________

         Printed for the use of the Committee on the Judiciary


      Available via the World Wide Web: http://judiciary.house.gov


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                       COMMITTEE ON THE JUDICIARY

                      LAMAR SMITH, Texas, Chairman
F. JAMES SENSENBRENNER, Jr.,         JOHN CONYERS, Jr., Michigan
    Wisconsin                        HOWARD L. BERMAN, California
HOWARD COBLE, North Carolina         JERROLD NADLER, New York
ELTON GALLEGLY, California           ROBERT C. ``BOBBY'' SCOTT, 
BOB GOODLATTE, Virginia                  Virginia
DANIEL E. LUNGREN, California        MELVIN L. WATT, North Carolina
STEVE CHABOT, Ohio                   ZOE LOFGREN, California
DARRELL E. ISSA, California          SHEILA JACKSON LEE, Texas
MIKE PENCE, Indiana                  MAXINE WATERS, California
J. RANDY FORBES, Virginia            STEVE COHEN, Tennessee
STEVE KING, Iowa                     HENRY C. ``HANK'' JOHNSON, Jr.,
TRENT FRANKS, Arizona                  Georgia
LOUIE GOHMERT, Texas                 PEDRO R. PIERLUISI, Puerto Rico
JIM JORDAN, Ohio                     MIKE QUIGLEY, Illinois
TED POE, Texas                       JUDY CHU, California
JASON CHAFFETZ, Utah                 TED DEUTCH, Florida
TIM GRIFFIN, Arkansas                LINDA T. SANCHEZ, California
TOM MARINO, Pennsylvania             JARED POLIS, Colorado
TREY GOWDY, South Carolina
DENNIS ROSS, Florida
SANDY ADAMS, Florida
BEN QUAYLE, Arizona
MARK AMODEI, Nevada

      Sean McLaughlin, Majority Chief of Staff and General Counsel
       Perry Apelbaum, Minority Staff Director and Chief Counsel
                                 ------                                

  Subcommittee on Intellectual Property, Competition, and the Internet

                   BOB GOODLATTE, Virginia, Chairman

                   BEN QUAYLE, Arizona, Vice-Chairman

F. JAMES SENSENBRENNER, Jr.,         MELVIN L. WATT, North Carolina
Wisconsin                            JOHN CONYERS, Jr., Michigan
HOWARD COBLE, North Carolina         HOWARD L. BERMAN, California
STEVE CHABOT, Ohio                   JUDY CHU, California
DARRELL E. ISSA, California          TED DEUTCH, Florida
MIKE PENCE, Indiana                  LINDA T. SANCHEZ, California
JIM JORDAN, Ohio                     JERROLD NADLER, New York
TED POE, Texas                       ZOE LOFGREN, California
JASON CHAFFETZ, Utah                 SHEILA JACKSON LEE, Texas
TIM GRIFFIN, Arkansas                MAXINE WATERS, California
TOM MARINO, Pennsylvania             HENRY C. ``HANK'' JOHNSON, Jr.,
SANDY ADAMS, Florida                   Georgia
MARK AMODEI, Nevada

                     Blaine Merritt, Chief Counsel

                   Stephanie Moore, Minority Counsel


























                            C O N T E N T S

                              ----------                              

                           FEBRUARY 17, 2012

                                                                   Page

                           OPENING STATEMENTS

The Honorable Bob Goodlatte, a Representative in Congress from 
  the State of Virginia, and Chairman, Subcommittee on 
  Intellectual Property, Competition, and the Internet...........     1
The Honorable Melvin L. Watt, a Representative in Congress from 
  the State of North Carolina, and Ranking Member, Subcommittee 
  on Intellectual Property, Competition, and the Internet........     3

                               WITNESSES

The Honorable Christopher B. Saxman, former Delegate, Virginia 
  House of Delegates
  Oral Testimony.................................................     5
  Prepared Statement.............................................     7
J. Douglas Richards, Partner, Cohen Milstein
  Oral Testimony.................................................     9
  Prepared Statement.............................................    11
Marina Lao, Professor of Law, Seton Hall University School of Law
  Oral Testimony.................................................    20
  Prepared Statement.............................................    21


                   LITIGATION AS A PREDATORY PRACTICE

                              ----------                              


                       FRIDAY, FEBRUARY 17, 2012

              House of Representatives,    
         Subcommittee on Intellectual Property,    
                     Competition, and the Internet,
                                Committee on the Judiciary,
                                                    Washington, DC.

    The Subcommittee met, pursuant to call, at 9:36 a.m., in 
room 2141, Rayburn House Office Building, the Honorable Bob 
Goodlatte (Chairman of the Subcommittee) presiding.
    Present: Representatives Goodlatte, Quayle, Chabot, Watt, 
and Jackson Lee.
    Staff present: (Majority) Holt Lackey, Counsel; Olivia Lee, 
Clerk; and (Minority) Stephanie Moore, Subcommittee Chief 
Counsel.
    Mr. Goodlatte. Good morning and welcome to this hearing of 
the Subcommittee on Intellectual Property, Competition, and the 
Internet. Today's hearing is on litigation as a predatory 
practice.
    The Judiciary Committee has heard ample evidence this 
Congress about the excesses and abuses of America's lawsuit 
system. We have heard how runaway litigation distorts our 
health care and patent systems. The Constitution Subcommittee 
has received testimony showing that our system of discovery in 
litigation is unduly costly and that even frivolous lawsuits 
too often go unsanctioned.
    We have reported several bills to rein in litigation 
abuses, including the HEALTH Act, the Smith-Leahy America 
Invents Act, and the Lawsuit Abuse Reduction Act.
    Today's hearing examines a different aspect of America's 
lawsuit problem, the strategic abuse of litigation system as an 
anti-competitive tactic. Precisely because our civil justice 
system is so expensive and tolerant of tenuous claims, 
litigation can be a deadly weapon in the hands of a cartel or 
an aspiring monopolist. Litigation can be used to drive up a 
competitor's costs, to gain access to a competitor's otherwise 
confidential information, and to divert a competitor's 
resources away from offering competitive goods and services.
    Large companies can impose ruinous legal costs on their 
smaller competitors by forcing them to defend against a 
lawsuit. The median case in Federal court costs about $20,000 
to defend, and, in many cases, the cost is much higher.
    A predatory plaintiff controls the scope of the claims in 
the suit, and so has the ability to structure its claims and 
discovery requests in a way that maximizes costs for the 
defendant. And the costs of litigation weigh much heavier on a 
small business than a large corporation.
    If the claim is merely plausible, then a predatory 
plaintiff is entitled to discovery of any matter relevant to 
the claims or defenses in the case. A defendant may be forced 
to turn over e-mails, business plans, customer lists, and other 
sensitive information. The more documents the defendant is 
forced to turn over, the higher the costs of the lawsuit. And 
the lawsuit forces the defendant to spend time and money on 
litigation rather than competing in the marketplace.
    For all of these reasons, litigation can be a particularly 
effective predatory strategy. Deployed strategically, 
litigation can put a competitor out of business, prevent a 
competitor from ever entering the market, or force a competitor 
to reduce its output.
    If a big company succeeds in using litigation to limit 
competition, then there is a dangerous probability that it 
could profit by raising prices on consumers.
    Indeed, strategic litigation can be a more effective means 
of eliminating a competitor than tactics like predatory pricing 
that have long been banned by the antitrust laws. Predatory 
pricing requires a dominant party to sell its products at below 
its costs, lowering its profits in the short term in the hope 
of realizing monopoly profits after the competitor is 
eliminated. With litigation, on the other hand, a party can 
seek a monopoly or to eliminate a competitor without having to 
lower its own prices.
    While a litigation strategy imposes litigation costs on a 
predatory plaintiff, it imposes equivalent costs on a target 
defendant. The defendant, often a smaller business than the 
predatory plaintiff, may be less equipped to bear these costs.
    As a predatory tactic, abusive litigation is relatively 
cost-effective for the predatory plaintiff and expensive for 
the defendant. This is why some commentators have dubbed 
abusive litigation a form of ``cheap exclusion.''
    But the Supreme Court has created an exemption that 
protects abusive anti-competitive litigation from the antitrust 
laws. The Noerr-Pennington doctrine was originally formulated 
to create an antitrust immunity for citizens exercising their 
First Amendment right to petition the legislature. Because 
government actions are beyond the scope of antitrust laws, and 
because citizens have a right to petition the government to 
adopt policies they favor, the Court held that the political 
petitioning activities do not violate the antitrust laws.
    The Court has since extended this holding to protect all 
forms of petitioning the Government, including the filing of a 
lawsuit. But the analogy between petitioning the legislature 
and petitioning a court is flawed.
    Threatening to restrict a frivolous or abusive political 
argument could chill free speech and the flow of information, 
and raises serious First Amendment questions. But courts have 
long put reasonable limits on the types of arguments that a 
litigant can make and have long-sanctioned frivolous and 
abusive arguments made for improper purposes.
    Abuse of process was a tort at common law. Rule 10 of the 
Federal Rules of Civil Procedure provides for dismissal of 
meritless and implausible claims. Rule 11 provides sanctions 
for filings made with an improper purpose. The rules of 
evidence prohibit the introduction of evidence based on 
hearsay, conjecture, or unreliable methods of expert analysis.
    Applying the antitrust laws to prohibit litigation filed 
with the anticompetitive intent to monopolize a market or to 
unreasonably restrain trade would not harm the public's right 
to access the courts for legitimate purposes. Unfortunately, 
the courts have liberally applied Noerr-Pennington antitrust 
immunity to litigation and have construed the sham litigation 
exception to that doctrine very narrowly.
    As a result, abusive litigation persists as a predatory 
anticompetitive tactic. Today's hearing will explore this 
problem and how to address it.
    I want to welcome and recognize the Ranking Member of the 
Subcommittee, the gentleman from North Carolina, Mr. Watt.
    Mr. Watt. Thank you, Mr. Chairman. And I appreciate the 
Chairman convening this hearing.
    The First Amendment holds a hallowed place in our 
Constitution, guaranteeing the right of people to petition the 
government. Antitrust laws are also of fundamental importance 
in our society. As Justice Thurgood Marshall observed years 
ago, ``Antitrust laws are the Magna Carta of free enterprise. 
They are as important to the preservation of economic freedom 
and our free enterprise system as the Bill of Rights is to the 
protection of our fundamental personal freedoms.''
    The question here seems to me to be, what happens when a 
fundamental personal right conflicts with a fundamental free 
enterprise right? Which right is more fundamental and should 
take precedence in that event?
    Early tensions between these two principles brought into 
focus the need for doctrinal adjustments and led to the Noerr-
Pennington immunity.
    As we have heard, the Noerr-Pennington doctrine provides 
immunity from antitrust liability, the guardian of free 
enterprise rights, to individuals and corporations who exercise 
their personal rights to petition the Federal or State 
Government to take official actions that may impose a restraint 
on trade.
    As Members of Congress, we often think about the right to 
petition the government as protecting lobbying, but Noerr 
applies to other areas of First Amendment expression as well.
    In litigation, I think we can all imagine the dominant 
players in an industry reacting with hostility against a small 
player who dares to enter that market. Attempting to drive out 
rivals from the opportunity to compete is clearly an abuse of 
process and antitrust principles. But it is also too easy to 
respond to competitive lawsuits by claiming that the suit is 
merely a means to eliminate competition.
    If dominant players, the rich and well-represented who can 
afford the best legal minds, walked into court on an equal 
footing with small players, the poor, the indigent, and the 
underrepresented, wouldn't our system of justice in general be 
eminently more fair? Or to state the converse, if the small 
players, the poor, indigent litigants, walked into court on an 
equal footing with dominant players, the rich and well-
represented, wouldn't justice be done a lot more often?
    In an effort to constrain dominant players, the Supreme 
Court in a 1993 case, Professional Real Estate Investors v. 
Columbia Pictures Industries, the so-called PRE case, made an 
attempt to constrain the Noerr doctrine to prevent a perversion 
of the First Amendment by giving structure to the so-called 
sham exception to Noerr immunity.
    In subsequent years, however, the PRE test for determining 
whether a petition in the litigation context is a sham has 
shown signs of ineffectiveness.
    I believe it is important to consumers, the economy, and 
businesses--small and big--to know how to distinguish 
legitimate petition from an anti-competitive effort to 
undermine competition. In many ways, unfortunately, this 
Judiciary Committee has preoccupied itself with protecting 
dominant players from frivolous litigation. So in a sense, this 
hearing seems to me to represent a welcome role reversal for 
the Committee.
    I am particularly interested in hearing from witnesses 
their views on the breadth of Noerr-Pennington in the 
litigation context, as well as the scope of the sham litigation 
exception. Are they currently working in a compatible fashion? 
Does one make the other meaningless? Further, should Noerr-
Pennington immunity have parallel application across the 
methods available to petition the government? Or is litigation 
decisively different?
    I appreciate that we have a businessman, a law professor, 
and a litigator on our panel, and I believe that we will be 
enriched by the diversity of perspectives reflected here today.
    The Chairman spoke quite a bit in his opening statement 
about abusive litigation. I guess I come kind of from a 
different perspective. I have seen a lot of abusive defense of 
litigation: stonewalling, failing to give up documents, failing 
to allow the justice system. So perhaps our next hearing will 
be about that disparity between rich and poor, dominant and 
small, and we will get to really trying to level the playing 
field in the litigation context, which is really where the 
problem exists, in my opinion.
    I yield back, Mr. Chairman.
    Mr. Goodlatte. I thank the gentleman for his comments. And 
I think he will find that this hearing will, indeed, touch on 
some of those issues that you describe.
    And we welcome all of our witnesses and the contributions 
they will make.
    But before I introduce them, I would like them, as is the 
custom of this Committee, to stand and be sworn.
    [Witnesses sworn.]
    Mr. Goodlatte. Thank you very much, and please be seated.
    Our first witness is Chris Saxman, a former member of the 
Virginia House of Delegates. Mr. Saxman's family founded and 
runs the Shenandoah Valley Water Company. Mr. Saxman has been 
involved in issues facing that industry as a former chairman 
and current board member of the International Bottled Water 
Association. I look forward to hearing his perspective on this 
issue as a policymaker and as a small-business man. And I am 
proud to call Mr. Saxman a constituent and friend.
    Our second witness, Doug Richards, practices antitrust 
class action law and is the managing partner at the New York 
office of Cohen Milstein. Before entering private practice, Mr. 
Richards served as deputy general counsel of the Commodity 
Futures Trading Commission, where he received a special service 
award for exemplary accomplishment.
    Our third and final witness is Professor Marina Lao of 
Seton Hall University School of Law. Professor Lao is a former 
attorney with the Department of Justice Antitrust Division, a 
member of the advisory board of American Antitrust Institute, 
and the former Chair of the section of antitrust and economic 
regulation of the Association of American Law Schools. 
Professor Lao's article ``Reforming the Noerr-Pennington 
Antitrust Immunity Doctrine'' examines the scope of Noerr-
Pennington immunity and offers helpful suggestions for reform.
    I would point out to each of the witnesses that there is a 
timer on the table in front of you. You have 5 minutes to make 
your statements. Your entire statement, written statement, will 
be made a part of the record. When the yellow light comes on, 
you will have 1 minute to complete your statement. When the red 
light comes on, we ask that you wrap up your remarks.
    And we will start with Mr. Saxman.
    Welcome. Glad to have you up from the Shenandoah Valley.

