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





           INTERNATIONAL TRADE COMMISSION AND PATENT DISPUTES

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

                                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

                               __________

                             JULY 18, 2012

                               __________

                           Serial No. 112-143

                               __________

         Printed for the use of the Committee on the Judiciary





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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

           Richard Hertling, Staff Director and Chief 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

                              ----------                              

                             JULY 18, 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

The Honorable John Conyers, Jr., a Representative in Congress 
  from the State of Michigan, Ranking Member, Committee on the 
  Judiciary, and Member, Subcommittee on Intellectual Property, 
  Competition, and the Internet..................................     4

                               WITNESSES

Colleen V. Chien, Professor, Santa Clara University School of Law
  Oral Testimony.................................................     7
  Prepared Statement.............................................    10

David B. Kelley, Intellectual Property Counsel, Ford Global 
  Technologies, LLC
  Oral Testimony.................................................    23
  Prepared Statement.............................................    24

Neal A. Rubin, Vice President of Litigation, Cisco Systems, Inc.
  Oral Testimony.................................................    27
  Prepared Statement.............................................    29

Bernard J. Cassidy, General Counsel and Executive Vice President, 
  Tessera Technologies, Inc.
  Oral Testimony.................................................    35
  Prepared Statement.............................................    37

Albert A. Foer, President, American Antitrust Institute
  Oral Testimony.................................................    47
  Prepared Statement.............................................    49

                                APPENDIX
               Material Submitted for the Hearing Record

Attachments to the Prepared Statement of Colleen V. Chien, 
  Professor, Santa Clara University School of Law................    76

Material submitted by Bernard J. Cassidy, General Counsel and 
  Executive Vice President, Tessera Technologies, Inc............   145

Material submitted by 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..................................   172

Letter from Catherine A. Novelli, Vice President, Worldwide 
  Government Affairs, Apple Inc..................................   247
                        OFFICIAL HEARING RECORD
      Material Submitted for the Hearing Record but not Reprinted

Federal Trade Commission report entitled ``The Evolving IP Marketplace, 
    Aligning Patent Notice and Remedies With Competition,'' submitted 
    by the Honorable Zoe Lofgren, a Representative in Congress from the 
    State of California, and Member, Subcommittee on Intellectual 
    Property, Competition, and the Internet. This submission is 
    available at the Subcommittee and can also be accessed at:

    http://www.ftc.gov/os/2011/03/110307patentreport.pdf

Item entitled ``Patently Protectionist? An Empirical Analysis of Patent 
    Cases at the International Trade Commission,'' submitted by Colleen 
    V. Chien, Professor, Santa Clara University School of Law. This 
    submission is available at the Subcommittee and can also be 
    accessed at:

    http://ssrn.com/abstract=1150962

Paper entitled ``Protecting Domestic Industries at the ITC,'' submitted 
    by Colleen V. Chien, Professor, Santa Clara University School of 
    Law. This submission is available at the Subcommittee and can also 
    be accessed at:

    http://ssrn.com/abstract=1856608

 
           INTERNATIONAL TRADE COMMISSION AND PATENT DISPUTES

                              ----------                              


                        WEDNESDAY, JULY 18, 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 10:07 a.m, in 
room 2141, Rayburn House Office Building, the Honorable Bob 
Goodlatte (Chairman of the Subcommittee) presiding.
    Present: Representatives Goodlate, Coble, Chabot, Issa, 
Jordan, Marino, Adams, Amodei, Watt, Conyers, Berman, Chu, 
Deutch, and Lofgren.
    Staff Present: (Majority) Blaine Merritt, Subcommittee 
Chief Counsel; Olivia Lee, Clerk; and (Minority) Stephanie 
Moore, Subcommittee Chief Counsel.
    Mr. Goodlatte. The Subcommittee on Intellectual Property, 
Competition, and the Internet will come to order.
    I will recognize myself for an opening statement.
    Our Subcommittee had much to celebrate following passage of 
the Leahy-Smith America Invents Act, or AIA. The most 
comprehensive change to American patent law in 175 years, the 
AIA addresses a number of issues. The dynamic that compelled 
our Subcommittee to debate patent reform for 6 years was the 
prevalence of frivolous patent suits that drained resources 
from R&D projects and compromised job creation in several 
industries. I am confident that several of the AIA reforms, 
such as post-grant review, changes to joinder and U.S. district 
court litigation, and a transitional program to scrub business 
method patents, will rid the system of many of these bogus 
lawsuits.
    One would think that such a legislative accomplishment 
obviates the need for the Subcommittee to conduct additional 
patent review in this Congress. Unfortunately, that is not the 
case. Today's hearing focuses on the operations of the 
International Trade Commission, or ITC, and how that 
organization handles patent disputes.
    Increasingly, many high-profile patent disputes are 
adjudicated before the ITC. The Commission is an independent, 
quasi-judicial government agency that provides nonpartisan 
counsel to the legislative and executive branches of the 
government. It assesses the impact of imports on U.S. 
industries, maintains the Harmonized Tariff Schedule of the 
United States, and oversees actions against certain unfair 
trade practices, including subsidies; dumping; and patent, 
trademark, and copyright infringement.
    As part of the Trade Act of 1974, Congress created the 
modern ITC along with its main attributes: independence as a 
Federal agency, final decision-making authority subject to a 
Presidential veto, the power to issue cease and desist as well 
as exclusion orders, formalized coverage of unfair trade 
proceedings by the Administrative Procedure Act, or APA, and a 
requirement that the Commission issue decisions with dispatch.
    Agency proceedings regarding patent infringement are 
governed by Section 337 of the Tariff Act of 1930 as well as 
the adjudicative provisions of the APA and the Commission's 
procedural rules that are typically supplemented by ground 
rules issued by the presiding administrative law judge. Section 
337 declares the infringement of certain statutory intellectual 
property rights and other forms of unfair competition in import 
trade to constitute unlawful practices. Most Section 337 
investigations involve allegations of patent or registered 
trademark infringement.
    To be successful, a complainant must prove the following 
elements: first, the existence of unfair methods of competition 
or unfair acts in the importation of articles into the United 
States. For patent cases, infringement of a valid U.S. patent 
constitutes an unfair act. And, second, the importation of 
articles or the sale of such articles in the United States, the 
threat of which is to destroy or substantially injure a 
domestic industry. This also includes preventing the 
establishment of such an industry or restraining or 
monopolizing trade and commerce in the United States.
    Remedies for Section 337 violations generally consist of 
either a limited exclusion order that is directed to a 
respondent specifically found to have violated Section 337 or a 
general exclusion order that applies to all infringing goods, 
whatever the source. A general exclusion order has sweeping 
application and therefore requires a complainant to demonstrate 
that the remedy is necessary to prevent circumvention of a 
limited exclusion order or because there is a pattern of 
statutory violation and it is difficult to identify the source 
of the infringing goods.
    Prior to the Supreme Court's 2006 decision in eBay v. 
MercExchange, the issuance of injunctions in patent disputes 
was almost automatic. But the Court's ruling that the 
traditional four-factor injunctive relief test applies equally 
to patent disputes now means that a patent holder has, on 
average, a one-in-three chance of securing an injunction from a 
U.S. district court. By contrast, a patent holder who prevails 
in the ITC is virtually guaranteed to obtain an exclusion 
order, the functional equivalent of an injunction, absent truly 
exceptional public interest concerns.
    This has become of great interest to patent trolls who do 
not commercialize their patents. eBay restricts their access to 
injunctive relief in U.S. district court, but it is technically 
possible for them to fulfill the domestic industry requirement 
of ITC adjudication through licensing activities. The advent of 
globalization has led to a migration of manufacturing resources 
from the United States to other countries.
    This reality, combined with particular elements of ITC 
practice, has made the Commission an increasingly attractive 
forum for all patent holders to defend their property rights. 
In fact, the average number of ITC complaints filed annually 
during the past decade is nearly triple the average for the 
previous decade. And at least one study indicates that many of 
the complainants are larger firms with multiple product lines 
and valuable patent portfolios that have a better chance to win 
in the ITC than in U.S. district court.
    However, according to some reports, over the past half-
decade we have also seen a dramatic increase in the number of 
cases brought at the ITC by nonpracticing entities as well as 
the number of defendants named in these cases. The number of 
defendants in these cases grew from 22 in 2010 to 232 in 2011. 
This begs the question of whether certain parties are flocking 
to the ITC in the wake of the stricter joinder rules and other 
provisions enacted as a part of the America Invents Act.
    Given the Commission's burgeoning and high-profile 
caseload, it is a good time for our Subcommittee to conduct an 
oversight hearing about ITC operations and how the agency 
handles patent disputes. The scope of the hearing is free-
ranging and will address any relevant topic, but the 
Subcommittee will certainly want to address such issues as 
whether ITC rulings complement or conflict with U.S. district 
court decisions, how the ITC treats standard-essential patents, 
how a plaintiff satisfies the domestic industry requirement of 
an investigation, and whether exclusion orders are too 
cavalierly granted.
    That concludes my opening statement, and I am now pleased 
to recognize the Ranking Member of the Subcommittee, the 
gentleman from North Carolina, Mr. Watt.
    Mr. Watt. Thank you, Mr. Chairman.
    Let me start by thanking Chairman Goodlatte for two things: 
number one, his excellent summary of some of the concerns that 
have been raised that give rise to this hearing. By going into 
such detail, it enables me to gloss across the surface of a 
number of things. And what an excellent presentation.
    Second, I want to thank Chairman Goodlatte and his staff 
for their willingness to expand the witness panel. We usually 
have three or four witnesses, but today we have five. And that 
is important. By doing so, it enabled us to invite Bernard 
Cassidy from Tessera, a company that specializes in 
microelectronic solutions, which, in addition to having a 
facility in my congressional district in Charlotte, North 
Carolina, will provide some different perspectives on some 
matters for which there is otherwise near-unanimity on the 
panel. And while I may not agree with everything Mr. Cassidy 
will have to say, I always think it is important to hear the 
full range of perspectives on these issues. And I am happy to 
welcome Mr. Cassidy here today from my congressional district.
    Over the past several months, there have been numerous 
reports of patent wars within the tech and other industries. 
The technology titans especially have been embroiled in 
contentious battles accusing each other of infringing each 
other's patents. Companies that previously cross-licensed their 
technologies in the marketplace now instead engage in tactics 
designed to undermine their rivals.
    In addition, companies are expanding their patent 
portfolios by purchasing hundreds and thousands of patents to 
bolster their ability to counterclaim. In July 2011, a 
consortium of companies, including Apple and Microsoft, bought 
6,000 Nortel patents in an auction for $4.5 billion. In August 
2011, Google purchased Motorola Mobility, including its 17,000 
patents, for $12.5 billion. In April 2012, Microsoft purchased 
925 patents from AOL for $1.1 billion. And Facebook, also in 
April of this year, purchased 650 of the 925 AOL patents from 
Microsoft for $550 million. These expanding patent arsenals 
certainly do not signal a retreat in the patent arms race.
    While robust enforcement of intellectual property rights, 
including by litigation, is a necessary and often an effective 
means to further innovation and restore order to the 
marketplace, a recent migration of patent infringement actions 
to the International Trade Commission has intensified concerns 
about the possibility of patent holdups, in which patent 
holders can use the threat of an exclusion order banning 
infringing products from entering the country, often as an 
unfair negotiating tool.
    Patent holdups are particularly concerning where standard-
essential patents are involved. Last month, Chairman Smith, 
Ranking Member Conyers, and I wrote a letter to the ITC in 
which we cautioned that, quote, ``the ability to leverage 
standard-essential patents to obtain an exclusion order may 
result either in these products being excluded from markets 
altogether or in companies paying unreasonable royalty rates to 
prevent an exclusion,'' close quote. In either case, the 
consumer loses.
    The uptick in cases before the ITC has also reinvigorated 
calls for Congress to address the so-called patent trolls. The 
2006 Supreme Court decision in eBay v. MercExchange arguably 
made it substantially, some would say decisively, more 
difficult for patent holders to obtain injunctions against 
infringing products by requiring parties to justify why money 
damages are insufficient to remedy the infringement. Perhaps, 
as a consequence, it is argued, entities that own but do not 
practice or otherwise commercialize their patents find the ITC 
a more favorable forum to extract undeserved settlements.
    I know our witnesses have passionate views to share about 
the extent to which these activities foster an uncompetitive 
environment and stifle innovation. So I will conclude with the 
observation that, in my view, whether we are talking about 
battles between industry leaders in the technology space or 
those so-called trolls preying upon the deep pockets of those 
leaders, it is time for the patent wars to find patent peace. 
They are a drain on the economy, a tremendous diversion of 
resources away from innovation, and ultimately not good for the 
consumer or the country.
    I look forward to hearing the various perspectives and 
proposed solutions from our witnesses, and again thank the 
Chairman for the hearing and yield back.
    Mr. Goodlatte. I thank the gentleman.
    The Chair is pleased to recognize the Ranking Member of the 
Judiciary Committee, the gentleman from Michigan, Mr. Conyers.
    Mr. Conyers. Thanks, Chairman Goodlatte.
    Today's hearing is to look at the specifics of how the 
International Trade Commission process is used to protect the 
American industry and property. But I would like to frame my 
comments by reminding that our system should first and foremost 
protect competition and the American workers who create 
intellectual property from monopolistic and anticompetitive 
practices that unfortunately are too much in existence at the 
present time. That is why I think this is a good hearing, and I 
look forward to the comments from our witnesses on this part of 
our responsibilities.
    Now, against the backdrop of deregulation, offshore cash-
hoarding, insufficient antitrust enforcement, our government is 
at a crossroads when it comes to protecting our workers and our 
consumers. The patent litigation system should protect American 
ideas and lay the foundation for American enterprise, but it 
shouldn't be distorted to favor those with the largest budgets 
and cash reserves. And I am hopeful that the International 
Trade Commission is accomplishing that objective.
    The large, more or less monopolistic players have taken to 
collecting patents as a way to attack competitors. It has just 
become a part of the competition that goes on. And, of course, 
it ends up concentrating market power in an unhealthy way. 
Patents have never been more valuable than they are now, and 
the large corporations have taken to collecting patents as a 
legitimate competitive tool to concentrate market power. And I 
hope this concern is examined as carefully as we can with the 
time we have.
    Now, I believe that antitrust review must play an increased 
role in the functioning of Standards-Setting Organizations, 
SSOs. Standards-Setting brings competitors together to work on 
an industry's future so that we must make sure that there is 
less competitive activity occurring--maybe, ideally, no 
competitive activity occurring. Standards for interoperability 
and access are crucial to the development of high technology, 
and most evident, at the moment, in the evolution of mobile 
smart phones.
    Now, eBay v. MercExchange, the Supreme Court decision, is 
cited by my staff as a mostly good decision, that injunctive 
relief can only be awarded to patent holders who satisfy the 
traditional four-prong equitable test for an injunction. To 
file suit in the ITC, a patent owner must meet the domestic 
industry requirements, which can be shown by demonstrating 
substantial investment in the patent's exploitation, including 
engineering, research, and development, or licensing.
    Now, it is not clear how much of the rise in ITC litigation 
is caused by patentees seeking to avoid the eBay court 
decision, but this is because IT litigation has been increasing 
prior to the 2006 decision. So, more than any other time that I 
can recall, we need a more effective and efficient patent 
system, and that is why we are here.
    Thank you, Mr. Chairman.
    Mr. Goodlatte. I thank the gentleman.
    Without objection, other Members' opening statements will 
be made a part of the record.
    And we will turn to our witnesses. Each of the witnesses' 
written statements will be entered into the record in its 
entirety. I ask that each witness summarize their testimony in 
5 minutes or less.
    To help you stay within that time, there is a timing light 
on your table. When the light switches from green to yellow, 
you will have 1 minute to conclude your testimony. When the 
light turns red, it signals that the witness' 5 minutes has 
expired.
    And as is the custom with this Subcommittee, I would ask 
that the witnesses stand and be sworn.
    [Witnesses sworn.]
    Mr. Goodlatte. We have a distinguished witness panel today.
    Our first witness is Colleen Chien, Assistant Professor at 
the Santa Clara University School of Law in the congressional 
district of the gentlewoman from California, Ms. Lofgren. And I 
believe this is the second law professor from Santa Clara we 
have had just within the last month testify before this 
Subcommittee.
    And I have had the opportunity to visit Santa Clara on a 
number of occasions for State of the Net West conferences. So 
you are very welcome.
    Professor Chien is nationally known for her research and 
publications surrounding domestic and international patent law 
and policy issues. Her work has been cited by the Federal Trade 
Commission and in Congress. She has testified before government 
agencies on patent issues, frequently lectures at national law 
conferences, and has published several in-depth empirical 
studies on topical patent matters. She is an expert on the 
International Trade Commission, a topic on which she has 
authored several articles.
    Prior to joining the Santa Clara law faculty in 2007, 
Professor Chien prosecuted patents at a San Francisco law firm, 
served as an advisor to the School of Social Medicine at 
Harvard Medical School, worked as a spacecraft engineer at 
NASA's Jet Propulsion Lab, and was an investigative journalist 
at the Philippine Center for Investigative Journalism as a 
Fulbright Scholar. She earned her A.B. and B.S. in Engineering 
from Stanford University and her law degree from Boalt Hall at 
the University of California, Berkeley--a well-rounded a 
witness, I would say.
    Our next witness is David B. Kelley, Intellectual Property 
Counsel for Ford Global Technologies. Mr. Kelley handles a wide 
variety of IP matters for Ford, including litigation 
management, licensing evaluation, and invention dockets 
management. Prior to joining Ford, Mr. Kelley was an associate 
attorney at a large IP law firm and practiced several years as 
a civil litigator. He earned degrees in Computer Science and 
Mechanical Engineering from Michigan State University and a law 
degree from the University of Toledo.
    Our next witness is Neal Rubin, Vice President of 
Litigation at Cisco Systems. In that capacity, Mr. Rubin is 
responsible for managing the company's portfolio of commercial 
intellectual property and employment litigation as well as 
other business disputes. In addition to hiring outside counsel 
and resolving litigation worldwide, Mr. Rubin counsels Cisco's 
business units on ways to mitigate legal risk.
    Prior to joining Cisco, Mr. Rubin was Assistant United 
States Attorney for the Northern District of California. He 
also practiced law, focusing on intellectual property and 
technology litigation, claims for violations of corporate 
security laws, and employment disputes. Mr. Rubin has been a 
trial advocacy and moot court instructor at Stanford Law 
School. He earned his B.A. with honors from Amherst College and 
his J.D. from the University of Southern California Law School.
    Our next witness is Barney Cassidy, General Counsel and 
Executive Vice President of Tessera. Before coming to Tessera, 
Mr. Cassidy served for more than 9 years as General Counsel and 
Senior Vice President for Tumbleweed Communications, where he 
was responsible for corporate development and legal matters. He 
also practiced law at two firms and clerked for the Honorable 
John Noonan, Jr., at the United States Court of Appeals for the 
Ninth Circuit. Mr. Cassidy earned his Bachelor's Degree from 
Loyola University in New Orleans, his master's in philosophy 
from the University of Toronto, and his law degree from 
Harvard, where he served as editor of the Harvard Law Review.
    Our final witness is Albert Foer, President of the American 
Antitrust Institute. Prior to his work at the Institute, which 
he founded, Mr. Foer practiced law in Washington, worked at the 
Federal Trade Commission's Bureau of Competition, and served as 
the CEO of a chain of jewelry stores. Mr. Foer also teaches 
antitrust law to undergraduate and graduate business students. 
He has published widely and is the co-editor of ``The 
International Handbook on Private Enforcement of Competition 
Law'' and of the forthcoming ``Private Enforcement of Antitrust 
Law in the United States.'' He earned his undergraduate degree 
from Brandeis, a Master's degree in Political Science from 
Washington University, and his law degree from the Chicago 
School of Law.
    Welcome to you all.
    And we will begin with Professor Chien.