   TESTIMONY OF THE HONORABLE CHRISTOPHER B. SAXMAN, FORMER 
             DELEGATE, VIRGINIA HOUSE OF DELEGATES

    Mr. Saxman. Thank you, Mr. Chairman, and Members of the 
Committee.
    My name is Chris Saxman. I am a recently retired member of 
the Virginia General Assembly, having served the 20th House 
District from 2002 to 2010. I grew up in a small family 
business, the Shenandoah Valley Water Company, and we have 45 
full-time employees for whom we provide health care for the 
entire family while paying above-average market wages. 
Additionally, I am a past chairman of the International Bottled 
Water Association, while currently serving on its board of 
directors and executive committee.
    In short, Mr. Chairman, I have seen the business world as a 
frontline low-skill employee to a bottled water deliveryman to 
a manager to an executive. I have been a legislator who has 
worked on legislation dealing with just about every aspect of 
business, and I have also worked very closely with small mom-
and-pop companies and large global corporations who employ 
people in the tens of thousands to improve products, services, 
relationships, and industry standards.
    Over the course of my life in business and politics, I have 
come across a disturbing and pervasive business practice that, 
in my opinion, threatens the very foundations of the American 
free market capitalist system. In most political debates, I 
would be considered a free-market, supply-side adherent; 
however, I also believe that, as James Madison said, ``If men 
were angels, no government would be necessary.''
    A sound economy is not just what one can do in a market but 
also what one should do. Government should protect people who 
are engaged in commerce just as it should protect the average 
citizen. One cannot steal property from another just as one 
cannot physically harm or threaten another to gain property or 
pleasure.
    The issue today before you is predatory litigation or, as I 
prefer to call it, legal extortion. I will give you two 
examples of which I have become aware in my various capacities.
    Number one, a multinational non-American company in my 
industry willfully, intentionally, and knowingly breached a 
contract with which it had complied for 13 years in order to 
gain financially at the expense of an American company with 
whom they had had a successful, mutually beneficial 20-year 
business relationship. The American company, at the time of the 
breach, was .4 percent the size of the North American 
subsidiary of a large multinational which broke the contract, 
and one one-hundreth the size of its global parent.
    The evidence through the trial clearly shows a pattern of 
behavior in which the larger company, and its employees, 
conspired to steal--my term--steal from the smaller firm that 
which it could not gain in the market or would not purchase at 
fair market value.
    If our biggest competitors decide--I think I am missing 
part of my testimony. It is on the backside, Mr. Chairman.
    Rather than simply pay the company fair market value for 
the business, the larger company figured that it would be 
cheaper to take the business via the American court system.
    So by forcing the American company to defend its own 
property in Federal court and force the American company to 
spend millions of dollars in legal fees, the larger company 
determined it had nothing to lose.
    What is even more disturbing is that the large 
multinational forced the smaller company to initiate the 
litigation. It is literally a win-win scenario. Even if, after 
5 years of expensive and time-consuming litigation, which is 
still pending at the appellate level, they lose the case, the 
company will either expense it off their books or account it as 
an asset purchase ending up with the business they initially 
sought.
    The large multinational went so far as to investigate the 
American company owner's personal and corporate debt load 
before it decided to take pre-emptive legal action. They waited 
until he was in a weakened condition and then made their move. 
The results for the consumer will be a less competitive market. 
The broader community will see wealth being transferred out of 
the country, lost jobs, lower wages and benefits, and overall 
economic decline.
    The second case involves the extortion of taxpayer money by 
the use of threat of legal action by companies who have 
submitted bids to local governments under a legal Request for 
Proposal process. In this situation, a company will submit bids 
that do not entirely comply with an RFP but will have a bid 
price that is much higher than necessary. When that company is 
not awarded the RFP, the company will threaten legal action 
unless the bidding process is reconsidered. This causes 
inordinate delays and, obviously, higher bid awards, because 
most local governments cannot afford protracted legal expenses.
    Companies know that they have a distinct advantage in this 
process--again, in a win-win scenario. They will either win the 
bid or get the local government to increase the overall price 
in the market, which will naturally be seen in similar bids 
throughout the country, and all at taxpayer expense.
    So a bid that forces up prices in X county in Virginia will 
transfer to Y city in North Carolina due to market realities. 
This is a very well-thought-out corporate strategy which, in 
conjunction with Federal mandates and accompanying Federal 
grants, strikes at the very heart of the problems that 
undermines our economy--lack of trust in our governing and 
institutional structures.
    I can provide specifics upon request, but my interest here 
today is to leave you with the impression that there is 
something very wrong in our economy. The court system has been 
weaponized in the market and is being used against smaller, 
weaker companies who cannot withstand the attacks.
    [The prepared statement of Mr. Saxman follows:]
      Prepared Statement of the Honorable Christopher B. Saxman, 
              former Delegate, Virginia House of Delegates
    Mr. Chairman and members of the Committee,
    My name is Chris Saxman. I am a recently retired member of the 
Virginia General Assembly having served the 20th House District from 
2002-2010. I grew up in a small family business, Shenandoah Valley 
Water Company and we have 45 full time employees for whom we provide 
health care for the entire family while paying above average market 
wages. Additionally, I am a past Chairman of the International Bottled 
Water Association while currently serving on its Board of Directors and 
Executive Committee.
    In short Mr. Chairman, I have seen the business world as a front 
line low skill employee to a bottled water deliveryman to a manager to 
an executive. I have been a legislator who has worked on legislation 
dealing with just about every aspect of business and I have also worked 
very closely with small mom and pop companies and large global 
corporations who employ people in the tens of thousands to improve 
products, services, relationships and industry standards.
    Over the course of my life in business and politics, I have come 
across a disturbing and pervasive business practice that, in my 
opinion, threatens the very foundations of the American Free Market 
Capitalist system.
    In most political debates I would be considered a free market 
supply side adherent; however, I also believe that as James Madison 
said ``If men were angels, no government would be necessary.''
    A sound economy is not just about what one CAN do in a market but 
also what one SHOULD do.
    Government should protect people who are engaged in commerce just 
as it should protect the average citizen. One cannot steal property 
from another just as one cannot physically harm or threaten another to 
gain property or pleasure.
    The issue before you today is ``predatory litigation'' or as I 
prefer to call it ``legal extortion.''
    I will give you two examples of which I have become aware in my 
various capacities.
    1. A multinational non American company, in my industry, willfully, 
intentionally and knowingly breached a contract with which it had 
complied for 13 years in order to gain financially at the expense of 
the American company with whom they had had a successful mutually 
beneficial 20 year business relationship. The American company, at the 
time of the breach was .4% the size of the North American subsidiary of 
the large multinational which broke the contract and .01% the size of 
its global parent. The evidence throughout the trial clearly shows a 
pattern of behavior in which the larger company, and its employees, 
conspired to steal from the smaller firm that which it could not gain 
in the market or would not purchase at fair market value. Rather than 
simply pay the company fair market value for the business, the larger 
company figured that it would be cheaper to take the business via the 
American court system. So, by forcing the American company to defend 
its own property in federal court and force the American company to 
spend millions of dollars in legal fees, the larger company determined 
it had nothing to lose. What is even more disturbing is that the large 
multinational forced the smaller company to initiate the litigation.
    It's literally a win win scenario. Even if, after 5 years of 
expensive and time consuming litigation (which is still pending at the 
appellate level) they lose the case, the company will either expense it 
off their books or account it as an asset purchase ending up with the 
business they sought.
    The large multinational went so far as to investigate the American 
company's owner's personal and corporate debt load before it decided to 
take pre-emptive legal action. They waited until he was in a weakened 
condition and then made their move.
    The results for the consumer will be a less competitive market. The 
broader community will see wealth being transferred out of the country, 
lost jobs, lower wages and benefits, and overall economic decline.
    2. Another case involves the extortion of taxpayer money by the use 
of threat of legal action by companies who have submitted bids to local 
governments under a legal Request For Proposal process. In this 
situation, a company will submit bids that do not comply entirely with 
an RFP but will have a bid price that is much higher than necessary. 
When that company is not awarded the RFP, the company will threaten 
legal action unless the bidding process is reconsidered. This causes 
inordinate delays and obviously higher bid awards because most local 
governments cannot afford protracted legal expenses. Companies know 
that they have a distinct advantage in this process again, in a win win 
scenario. They either win the bid or get the local government to 
increase the overall price in the market which will naturally be seen 
in similar bids throughout the country and all at taxpayer expense. So, 
a bid that forces prices up in X County in Virginia will transfer to Y 
City in Pennsylvania due to market realities. This is a very well 
thought corporate strategy which, in conjunction with federal mandates 
and accompanying federal grants, strikes to heart of the problem that 
undermines our economy--lack of trust in our governing and 
institutional structures.
    I can provide specifics upon request but my interest here today is 
to leave you with the impression that there is something very wrong in 
our economy. The court system has been weaponized in the market and is 
being used against smaller, weaker companies who cannot withstand the 
attacks.
    We are a small family business who is constantly competing with 
large multinational corporations for every customer. We live under the 
constant threat of predatory litigation. If our biggest competitors 
decide to train the full resources of their legal divisions on us, how 
can we compete? We just want to be in business to deliver good, safe 
and great tasting bottled water to our customers at the best price in 
the market. We employ 45 Virginians who share that goal and work hard 
every day to make it a reality. But we don't have a team of lawyers on 
retainer ready to engage in trench warfare. We want to win in the 
marketplace, not the courtroom. I think every small businessman in 
America feels the same way.
    Imagine my surprise when I learned that the law creates a special 
exemption from antitrust, the Noerr-Pennington Doctrine, that protects 
these big companies' right to sue my family's business and fellow small 
businesses in an attempt to drive us from the market. I don't think it 
is right that one of the most effective strategies that our competitors 
can adopt to exclude us from the market is also one of the few 
exclusionary strategies that enjoys near blanket immunity from the 
antitrust law.
    We're not afraid of predatory pricing by my rivals. We're not 
afraid of anything our competitors can do to us in the market. If the 
game is delivering water to our customers at the best price with the 
best service, I know we can beat them. We have the best and hardest 
working drivers, customer service reps, and sales team in the 
Shenandoah Valley. But if the game is a protracted lawsuit, well, we 
just can't compete with their lawyers.
    The impacts are felt all across society in a subtle but serious 
way--people lose health care, jobs are lost and corporate profits are 
concentrated and in many cases sent overseas. Unless the law sanctions 
this behavior severely, big corporations will continue to engage in it. 
Unfortunately, experience teaches that they will not do what they 
should do, but what they can get away with. Right now they can abuse 
the legal system to weaken smaller competitors like us, and so they do. 
The antitrust law should be clarified so that abusive litigation is 
punished just as severely as other anticompetitive, predatory 
strategies--including by treble damages and, where appropriate, 
criminal sanctions.
    Thank you Mr. Chairman.
                               __________

    Mr. Goodlatte. Thank you, Mr. Saxman.
    Mr. Richards, welcome. You might want to turn on your 
microphone there. Thank you.

          TESTIMONY OF J. DOUGLAS RICHARDS, PARTNER, 
                         COHEN MILSTEIN

    Mr. Richards. Good morning, Chairman Goodlatte, Ranking 
Members Watt and Conyers, and Members of the Subcommittee. I am 
Doug Richards, and I am managing partner of the New York office 
of the law firm of Cohen Milstein Sellers & Toll. My legal 
practice focuses mainly on antitrust claims, largely including 
antitrust claims arising from unfounded patent litigation.
    I have been asked to testify today to share my perspectives 
concerning the scope of immunity that one should have from 
antitrust liability stemming from use of litigation as a 
predatory practice. My perspectives on that question stem from 
my experience in having represented plaintiffs in several 
antitrust claims during the last 10 years that asserted claims 
of sham litigation, arising mainly from defective patents.
    I am testifying on my own behalf, and the opinions 
expressed are my own.
    Thank you for giving me the opportunity to testify about 
current legal standards governing antitrust liability stemming 
from sham litigation. It is important that the law governing 
Noerr-Pennington immunity strike a correct balance between the 
need to reward invention by allowing intellectual property 
owners to obtain and protect their intellectual property 
through litigation, on one hand, and the need to preserve 
competition in the face of unfounded intellectual property 
claims, on the other.
    These antitrust issues often arise when a patent-holder 
sues a company alleging patent infringement, such as when a 
brand-name pharmaceutical company sues a generic drug company 
for infringing its patents and wins or settles the case. 
Purchasers of the drug at issue then sometimes bring an 
antitrust suit against the brand-name pharmaceutical company, 
claiming that the patent litigation was sham litigation, 
because the patent was invalid due to fraud on the part of the 
patent-holder in obtaining the patent.
    I believe that the law is currently out of balance and 
effectively immunizes unfounded litigation to too great a 
degree from challenge under antitrust law. In several key 
respects, legal hurdles that an antitrust plaintiff must clear 
in order to pursue antitrust claims based on predatory 
litigation have been set too high by the courts. The result is 
that dominant corporations are often not held duly accountable 
when they bring unfounded intellectual property claims for the 
purpose of excluding competitors from the marketplace.
    In resolving the tension between goals of antitrust and of 
intellectual property, the courts have stacked the deck in 
favor of intellectual property rights, even when they are 
legally unfounded, and to the detriment of the public's right 
to protect itself under antitrust law against unjustified 
monopoly prices.
    Under the Professional Real Estate Investors case, the core 
requirement for antitrust liability arising from a claim of 
sham litigation is that the claim must be both objectively and 
subjectively baseless. Even from the outset of the analysis in 
actual cases, this dichotomy between objective baselessness and 
subjective baselessness is often unclear.
    Suppose, for example, as is often true in these cases, that 
the antitrust plaintiff has uncovered evidence that a patent-
holder actually conducted its own tests, prior to obtaining a 
patent, that showed in one way or another that the patent 
should not be granted. Does that evidence go to objective 
baselessness, subjective baselessness, or both?
    If those tests weren't part of the published literature, 
defendants often argue they are irrelevant to objective 
baselessness, because all they show is what the defendant knew 
subjectively, and not what some sort of objective reasonable 
person would know. But shouldn't a test of baselessness address 
what the defendant actually knew?
    There is no sensible reason to divorce the objective 
reasonableness inquiry from facts actually known at the time by 
the antitrust defendant, if the goal is to deter groundless 
claims.
    In actual cases, to focus on what was actually known by a 
defendant often provides a richer and more reliable guide to 
what someone in the position of the antitrust defendant should 
have known, than to limit one's focus in the first instance 
only to what some purely hypothetical reasonable person would 
have known in some hypothetical context.
    Even if objective baselessness is required, therefore, what 
the defendant actually knew should be one of the most reliable 
guides to whether a case was baseless in light of known facts.
    Nevertheless, the court in the Professional Real Estate 
wrote that only if challenged litigation is objectively 
meritless may a court examine the litigant's subjective 
motivation. One can reasonably argue that this statement 
relates only to evidence of the defendants' subjective 
motivation, and not to the defendant's subjective knowledge of 
facts.
    But the Federal Circuit has not recognized that 
distinction, holding instead that facts that only the defendant 
itself was aware of prior to filing suit cannot properly be 
considered in making the objective reasonableness inquiry.
    In cases where the antitrust defendant clearly knew facts 
that made the patent invalid, confusion about the fuzzy 
distinction between objective and subjective baselessness can 
cause courts to turn a blind eye to the clearest and most 
compelling evidence that a case had no reasonable basis at all.
    I see my time is out, so I will just sum up by saying that 
I am in agreement with the fact that there is a need to curtail 
the scope of immunity from antitrust liability under the Noerr-
Pennington doctrine.
    And I thank you for the opportunity to testify today.
    [The prepared statement of Mr. Richards follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
        

                               __________
    Mr. Goodlatte. Thank you, Mr. Richards.
    Professor Lao, welcome. You might want to pull that 
microphone closer and turn it on.