           TESTIMONY OF COLLEEN V. CHIEN, PROFESSOR, 
              SANTA CLARA UNIVERSITY SCHOOL OF LAW

    Ms. Chien. Thank you, Chairman Goodlatte, Ranking Member 
Watt, and Members of the Subcommittee. It is a huge honor to be 
here today.
    We are here to talk about the ITC, and I want to make three 
points today. I want to talk about how the ITC is being used, 
why some of these uses are problematic in my opinion, and how 
they could be addressed.
    First, about how the ITC is being used, my research shows 
that the ITC is being used broadly. Although created to address 
foreign piracy, the venue hears many types of disputes: 
competitor cases, pure domestic disputes, and others. This 
means that sometimes the ITC is being used properly in the way 
intended, a domestic industry against a foreign company. About 
17 percent of cases fit this profile. A number of other cases 
are being filed there because, to its credit, the ITC is fast 
and predictable. Litigants like that.
    But sometimes the ITC is being used opportunistically, 
meaning it is being used by parties specifically to get the 
injunction that they can't get in district court. As Chairman 
Goodlatte said, if you are a troll, it is almost impossible to 
get a district court injunction. Even if you make products a 
quarter of the time, you are going to be denied an injunction 
in district court.
    But exclusion orders are still the norm in the ITC. 
Litigants know this. They have compared ITC injunctions to 
Damocles' swords that ratchet up the pressure. How prevalent in 
this practice? By my count, a quarter of cases, naming nearly 
half of the respondents, have been brought by trolls. American 
companies are nearly twice as likely to be named in these suits 
as foreign ones.
    I have one slide to show that point.
    To me, that litigants are calling ITC injunctions Damocles' 
swords to get big settlements, a lot of times against American 
companies, is bad news. What we see on the slide here is, if 
you look at all of the troll cases that have been brought at 
the ITC in the last 18 months and you count up all the 
defendants that are named, you see that 209 of them have been 
from the U.S., versus only 123 from foreign jurisdictions. Many 
of these are from California, 92 of them, New Jersey, New York, 
and Texas. So even though you think about the ITC as wanting to 
protect American companies, often it is being used against 
them.
    I think this is something that we need to consider. And 
that ITC injunctions, again, can be considered Damocles' swords 
is not a good development. It contributes to a favorable 
climate for patent trolling that we have talked about already, 
and it drives investment toward patent speculation and away 
from productive enterprise.
    We are talking about the law today, but what really matters 
is how the law drives investment and hiring decisions. What do 
I mean? Well, Congressman Watt mentioned the Nortel patent 
purchase. In that single purchase, Apple contributed $2.6 
billion to buy patents from Nortel. In that same year, they 
only spent $2.4 billion on R&D.
    Last week, I was disheartened to read and confirm with a 
prominent venture capitalist that companies that used to invest 
in startups have now begun investing in patent assertion. Why 
the change? Less risk and bigger potential gains. The bottom 
line is, if it is easier for people to make money using patents 
rather than compete or build new companies, they will do so.
    If there is a problem, then, real or perceived, how can it 
be fixed? I see two ways: to change the way that the law 
applies or to change the law. The ITC can do the former; 
Congress, if needed, should do the latter.
    Let me explain. The ITC statute is expansive enough that, 
as it exists, it gives the ITC discretion to change course and 
narrow the gaps between it and the district courts. It could do 
so in three ways.
    First, it could change the way it grants injunctions. An 
injunction hurts. Literally, it means that you have to stop 
selling your product. That is your entire business, selling 
products. But if you give a company transition time, it hurts 
less. If you allow them to grandfather in existing products, 
that also reduces the pain to consumers and competitors. The 
ITC could do both things and, indeed, has done them before.
    The ITC could also be more evenhanded about how it applies 
the domestic industry requirement. Right now, ironically, it is 
easier to prove this if you don't make something than if you 
do, with respect to the technical prong. And, finally, I 
believe the ITC could be more proactive when it decides cases 
and affirmatively set policy direction.
    Now, so far, the ITC has made some positive changes: on 
domestic industry precedent when deciding cases, and progress 
also in using delays and grandfathering with respect to public 
interest. So that is encouraging. It has also, however, been 
reluctant to say it is making policy and precedent when it 
decides cases, and progress has been slower as a result. That 
is less encouraging.
    Now, however, I believe the ITC has received a lot of 
attention, more than in a long time. As a result, I think it 
will continue to evolve the law and maybe do so faster. Over 
the next 6 to 12 months, they may have opportunities to prove 
their adaptiveness to the changing conditions. I say ``may'' 
because it will depend on getting the facts right before them 
and in the right cases, and also for parties not settling.
    Congress' role, I think, should be to exercise oversight 
and evaluate how quickly the ITC is moving. If the ITC doesn't 
move to discourage opportunistic behavior because it can't or 
won't, Congress should step in.
    Thank you very much.
    Mr. Goodlatte. Thank you.
    [The prepared statement of Ms. Chien follows:]


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


See Appendix for the attachments submitted with this statement.


                               __________
    Mr. Goodlatte. Mr. Kelley, welcome.

 TESTIMONY OF DAVID B. KELLEY, INTELLECTUAL PROPERTY COUNSEL, 
                 FORD GLOBAL TECHNOLOGIES, LLC

    Mr. Kelley. Mr. Chairman, Ranking Member Watt, and Members 
of the Committee, thank you for inviting me here to this 
hearing today. It is my honor and privilege to appear before 
you.
    I am an Intellectual Property Counsel for Ford Motor 
Company, and I am here to testify regarding a problem plaguing 
production and manufacturing companies, who employ hundreds of 
thousands of Americans workers. At Ford, we directly employ 
more than 65,000 Americans, and our dealers employ more than 
150,000 Americans.
    Ford wholeheartedly supports the underlying purpose of 
Section 337 investigations--that is, to prevent unfair 
competition from foreign entities and to protect American 
industry, jobs, and innovation. We have utilized the ITC to 
prevent importation of products that blatantly infringed our 
intellectual property and that unfairly competed with our auto 
parts.
    Nonetheless, Ford has also recently been hauled into the 
ITC under circumstances that cry out for reform. In November of 
last year, a Swiss-based patent-holding company, Beacon 
Navigation GmbH, brought one of the largest Section 337 cases 
ever against major manufacturers, American manufacturers. The 
case, involving GPS navigation systems, named as respondents 
every major producer of automobiles in the United States. These 
companies employ hundreds of thousands of Americans in good-
paying manufacturing jobs.
    Beacon asserted that certain Ford vehicles should be 
excluded from the U.S. market; this, despite the fact that 
these Ford vehicles contain a high percentage of content 
manufactured in the U.S. by American workers. In addition, the 
navigation component that Beacon claimed was covered by its 
patents was a small part of the navigation system and a 
miniscule part of the total vehicle value.
    And so, a highly complex product with thousands of parts, 
many of which were manufactured and assembled in the U.S. by 
tens of thousands American workers, was subject to exclusion 
from the U.S. Market by a foreign patent assertion entity with 
a patent allegedly covering a small component of that product. 
Beacon ultimately withdrew its complaint, but not before 
costing respondents tens of millions of dollars in defense 
fees. Rather than protect the jobs, U.S. jobs, the case 
threatened U.S. jobs.
    Beacon should not have been allowed to initiate a 337 
investigation in the first place because it had no real trade 
grievance; it was only seeking money damages. Nonetheless, 
Beacon was able to proceed because there is no procedure to 
challenge the reasonableness of an ITC investigation at the 
beginning and because they claimed domestic industry under the 
licensing clause in Section 337.
    In my opinion, the Federal court system, particularly the 
Federal Circuit Court of Appeals, is doing an excellent job in 
recognizing the PAE problem and fashioning judicial policy to 
put appropriate limits on PAE abusive practices. Congress also 
deemed it necessary to correct some of these practices in the 
recently enacted America Invents Act, which, in part, limits a 
PAE's ability to include unrelated defendants in a patent 
lawsuit.
    Unfortunately, the adjustments made by the courts and 
Congress to limit PAEs do not apply to the ITC, and the ITC is 
not bound by Supreme Court precedent that requires a thorough, 
equitable evaluation prior to the grant of injunctive-type 
relief. In fact, the ITC has only exercised its public interest 
equitable powers to deny an exclusion order a handful of times 
over the last 40 years.
    While I have the utmost respect for the ITC, including the 
commissioners, ALJs, staff, general counsel, and others, it is 
clear to me that the ITC is not able to remedy the problem. The 
ITC is constrained by statute and, to its credit, stays within 
the statutory authority. Some believe the ITC has the ability 
to fix this problem without statutory change. There is no 
evidence that it will do so. To the contrary, the ITC has 
stated that it will not distinguish between innovators and PAEs 
that claim domestic industry based on licensing activities.
    It is therefore necessary, and I ask you here today, to 
remedy the problems I have described by supporting the 
following statutory changes to the Trade Act of 1930. First, 
institute an inquiry into the equities of each 337 
investigation at an early stage of the proceeding. Second, 
change the domestic industry requirements by limiting 
qualification to those who engage in production-based 
licensing. These changes will preserve legitimate uses of the 
ITC while shunting PAEs who have an adequate remedy at law to 
the Federal courts where they may belong.
    Thank you, Mr. Chairman and Ranking Member, for holding 
this hearing and shining a light on a problem that is harming 
American manufacturers.
    Mr. Goodlatte. Thank you, Mr. Kelley.
    [The prepared statement of Mr. Kelley follows:]
 Prepared Statement of David B. Kelley, Intellectual Property Counsel, 
                     Ford Global Technologies, LLC
    Chairman Smith, thank you for inviting me to this hearing today. It 
is my honor and privilege to appear before this subcommittee.
    I am an Intellectual Property counsel for Ford Global Technologies, 
LLC, a wholly owned subsidiary of Ford Motor Company that handles all 
intellectual property matters for the company. I am here to testify 
regarding a problem plaguing production and manufacturing companies who 
employ hundreds of thousands of American workers. At Ford, we directly 
employ more than 65,000 Americans--and our dealers employ more than 
150,000 Americans.
    We believe that Section 337 of the Tariff Act is an important tool 
for the protection of American jobs and intellectual property. Section 
337 is a US trade law, enacted in 1930. It was designed to protect U.S. 
manufacturers from unfair foreign competition, and empowers the U.S. 
International Trade Commission (ITC) to exclude products from the U.S. 
market. The statute is particularly useful in intellectual property 
enforcement cases because it sometimes is difficult to enforce a patent 
against foreign infringers in the U.S. courts due to jurisdictional 
issues. Section 337 permits direct action against the infringing 
products, whether or not the maker of the products is subject to the 
U.S. courts.
    Increasingly, Section 337 is being abused by Patent Assertion 
Entities (PAEs) who acquire and hold patents for the purpose of 
litigation. PAEs don't produce goods--they don't actually use 
technology to create products or jobs in the United States. Their goal 
is to threaten other businesses with patent litigation in the hope that 
those other businesses will agree to pay royalties rather than face 
continuing legal claims.
    In recent years, PAEs have targeted Americans manufacturers, 
threatening their U.S. operations, and trying to force them into cash 
settlements that would not be awarded by a court. This began after the 
U.S. Supreme Court ruled, in the 2006 eBay decision, that U.S. courts 
could issue injunctions in patent cases only if the plaintiff could 
show the traditional requirements for injunctive relief. Most 
importantly, the plaintiff is required to show that irreparable harm 
would occur if the injunction did not issue. A PAE that is only seeking 
money can't show irreparable harm: money can always be awarded later. 
So the Supreme Court decision meant that PAEs would have to prove their 
damages. But the PAE business model is to seek quick negotiating 
leverage, not to pursue a long patent case for damages. So after the 
eBay decision, Section 337 became more attractive to PAEs. It offers an 
injunction-like remedy without requiring proof that an injunction is 
warranted. PAEs use the threat of a Section 337 exclusion order to 
obtain bargaining leverage, just as prior to eBay PAEs used the threat 
of a court injunction.
    By the time a manufacturer enters production, the company has spent 
great sums of money on design integration, tooling, and other 
investments to incorporate a particular technology. The technology 
itself may not be valuable--it may be trivial--but it is very expensive 
to change it after the investments have been made. PAEs can assert a 
minor patent against such a company and demand exorbitant sums--amounts 
far beyond the actual value of the technology in the market--because 
the manufacturer must either pay or walk away from its sunk costs.
    This tactic is a patent ``hold-up.'' That is, the PAE demands 
royalties that are large not because the patent is valuable, but 
because the target is vulnerable. This behavior by PAEs hinders 
innovation instead of promoting the adoption of new technology.
    Some believe that most, if not all, Section 337 cases are brought 
against shadowy Asian companies that are counterfeiting American goods 
or infringing U.S. patents. In fact, only a small percentage of Section 
337 cases are brought by a U.S. company against foreign companies. Most 
cases are brought against a mix of U.S. and foreign companies. PAEs 
like to bring their cases against prominent U.S. companies, because 
their goal is not to exclude foreign products from the United States or 
to protect American manufacturers: it is to negotiate a royalty stream 
to earn a return on their investment. In recent years PAEs have brought 
Section 337 actions against such prominent U.S. companies as Apple, 
Ford, Google, General Motors, Hewlett Packard and Intel, among many 
others.
    These U.S. manufacturers, and others, operate on a global basis: 
they sell their products globally, and they ensure their products are 
internationally competitive by purchasing parts and materials globally 
as well. Exclusion of critical parts or components from the U.S. market 
can lead to a calamitous shut-down of U.S. operations.
    The intensity and fast pace of ITC litigation creates an atmosphere 
where a respondent in the ITC must divert extensive resources quickly 
to its defense or face a rapid, adverse and unfair result. Even if a 
company is confident that its imported products do not infringe a 
patent, the costs of litigation, the uncertainty of litigation, and the 
risks of an interruption of business are so great that the company may 
be tempted to settle.
    Ford wholeheartedly supports the underlying purpose of Section 337 
investigations, that is, to prevent unfair competition from foreign 
entities, and to protect American industry, jobs, and innovation. We 
have utilized the ITC to prevent importation of products that blatantly 
infringed our intellectual property and that unfairly competed with our 
parts.
    Nonetheless, Ford has also been recently hauled into the ITC under 
circumstances that cry out for reform. In November of last year, a 
Swiss-based patent holding company, Beacon Navigation GmbH, brought one 
of the largest Section 337 cases ever against major American 
manufacturers. The case, involving GPS navigation systems, named as 
respondents every major producer of automobiles in the United States, 
including Chrysler, Ford, General Motors, Honda, BMW, Mercedes, Nissan 
and Toyota. These companies employ hundreds of thousands of Americans 
in good-paying manufacturing jobs. Rather than protect U.S. jobs, the 
case threatened U.S. jobs. Beacon also sued the companies in Delaware 
district court. The patents underlying the 337 investigation allegedly 
cover certain aspects of automotive navigation systems. Despite the 
fact that Beacon has only a handful of employees in the US, did not 
itself make any products, had not undertaken any research or 
development related to navigation systems, had purchased the patents 
from another party, was only interested in obtaining royalties, and had 
questionable licensing activities, it claimed that it qualified as a 
``domestic industry'' under the licensing clause of the statute.
    Beacon asserted that certain Ford vehicles assembled in Mexico and 
Canada should be excluded from the U.S. market. This despite the fact 
that these Ford vehicles contain a high percentage of content 
manufactured in the U.S. by American workers, and despite the fact that 
the vehicles were imported under the North American Free Trade 
Agreement (NAFTA). In addition, the navigation component that Beacon 
claimed was covered by its patents was a relatively small percentage of 
the total vehicle value. And so a highly complex product with thousands 
of parts, many of which were manufactured and assembled in the U.S. by 
tens of thousands of American workers, was subject to exclusion from 
the U.S. market by a foreign PAE.
    Beacon was using the ITC to obtain exorbitant royalties far beyond 
a reasonable value. And they attempted to use the ITC as leverage to 
extract higher fees on products made in the U.S., such as Ford F-150 
trucks, that contain a small component from a global supplier. Beacon 
even tried to get royalties for vehicles in countries where it had no 
patents by using the leverage of the ITC investigation.
    Only after diligent inquiry by defense counsel and by forceful 
direction from the ITC judge did it become apparent that Beacon could 
not sustain its claim of a domestic industry. It subsequently withdrew 
its complaint. But not before costing the respondents tens of millions 
of dollars in defense fees.
    The Beacon case demonstrates the extent to which 337 investigations 
have strayed from their intended purpose. Beacon should not have been 
allowed to initiate a 337 investigation because it had no real trade 
grievance--it was only seeking money damages. Its alleged licensees do 
not make automotive navigation systems, and even if they did, they do 
not have the capacity to supply even a fraction of the industry that 
Beacon sought to exclude. Nonetheless, Beacon was able to proceed 
because they claimed domestic industry under the licensing clause in 
Section 337, and because there is no procedure to challenge the 
reasonableness of an ITC remedy at the beginning of an investigation.
    Licensing is permitted in the domestic industry test to allow 
innovators who don't make products, like universities, to use Section 
337. Innovators engage in production-based licensing, sometimes called 
``ex-ante'' licensing. That is, innovators license their patents before 
a product is developed and encourage their licensees to bring new 
products to market. This helps create American jobs in product 
development and manufacturing. On the other hand, PAEs obtain and 
license their patents after a product has come to market, and seek to 
share in the value already created by others. This is referred to as 
revenue-based licensing, or ``ex-post'' licensing. While a PAE may have 
a claim in district court, it should have no place in the ITC, which is 
intended to protect U.S. industries and jobs, not to allocate existing 
value among claimants by awarding damages. The current domestic 
industry test in Section 337 does not specifically distinguish between 
production-based licensing and revenue-based licensing. And so, under 
current practice, almost any patent owner, even foreign based PAEs with 
virtually no presence in the U.S. and licensees with limited capacity, 
can bring an action against an entire U.S. industry. The ITC is thus 
essentially operating as an alternate patent court in many respects.
    In my opinion, the federal court system, particularly the Federal 
Circuit Court of Appeals, is doing an excellent job in recognizing the 
PAE problem and fashioning judicial policy within their authority to 
put appropriate limits on abusive PAE practices. Congress also deemed 
it necessary to correct some of these practices in the recently enacted 
America Invents Act (AIA), which, in part, limits a PAE's ability to 
include unrelated defendants in a patent lawsuit.
    Unfortunately, the adjustments made by the courts and Congress to 
limit PAEs do not apply to the ITC. PAEs can name any number of 
respondents in their complaints. Recent statistics clearly show an 
increase in the number of respondents in 337 investigations, mainly the 
result of PAEs. And the ITC is not bound by Supreme Court precedent 
that requires a thorough equitable evaluation prior to the grant of 
injunctive type relief. In fact the ITC has only exercised its public 
interest equitable powers to deny an exclusion order a handful of times 
in the many hundreds of investigations it has undertaken over the last 
forty plus years.
    While I have the utmost respect for the ITC, including the 
Commissioners, ALJs, Staff, General Counsel, and others, it is clear to 
me that the ITC is not able to remedy the problem. This is so because, 
by its own admission, it is not a policy-making body. The ITC is 
constrained by statute and, to its credit, stays strictly within its 
statutory authority. However, this has resulted in a mechanistic 
application of the law which has ultimately led to absurd situations 
like the Beacon case that I've related, which is one of many examples 
of PAE abuse in the ITC.
    Some believe that the ITC has the ability to fix this problem 
without statutory change. There is no evidence that it will do so. To 
the contrary, the ITC has stated that it will not distinguish between 
entities that claim domestic industry based on particular licensing 
activities. That is, any entity that can show it has licensed a patent 
to another party, even if it is revenue-based ``ex-post'' licensing, 
qualifies as a ``domestic industry'' under current ITC law. And while 
recent decisions and proposed rule changes indicate that the ITC may 
genuinely be trying to address the problem in limited respects, these 
attempts will likely fall far short of eliminating PAE activity from 
unfairly burdening productive US manufacturers that employ hundreds of 
thousands of American workers.
    It is therefore necessary, and I ask you here today, to remedy the 
problems I've described by supporting the following statutory changes 
to the Trade Act of 1930:
    First, institute an inquiry into the equities of each 337 
investigation at an early stage of the proceeding, or even before an 
investigation is begun. The inquiry preferably would be the first 
matter undertaken by an ALJ. An initial determination by an ALJ on this 
issue should be immediately reviewable by the Commission, and a 
Commission determination should be reviewable by the Federal Circuit 
Court of Appeals. This inquiry will allow the ITC to use its discretion 
in preventing abusive PAEs from initiating non-trade related 
investigations. The inquiry could be similar to that used by the courts 
before awarding injunctive relief.
    Second, change the domestic industry requirements by either 
limiting qualification to those who engaged in production-based (ex-
ante) licensing, or by eliminating the licensing aspect entirely, as 
licensing entities are really seeking money and the ITC cannot award 
damages.
    These changes will preserve legitimate uses of the ITC while 
shunting PAEs who have an adequate remedy at law to the federal courts, 
thus protecting U.S. industry, jobs and technology from abusive and 
destructive litigation in the ITC.
    Thank you Mr. Chairman and Ranking Member for holding this hearing 
and shining a light on a problem that is harming American 
manufacturers. I appreciate your efforts to bring forth legislation 
that will deliver a fair solution that preserves the intent of the law 
while fixing the abuses of PAEs.
                               __________