          TESTIMONY OF MARINA LAO, PROFESSOR OF LAW, 
              SETON HALL UNIVERSITY SCHOOL OF LAW

    Ms. Lao. Good morning, and I apologize for having been a 
little bit late. I got lost in this cavernous building, believe 
it or not.
    Thank you so much for inviting me to participate in this 
hearing. I am a law professor at Seton Hall University School 
of Law.
    My written statement and my testimony today is drawn in 
part from an article I had published, entitled ``Reforming the 
Noerr-Pennington Antitrust Immunity Doctrine.''
    Let me first start out by giving a little bit of context. 
In a democracy, citizens have the right to petition the 
government. But efforts to influence the government sometimes 
have an impact on competition. When that happens, then there is 
a tension between the antitrust law and the First Amendment. 
The Noerr-Pennington immunity doctrine developed as a result of 
that, to try to reconcile and resolve that tension.
    The Noerr-Pennington doctrine, as it stands, is sweeping. 
But in the early years, it was limited by a sweeping sham 
exception. The Noerr-Pennington immunity doctrine applies to 
both lobbying the legislature, the executive branch, and to the 
petitioning judiciary.
    And I think therein lies some of the problem, because 
lobbying the legislature is quite different from so-called 
petitioning the judiciary, because when we talk about 
petitioning the judiciary, we are actually talking about 
litigation, filing a lawsuit.
    So I am going to start out just by talking a little bit 
about litigation and the PRE case, which Mr. Watt had referred 
to quite a bit.
    As I mentioned earlier, the sham exception at first was 
quite broad, and it kept check on the Noerr immunity doctrine. 
But in 1993, the Supreme Court decided the PRE case, which 
severely restricted the sham exception. Basically, it set forth 
a two-pronged test.
    First, the plaintiff will have to show that the underlying 
case was objectively baseless, in the sense that no reasonable 
litigant could have realistically expected success on the 
merits. It must then show that the antitrust defendant brought 
the lawsuit for the purpose of harming the rival through the 
use of the government process, rather than through the outcome 
of that process.
    Both parts of the test are quite troubling, as I stated 
perhaps in more detail in my written statement. And I don't 
really have time to go into it at length now.
    But I would say that one of the reasons that the objective 
test is so troubling is that a case can in fact be objectively 
baseless if it is clearly irrational for the person to have 
brought the litigation but for the competitive harm that it 
could inflict on its rival. But if there is a colorable basis 
in law for the lawsuit, we would still say under PRE that this 
case fails to pass the objective baselessness test.
    In fact, Justices Stevens and O'Connor, who had concurred 
in the judgment, disagreed sharply with this reasoning and with 
this articulation of the two-pronged test. They raised the 
point that you can see how someone could bring a lawsuit, have 
it run for 10 years, take two trips to the Court of Appeals and 
recover a nominal sum from the defendant. Yet under this PRE 
test, this would be called a not objectively baseless lawsuit. 
And that is one of the problems.
    The second prong is also slightly problematic, because you 
would have to show that the defendant brought the suit in 
order--for the purpose of harming the competitor through the 
use of the process and not for the outcome. But people often do 
have mixed motives, and often people do bring a lawsuit to get 
the outcome and as well to harm--and to harm the competitor as 
well.
    So under this definition, it would seem as though the 
second test would also not be met. Without a meaningful 
doctrinal limit to the immunity doctrine, I think there are 
greater risks that dominant firms can bring actions against 
smaller companies that I think would not have been rationally 
brought, otherwise.
    I think as a matter of policy, it would be desirable to 
limit Noerr and to perhaps expand the sham exception. The 
question is, does the First Amendment allow us to do that?
    Various commentators have noted the distinction between 
petitioning the legislature and petitioning in the adjudicatory 
settings. And I totally agree with that.
    I think when we are talking about petitioning the 
judiciary, we don't need that much protection. That is because 
the judiciary is very, very different. Already, the litigants 
are bound by very strict rules when they go into court to 
litigate. There are Rule 11 sanctions. There are all kinds of 
penalties for litigants, if they do not tell the truth.
    So to the extent that all those sanctions and all those 
rules are considered constitutional, it is very hard for me to 
see why--if you say that you would not allow them to make 
misrepresentations, that somehow that might offend the First 
Amendment.
    I see that I have run out of time. And I will just stop 
right here. If you have any questions, I would be happy to take 
them. Thank you.
    [The prepared statement of Ms. Lao follows:]
          Prepared Statement of Marina Lao, Professor of Law, 
                  Seton Hall University School of Law
    Thank you for inviting me to participate in this hearing. I am a 
law professor at Seton Hall University School of Law specializing in 
antitrust law. I am also a member of the Advisory Board of the American 
Antitrust Institute (AAI), a former chair of the Section of Antitrust 
and Economic Regulation of the Association of American Law Schools 
(AALS), and a former attorney at the Department of Justice, Antitrust 
Division. My written Statement, and my testimony today, is drawn in 
part from an article that I have published entitled ``Reforming the 
Noerr-Pennington Antitrust Immunity Doctrine.\1\
---------------------------------------------------------------------------
    \1\ Marina Lao, Reforming the Noerr-Pennington Antitrust Immunity 
Doctrine, 55 Rutgers L. Rev. 965 (2003).
---------------------------------------------------------------------------
    The essence of a representative democracy, protected by the First 
Amendment right to petition, is the citizen's right to communicate 
their desires, anticompetitively motivated or otherwise, to government 
officials. However, when efforts to persuade the government produce 
anticompetitive effects (harm to competition), they necessarily impinge 
upon federal antitrust law, creating tension between that law and the 
First Amendment and related values. The Noerr-Pennington antitrust 
immunity doctrine was developed in an effort to resolve that tension.
    As originally conceived, the Noerr-Pennington doctrine stood for 
the principle that genuine efforts to persuade the government to adopt 
a particular course of action are not subject to antitrust scrutiny, no 
matter how anticompetitive the petitioner's motive and the action 
sought. It originated from two U.S. Supreme Court cases that gave the 
doctrine its name: Eastern Railroad President Conference v. Noerr Motor 
Freight,\2\ which immunized petitioning the legislature; and United 
Mine Workers of America v. Pennington,\3\ which immunized petitioning 
the executive branch of the government. About a decade later, in 
California Motor Transport Co. v. Trucking Unlimited,\4\ the doctrine 
was further extended to petitions to courts (and administrative 
agencies acting in an adjudicatory capacity). There is a ``sham'' 
exception to Noerr: if the petitioning is considered sham, Noerr 
immunity would have no application.
---------------------------------------------------------------------------
    \2\ 365 U.S. 127 (1961).
    \3\ 381 U.S. 657 (1965).
    \4\ 404 U.S. 508 (1972).
---------------------------------------------------------------------------
    My Statement will focus on the current expansive scope of Noerr, 
and the correspondingly narrow sham exception, as it is applied to 
judicial petitions. Litigation can be a particularly effective method 
of predation.\5\ Even if it is unsuccessful, it may inflict substantial 
costs on a competitor and otherwise cause significant competitive harm. 
I will also address whether such an expansive interpretation of the 
Noerr doctrine, as applied to judicial petitioning, is required under 
either the First Amendment right of petition or a statutory 
construction of the Sherman Act, and conclude that it is not.
---------------------------------------------------------------------------
    \5\ See, e.g., Robert H. Bork, The Antitrust Paradox: A Policy At 
War With Itself 347-78; Grip-Pak v. Illinois Tool Works, Inc., 694 F.2d 
466 (7th Cir. 1982), cert. denied, 461 U.S. 958 (1983).
---------------------------------------------------------------------------
    T2Noerr doctrine as applied to judicial petitions, and the ``sham'' 
exception. In California Motor Transport, while the Supreme Court 
extended the Noerr antitrust immunity doctrine to judicial and quasi-
judicial petitions, it applied a ``sham'' exception for the first time 
to deny immunity to the antitrust defendants. It held that the 
defendants, who had sought to forestall competition by routinely 
opposing their competitors' applications for operating rights in 
administrative and judicial proceedings, regardless of the merits of 
the cases, were not entitled to Noerr immunity because their 
petitioning was ``sham.'' The sham exception, then unclearly defined 
and loosely applied to different kinds of improper conduct, served as a 
doctrinal limit to the expansive Noerr immunity principle for decades.
    In 1993, however, the definition of sham was severely restricted by 
the Supreme Court in Professional Real Estate Investors, Inc. v. 
Columbia Picture Industries, Inc. (PRE).\6\ Writing for the Court, 
Justice Thomas said that, for an underlying lawsuit to be considered 
sham, it must be ``objectively baseless in the sense that no reasonable 
litigant could realistically expect success on the merits.'' \7\ If 
this objective test is met, it must also be shown that the ``baseless 
lawsuit conceals `an attempt to interfere directly with the business 
relationships of a competitor,' through the `use [of] the governmental 
process--as opposed to the outcome of that process--as an 
anticompetitive weapon.'' \8\ In other words, the antitrust plaintiff 
must prove not only that the earlier lawsuit was objectively baseless 
but that the antitrust defendant had brought it merely to harm the 
competitor through the process and not for the litigation outcome.
---------------------------------------------------------------------------
    \6\ 508 U.S. 49 (1993).
    \7\ Id. at 60-61.
    \8\ Id. (quoting City of Columbia v. Omni Outdoor Adver. Inc., 499 
U.S. 365, 380 (1991)).
---------------------------------------------------------------------------
    Both parts of the test are somewhat troubling. As to the objective 
component, the Court also said that success in the earlier lawsuit 
precludes a finding of objective baselessness (while a lawsuit that is 
unsuccessful at every stage of the proceedings is not necessarily 
baseless).\9\ This raises the question of how earlier lawsuits that 
succeed because of the antitrust defendant's misrepresentations or 
fraud upon the court should be treated. Would they be deemed to 
automatically fail the ``objectively baseless'' test because a 
successful lawsuit, by definition, is not baseless? Or should the 
misrepresentation take the judicial petitioning outside the scope of 
Noerr? Unfortunately, the Supreme Court in PRE reserved that question 
for another day.\10\ As a result, lower court treatment of this issue 
has been confusing and inconsistent. Most seem to treat intentional 
misrepresentations as a subset of sham but require an additional 
showing that those misrepresentations ``infected the core'' of the 
claim and the decision, or ``deprived the litigation of its 
legitimacy'' before the suit might be considered objectively 
baseless.\11\
---------------------------------------------------------------------------
    \9\ Id. at 60 n.5.
    \10\ Id. at 61 n.6 (``We need not decide here whether and, if so, 
to what extent Noerr permits the imposition of antitrust immunity for a 
litigant's fraud or other misrepresentations.'').
    \11\ See, e.g., Armstrong Surgical Center, Inc. v. Armstrong County 
Memorial Hospital, 185 F.3d 154 (3d Cir. 1999) (declining to carve out 
a misrepresentation exception); Cheminor Drugs Ltd. V. Ethyl Corp., 168 
F.3d 118 (3d Cir. 1999) (declining to recognize a fraud or 
misrepresentation exception to Noerr, but treating misrepresentation as 
a variant of sham and applying a modified PRE test that requiring a 
showing that the misrepresentation ``infected the core'' of the case); 
Kottle v. N.W. Kidney Ctrs., 146 F.3d 1056 (9th Cir. 1998) (treating 
misrepresentation as a variant of the sham exception but adding the 
requirement that the fraud ``deprives litigation of its legitimacy'').
---------------------------------------------------------------------------
    Even in the absence of misrepresentations in an earlier suit, the 
Court's definition of an objectively baseless suit as one that no 
``reasonable litigant could realistically expect success on the 
merits'' seems unnecessarily narrow. Under this definition, an earlier 
suit would not be defined as objectively baseless even if it is clearly 
irrational but for its ability to inflict competitive harm on a rival 
(the antitrust plaintiff), so long as the suit has a colorable basis in 
law such that a reasonable litigant could expect success on the merits. 
It should be noted that former Justices Stevens and O'Connor, who 
concurred only on the Court's judgment but not its reasoning, were very 
critical of this narrow definition of the objective baselessness test. 
They questioned whether a case involving ten years of litigation and 