    Mr. Goodlatte. Mr. Rubin, we are pleased to have your 
testimony.

TESTIMONY OF NEAL A. RUBIN, VICE PRESIDENT OF LITIGATION, CISCO 
                         SYSTEMS, INC.

    Mr. Rubin. Although the International Trade Commission 
hears many patent cases, it is fundamentally a trade forum, 
charged with protecting U.S. industry and U.S. consumers from 
unfair foreign competition.
    I am here today because, under the ITC's interpretation of 
its governing statute, a Canadian company with one employee in 
the United States that buys a portfolio of Israeli patents can 
seek to enjoin Cisco, a U.S. company that employs tens of 
thousands of U.S. engineers, from selling its products into the 
U.S. because some of the component parts are sourced from 
abroad.
    That is one example, and there are many others, where 
patent assertion entities that do not design, develop, sell, or 
import any products can nevertheless meet the definition of a 
U.S. industry worthy of ITC protection, while U.S. companies 
that employ thousands of engineers can be deemed foreign 
competitors whose products can be excluded from U.S. markets. 
That needs to be remedied.
    My name is Neal Rubin, and I am the Vice President of 
Litigation for Cisco Systems. Headquartered in San Jose, 
California, Cisco is one of the world's largest makers of 
telecom equipment, with 36,000 employees here in the U.S. Cisco 
invested $5.8 billion in our most recent year on research and 
development, 80 percent of that in the United States, with the 
goal of making the future of communication faster, more 
reliable, and more secure.
    Cisco has more than 9,000 U.S.-issued patents. But like 
every successful technology company in the U.S., Cisco has 
experienced an extraordinary increase in patent litigation in 
the last 5 to 10 years. Of the dozens of patent infringement 
lawsuits filed against Cisco, virtually all of them are brought 
by patent assertion entities.
    In the last few years, these entities have begun to sue 
Cisco in the ITC because, under the Supreme Court's eBay 
decision, companies that do not build products can no longer 
obtain injunctions when they sue for infringement in district 
court. Cisco was a respondent in only one ITC case prior to 
2010. Since then, we have been named five times. Cisco will 
spend considerably more than $20 million this year defending 
these cases.
    While this Committee did extensive work to reform the 
patent system, resulting in the American Invents Act, most of 
these reforms do not apply to the ITC.
    Because the ITC is designed to protect U.S. industry, it 
can issue an exclusion order only when a domestic industry 
related to the patent exists or is being established. One way a 
patent owner can establish and satisfy the domestic industry 
requirement is to show substantial investment in exploiting the 
patent via its licensing efforts.
    But the Tariff Act and its legislative history illustrate 
that the licensing activity Congress intended to satisfy, the 
domestic industry requirement, is production-driven licensing, 
meaning efforts that promote the adoption and use of the 
patented technology to create new products and new industries. 
The ITC, however, has recognized a new licensing model, one 
that we call revenue-driven licensing. Patent assertion 
entities engaged in revenue-driven licensing do not design, 
develop, sell, or import any products. Their efforts merely 
raise the price of existing products.
    The Supreme Court's eBay decision recognized exactly this 
policy distinction between production-driven licensing and 
revenue-driven licensing, and precluded injunctive relief in 
district court for parties engaged solely in revenue-driven 
licensing. The ITC, however, is not bound by the eBay decision 
and has moved in the opposite direction, holding the entities 
engaged solely in revenue-driven licensing meet the domestic 
industry requirement.
    The result is that these patent assertion entities are 
increasingly turning to the ITC, with the number of filings and 
the number of companies sued spiking dramatically. The data 
from last year shows PAE cases represent 40 percent of the 
entire 337 ITC docket and includes 60 percent of the 
respondents.
    One Cisco case from earlier this year is illustrative of 
the problem. The complainant was MOSAID Technologies, a company 
headquartered in Ottawa, Canada, in the business of patent 
acquisition and enforcement. MOSAID bought a portfolio of 
patents from a failed Israeli company. And in 2011, MOSAID sued 
Cisco in the ITC, seeking to exclude many of Cisco's products 
from sales in the U.S. because foreign-made components 
allegedly infringed those patents.
    In an effort to manufacture evidence of a domestic 
industry, MOSAID rushed to open its only office in the United 
States shortly before suing. MOSAID had one employee there at 
the time.
    But that was just the beginning. MOSAID had to rely on the 
licensing prong to show a domestic industry, and therefore 
served subpoenas on their licensees, requesting documents and 
testimony to support their domestic industry claim. MOSAID then 
paid these licensees to respond to the subpoenas and to 
testify, even though they were obligated by law to do so.
    MOSAID ultimately dismissed its case when its misconduct 
was uncovered. But in the end, Cisco spent more than $13 
million litigating a case that should never been brought in the 
ITC. And but for MOSAID's misconduct, we could still be there.
    Congress can solve this problem by clarifying that 
complainants in the ITC can establish a domestic industry only 
through licensing that promotes the market adoption of the 
patented technology. Doing so would return the focus of the ITC 
to its original intent and align the ITC with patent law and 
the Federal courts. PAEs could still pursue monetary damages in 
Federal courts, and domestic manufacturers and universities 
would continue to benefit from the ITC's protections. What PAEs 
would lose is the ability to use the ITC to threaten companies 
with the prospect of an exclusion order that does not benefit 
any U.S. industry.
    Thank you for giving Cisco an opportunity to provide input 
on this important topic. I look forward to your questions.
    Mr. Goodlatte. Thank you, Mr. Rubin.
    [The prepared statement of Mr. Rubin follows:]
  Prepared Statement of Neal A. Rubin, Vice President of Litigation, 
                          Cisco Systems, Inc.
    Members of the House Judiciary Committee, thank you for the 
opportunity to testify before this Committee about the detrimental 
impact patent assertion entities are having on U.S. businesses through 
their ever increasing use of the United States International Trade 
Commission (the ``ITC'') as a preferred forum for patent assertions. 
This Committee did extensive work to reform the patent system in the 
America Invents Act. However, most of those reforms and the 
improvements in case law that resulted from the Act do not apply to the 
ITC.
    The ITC is an international trade forum charged with protecting 
U.S. businesses and U.S. consumers from unfair foreign trade practices. 
The ITC is not a general venue for patent disputes. Nonetheless, patent 
assertion entities who do not develop, do not make, do not sell and 
import products are now routinely using the ITC to assert their patents 
against U.S. operating companies, imposing great expense and burden on 
them and on U.S. consumers. These assertions in the ITC are injuring 
rather than protecting our domestic economy.
    Prior to 2006, patent assertion entities (companies whose only 
business is licensing and litigating patents to make money) essentially 
did not use the ITC. But by 2011, patent assertion entity cases 
comprised one quarter of ITC investigations instituted, and nearly half 
of all respondents in the ITC were named in patent assertion entity 
investigations. This year, 40% of the investigations instituted are 
patent assertion entity cases, and they comprise 60% of ITC 
respondents. This is happening because the 1988 Congressional 
amendments to Section 337 of the Tariff Act of 1930 have been 
interpreted to require the ITC to accept complaints from entities that 
invest in any kind of domestic licensing, including ``revenue-driven 
licensing.''
    ``Revenue-driven licensing'' also is sometimes termed ``ex post 
facto''K licensing. In other words, it is licensing or attempted 
licensing that occurs after another company has already sold products 
allegedly using the patented technology. Generally, the targeted 
products were independently developed without knowledge of the patent, 
and it is not uncommon for the patent claims to be drafted after the 
targeted product has already been sold. This is not the ``production-
driven licensing'' activity, where licenses encourage the development 
and sales of new products, that Congress intended would satisfy the 
ITC's jurisdiction requirement when it amended the Tariff Act.
    These types of cases have become particularly prevalent in recent 
years because the remedy the ITC may issue--an exclusion order that 
bars a U.S. company from importing its products for sale in the U.S.--
has been unavailable to patent assertion entities in federal court 
since 2006, when the Supreme Court decided eBay v. MercExchange. In 
that case, the Supreme Court held that injunctive relief may only be 
awarded to patent holders who satisfy a traditional four prong 
equitable test for an injunction by proving, among other things, that 
their patent claims cannot be adequately satisfied by an award of money 
damages.\1\ Patent assertion entities, which by definition are looking 
for money, have no standing to seek injunctive relief in federal 
courts. Because of this, they have turned their sights on the ITC as a 
preferred venue for asserting their patents against U.S. operating 
companies, in order to threaten them with the prospect of exclusion 
orders that they would not be able to receive in a federal court. By 
filing in the ITC, these entities hope to extract more than the true 
value of the patented technology from U.S. operating companies.
---------------------------------------------------------------------------
    \1\ eBay Inc. v. MercExchange LLC, 547 U.S. 388 (2006).
---------------------------------------------------------------------------
    The use of the ITC in this manner should not be allowed. Patent 
assertion entities do not engage in the kind of domestic licensing 
activities that should qualify them to use the ITC. Congress did not 
intend for its trade statutes to allow patent assertion entities who 
target existing products for licensing revenues to bring their claims 
in the ITC. The ITC is a trade forum intended to protect U.S. industry 
and U.S. consumers. It was not intended to be a forum for a few 
individuals to extract settlements far beyond what they would be 
entitled to receive if they sued in a U.S. court.
    Claims by patent assertion entities can be and are adjudicated in 
federal district courts empowered to award money damages where 
appropriate. The ITC is an international trade forum intended to 
protect U.S. industry. Yet under current ITC practice, it is being used 
with increasing frequency by patent assertion entities to harm U.S. 
industry. My testimony addresses this problem of patent assertion 
entities' increasing filing of claims in the ITC and proposes a 
solution.

                         Introduction to Cisco

    I am the Vice President of Litigation for Cisco, one of the world's 
largest developers of networking and telecommunications equipment that 
powers the Internet, with more than $45 billion in annual sales and 
over 36,000 U.S. employees. Cisco's success as a company is a direct 
result of our ability to innovate. Our products originally were 
designed for communications within private or enterprise networks. When 
the public Internet emerged in the mid 1990s, our products found 
immediate application for worldwide use. Today, Cisco's networking 
equipment forms the core of the global Internet and most corporate and 
government networks. We invested $5.8 billion in the 2011 fiscal year 
on researching and developing the next generation of networking 
equipment, with the goal of making the future of communication faster, 
more reliable and more secure. We have invested another $4.1 billion in 
research and development of our products in the first three quarters of 
fiscal year 2012 alone.
    Like all successful technology companies based in the United 
States, Cisco has experienced a large increase in patent litigation 
over the past 5-10 years from entities that do not design, develop or 
sell any products. These entities who are suing Cisco are not 
universities, but instead are entities staffed by lawyers and backed by 
financiers who seek to profit from patent lawsuits. Of the dozens of 
patent infringement lawsuits currently pending against Cisco, virtually 
all of them were brought by patent assertions entities.
    Over the past two years, patent assertion entities have begun 
filing claims against Cisco in the ITC. In calendar year 2011, 
approximately 60 ITC investigations were initiated by the Commission 
and Cisco was a respondent in about 5% of all cases filed in the ITC in 
that period. Looking at it another way, Cisco was a named respondent in 
exactly one ITC case up until 2010 (which was filed by a US practicing 
entity). Since the beginning of 2010, Cisco has been a named as a 
respondent in five matters, nearly all of which were filed by patent 
assertion entities.

     The ITC's Role as an International Trade Forum Rather Than an 
                      Intellectual Property Forum

    Complaints filed by patent assertion entity are turning the ITC 
into general patent forum. This is inconsistent with the role of the 
ITC as provided in its governing statute. The ITC is ``an independent 
federal agency whose strategic operations are to determine import 
injury to U.S. industries in antidumping, countervailing duty, and 
global and bilateral safeguard investigations; direct actions against 
unfair trade practices involving patent, trademark, and copyright 
infringement; support policymakers through economic analysis and 
research on the global competitiveness of U.S. industries; and maintain 
the Harmonized Tariff Schedule of the United States.'' \2\ The ITC is a 
trade forum whose mission is to protect U.S. industries and U.S. 
consumers from injuries they suffer from unfair foreign competition. 
Where appropriate, the ITC may issue an exclusion order to prohibit 
unlawful importation of an infringing product, where importation harms 
a domestic U.S. industry in articles protected by that patent.
---------------------------------------------------------------------------
    \2\ United States International Trade Commission Strategic Plan, 
Fiscal Years 2009-2014, available at http://www.usitc.gov/press_room/
documents/strategic_plan_2009-2014.pdf
---------------------------------------------------------------------------
    The ITC is not, however, empowered to hear any and all U.S. patent 
infringement disputes. U.S. federal district courts have exclusive 
jurisdiction over most patent infringement lawsuits, where they can 
award relief such as monetary damages. The ITC only has authority to 
adjudicate patent disputes that involve unfair foreign imports that 
negatively impact U.S. industry. In particular, because the ITC exists 
to protect U.S. industry, the ITC is empowered to issue an exclusion 
order in a patent case only if ``an industry in the United States, 
relating to the articles protected by the patent, . . . exists or is in 
the process of being established.'' (19 U.S.C. Section 1337). A patent 
owner can satisfy this domestic industry requirement in a patent case 
in one of three ways:

          By showing significant investment in plant and 
        equipment in the U.S. related to an article protected by the 
        patent;

          By showing significant employment of labor or capital 
        in the U.S. related to an article protected by the patent; or

          By showing substantial investment in exploiting the 
        patent via engineering, R&D or licensing in the U.S.

    It is the third method of satisfying the domestic industry 
requirement--exploiting patents via ``licensing'' investments in the 
U.S.--that I will focus on in these comments. In particular, patent 
assertion entities, which do not design, develop, make, or sell any 
products, often rely upon the statute's reference to a ``substantial 
investment'' in ``licensing'' of articles protected by the patent to 
claim that they have a domestic U.S. industry in need of protection. In 
addition, such patent assertion entities often rely upon the domestic 
activities of their unwilling licensees (unwilling because most such 
licenses are agreed upon in settlement of litigation or after the 
licensee has been threatened with patent litigation on its existing 
products).
    But this statutory language, added by Congress in 1988, should not 
apply to the ``revenue-driven licensing'' model. Patent assertion 
entities engaged in ``revenue-driven licensing'' target already 
existing products for licensing revenues. Congress added the 
``licensing'' language to the Tariff Act in 1988 to permit a domestic 
industry based upon a substantial investment in production-driven 
licensing by patentees, such as universities or U.S. production 
companies, who had made substantial investments in developing 
technology and engaged in ``production-driven licensing'' to 
commercialize that technology--licensing efforts that promote the 
adoption and use of a patented technology and create new products and 
industries. A ``production-driven license'' generally is between two 
willing parties; one party that developed the technology and another 
party that wants to use the technology to create its own products. 
``Revenue-driven licensing,'' by contrast, seeks to use patents, not as 
a basis for creating new goods, but rather for extracting licensing 
fees from others for sales of products that were already in the 
marketplace. ``Revenue-driven licenses'' generally involve an unwilling 
party who developed its products on its own and then entered into a 
subsequent license, often during or under threat of litigation. 
Further, in many of these cases, the patent holder did not even develop 
the technology, but instead purchased the patents from the original 
inventor.
    We believe Congress intended to protect a domestic U.S. industry of 
new products created through licensing, not to create a windfall for 
those who seek to make money from suing operating companies after those 
companies have created and developed new products through their 
independent efforts and investments in the United States.

   Increasing Use of the ITC by Patent Assertion Entities Harms U.S. 
                                Industry

    The increasing use of the ITC by patent assertion entities 
(entities whose business is ``revenue-driven licensing'') appears 
attributable in substantial part to a Supreme Court case that has made 
real progress in balancing the enforcement of patents in the federal 
district courts, but that has been held to not apply to the ITC. In 
2006, the U.S. Supreme Court issued its eBay v. MercExchange decision 
which made clear that patentees who can be adequately compensated with 
monetary damages, such as a reasonable royalty, should not be awarded 
permanent injunctions as a matter of course as had been the past 
practice. Rather, district courts should apply a four part test to 
evaluate the equities of granting injunctive relief. Under that test, 
patent assertion entities, which exist only to assert patents and 
collect money, do not have standing to obtain a permanent injunction. 
While they may pursue a reasonable royalty, they cannot use the threat 
of a permanent injunction to unfairly coerce U.S. operating companies 
to pay exorbitant and unreasonable royalties.
    Since the eBay decision issued, patent assertion entities have 
sought to try to find new ways to impose the threat of an injunction 
against U.S. operating companies, in order to extract excessive 
royalties. Because the ITC may award exclusion and cease and desist 
orders in patent proceedings, these entities increasingly have used the 
ITC as a preferred forum for patent assertion. Indeed, prior to the 
eBay decision, patent assertion entities essentially did not use the 
ITC. However, the year following that decision, the ITC instituted four 
investigations brought by patent assertion entities, and the trend has 
continued ever since.
    Although many companies believe that the domestic industry 
provisions of our trade statutes should prevent patent assertion 
entities from routinely using the ITC this way, case law has recognized 
a licensing model called ``revenue-driven licensing'' as being within 
the ambit of the statute.\3\ Although the ITC has concluded that 
``revenue-driven licensing'' is entitled to ``less weight'' than the 
``industry-creating, production-driven licensing activity that Congress 
meant to encourage'' in its statute, ITC case law interprets the Tariff 
Act of 1930, as amended, as recognizing all licensing including 
``revenue-driven licensing.'' \4\ Further, the ITC may consider the 
U.S. activities of such unwilling revenue-driven licensees as part of 
the domestic industry of the licensor. In light of this expansive 
interpretation of the licensing provision of the ITC statute, patent 
assertion entities routinely use the ITC as a preferred forum for their 
disputes, relying upon ``revenue-driven licensing'' to claim a 
substantial investment in licensing, rather than the ``production-
driven licensing'' intended to be protected by Section 337.
---------------------------------------------------------------------------
    \3\ See, e.g., Certain Multimedia Display and Navigation Devices 
and Systems, Components Thereof, and Products Containing Same, Inv. No. 
337-TA-694, Comm'n Op. at 15 (Aug. 8, 2011).
    \4\ Id.
---------------------------------------------------------------------------
    Statistics unquestionably bear this out. Last year, we estimate 
that approximately \1/4\ of all ITC cases were filed by patent 
assertion entities, with the ITC reporting record breaking levels of 
ITC case filings. And, this figure understates the actual impact of 
these ITC cases because approximately 50% of all respondents named in 
an ITC investigation last year were respondents in ITC investigations 
filed by patent assertion entities. Further, based on the data 
available for this year, patent assertion entity cases account for over 
40% of the entire 337 ITC docket and respondents in those cases account 
for over 60% of all respondents. Consistent with these observations, in 
the ITC's Budget Justifications for every year from FY 2008 to FY 2012, 
the ITC has noted its expanding case load, and has attributed this in 
substantial part to the availability of exclusionary relief in the ITC. 
In its Budget Justification for FY 2012, the ITC specifically referred 
to the eBay case as a contributing factor for this difference in 
remedies and the attractiveness of the ITC as a forum for patent 
suits.\5\ The ITC has become so inundated with patent proceedings that 
it has noted the exceptional demands patent cases are placing on its 
budgets and staff, for example, supplementing its Human Capital Plan 
for 2009-2013 to change its procedures to reflect a record breaking 
increase in patent litigation.\6\ Likewise, the FTC reported in 2011 
that the eBay decision may be the cause of this activity and suggested 
that the ITC should only find domestic industry where there is a 
production-driven licensing activity.\7\
---------------------------------------------------------------------------
    \5\ U.S. International Trade Commission, Budget Justification 
Fiscal Year 2012 at p. 21, available at http://www.usitc.gov/
press_room/documents/budget_2012.pdf.
    \6\ U.S. International Trade Commission, Supplement to the 
Strategic Human Capital Plan 2009-2013, January 2011, available at 
http://www.usitc.gov/intellectual_property/documents/2009_13_SHCP.pdf
    \7\ FTC, The Evolving IP Marketplace: Aligning Patent Notice and 
Remedies with Competition, 29-30 (Mar. 2011).
---------------------------------------------------------------------------
    This increased use of the ITC by patent assertion entities is 
detrimental to the U.S. economy in many ways, and I will discuss one 
example involving Cisco below. Patent assertion entities--often staffed 
by lawyers and backed by financiers--purchase patents for the sole 
purpose of asserting them against operating companies as a tax on an 
operating company's research and development efforts. These entities 
are engaged in ``revenue-driven licensing.'' Although ``revenue-driven 
licensing'' is recognized by the ITC as being entitled to ``less 
weight'' than the ``industry-creating, production-driven licensing 
activity that Congress meant to encourage,'' the ITC still permits 
``revenue-driven licensing'' to qualify for a domestic industry because 
the case law suggests all licensing activities qualify. ``Revenue-
driven licensing,'' however, results in no new products; it merely 
raises the prices of existing products. Firms engaged in ``revenue-
driven licensing'' are not a domestic industry that needs to be 
protected from foreign competition.
    In addition to burdening U.S. industries and harming U.S. 
consumers, these cases also are straining the resources of the ITC. 
Patent assertion entity litigation has shifted the ITC from an 
administrative agency charged with protecting U.S. manufacturers and 
securing U.S. jobs to a generalized intellectual property court 
routinely used by patent assertion entities to place a tax on the 
development and sales of actual products by U.S. based companies. 
Patent assertion entity cases undermine the ITC's purpose of protecting 
domestic industry from unfair foreign competition.