two appeals to recover a dollar from a defendant, for example, would 
qualify as an objectively baseless suit under this test.\12\
---------------------------------------------------------------------------
    \12\ 508 U.S. at 68.
---------------------------------------------------------------------------
    PRE's second prong--the subjective standard--is also problematic. 
If the underlying lawsuit is already shown to be objectively baseless 
(a threshold prerequisite), it is unclear why the antitrust plaintiff 
must further demonstrate that the litigant brought the suit to harm the 
competitor through the process of litigation, and not for the outcome. 
Proof of objective baselessness, especially as the term is currently 
construed, should sufficiently show that the litigant had probably 
brought the suit for an improper purpose. It is difficult to imagine 
why the litigant would otherwise bring an objectively baseless suit. 
Therefore, at best, the subjective test seems superfluous. Moreover, 
under a literal reading of this test, if a litigant with an objectively 
baseless suit actually seeks to win the suit (most likely aided by 
misrepresentations) and not to simply use the process as an 
anticompetitve strategy, the subjective test may not be satisfied and 
the suit may not be considered sham even if the litigant loses the 
underlying suit. Thus, at worst, the subjective test eviscerates the 
sham exception.
    In the absence of a meaningful doctrinal limit to the expansive 
Noerr immunity principle, there are greater risks that dominant firms 
could bring action against smaller competitors that they would not have 
rationally brought, in order to impose heavy costs on a small rival in 
the hope of excluding it from the market, diminishing its ability to 
compete on the merits, or deterring entry by other firms.\13\ From a 
policy perspective, it would be desirable to limit Noerr to a narrower 
sphere of conduct so as to be more responsive to competition concerns. 
I believe that it can be done: the First Amendment right of petition 
does not call for the expansive interpretation currently given Noerr 
(and the corresponding narrow reading of its exceptions), particularly 
in the adjudicatory context. Nor is such a broad reading of the 
doctrine necessary under a statutory construction of the Sherman Act.
---------------------------------------------------------------------------
    \13\ See Grip-Pak v. Illinois Tool Works, Inc.,, 694 F.2d 466, 472 
(7th Cir. 1982), cert. denied, 461 U.S. 958 (1983) (``Suppose a 
monopolist brought a tort action against a single, tiny competitor; the 
action had a colorable basis in law; but in fact the monopolist would 
never have brought the suit . . . except that it wanted to use pretrial 
discovery to discover its competitor's trade secrets; or hoped that the 
competitor would be required to make public disclosure of its potential 
liability in the suit and this disclosure would increase the interest 
rate that the competitor had to pay for bank financing; or just wanted 
to impose heavy legal costs on the competitor in the hope of deterring 
entry by other firms.'')
---------------------------------------------------------------------------
    Limits of First Amendment protection for judicial petitioning. 
There is some uncertainty and confusion over whether Noerr is grounded 
on the First Amendment right of petition or on statutory construction. 
I will treat the doctrine as based partly on constitutional principles 
and partly on statutory interpretation and will analyze its appropriate 
scope under both, starting first with the constitutional right of 
petition.
    Various commentators have noted the distinction between petitioning 
in legislative and adjudicatory settings and have argued that Noerr 
should be more liberally construed with respect to the former.\14\ I 
agree with the distinction and would further suggest that, for 
petitioning in the adjudicatory context, the Constitution guarantees 
the right of access to courts (and other adjudicatory tribunals) but 
not much more. The traditional constitutional argument for tolerance of 
some petitioning falsehoods and abuses is that penalizing 
misrepresentations may unduly ``chill'' the flow of information to the 
government as well as chill the people's exercise of their right to 
petition the government.\15\ The concern is that some people may shy 
away from making efforts to influence government for fear that the 
statements they make or the information they provide may inch over the 
line of truth and result in antitrust exposure. But this argument is 
more persuasive for petitioning in legislative rather than adjudicatory 
spheres.
---------------------------------------------------------------------------
    \14\ See, e.g., Bork, supra note ___, at 356; Stephen Calkins, 
Developments in Antitrust and the First Amendment: The Disaggregation 
of Noerr, 57 Antitrust L.J. 327, 358 (1988).
    \15\ See generally Einer Elhauge, Making Sense of Antitrust 
Petitioning Immunity, 80 Cal. L. Rev. 1177 (1992).
---------------------------------------------------------------------------
    Legislative proceedings are more open and politically oriented than 
judicial proceedings and are generally expected to provide a forum for 
uninhibited debate. In the legislative process, there is also greater 
value placed on the free flow of information to the government. 
Legislative bodies are expected to solicit information and hear 
arguments from a variety of sources and sort through them before making 
decisions. It is also perhaps understood that political lobbying often 
involves some slanting of the truth and outright misrepresentations. 
Ideally, the greater input from divergent interests will correct, 
balance, or compensate for any such inaccuracies. For these reasons, 
more protection for petitioning in the legislative process may be 
justified.
    Our judicial system, in contrast, operates very differently. It is 
not a free-for-all forum for unstructured policy debates or the airing 
of all grievances; disputes must be litigated in accordance with the 
rules and procedures that govern courts. Thus, the concern that less 
robust First Amendment protection might ``chill'' debate is arguably 
not a real issue in the right to petition in the adjudicatory sphere. 
More importantly, our court system is already subject to many 
restrictions. They include the imposition of Rule 11 sanctions for the 
filing of meritless complaints \16\ and other penalties for various 
litigation abuses. For example, legal judgments obtained through fraud 
and misrepresentation can be set aside;\17\ perjury is uniformly 
punished;\18\ and penalties may be imposed for vexatious judicial 
filings.\19\ There are also numerous court-imposed rules governing 
judicial proceedings. They range from rules prohibiting or limiting 
media coverage of certain trials,\20\ limiting the right of attorneys 
to speak in some pending cases,\21\ controlling the use of discovery 
documents,\22\ and the like. Unless one is ready to argue that these 
existing rules and sanctions are all unconstitutional, which no one has 
suggested, it is difficult to see why stripping Noerr immunity off 
litigation misconduct would somehow be constitutionally impermissible. 
The right of petitioning the courts must, in fact, constitutionally 
permit substantial control of the adjudicatory processes.
---------------------------------------------------------------------------
    \16\ Fed. R. Civ. P. 11(b)(3).
    \17\ Fed. R. Civ. P. 60(b),
    \18\ See, e.g., 18 U.S.C. Sec. 1621
    \19\ See 28 U.S.C. Sec. 1927
    \20\ See, e.g., Bridges v. California, 314 U.S. 252, 271 (1941).
    \21\ See, e.g., Gentile v. State Bar of Nevada, 501 U.S. 1030, 
1048-51, 1058 (1991).
    \22\ See, e.g., Seattle Times Co. v. Rhinehart, 467 U.S. 20, 37 
(194)
---------------------------------------------------------------------------
    In short, in terms of petitioning the courts, the First Amendment 
certainly protects citizens' right of access to courts and other 
adjudicatory processes. But it is questionable whether constitutional 
protections extend much beyond that. Those using our courts and other 
adjudicatory processes are already required to abide by myriad rules 
that govern those processes, and misrepresentations and various forms 
of improper litigation conduct are already subject to sanctions. An 
antitrust rule providing that material misrepresentations to courts, 
for example, would not be protected under Noerr, even if the litigant 
is genuinely seeking a favorable outcome in litigation, can be no more 
offensive to the Constitution than the existing rules that govern court 
processes. In other words, it is constitutionally permissible to 
recognize a misrepresentation exception to Noerr and to otherwise 
liberalize the sham exception in order to limit the scope of Noerr, at 
least in the litigation context.
    Scope of Noerr protection under statutory construction. Of course, 
even if the breadth of the Noerr doctrine is not constitutionally 
mandated, whether the Sherman Act itself should be construed to give 
the doctrine such an expansive reading (and its exceptions a narrow 
reading) is a separate issue. Determining the appropriate parameters of 
Noerr as a matter of statutory interpretation is difficult because the 
Sherman Act provides no real guidance.
    It is often said that federal antitrust law regulates private, not 
state, actions that are in restraint of trade.\23\ Therefore, valid 
actions taken by the state are not subject to antitrust scrutiny, no 
matter how anticompetitive their effect. It then logically follows 
that, in a representative democracy, if the government can lawfully 
take action that is anticompetitive, private citizens should be free to 
urge the government to take those actions.\24\ Accordingly, the Sherman 
Act should not be interpreted in a way that would undermine the values 
of a democratic system of government, independent of First Amendment 
concerns.
---------------------------------------------------------------------------
    \23\ See Parker v. Brown, 317 U.S. 341, 350-51 (``We find nothing 
in the language of the Sherman Act or in its history which suggests 
that its purpose was to restrain a state or its officers or agents from 
activities directed by its legislature'').
    \24\ See City of Columbia v. Omni Outdoor Adver., 499 U.S. 365, 379 
(1991)
---------------------------------------------------------------------------
    Defining the statutory scope of Noerr (similar to an analysis under 
the First Amendment) requires distinguishing between legislative and 
judicial petitioning. The reasons for drawing the distinction are 
largely the same as those discussed for the First Amendment, and need 
not be reiterated here. The norms of acceptable conduct are decidedly 
different for lobbying in more open political settings than they are 
for litigating in the court system. As the Supreme Court suggested in 
Noerr, in a no-holds-barred fight among competitors in attempting to 
influence legislation, some misrepresentations may be inevitable.\25\ 
That is not the case in judicial proceedings, where adjudicators must 
rely on the parties for the information on which a decision will be 
based and, therefore, expect the information presented to be 
accurate.\26\ Presenting false information in judicial settings 
threatens the proper functioning of the system, and there is no reason 
to construe the Sherman Act to encourage these acts.
---------------------------------------------------------------------------
    \25\ Noerr Motor Freight, 365 U.S. at 144.
    \26\ See Clipper Exxpress v. Rocky Mountain Motor Tariff Bureau, 
690 F.2d 1240, 1261 (9th Cir. 1982).
---------------------------------------------------------------------------
    While the Noerr doctrine should encourage citizen participation in 
the political process, there is another value related to a democratic 
government that is worth protecting as well--the integrity of 
government. The need to protect the judicial system from corruption or 
abuse militates against too narrow an interpretation of sham and is a 
counterbalance against the reasons for a broad immunity concept.
    Proposals for limiting the Noerr doctrine. The wide swath that has 
been cut for the petitioning immunity doctrine is unwarranted both 
constitutionally and as a matter of statutory construction. It also 
poses risks to competition and, ultimately, to consumers. Ideally, the 
PRE definition of sham should be liberalized. With respect to the 
objective baselessness test, the antitrust plaintiff must usually show, 
under current law, that the theory of the earlier suit was so contrary 
to existing law that no reasonable person could realistically expect to 
win on the merits. It may be better, instead, to require the antitrust 
plaintiff to merely show that the bringing of the earlier suit would 
not have been brought by a reasonable person were it not for the 
anticipated collateral damage that would be inflicted on the smaller 
rival sued. For example, if a dominant firm incurs large sums of money 
and spends years in litigation, including on appeal, to recover a 
nominal amount, it seems that the lawsuit should be considered 
objectively baseless despite the fact that the claim might have a 
colorable basis in law and the dominant firm ultimately won.
    As to the subjective test, I propose eliminating it altogether for 
alleged sham in the litigation context. The subjective test is 
particularly unsuited for use in litigation settings for reasons that 
were addressed earlier.
    I would also propose carving out a misrepresentation and fraud 
exception to Noerr.
    Narrowing the Noerr doctrine (and liberalizing the sham exception) 
would promote the competition values that underlie the antitrust laws 
and yet not encroach on the constitutional First Amendment right of 
petition.
                               __________

    Mr. Goodlatte. Thank you very much.
    As time allows, we may do more than one round of questions, 
and that might afford you an opportunity to bring out some of 
the points in your remarks. And I hope that we can talk about 
some of the remedies that might be possible, given the 
constraints placed on all of us by the Supreme Court decision, 
which, obviously, you have to figure out how to deal with.
    And, Mr. Saxman, I have read your testimony, and I know you 
didn't get through all of it, so let me ask you a question that 
might prompt you to get to some of the points that you had 
hoped to get to.
    Does a small business have a better chance of competing 
with a bigger business in the market or in the courtroom? And 
why?
    Mr. Saxman. Oh, absolutely in the market, Mr. Chairman. And 
thank you for asking us some more questions on that line.
    I can compete in the marketplace. When you get to a certain 
scale, you can compete against just about anyone in the world, 
depending upon your products, your market, and how well you are 
continually improving your operations.
    But when you are up against a potential multi-year--some 
litigation will take 5 to 7 years, once you get through the 
entire process, with millions of dollars in legal fees. You are 
up against a cost parameter that you just never factor into 
your business operations. And with the margins that we deal 
with anyway, you are likely to make 10 percent on your money at 
the end of the day. So how can you calculate that in as 
expected expense, cost of goods, cost of doing business?
    And then when you walk into your office every day and you 
see the people who are adversely impacted don't even know they 
are being adversely impacted, you know, the single mom with two 
kids who is trying to put them through school and who is 
relying on their health care. If their jobs are gone, their 
health care is gone. What are those kids going to be up 
against?
    That is the human factor that really happens in the 
marketplace, because I would rather have my money invested in 
the market, developing our products and services, trying to 
make more money, provide more benefits for our employees. If we 
lose, if the companies in our industry lose, if small 
businesses lose, if people lose jobs, they lose wages, they 
lose benefits, they lose hope. It is staggering the amount of 
decline that can occur.
    It is sort of the expression of, how does bankruptcy 
happen? Gradually, then suddenly. You don't know how long it is 
going to take to fight these lawsuits. And you are just trying 
to compete in an honest, open manner.
    And these larger companies can conspire, literally 
conspire, because they have large legal teams--and that is 
perfectly within their rights to do so. But when they weaponize 
the legal system against us, to take what is rightfully ours, 
they can leverage us--if they brought a lawsuit or forced us to 
bring a lawsuit, most companies would throw their hands up and 
say, ``I can't bear that cost. It is better for me to just get 
out, sell at a lower value, pennies on the dollar, then lose 
and lose everything.''
    It is quite unfair.
    Mr. Goodlatte. Let me ask you this: Do small companies who 
are dragged into litigation have to pass those costs onto 
consumers? And if they do have to pass those costs on, because 
they can be an expensive portion of their profit margin, how do 
they do that when they are competing in a competitive market 
where other people don't have those costs and, therefore, don't 
have to worry about raising their price?
    Mr. Saxman. That is where you get into a cost structure, 
Mr. Chairman, that is untenable and impossible. There is a 
point at which you can't.
    There is also a point at which the investment becomes--it 
is irrelevant to the effort. It is just not worth it. And when 
a person gives up because not--you didn't lose in the 
marketplace because your products weren't good, or your 
services weren't good, or you didn't train your people, or you 
didn't do what you should have done, that goes on in the 
business--we do that every day. We wake up with that. We go to 
bed with that.
    When someone can take it from you, with something you never 
even trained yourself to become, and can take it from you, I 
consider it a theft and crime. And I think it should be 
criminally prevented. They should be prosecuted, not just 
penalized financially.
    Financially, they can absorb that into their operations, if 
they lose. We can't. The cost is too much. I think, personally, 
Mr. Chairman, people should go to jail. I think it is 
felonious.
    Mr. Goodlatte. Let me ask Professor Lao a question.
    Isn't litigation fundamentally different from other forms 
of First Amendment petitioning? Should the same doctrine that 
exempts core speech, like citizens petitioning the legislature, 
really apply to litigation?
    Ms. Lao. I personally don't think so. I think the First 
Amendment right of petition, with respect to litigation, really 
only allows access. It means that people will have access to 
the court system. You will be able to go and seek redress for 
your grievances.
    But I don't think misrepresentations and abuse of process 
should be given that much tolerance. I can see the need to be a 
little bit more tolerant in the lobbying context because the 
norms are different. It is understood that in the rough-and-
tumble world of lobbying that there might be, perhaps, the 
slanting of the truth or, perhaps, even misrepresentation.
    But it doesn't really matter as much, because as a 
legislator, you have a lot of sources for information. You can 
reach out to different, diverse interests, and then you can 
then sort through the information and come to a conclusion.
    But in the court system, we have an adversarial system, so 
the court does not, the judge does not go out and find the 
truth. It has to rely on the two parties to give it the truth. 
So I think in that instance, we have to be more careful about 
falsehoods and misrepresentations and so forth.
    Mr. Goodlatte. Thank you.
    The gentleman from North Carolina is recognized.
    Mr. Watt. Mr. Chairman, there are so many angles from which 
I could approach this. I am having a little trouble sorting 
through which one takes precedence.
    Mr. Goodlatte. If the turnout remains you and me, we will 
be able to ask a lot of questions, so fire away.
    Mr. Watt. We will go back and forth, okay.
    Mr. Saxman, I guess the problem I am having with your 
testimony kind of comes down to this question: Should a court 
in civil litigation take into account the relative power, 
financial position, or representation of the parties that are 
appearing before it? That is the logical extension of what you 
seem to be saying.
    These people had more power than you. They had more money 
than you. They could stay in litigation a lot longer. And I 
don't know how a court is going to be able ever to do that.
    I mean, I have been advocating that we level the playing 
field between powerful and non-powerful throughout my legal 
career, but you seem to be taking the court into much, much 
deeper waters then I think we are capable of doing.
    Maybe you can help me understand that.
    Mr. Saxman. Yes, sir. Thank you for the question. And I 
certainly agree with you.
    Do they have the right to bring lawsuits or action against 
us? Absolutely. If it is not legitimate, if it is meant to 
constrain us in the marketplace, if it is meant to tie us up, 
if they do it in a manner that is not--it is a great question, 
because how do you defend yourself in a marketplace when that 
is not the market? We are not a law firm. We don't do this.
    So if you are out there just doing your own business, and 
they want to come in and take your business, for marginal P&L 
and quarterly basis, because a regional manager says we got to 
have this business, we will go in and breach contracts.
    Mr. Watt. What if the circumstances were reversed?
    Or maybe I should ask Mr. Richards and Professor Lao, is 
there anything in the law that protects litigants from abusive 
defense of litigation?
    I will give you a couple examples. I mean, I could give you 
a bunch of them, because I practiced law for a lot of time. I 
mean, I have been in a lot of lawsuits where I was the only 
lawyer on the plaintiff's side, six or seven high-powered 
lawyers on the other side. They will paper you to death, mostly 
civil rights cases.
    So I have seen a lot more abuse in actuality, I will give 
you another example, since I am talking about my own personal 
experience.
    I represented Stevie Wonder when he was in his automobile 
accident in North Carolina. A simple case, clear liability. No 
question, after they scoured the car and made sure that no 
drugs or anything were involved. I understood that.
    All we were looking for was the insurance company to pay 
some modest amount, because the guy who was driving the car, 
Stevie, was sitting there blind; he obviously wasn't driving 
the car. The guy who was driving the car drove the car right 
into the bed of a truck in front of them. Clear liability.
    I end up in California taking depositions in the case, just 
because the lawyer wanted to meet Stevie Wonder.
    Is that abusive?
    I mean, this kind of stuff happens all the time in 
litigation. He knew his insurance company client was going to 
pay him for that trip out there. He wanted his kid to have 
Stevie Wonder's, my client's, autograph. And I am saying, why 
am I sitting in California for 3 days, waiting on a deposition 
in a case where there is clear liability?
    This is disparity between the parties. Now how is the court 
ever going to take that into account? I go into court, and the 
court would laugh at me if I said, you know, this guy took me 
all the way to California to take a deposition. He knew he was 
going to pay the claim, at some point. But he was on the clock. 
He was abusing the process.
    People abuse the legal process all the time. And we need 
some kind of constraints around it. But I guess my concern here 
is I don't--this seems to me to be one of the least of the 
problems we ought to be trying to level the playing field on.
    You know, I acknowledge that it is a problem, but what is 
the solution to it? How do we get past this--I am over my time, 
and then I am going to give you some more examples where there 
is abuse in the process. Disparities between the parties always 
give rise to abuse.
    And that is why I was saying in my opening statement, we 
have preoccupied ourselves with the little people trying to 
find redress in litigation, saying that their class-action 
lawsuits, their individual lawsuits, are frivolous. This is a 
welcome reversal of our roles, as far as I am concerned. We 
ought to be looking out for little people. But I don't know how 
you do it, and I don't know what the standard ought to be.
    That is the question that this Committee has got--and can 
we articulate a different standard that won't just result in 
more litigation, more appeals? And if this decision is based on 
a constitutional principle, how do we pass a statute that is 
going to have any impact on it anyway?
    So, go ahead.
    Mr. Saxman. Thank you, Congressman. And I certainly 
understand, from a non-legal perspective, having not been a 
lawyer, in the case that I was aware of that I brought to the 
Chairman's attention last year, you had a company in good faith 
that brought a contract to another--they were in business 
together. For 13 years, they----
    Mr. Watt. You see, the problem is, Mr. Saxman, is you want 
to individualize this to your case. Our role here, we can't 
individualize this to your case. We have to come up with an 
articulable, global standard.
    So, I mean, I am very sympathetic to your case. Don't get 
me wrong. I am not dismissing it. You were probably dealt with 
unfairly.
    But come on, Mr. Richards, help me. You are in litigation.
    Professor, you teach this stuff all the time, help us out.
    Mr. Richards. Well, if I may, Ranking Member Watt. All of 
the points you are making, I think, are very valid points. I 
mean, as a class-action plaintiff's lawyer, I am very 
sympathetic to them. I think I try and equalize, level the 
playing field, every day of my working career. I think those 
kinds of issues are very important.
    To a large extent, they are dealt with through procedural 
issues, like class actions, Rule 23, efforts on the part of the 
Federal Rules Advisory Committee to keep costs down, that kind 
of thing. I think all that is good. All of that is better left 
in the purview of the Federal Rules Advisory Committee.
    What we are talking about, I think, here is a little bit 
different. I think there is really an agreement, generally, in 
the case law and among all the witnesses, and I think there 
would be agreement between both parties, that there is nothing 
to be gained from baseless lawsuits.
    Mr. Watt. I agree.
    Mr. Richards. The real challenge is to find out how you do 
find out----
    Mr. Watt. Let me go on record saying I agree with that.
    Mr. Richards. And I agree with it, too.
    How do you decide whether a lawsuit is baseless? And by 
what legal standard? That is really the hard part of what we 
have here.
    And what happened in the Professional Real Estate case is 
that the Supreme Court articulated a standard for baselessness, 
which when applied in actual practice raises all kinds of 
questions and is extremely problematic.
    It leaves so much room for debate about what it means that 
you wind up with courts going off and doing really uninformed 
things, because they are guided by standards that they try to 
take seriously, but they are so unclear that they don't know 
what----
    Mr. Watt. Is it based on the Constitution or is it based on 
other----
    Mr. Richards. There is certainly a constitutional dimension 
to the right to petition your government, and there should be. 
But should the right to petition your government include the 
right to knowingly lie to your government? Shouldn't there be 
an exception for that?
    Mr. Watt. If so, I hope you will tell some of the lobbyists 
that come see me. [Laughter.]
    Mr. Richards. I mean, I think there is more consensus, I 
think, about sort of what the exceptions to Noerr-Pennington 
should be than I think perhaps is coming across here.
    There was an effort on the part of the Federal Trade 
Commission a few years ago, which wrote a very fine report 
relating to enforcements on the Noerr-Pennington doctrine, 
cataloging what the exceptions to the Noerr-Pennington doctrine 
are under established law. I think it is an excellent report. I 
think it does a good job of sorting through and laying out what 
the exceptions are.
    One of the exceptions that it provides is an exception for 
fraud. And certainly in the patent cases, there is a Supreme 
Court case called Walker Process which recognized a long time 
ago that there can be an exception for Noerr-Pennington when 
you are dealing with fraud on the Patent Office in obtaining a 
patent.
    So in the cases I am dealing with, there is really no--you 
know, courts almost never fail to see that there is a separate 
exception to Noerr-Pennington for sham litigation and a 
separate exception for fraud. They see that all the time.
    The problem, really, or one of the big problems, is that 
the Professional Real Estate definition is very murky. And I 
think it gives rise to all kinds of problems about what it 
means. And when you have a murky standard like that, about 
something as fundamental----
    Mr. Watt. Do you solve it legislatively?
    Mr. Richards. I think it could be solved legislatively.
    Mr. Goodlatte. Let me take back my time. We will come back 
to you, again, because I am doing a second round here.
    Mr. Watt. Go ahead. I yield back.
    Mr. Goodlatte. I do want to follow up on your question, 
though, because it is right to the point. And that is, what can 
we do about this?
    So I want to ask each of you, and I will start with 
Professor Lao, do any of you believe that there may be room for 
a compromise that holds anti-competitive abusers of litigation 
accountable while remaining mindful of the concerns that led 
the Supreme Court to avoid full Sherman Act liability for 
litigation?
    For example, could Congress provide for fee shifting if the 
court found that the suit was brought for anti-competitive 
purposes, not just sham purposes, but anti-competitive 
purposes? Or perhaps allow antitrust claims for predatory 
litigation to proceed only with Department of Justice or FTC 
approval?
    Professor Lao?
    Pull the microphone closer to you.