  Cisco's Recent History in the ITC Illustrates the Disproportionate 
            Impact ITC Cases Can Have on Operating Companies

    Patent assertion entity litigation before the ITC is particularly 
injurious to U.S. operating companies and the domestic economy because 
of the disproportionate costs such litigations impose. For example, 
although ITC cases comprise only about 10% of Cisco's overall 
litigation docket, these few cases account for almost half of our 
overall litigation budget. Cisco spends more than ten million dollars 
defending individual actions in the ITC. Cisco's experience in this 
respect is consistent with experiences described in legal trade 
journals, such as the American Lawyer's law.com publication, which 
reported back in 2009 that litigating just one ITC case can ``easily 
cost $10 million or more.'' \8\
---------------------------------------------------------------------------
    \8\ ITC Patent Disputes Continue to Provide Steady, Profitable Work 
(Law.com, 2009).
---------------------------------------------------------------------------
    ITC cases are disproportionately expensive because the ITC allows 
for broader discovery than do the district courts. For example, the 
Federal Rules of Civil Procedure limit the number of interrogatories 
and substantive requests for admissions that can be asked of a party to 
25, and limit the number of depositions of a side to ten. The ITC does 
not. In a recent ITC proceeding, a complainant asked Cisco over 7,000 
Requests for Admission (6,975 more than a district court would permit) 
that had to be answered in short time frames. Similarly, the ITC does 
not limit the number of interrogatories a party can ask, although some 
Administrative Law Judges permit 175 interrogatories per party, which 
is still seven times the amount permitted by the Federal Rules for a 
district court matter. Depositions are typically not limited in number, 
either. In a recent case, 22 Cisco witnesses were deposed in 28 days, 
more than double the ten allowed by the Federal Rules. Cisco also 
produced over 3.5 million pages of documents in an extremely short time 
frame required by the ITC rules.
    These enormous costs are becoming routine in cases brought by 
patent assertion entities. A recent example of such a case involving 
Cisco is Investigation No. 337-TA-778, In the Matter of Certain 
Equipment for Communications Networks, Including Switches, Routers, 
Gateways, Bridges, Wireless Access Points, Cable Modems, IP Phones, and 
Products Containing Same. Although we believe that the ALJ in charge of 
our Investigation did an excellent job adjudicating the matter--taking 
unprecedented steps to address misconduct by our opponent--the matter 
still consumed over ten million dollars in legal fees and costs, and 
imposed countless hours of business distraction on our company.
    Complainant in the 778 Investigation was Mosaid Technologies, a 
company headquartered in Ottawa, Canada, that at the time of filing was 
publicly traded on the Canadian stock exchange, and in the business of 
patent acquisition and enforcement. Mosaid purchased a portfolio of 
patents from a failed Israeli company and then sent Cisco an 
unsolicited letter claiming that Cisco needed to license the patents. 
In 2010, after Mosaid accused Cisco of infringing these patents, Cisco 
filed a declaratory judgment action in the United States District Court 
for the District of Delaware seeking to establish that its products did 
not infringe and that the patents were invalid. In May 2011, apparently 
unhappy with what Mosaid claimed to be the slow pace in the district 
court, Mosaid brought claims against Cisco in the ITC accusing Cisco of 
infringing some of the same patents-in-suit in Delaware. Mosaid 
claimed, among other things, that it had a domestic industry based upon 
its licensing activities for the patents-in-suit and the activities of 
its alleged licensees. And, in a transparent attempt to enhance its 
domestic industry case (given that it is a Canadian company), Mosaid 
rushed to open its only ``office'' in the United States--in Plano, 
Texas--shortly before filing its ITC complaint against Cisco. But that 
was just the beginning. Mosaid had to rely on the ``licensing'' prong 
to show a domestic industry, so it Mosaid served subpoenas on two third 
parties, including at least one of its licensees, requesting documents 
and testimony from them to support Mosaid's domestic industry claims. 
In a further attempt to bolster its claims, Mosaid improperly gave 
inducements to these two third parties in order to generate 
``goodwill'' from them to respond to the subpoenas that they were 
legally obligated to respond to under the law.
    After Cisco's counsel learned of these facts, Cisco filed a motion 
to preclude Mosaid from relying on any evidence connected to Mosaid's 
misconduct. The ALJ ruled in Cisco's favor, finding that Mosaid 
improperly compensated third parties to obtain evidence from them in 
support of Mosaid's claims. The ALJ then took an unprecedented step of 
ordering the trial of Mosaid's case to proceed first on domestic 
industry, expressing skepticism over whether Mosaid could establish a 
domestic industry in light of the sweeping exclusion of evidence. After 
several of these orders had issued, on the eve of trial Mosaid 
dismissed its entire ITC case--sending the parties back to Delaware 
where they had started. Cisco had by then spent thirteen million 
dollars litigating in the ITC. Cisco produced in excess of 3.5 million 
pages of documents, responded to 121 interrogatories (five times the 
amount permissible in a district court case), and presented 22 of its 
personnel for depositions over a period of 28 days (more than double 
the number permitted in a district court case), all within an expedited 
time frame.
    Although Cisco greatly appreciates the time and attention that the 
ALJ put into the Mosaid matter, and the public orders that preceded the 
dismissal, Cisco believes that as a matter of public policy this case 
should not have been before the ITC in the first place. Mosaid is a 
Canadian company; other than its purported Plano office opened just 
before the ITC complaint was filed, it has no U.S. presence. More 
important, it has no product business and so it sought to rely upon 
licenses it entered into after it purchased the patents-in-suit. If the 
current proposed amendments had been in place, Mosaid would not have 
been able to make even a colorable argument that it satisfied the 
domestic industry requirement.
    This matter caused Cisco to spend millions of dollars that could 
otherwise have supported the research and development of Cisco's own 
products. Every dollar spent on ITC litigation detracts from Cisco's 
ability to employ people in the United States to develop new products. 
And Cisco is but one example. Last year, over 230 respondents in the 
ITC were named in investigations initiated by patent assertion 
entities. This trend harms U.S. competitiveness, U.S. industry and U.S. 
consumers, and detracts from the ITC's guiding principle to protect 
U.S. competitiveness, U.S. industry and U.S. consumers from unfair 
foreign competition.

   Congressional Legislation Clarifying when Licensing May Support a 
  Domestic Industry and Confirming Applicability of the eBay Factors 
                      Would Benefit U.S. Industry

    Cisco appreciates the efforts by the ITC--including its 
Commissioners, Administrative Law Judges, Office of General Counsel, 
and Staff--to handle a burgeoning caseload of patent infringement 
proceedings and the ITC's focus on domestic industry and public 
interest issues. Cisco also appreciates the ITC's ongoing efforts to 
explore ways to reduce costs such as developing electronic discovery 
guidelines.
    Cisco believes there is a simple solution to the problem posed by 
patent assertion entities and their ``revenue-driven licensing'' 
models. Specifically, Congress should amend Section 337 of the Tariff 
Act of 1930 to clarify that complainants in the ITC cannot rely on 
``revenue-driven licensing,'' or the activities of revenue-driven 
licensees, to satisfy the domestic industry requirement and gain access 
to the ITC. Instead, a domestic industry can be established only 
through licensing efforts that promote the market adoption and use of 
the patented technology, i.e., where the license was entered into 
before the licensee's adoption and use of the patented technology. The 
Federal Trade Commission has made a similar recommendation in its March 
2011 Report, The Evolving IP Marketplace: Aligning Patent Notice and 
Remedies with Competition. Congress should state that the ITC should 
only grant exclusion orders in accordance with traditional equitable 
factors as set forth in eBay. Doing so would align the ITC with 
traditional principles of equity set forth in the Supreme Court's eBay 
decision.
    Patent assertion entities would still have federal courts available 
to them and could still pursue fair monetary damages if they showed 
ownership of a valid and infringed patent and an entitlement to 
damages. And domestic manufacturers and universities would continue to 
benefit from the ITC's protections. What patent assertion entities 
would lose is the ability to use the ITC to threaten companies with the 
prospect of an exclusion order, and the certainty of an extraordinarily 
expensive patent litigation, to obtain settlements far in excess of the 
true value of the patented technology. This litigation tactic does not 
benefit any U.S. industry.
                               __________

    Mr. Goodlatte. Mr. Cassidy, welcome.

TESTIMONY OF BERNARD J. CASSIDY, GENERAL COUNSEL AND EXECUTIVE 
           VICE PRESIDENT, TESSERA TECHNOLOGIES, INC.