    Ms. Lao. So that would be a bit of a compromise. You are 
stripping it of the Noerr immunity where there is sham, but 
then what you are saying is that you would require them, you 
would require the antitrust plaintiff, to get an okay from the 
government, from the FTC or the Department of Justice?
    Mr. Goodlatte. No, it would be a claim for predatory 
litigation.
    Ms. Lao. Predatory litigation. So----
    Mr. Goodlatte. That would be your antitrust claim----
    Ms. Lao. Oh, okay.
    Mr. Goodlatte [continuing]. Would be that the parties 
engaged in predatory litigation, but in order to get around the 
Supreme Court decision, could you put a caveat on it that it 
has to receive some stamp of approval?
    Ms. Lao. That probably goes a little bit beyond what I am 
comfortable with. What I am suggesting is simply that, to the 
extent that they have gone beyond the bounds of what the First 
Amendment is protecting, then we should just take away the 
immunity. And when we say we take away the immunity, we are not 
imposing liability on them right away. We are just saying that 
it is not petitioning. Because it is not petitioning, then you 
are going to be subject to the antitrust laws. The antitrust 
plaintiff will still have to prove all of the elements of the 
antitrust violation.
    So in a way, we are not really giving the antitrust 
plaintiff anything more than what was his due without the Noerr 
immunity doctrine.
    But I guess I am quite conservative in that regard.
    Mr. Goodlatte. There have been some well-known prominent 
judges, like Judge Posner and Judge Bork, who have been critics 
of this Supreme Court test. And I am wondering if you think 
that--one test is the reasonable litigant test, which you 
advocated----
    Ms. Lao. Right.
    Mr. Goodlatte [continuing]. And a version of which Judge 
Posner articulated in the Grip-Pak case. Could you describe 
that test?
    Ms. Lao. Yes, I like that test very, very much.
    The test is an objective test, and what it asks is, would a 
rational person have brought this lawsuit if you take away the 
anti-competitive harm that it would inflict on the competitor? 
So in other words, you are taking away that portion of it, and 
you are asking, would a rational person have brought such a 
lawsuit?
    And if a rational person would not have brought the 
lawsuit, then it doesn't matter that the antitrust defendant 
actually won that lawsuit.
    Judge Posner gave the example of a major firm, a dominant 
firm, bringing tort action against a tiny, tiny competitor, in 
order to extract certain things, hoping that they will have to 
make the disclosure. Once you have to make the disclosure to 
the SEC, or whatever, then you are going to see your finance 
charges go up when you go to get financing and so forth. So you 
are imposing costs, you are using litigation to impose costs on 
rivals.
    So if you simply look at it and ask, if it weren't for all 
of these things, would you spend so much money to litigate, 
just to receive a nominal amount? And I believe that is what 
Judge Posner was describing as the possible test.
    Mr. Goodlatte. Mr. Richards, what do you think about that 
test?
    Mr. Richards. Well, the problem that I see with that test 
is that in lots of situations--take the intellectual property 
context that I am most familiar with. When someone brings a 
lawsuit on a patent, of course their objective is to take their 
competitor out of the market. That is why they are suing on the 
patent. Their contention is that that is what that patent 
entitles them to obtain.
    If you adopt a test that somehow makes that wrongful, you 
are undermining the patent laws. You are undermining the whole 
purpose of the grant of the patent. So I am not sure that that 
standard would really work very well.
    I need to think about it. I think you need to----
    Mr. Goodlatte. Well, let's ask Professor Lao what she 
thinks about your exception to that.
    Can that be carved out as an exception, or is that a good 
rebuttal to this test?
    Ms. Lao. We are talking about patents, right?
    I think when we are talking about patents, patents are in a 
different category altogether, for that reason. Because when 
you do bring a lawsuit, you are trying to exclude the 
competitor.
    But there is an additional problem with the subjective test 
in the PRE case. In the PRE case, the subjective test is that, 
if someone brings a lawsuit for the purpose of trying to win 
the lawsuit no matter how baseless it is, then it would 
automatically not be sham. So you could actually have a very 
invalid patent that you know is very, very shaky, and you would 
still bring the lawsuit, but it would not be considered sham. 
So I don't know how you would deal with something like that.
    Mr. Richards. Well, no, because of that, in actual patent 
litigation, it is objective baselessness that becomes the main 
focus and not the subjective baselessness, which is more or 
less a given. I mean, clearly, a subjective intent in a patent 
case is to take the competitor out of the markets. So 
subjective baselessness becomes not part of----
    Mr. Goodlatte. What about the patent case where the patent 
is expired but the company has come up with a specious argument 
why their rights should be preserved under the patent law? Or 
they re-patent with a minute change to the patent----
    Mr. Richards. That happens all the time.
    Mr. Goodlatte. And they bring litigation against the 
competitor to drive them out on that basis?
    Mr. Richards. And that happens all the time.
    Mr. Goodlatte. Right. So what do we do to stop that abuse?
    Mr. Richards. Something that is very disappointing, and you 
see over and over and over in these cases, is that people at 
the end of the patent life on the chemical compound will come 
up with a formulation patent, a patent on a coating that goes 
on the pill or something like that, and will get a patent from 
the Patent Office based on representations to the Patent Office 
about the uniqueness of this coating that are totally bogus. 
And then the consequence of that is that you have years of 
litigation where the brand-name drug manufacturer is able to 
give the generics off the market based on the bogus patent.
    And you really need, desperately, in this country a legal 
standard to identify the situations in which brand-name drug 
manufacturers under those circumstances are held accountable 
because the patent claim is unfounded. That is very important.
    In the PRE standard does not satisfy that need. It is too 
demanding. It is very, very difficult in practice. The 
distinction between objective and subjective is very unclear.
    Mr. Goodlatte. Thank you.
    The Chair recognizes the gentlewoman from Texas, Ms. 
Jackson Lee.
    Ms. Jackson Lee. I thank the Chairman and the Ranking 
Member.
    This might be a hearing that we should either have an 
opportunity to continue or to expand it at another hearing 
going forward. I think it is a very vital question related to 
the balance of power. When you talk about a large company or a 
company that is making its mark on either the industry or the 
invention, and, of course, up against what is a company or a 
small company with smaller assets.
    So let me just raise an across-the-board question, but 
start with Chris Saxman, as to the breadth and depth of the 
Noerr-Pennington case. From your perspective, how devastating 
is that for small businesses, startups, to thrive?
    Mr. Saxman. Thank you, Congresswoman.
    When I first brought this to the Chairman's attention--
Congressman Goodlatte is my Congressman--I had no idea what 
Noerr-Pennington was. When counsel called me and said, well, 
this applies to the Noerr-Pennington doctrine, I said, ``Who is 
Nora Pennington?'' I have a daughter named Nora, so I went to 
``Nora.''
    And then I found out what it was, and that there was an 
exemption for companies to do this, I almost had to put my jaw 
back on head, because I couldn't understand how you could 
exempt--there could be an exemption for people to basically do 
what they shouldn't be doing.
    And to Congressman Watt's original question, it happens all 
the time. People have differing opinions. They go to court. 
They settle it. Litigation occurs.
    But when the market is adversely impacted, the larger 
company moves in and wants to compete, we can compete. If we 
have to go to court to justify our existence or our products or 
whatever we are doing, and they are exempt from antitrust 
protection, that is the problem. That is where the larger 
community is being harmed, and that is why antitrust exists in 
the first place.
    When I was in the legislature, one of the words you always 
looked for in legislation that was drawn up were exemptions and 
credits. Those are the bells and whistles that said, oh, here 
is what they are going for.
    And exemptions are a problem. When you exempt people and 
corporations or anything from the law, that is the loophole 
that creates the problem. That is the bubble that is about to 
burst. And that is where----
    Ms. Jackson Lee. That is where you have the lopsided scales 
of justice, is what you are saying.
    Mr. Saxman. And we can't----
    Ms. Jackson Lee. You are doing business and in the 
courtroom at the same time, fighting more or less not over an 
issue or a contractual issue, but fighting over your existence 
or whether someone is defining--whether you are violating some 
sort of protection that the company has.
    Let me go to Professor Lao and just ask: How would you? And 
I know we have had this give-and-take. I assume other Members 
may have approached some of this.
    But how would we reorder that scale of justice with the 
underlying premise that, in America, the courts are there 
governed by the law to resolve differences. But in this, as I 
perceive it, as I have read some of the materials, it looks as 
if I am at Wal-Mart and I'm shopping and seeing what the best 
deal would be for my company by way of a lawsuit.
    Professor, and with the backdrop of Noerr-Pennington?
    Ms. Lao. I must say, Congresswoman, that antitrust law does 
not take that so much into account. Over the last 20 years or 
so, antitrust has become very much of a price theory 
discipline. So rightly or wrongly, we look at the effect of 
conduct on price and output, rather than on whether it harms a 
smaller competitor or not. The Chicago School of thought has 
made that change and was started in the 1970's.
    I do not count myself as being in that school of thought. 
But at the same time, I also do believe that perhaps antitrust 
should be guided more by economics, that perhaps we should 
leave it to some other discipline to care of the inequalities.
    Ms. Jackson Lee. Do you think Noerr-Pennington's reach is 
extensive?
    Ms. Lao. I'm sorry?
    Ms. Jackson Lee. Do you think the Noerr-Pennington case is 
extensive in its reach?
    Ms. Lao. I think the Noerr-Pennington case is all right 
when we are talking about petitioning the legislature or even 
the executive branch. But I think Noerr is too broad when we 
are applying it to petitioning the judiciary.
    When you talk about petitioning the judiciary, we are 
really just talking about litigation. When we are talking about 
litigation, we are just talking about having the right to have 
access to the court system.
    Ms. Jackson Lee. Thank you.
    Mr. Chairman, would you allow Mr. Richards to answer that 
question?
    Mr. Goodlatte. Sure.
    Mr. Richards?
    Ms. Jackson Lee. Thank you.
    Mr. Richards. I think one of the ways that I see things 
somewhat differently from Professor Lao is that I think if the 
standard for an objective case were defined more fairly and 
more clearly, I would think that standard could apply to 
legislation and lobbying activity. I think the problem is in 
the standard.
    I think some of what I think goes on is that it works so 
poorly in the litigation context that people want it fixed very 
desperately, and they think they are more likely to get a fix 
if they don't try to address the legislative context. And so 
they draw distinctions between them.
    But I think if you come up with the right standard, it 
should apply to both.
    I also would point out that there aren't just two contexts. 
There are lots of contexts were Noerr-Pennington applies. It 
applies to getting a patent from the Patent and Trademark 
Office. It applies to administrative contexts. So there is a 
whole range of situations where Noerr-Pennington immunity 
applies.
    And I personally do not think that the right way to do it 
is to say, well, we are going to have one standard applicable 
in this context and a different one in this context and a 
different in this context and a different one in this context. 
The right thing to do would be to try to have a standard that 
is very clear, very fair, and that works in all of the contexts 
at the same time.
    Mr. Goodlatte. The time of the gentlewoman has expired.
    Ms. Jackson Lee. Thank you, Mr. Chairman.
    Mr. Goodlatte. And I am going to just exercise my 
prerogative to follow-up on that question. I'm going turn to 
Mr. Chabot in just a second, but I want to follow up on that 
question while we are right on it.
    Are you saying that somehow that Congress could come up 
with a protocol or a scheme or a measure that says that when 
you petition the United States Congress for redress of your 
grievances, that there is going to be some kind of parity, some 
kind of fairness in terms of what different organizations or 
different companies or different labor unions put into that 
petition? I mean, I don't understand how you would accomplish 
that in the legislative context to say you can only do but so 
much petitioning of your redress of grievance and beyond that 
it becomes an anti-competitive, unfair advantage for your 
arguing point of view.
    Mr. Richards. Well, the notion of that baselessness, I 
think, doesn't apply as well in the legislative context to 
begin with.
    Mr. Goodlatte. Right. Agreed.
    Mr. Richards. But suppose, for example, that someone 
obtained legislation based on absolutely false representations 
of fact, the consequence of which is that they developed a 
monopoly on a particular product, or something like that. 
Should nothing be able to be done about that?
    That to me would be baseless lobbying activity, which had a 
terrible consequence of causing Congress to do something 
unknowingly, because they have been deceived, that has terrible 
anti-competitive consequences in the marketplace.
    I think I should be actionable. I think if you come up with 
a good standard that applies the litigation context, it could 
apply in the context as well.
    Ms. Jackson Lee. Mr. Chairman, before you go, can I ask a 
question of you, please?
    Mr. Goodlatte. Sure.
    Ms. Jackson Lee. I have additional questions. May I submit 
them into the record?
    Mr. Goodlatte. Absolutely.
    Ms. Jackson Lee. And maybe the witnesses will--not maybe, 
but the witnesses will be able to respond in writing?
    Mr. Goodlatte. We will. In fact, we may have several other 
questions that need an answer. We will submit them all to the 
witnesses and ask that they respond in writing to anything that 
you provide to us, and we may have some ourselves.
    Ms. Jackson Lee. I ask unanimous consent, Mr. Chairman. 
Thank you.
    Mr. Goodlatte. I thank the gentlewoman. And it is so 
ordered.
    And I am pleased to recognize the gentleman from Ohio, Mr. 
Chabot.
    Mr. Chabot. Thank you, Mr. Chairman. I will be relatively 
brief. I, actually, have an ambassador in the back waiting for 
a meeting, that they just brought down.
    But my the question is this, from an international 
perspective, to the extent that other countries around the 
world, either in Europe or in Asia, either have laws which are 
applicable to this or have had situations like this come up, is 
there any sort of economic disadvantage that the current law 
here has to U.S. companies or not? Any of the folks here would 
be--Ms. Lao?
    Ms. Lao. I am not aware of any.
    Mr. Richards. I think the general perception in most other 
countries is that they have been behind traditional American 
antitrust law and are trying to catch up. So they are certainly 
gradually adopting American-type antitrust standards.
    And I would suspect that they will, over time, adopt 
something like the Noerr-Pennington doctrine. But because 
antitrust enforcement has been really not very vibrant, 
historically, in other countries, there is a lot there is no 
law about as to antitrust law in the other countries. So we are 
really way out in the forefront on this.
    Ms. Lao. Except the E.C. is becoming extremely aggressive.
    Mr. Richards. They have, but I----
    Ms. Lao. So then----
    Mr. Chabot. Which one was that?
    Mr. Richards. The European Community.
    Ms. Lao. The European Community.
    Mr. Chabot. The European Community has.
    Mr. Richards. But have to say, I am not an international 
law scholar. I am not sure what the law currently is in the 
European Community on Noerr-Pennington. I just don't know.
    Mr. Chabot. Mr. Saxman?
    Mr. Saxman. Again, I am not an attorney. I don't understand 
international law, let alone America law--American law, let 
alone international law.
    The reality is, though, when international companies are 
behaving in a manner that they are not culturally aware of 
antitrust is, their behavior is outside of that realm of 
thinking. So what they are doing in the marketplace is 
predicated on what their cultural philosophy is and economics. 
And antitrust is not part of that.
    So that is part of the conditions that we feel in the 
marketplace every day, when you are up against international 
competition.
    Mr. Chabot. Okay, thank you very much.
    Mr. Chairman, I will yield back.
    Mr. Goodlatte. I think the gentleman.
    And the Chair recognizes the gentleman from North Carolina 
for further questions.
    Mr. Watt. Mr. Richards, you have told us a couple times we 
need to get to the right standard that would apply across the 
board to petitioning in the legislative context, to 
petitioning. What is the right standard? I mean, have you 
articulated a right standard in your----
    Mr. Richards. I have not in my statement. I think it is a 
very complex question.
    I think you go a long way toward that standard by looking 
at what the FTC wrote by way of exceptions to the Noerr-
Pennington doctrine in its report, which I think was 2006. I 
think they did a really fine job in that.
    I think the problem there, though, is that they really have 
to take as a given clear law, and some of the clear law that 
they are working with is the Professional Real Estate Investors 
case, so they do the best they can with that one, but it is 
really unclear.
    There are a lot of other contexts though, where they 
identify, I think, very appropriately and clearly areas of law 
which should not be protected and that should be exceptions, 
like ministerial acts, which is also a subject addressed in 
Professor Lao's article, and like fraud, another subject 
addressed in Professor Lao's article, and in the patent context 
in the Walker Process case in the Supreme Court.
    There are a lot of places where I think there probably is 
something like a consensus on what the rule should be here. I 
think one of the biggest problems is not really those areas. It 
is the Professional Real Estate Investor standard itself and 
this division, this artificial division of objective 
baselessness and subjective baselessness, and you having to 
address one before you can look at the other, so then you have 
to try and figure out which category evidence goes into. And it 
is just a mess.
    Mr. Watt. So should whatever standard--suppose we got to a 
standard, should it apply to not only to the filing of legal 
claims? Should it also apply to counterclaims and cross-claims?
    Mr. Richards. I think if it applies to a claim, it should 
apply to any claim. Certainly, I think there are fewer--there 
is less likely to be an antitrust problem with a counterclaim, 
because antitrust predators----
    Mr. Watt. Somebody in the audience disagrees with you, 
because they just sent me a question. Well, I will read the 
second part.
    An antitrust claim is brought only by a defendant in 
reaction to being sued, generally, according to them. If the 
sham exception is made easier, the defense by the original 
plaintiff to the antitrust claim is made harder. Therefore, it 
is easier to use the antitrust counterclaim weapon against the 
original plaintiff who decided his grievance warranted seeking 
redress in court.
    Do you disagree with that?
    Mr. Richards. You know, I would disagree with that because, 
often, who is the plaintiff and who is the defendant could be a 
consequence of things like a plaintiff seeking a declaratory 
judgment. If they know there is a controversy coming up, the 
plaintiff can just be trying to resolve the controversy so that 
it is not a defendant.
    Mr. Watt. But you agree whatever standards are the 
appropriate standards ought to apply to claim, counterclaim, 
cross-claim, legislature, courts, administrative, the whole 
gamut?
    Mr. Richards. I think a baseless claim as a baseless 
claim----
    Mr. Watt. Yes, okay.
    Mr. Richards. Whether it is a claim or counterclaim.
    Mr. Watt. Professor Lao, the same question, right 
standard--the first question I asked to Mr. Richards--how would 
you articulate the right standard?
    Ms. Lao. The right standard, I think that there are many 
parts of the standard that need to be changed. I don't know, 
if--do you want me to talk about several of them?
    So, for instance, Mr. Richards talked about petitions. What 
does petition mean? It is something that we haven't actually 
talked about.
    Well, for instance, I don't think the immunity should apply 
to someone who submits a petition where it is really nothing 
than just filing a form with the government. And the government 
simply does a ministerial task with----
    Mr. Watt. Okay, I think I accept your proposition that this 
is much easier if it is applied only to the courts. So, I guess 
let me accept that.
    Ms. Lao. Okay.
    Mr. Watt. Let's except out that people who petition 
Congress can lie, cheat, steal, beg, borrow, anything. That is 
fair game, in our context.
    Mr. Goodlatte. Well, let's say they might face some other 
consequences, as some lobbyists have, if they engage in----
    Mr. Watt. Right, if we did all of that. But in the legal 
context----
    Ms. Lao. Okay, in the litigation context, okay.
    Mr. Watt. In the litigation context.
    Ms. Lao. Then I would like to see a couple of things.
    First, I would like a fraud and misrepresentation exception 
to the Noerr doctrine carved out, so that if you obtained--if 
you succeed because of misrepresentation, that shouldn't mean 
that the lawsuit is not objectively baseless simply because you 
won, because, right now, that is what it is. If you win a 
lawsuit, then, by definition, your lawsuit was not objectively 
baseless. Now, I think that should be changed.
    Mr. Watt. You are saying that I could win a lawsuit and 
lose a claim of whether it was--should have been filed?
    Ms. Lao. So if I sue you in the underlying lawsuit, and I 
make misrepresentations to the court and so forth, and as a 
result----
    Mr. Watt. I understand the misrepresentations.
    Ms. Lao. Right.
    Mr. Watt. But suppose I don't misrepresent. I win the 
lawsuit. Is there a circumstance under which I should still be 
subjected to----
    Ms. Lao. I think so. I think so. This goes back to a----
    Mr. Watt. What is that circumstance?
    Ms. Lao. The Posner standard, Judge Poser's standard says 
that we simply look at whether it was a rational thing for the 
person to have done. Would a rational person have brought this 
lawsuit?
    Mr. Watt. I have represented a lot of irrational clients. 
[Laughter.]
    Ms. Lao. Excuse me?
    Mr. Watt. No, I'm serious. I have represented a lot of 
irrational clients who would go to substantial expense to right 
wrongs without financial consequences. That is a pretty 
ambiguous standard, as far as I am concerned. But go ahead.
    Ms. Lao. Well, that being Judge Posner. You know that he is 
an economics person, right? So what he does is----
    Mr. Watt. Well, you can rationalize it on economic basis--
--
    Ms. Lao. Right, right. He does it from----
    Mr. Watt. But there are a lot of claims that can't be 
reduced to the economics of the claim.
    Ms. Lao. True. But when we are talking about those claims, 
there probably isn't an antitrust angle to it, right? I think 
most people who bring lawsuits not for economic reasons but 
because they are angry about it or on principle, usually you 
are not talking about firms fighting over a patent and so 
forth, right?
    Mr. Watt. But you are not limiting this exception to just 
an antitrust case. I know that is our jurisdiction here, but 
whatever standard you come up with, doesn't it have to apply 
outside the antitrust context?
    Ms. Lao. No, I think I am really just addressing the 
antitrust context, because we are talking about the Noerr 
exception, right?
    Mr. Watt. And aren't you implicitly accepting exactly what 
you didn't accept, which is the Chicago theory, that this is 
all about the economics of it?
    Ms. Lao. Not really, because right now we are really 
talking about whether the antitrust plaintiff can bring an 
action against an antitrust defendant, alleging that he had 
violated Section 2 of the Sherman Act, for instance, right?
    So all we are saying is we are opening the door for the 
plaintiff to do that. The plaintiff would still have to show 
the defendant has market power, that she committed 
exclusionary--that he committed exclusionary conduct, and that 
there was an anti-competitive effect, and that there was no 
business justification.
    So we are not really imposing liability when we remove the 
shield. All we are saying is that, as a result of that, the 
antitrust plaintiff can go ahead as though there was nothing in 
its place.
    So it is still a very high burden for the plaintiff to 
meet.
    Mr. Watt. Mr. Chairman, I am well over my time.
    Mr. Goodlatte. If you would allow me, I would like to 
follow up on what you just said, and my counsel made this 
point. It is not about that irrational plaintiff, which you and 
I have both had, who are in pursuit of moral justice, if you 
will, and will go to whatever lengths to do it. It is about the 
rational pursuit, and I think this would relate back to the 
case that Mr. Saxman is talking about, where another company in 
the business that he is in face with a large competitor, the 
rational pursuit of anti-competitive gain that is the key to 
the test here.
    In other words, the suit would not be rational but for the 
anti-competitive motive.
    Is that a fair sum-up of the test that you are trying to 
apply here? And would that give you some more comfort that we 
might have something here?
    I like Mr. Richards' baseless test. I agree with you, and I 
agree with Professor Lao. I would not try to impose that in 
other environments than the judicial environment, and here's 
why. In the judicial environment, that small business is there 
whether they like it or not. They are fighting for their life, 
and it is them against a large entity that is attempting to use 
anti-competitive behavior to put them in a very, very difficult 
situation, whereas when you are talking about legislation, you 
have a multitude of different parties and players and the 
likelihood of success.
    It does happen where somebody gets something slipped into a 
bill. I mean, reform of the rules of Congress so you have more 
transparency, less likelihood that an actor could get something 
put into legislation that would give them an anti-competitive 
advantage, is there. But I think addressing it differently than 
you address action in a courtroom, to me, makes sense.
    And, therefore, I would like to keep this focused on what 
happens in the courts.
    I would also like to encourage each of you--we will submit 
some questions in writing--to focus on remedies that we could 
undertake here in the Congress. It might be changes to the 
Federal Rules of Civil Procedure.
    I am very interested in this issue, would like to pursue it 
further. This hearing has helped to, I think, point out the 
difficulties of any broadbrush solution to this. But I do think 
there are some narrow things that could make it less attractive 
to a business to engage in anticompetitive behavior in the 
nature and conduct of the legal proceedings that they 
undertake, especially if they are baseless and especially if 
they are for the clear purpose of gaining an anti-competitive 
advantage.
    Anybody want to add anything to that?
    Mr. Saxman. No, but I just wanted thank you, Mr. Chairman, 
for allowing us to come to you today and talk about what is 
going on in the marketplace. It is a very injurious to our 
economy, and hopefully we can find remedies to help save a lot 
of businesses out there.
    Mr. Goodlatte. I thank you.
    Does the gentleman from North Carolina have anything he 
wants to add?
    Mr. Watt. Just to explore a point that my staff is making 
with me, that Noerr-Pennington developed as an extension of the 
state action doctrine, which says that the state in its 
sovereignty can adopt anti-competitive practices if it wants. 
So the law should protect one's right to petition the 
government to do so.
    And I guess just to explore that a little further, I was 
reading this article about the gentleman who set up across from 
the Super Bowl, or an NFL game. I will just read the facts, 
then you will get the drift of where I am going.
    Last year an anti-bullying advocate teamed with Best Buy on 
what seemed like a promising idea. He would park his bus in 
Best Buy's parking lot near the Cowboys Stadium before a game, 
and he would host a John Madden videogame tournament. He would 
charge participants of the tournament, would teach children 
about how to detect and stop bullying.
    Arlington police and code enforcement officers asked 
Williams--asked the gentleman if he had a permit to be there. 
He did not, and he saw no reason why he should, since he was on 
private property of Best Buy with the store's express 
invitation.
    Security officers insisted that he move the bus. It was a 
commercial operation located within a so-called clean zone 
ordinance, right? So that is the government.
    So now a lawsuit has been filed. And the defense is Noerr-
Pennington. This is state action. Of course, this is private 
action, too. It is the NFL that he sued that is trying to claim 
this defense under Noerr-Pennington.
    But the point I think is, we shouldn't lose sight of the 
reason--I mean, I would probably be on the other side of the 
case with that guy, but Noerr-Pennington, as we understood it, 
was designed to allow governments to do certain anti-
competitive things. So we need to be aware of that----
    Mr. Goodlatte. If you would yield?
    Mr. Watt [continuing]. Maybe not private litigants, 
although the NFL is trying to hide behind the city's Noerr-
Pennington defense here.
    Mr. Goodlatte. If you would yield, as has been pointed out 
with patent laws and so on, we do grant monopolies for a number 
of different purposes. In this case, however, I would see a 
difference between the city bringing the lawsuit or being sued 
and raising the Noerr-Pennington defense and the NFL, because 
the city has the right to enforce----
    Mr. Watt. The NFL----
    Mr. Goodlatte. Well, the city has the right to raise the 
ordinance as a defense. And secondly, the individual who has 
been aggrieved here, the person promoting anti-bullying, and I 
agree with you. I would be very sympathetic to their efforts. 
But they have a whole separate course that they can pursue, and 
that is to petition the local government to change that law, so 
that it is accepting of the time of exception, the use 
exception, that they were attempting to make under those 
circumstances.
    That is different than two private litigants being stuck in 
the courtroom together and one of them having brought the other 
in for anti-competitive reasons. So if you keep it narrow, I 
think maybe we can look for some solutions here.
    Mr. Watt. As with most things, Mr. Chairman, what we have 
proven today is these issues are a lot more complex than they 
appear to be on their surface.
    So with that, I will yield back.
    Mr. Goodlatte. And with that, I have to agree with that 
observation. And I think the gentleman.
    And I think all of the witnesses today for your testimony.
    Without objection, all Members will have 5 legislative days 
to submit to the Chair additional written questions for the 
witnesses, which we will forward and ask the witnesses to 
respond as promptly as they can so that their answers may be 
made a part of the record.
    And without objection, all Members will have 5 legislative 
days to submit any additional materials for inclusion in the 
record.
    And with that, I again think the witnesses and declare the 
hearing to be--now I have a gavel--the hearing adjourned.
    [Whereupon, at 11 a.m., the Subcommittee was adjourned.]

                                 
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