    Mr. Cassidy. Thank you, Chairman.
    Chairman Goodlatte, Ranking Member Watt----
    Mr. Goodlatte. Mr. Cassidy, you may want to turn on that 
microphone and pull it close.
    Mr. Cassidy. Thank you.
    Chairman Goodlatte, Ranking Member Watt, and Members of the 
Subcommittee, my name is Bernard Cassidy. I am the Executive 
Vice President and General Counsel at Tessera Technologies, 
Inc., headquartered in the heart of Silicon Valley in San Jose, 
California, with operations in Charlotte, North Carolina, and 
elsewhere. I deeply appreciate this opportunity to speak before 
you regarding the importance of the ITC to my company and to 
the innovation economy.
    Tessera is a cofounder of the Innovation Alliance, a 
coalition of companies seeking to enhance America's innovation 
environment by improving the quality of patents and protecting 
the integrity of the U.S. patent system. The Judiciary 
Committee and its Members appreciate the importance of strong 
intellectual property law to the U.S. economy. We applaud your 
leadership in helping to build a legal system that encourages 
investment and innovation. The IA welcomes a discussion of the 
role of the ITC in safeguarding American industries from unfair 
trade. Nonetheless, we are skeptical about many of the changes 
being discussed today. We believe that the long-term interests 
of our innovation-based economy outweigh the near-term 
interests of a few important companies.
    Licensing U.S. intellectual property strengthens the 
economy and improves our trade balance. Section 337, the 
statute that regulates unfair practices in import trade, is a 
key element of the Nation's trade laws and ensures that 
American innovators, including companies that license their 
patents, will not be harmed by the importation of goods that 
infringe valid U.S. patents.
    Permit me to briefly address four issues.
    First, the domestic industry inquiry. To be able to pursue 
an action in the ITC, a patent holder must be or be in the 
process of establishing a domestic industry. What is clear to 
us is that the ITC has interpreted this term of art in a 
balanced manner. Harnessing its administrative expertise, it 
has consistently remained mindful of the 1998 amendment's 
intent to liberalize Section 337, but also remained equally 
vigilant in not allowing an expansion of the domestic industry 
test beyond the intent of Congress. Congressional action, 
despite the real concerns of some of my fellow panelists, 
should be reserved for a time when there is strong disagreement 
with the interpreted efforts of the ITC.
    Second, public interest factors. Section 337 states that 
the Commission, quote, ``shall,'' end quote, exclude goods it 
has found to be infringing from entry into the United States, 
quote, ``unless,'' end quote, it finds that relief is not 
appropriate in light of four public interest factors set out in 
the statute.
    Importantly, even if the ITC decides that remedy is 
appropriate, the President has the power to prevent the remedy 
from going into effect if he or she determines that a remedy is 
not appropriate for what the statute refers to as, quote, 
``policy reasons,'' an open-ended, undefined term. In short, 
the statute provides a remedy with robust built-in safeguards 
against misuse.
    Moreover, in November of 2011, about 8 months ago, the ITC 
issued new rules that allowed the administrative law judges to 
develop full records about public interest factors early in 
each case. This new and early focus on public interest factors 
supplements the multiple opportunities that interested parties 
have today to comment during the full commission review at the 
end of the case. We believe it would be premature for Congress 
to legislate on the process until the ITC has had an 
opportunity to determine whether it sufficiently and fairly 
addresses the concerns voiced about these factors.
    Third, the eBay factors. The argument that the ITC should 
be required to apply the so-called eBay standards for 
injunctions used in U.S. district court ignores the fact that 
the ITC and district courts are markedly different venues with 
different jurisdictions and different powers, necessitating 
different standards. Mandating application of eBay would 
substantially weaken the power of the ITC to deal with unfair 
trade practices.
    Fourth, standard-essential patents. A blanket a priori rule 
prohibiting or limiting the availability of exclusion orders to 
holders of patents that may be standard-essential patents would 
tip the balance in favor of infringers, to the detriment of 
innovation and, ultimately, consumers. Such proposals would 
essentially create a compulsory licensing regime and are 
contrary to the intent of SSO policies that encourage good-
faith bilateral negotiations. One must consider whether 
innovators would have any incentive to participate in an SSO if 
their patents were effectively made unenforceable. That would 
result in technologically inferior standards and reduce 
investments in research and development, postponing innovation 
and competition that are the drivers of U.S. economic growth.
    In conclusion, the ITC has the capability, the resources, 
and the track record to permit it to resolve the difficult 
questions being examined by this Committee and to apply the 
law. If there are specific examples of where the ITC has erred 
that warrant attention, the Innovation Alliance will be happy 
to work with Congress to develop consensus solutions. But, to 
be clear, we are generally of the view that the long-term 
interests of our innovation economy and the public better will 
be better served if the ITC is permitted to fulfill its 
obligations pursuant to existing law.
    Thank you.
    Mr. Goodlatte. Thank you, Mr. Cassidy.
    [The prepared statement of Mr. Cassidy follows:]


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    Mr. Goodlatte. And, Mr. Foer, we are pleased to have your 
testimony.

            TESTIMONY OF ALBERT A. FOER, PRESIDENT, 
                  AMERICAN ANTITRUST INSTITUTE

    Mr. Foer. Thank you, Mr. Chairman, Ranking Member Mr. Watt, 
and Subcommittee Members.
    As president of the American Antitrust Institute, an 
independent, nonprofit Washington think tank, I am pleased to 
offer our observations and recommendations regarding standards-
setting, intellectual property, and antitrust.
    We believe that globalization and the rapid pace of 
technological development have brought us to a point where it 
is no longer feasible to muddle through with three distinct 
legal regimes--intellectual property, antitrust, and 
international trade--each working more or less independently of 
the others.
    The current system of mutual assured destruction, requiring 
the acquisition of huge portfolios of patents as a condition of 
competing, together with the emergence of substantial 
nonpracticing entities committed to maximally aggressive patent 
enforcement activity, is enormously wasteful. The system often 
blocks rather than facilitating innovation. It is unduly 
anticompetitive. It has led to proliferation of patent holdup 
conduct and resulting corruption of open standards initiatives 
that would otherwise promote more competitive market outcomes.
    I am going to summarize a dozen points that receive more 
detail in my statement.
    Coordination is essential, both within the U.S. and among 
economies of the globe. Resolution of standards issues should 
include consultations with foreign jurisdictions in an effort 
to achieve the maximum feasible global consistency. The basic 
goal is to achieve better balance between competition and 
exclusion in the name of innovation. Improved functioning of 
standards-setting organizations is crucial to achieving better 
balance. Antitrust considerations must play a larger role in 
the functioning of standards-setting organizations. And in this 
regard, we urge Congress to revisit the Standards Development 
Organization Advancement Act of 2004, which has failed to 
reduce the risks of ex post anticompetitive patent holdup 
outcomes.
    Congress should also state its intent that the antitrust 
authorities and courts should apply the principles of the 
Hydrolevel case to the standard-essential patent situation. And 
coalitions of leading competitors should not be permitted to 
purchase patent portfolios with an intent to exclude from the 
market or otherwise seriously disable one or more nonincluded 
competitors.
    The concept of FRAND--fair, reasonable, and 
nondiscriminatory commitments--itself needs to be more 
standardized. We would apply the following five principles: 
One, FRAND should imply a waiver of the right to seek an 
injunction against a user of the standard. Two, FRAND should 
imply meaningful ex ante transparency on both price and 
nonprice license terms. Three, FRAND should imply that nonprice 
conditions to license a standard-essential patent be 
reasonable. Four, FRAND should imply that acquirers of 
standard-essential patents should be required to fully adhere 
to prior owners' public commitments to SSOs or others to 
license on FRAND terms. And, five, FRAND should imply a 
commitment to arbitrate disputes on the application of the 
FRAND commitment.
    Let me comment very quickly on the role of the 
International Trade Commission, which after the eBay opinion of 
the Supreme Court has become a primary forum for challenging 
alleged patent infringements.
    We support the Supreme Court's approach to injunctions and 
urge that its principles be applied by the ITC such that 
exclusionary injunctions would no longer be so automatic a 
remedy. Now, the ITC has recently shown signs of flexibility, 
and perhaps that agency can deal with the problem that has 
emerged by applying a broader interpretation of the public 
interest jurisprudence in their statute. If not, then we 
believe that Congress ought to act.
    I would be happy to elaborate on any of these points in the 
questioning. Thank you very much.
    Mr. Goodlatte. Thank you, Mr. Foer.
    [The prepared statement of Mr. Foer follows:]


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    Mr. Goodlatte. We will now beginning our questioning, and I 
will start with a question that I will direct to the three in 
the middle--Mr. Kelley, Mr. Rubin, and Mr. Cassidy.
    Are you generally satisfied with how the ITC operates now 
as it conducts Section 337 investigations? And what changes, if 
any, would you make to agency operations?
    Mr. Kelley?
    Mr. Kelley. Thank you, Mr. Chairman, for the question.
    We are satisfied with the ITC handling of cases that we 
brought there. As I said, we have utmost respect for the ITC.
    I think with respect to cases that are brought against us 
by the PAEs, we believe that there should be some changes made. 
One change would be to address the appropriateness of an 
exclusion order at the beginning of an investigation. So we 
believe that that would be more fair to everyone involved. And 
it would reduce the amount of litigation cost that many 
companies spend in the ITC, and I believe it would also reduce 
the ITC's workload.
    Mr. Goodlatte. Thank you.
    Mr. Rubin?
    Mr. Rubin. Well, I agree that the ITC is doing a terrific 
job with the cases in front of it. But I think that the world 
has changed dramatically, Mr. Chairman, since the last time 
Congress amended this particular law in three significant ways: 
number one, the rise of patent assertion entities that we are 
talking about today; number two, a global economy where 
companies like ours, it is virtually impossible to have a 
supply chain that is purely domestic, so you source products 
from all over the world to remain globally competitive; and 
then, number three, as you pointed out earlier, the eBay 
decision that takes away the injunctive remedy in Federal court 
for patent assertion entities.
    So it is those three changes that lead to the rise of all 
of this patent assertion litigation that you are seeing today 
in the ITC and require a change. And the change that we would 
like to see made is just to narrow the licensing prong of the 
domestic industry requirement so that only those licensing 
efforts that are before the fact, that are designed to actually 
foster the use of the new patented technology, can meet the 
domestic industry requirement, but that after-the-fact 
licensing efforts that are really a game of gotcha after a huge 
amount of investment is made, those should not be sufficient to 
meet the domestic industry requirement. I think that 
distinction needs to be drawn.
    Mr. Goodlatte. Thank you.
    Mr. Cassidy?
    Mr. Cassidy. Generally, Chairman Goodlatte, we are 
satisfied. We think that the ITC is a very effective Federal 
agency. We don't think it is fair to characterize it as a tool 
that people use for patent holdup.
    Mr. Goodlatte. You don't think the statistical trend that 
we have seen here of the increasing number of U.S. defendants 
in these cases is an indication that this is being used for a 
purpose that it wasn't originally intended?
    Mr. Cassidy. No, sir. I think it is an indication of the 
increased importance of intellectual property in our economy 
today.
    To give one example, there are 7 billion people on the 
planet; there are 6 billion mobile phone subscriptions. This is 
not an industry that is being held up by the ITC or anyone 
else. It is a burgeoning, successful industry.
    Similarly, I think in the cases discussed here today there 
have been successful outcomes for companies that have been 
attacked by people that did not have sufficient status to meet 
the domestic industry requirement.
    I feel for companies that are dragged into court, but we 
have to look at this from a systemic point of view, not from 
the point of view of the individual litigant. And it has been 
successful.
    I hesitate to think of what it would be like if we weaken 
the ITC. I believe the United States consumers would be----
    Mr. Goodlatte. Even if we try to say, hey, the ITC is 
intended for domestic companies so be a domestic company before 
you bring an action?
    Mr. Cassidy. The concern with that, Mr. Chairman, would be 
that it would be discriminatory against others who have 
intellectual property rights in the United States.
    Mr. Goodlatte. Well, certainly they have intellectual 
property rights in the United States, but that is not the 
intention of the ITC, the formation of the ITC.
    Mr. Cassidy. A fair point.
    Mr. Goodlatte. Let me ask Professor Chien, is the ITC an 
appropriate forum to settle disputes over royalties for 
standard-essential patents between domestic industries, which 
is essentially how it is being used in a number of these cases? 

    Ms. Chien. Thank you for your question, Mr. Goodlatte--
Chairman Goodlatte.
    I think the way that the ITC is set up now it is not really 
designed to decide royalties. It doesn't have that statutory 
authority. Nor because of the time frame it is on you can't 
really put the time in to deciding that.
    I think that your question raises a good possible use of 
the ITC to try to get people to settle potentially by using 
delay, but I don't think the way that it is structured now 
under the statute can really accomplish the aim of getting 
damages or royalties awarded, if that is was your question.
    Mr. Goodlatte. Let me ask another question. Should the 
ITC's jurisdiction over patent disputes be limited to those in 
which the accused infringer is not subject to a Federal court's 
jurisdiction?
    Ms. Chien. That would be a clean way to separate out and 
make sure that the ITC is really complementing rather than 
overlapping or conflicting with the district court, to actually 
just have it be hearing those cases which cannot in real life 
be heard in district court. I think, however, that the ITC does 
provide some valuable functions beyond just jurisdiction 
filling, that because it is a fact venue that it is--and also 
an efficient one that those are merits that would give it--
would benefit the system in general, not just those small 
cases.
    Mr. Goodlatte. Thank you.
    My time has expired. The gentleman from North Carolina, Mr. 
Watt, is recognized.
    He is going to defer his questioning; and we will now 
recognize the gentleman from Michigan, Mr. Conyers, for 5 
minutes.
    Mr. Conyers. Thank you very much, and I apologize for my 
absence. But I was so impressed with the appearance of Mr. 
Cassidy but not as impressed by his comments, and so I am going 
to have to direct my questions to the president of the American 
Antitrust Institute.
    I am concerned about the larger corporations using patents 
to enhance their competitive position. Let's be honest with it. 
Some of you have testified that is not much of a problem. Some 
have been neutral on it. Where do you see this going, Bert 
Foer?
    Mr. Foer. Thank you, Mr. Conyers.
    I don't think I see it as a big-versus-small issue 
particularly. I think it is a matter of getting the process 
right. For years and years, antitrust pretty much ignored 
standards-setting. It only came up in a couple of extreme 
cases. And generally this has been a totally deregulated area, 
which is good, except that now we have some problems. And when 
you take a look at the system for standards-setting, it is time 
to give more antitrust oversight to the way things work.
    If the Standards-Setting Organizations would voluntarily do 
what Congress urged them to do, then they could have--they 
could have a lot of this taken care of. But they haven't done 
that. They have conflicts internally with their members, and 
they can't seem to reach the right kinds of decisions. So I 
think Congress needs to become involved if antitrust is really 
going to work.
    Mr. Conyers. Wasn't that the process--isn't it endangered 
by the larger corporate interests that are squabbling here? I 
mean, I can't--we are in a capitalist system, whether you like 
it or not. The question, is how do we regulate? And I don't 
think it is the little companies that are keeping us 
disorganized. I gave up that naivete many decades ago.
    Mr. Foer. Well, certainly the largest corporations that 
participate in a standards-setting process are going to have 
more clout in that process, which means we have got to make the 
process fair, we have to standardize the process itself much 
more than it is. And if we can't get the organizations to do it 
voluntarily, then Congress should step in and push it along.
    Mr. Conyers. Okay.
    Mr. Foer. Because if it is going to be a fair process, then 
it has to have fair rules.
    Mr. Conyers. Who else wants to comment here?
    Mr. Rubin. Congressman, I would I agree that I don't see 
this as a big-company/small-company issue. Even large companies 
like Ford and Cisco were small companies. Less than a 
generation ago, Cisco was started by Stanford professors who 
couldn't communicate between disparate computer systems.
    And so we you agree that when you look at who can be a 
litigant in ITC you have to make sure that small businesses, 
universities, and large businesses alike have access to the 
ITC. We agree with that. But if you look at the problems that 
we are talking about today about domestic industry, if you have 
research and development activities like universities, small 
businesses, and large businesses, you have access to the ITC. 
If you employ labor and capital, you have access to the ITC, 
and you should.
    The only issue that we are looking at is this question of 
licensing. And we don't think that all licensing efforts need 
to be excluded, just those licensing efforts that don't support 
the adoption of new products. We don't think that really meets 
the definition of a trade group, and therefore that shouldn't 
be protected by the ITC, which is designed to protect U.S. 
industries.
    Mr. Conyers. Mr. Cassidy, you get the closing comment.
    Mr. Cassidy. I am sorry. I lost track of the question.
    Mr. Conyers. So have I, but you get the closing comment 
anyway.
    Mr. Cassidy. There is a question about whether or not 
licensing is a protected industry under statute, under 337. 
This has already been litigated, and the answer is when 
Congress said licensing in 1988, it meant licensing. It did not 
mean merely licensing for products that are already fully 
adopted or merely licensing for products that have not yet been 
adopted. It meant licensing which covers both spectrums. So 
that is the law, and I don't see the reason to change it.
    Mr. Conyers. Thank you, Mr. Chairman.
    Mr. Goodlatte. I thank the gentleman.
    The gentleman from California, Mr. Issa, is recognized for 
5 minutes.
    Mr. Issa. Thank you, Mr. Chairman.
    Professor Chien, your figure that 17 percent of the ITC 
patents--or cases--are essentially large U.S. companies. U.S. 
companies to U.S. companies exploiting the ITC in order to have 
a battle in the second venue.
    Ms. Chien. In order to have a what?
    Mr. Issa. In order to have a battle in the second venue, 
whether it is Broadcom v. Qualcomm or Kodak, Apple, or 
Motorola. Were these, in your opinion, part of the original 
intent? Did we intend to have major U.S. entities in ITC over 
what is often essentially the importation of a component?
    Ms. Chien. That is a great question. And just to get clear 
on the numbers, my 2008 report shows that actually about 60 
percent of cases involved competitors or large companies being 
sued. So it is a larger percentage than 17. That is the number 
that applies to foreign companies being sued by domestic 
industries.
    Mr. Issa. So, in effect, it is the majority of companies 
simply seeking an alternate venue not originally intended in 
the statute.
    Ms. Chien. That is correct. I believe that two-thirds of 
cases in the ITC have a district court counterpart. So they are 
not cases that could not have been brought in district court. 
In fact, they are being brought in district court as well. But 
here I think is where the ITC has provided a service to our 
economy and to these companies by providing a faster venue 
for--this needs to be resolved.
    Mr. Issa. This is a Committee that has been working on the 
rocket docket. A great deal of the work done in patent reform 
originated in this Committee. I think we are all for it.
    Look, we are the jurisdiction not of the ITC. The ITC is 
not really our game. Our game is the Article III courts. If 
what you are saying here today is two-thirds of the cases don't 
really belong in the ITC, they belong in Article III courts, 
but they are in the ITC for one of two reasons: one, likelihood 
of an exclusion order, which is effectively an injunctive 
relief when they may or may not be given it under the eBay 
decision, and speed to trial.
    If that is the case, then from a standpoint of protecting 
the Federal Government, protecting the taxpayer ultimately, 
shouldn't we find a way to have an ITC level of speed on those 
cases that would otherwise be or already are in Article III 
courts? In other words, the time to a decision if it was 
accelerated to meet or exceed the ITC, wouldn't that in fact 
eliminate the government spending money twice, particularly in 
the cases in which the Article III court may not stay the case?
    Ms. Chien. Yes, I think that would be the ideal solution. I 
don't think that our Federal court system is there yet. But 
through proposals and different initiatives like the patent 
pilot program then maybe we will get there.
    Mr. Issa. So let me just ask one follow-up, though.
    This Committee was very involved in the SOPA-PIPA 
discussion. You may have heard that. During that discussion one 
of--sometimes truth is the first casualty. There were a lot of 
statements made, but since I have you here, is it true that the 
ITC is less administratively burdensome, less expensive, and 
quicker to decision than Article III courts?
    Ms. Chien. I think that the schedules are compressed so it 
is actually more expensive in a shorter amount of time. Many of 
the cases do not settle and so net usually the cases are more 
expensive to litigate, but they are litigated on a faster 
basis.
    Mr. Issa. But that is a question of cases that are not 
settled. I mean, if you take out the ones that aren't settled 
in an Article III court, they go longer, cost more.
    And I don't know about everybody else here, but I, for one, 
have paid those multimillion dollar legal fees. I will tell you 
that your expense goes up during time often more than actual 
work. Every month you are in litigation you have a certain 
large amount of money for reevaluating, rethinking, redoing.
    So the reason I ask the question is during that discussion 
when we were looking at--and I still have a bill that would 
move intellectual property in the case of overseas piracy of 
copyright, move some jurisdiction into the ITC. Many people 
wanted to say that it was likely to not be able to quickly 
expand, as though we can get Federal judges quickly in Article 
III, and that it would be more expensive and take longer. Is 
there any basis under which you think that was true--would be 
true?
    Ms. Chien. I think that the ITC has proven able to keep its 
deadline of trying to keep cases resolved as quickly as 
possible and that they have experience in doing that and doing 
it well.
    Mr. Issa. Thank you.
    Mr. Chairman, I thank you for the opportunity to ask 
questions that were tangential to today's hearing but important 
to I think the Committee, and I yield back.
    Mr. Goodlatte. I thank the gentleman. And the Chair is now 
recognizing the gentlewoman from California, Ms. Lofgren, for 5 
minutes.
    Ms. Lofgren. Thank you, Mr. Chairman; and it is great to 
see a majority of the witnesses from the 16th congressional 
district, Cisco headquartered in the district and also Tessera. 
And you can see that not everyone in Silicon Valley sees this 
the same way.
    And certainly, Professor Chien, it is great to have you 
here with your tremendous expertise and such a distinguished 
member of my alma mater.
    So I think this is a very important hearing.
    And I guess one of the questions that I have, I think that 
certainly there are is an issue here--and you have identified 
it, Professor, as our witness Mr. Rubin--is how to get a remedy 
in a time frame that is reasonable.
    You know, I was thinking as Mr. Berman walked out that in 
1997, as a freshman Member, I ended up helping manage a patent 
reform bill that ultimately through other iterations passed 
last year. It takes a long time for the Congress to do 
anything.
    And so the question is, what can the FTC do? The court has 
I think indicated that they can't merely adopt the eBay rule 
without some guidance from us. However, the FTC has suggested--
and, Mr. Chairman, I would ask unanimous consent to put the FTC 
report into the hearing record, at least the relevant pages 
that--in using kind of an eBay standard----
    Mr. Goodlatte. Without objection, the report will be made a 
part of the record.*
---------------------------------------------------------------------------
    *The Federal Trade Commission report entitled ``The Evolving IP 
Marketplace, Aligning Patent Notice and Remedies With Competition,'' is 
not reprinted in this hearing record. The report is on file at the 
Subcommittee and can be accessed at:

      http://www.ftc.gov/os/2011/03/110307patentreport.pdf
    Ms. Lofgren [continuing]. To determine jurisdiction that 
you could end up with the same result. Have you seen that FTC 
report from last year and do you think that is a viable 
approach?
    Ms. Chien. I have seen the report, and I think that the 
report correctly identified the flexibility that the public 
interest statutory framework gives the ITC to do its analysis. 
It is not completely aligned, and I think one of the big 
differences is thinking about irreparable harm which is 
something you have to prove in district court and ITC will 
really focus on competitive conditions and impact consumers. 
But I think that in important ways we can coalesce the 
standards in this way.
    Ms. Lofgren. Mr. Rubin, do you have a comment on that same 
question?
    Mr. Rubin. Well, I think the FTC got it right. You can 
certainly apply the eBay factors. For example, irreparable 
harm, almost by definition dollars will fix this problem. There 
is not going to be irreparable harm if an injunction isn't 
issued, because you are talking about a company that doesn't 
actually compete in the marketplace. So while I do think that 
eBay factors can be applied, I think they can be applied pretty 
quickly and rather easily.
    I think what the ITC has, though, here is sort of two 
problems.
    The first is the question of jurisdiction that we are 
talking about. Who can be a plaintiff? Who can be a 
complainant? And that goes to this issue.
    The second one that we are talking about in terms of how 
expensive are these cases, how fast are they, it is true that 
longer tends to be costlier, but if you look at the ITC there 
are no limits on the type of discovery that can be taken in the 
ITC. In the case I was discussing earlier in my comment, Cisco 
was asked to respond to 7,000 requests for admissions. The 
Federal courts only allow 25. So while it is the case that 
sometimes ITC cases move more quickly, it is an incredible 
flurry of activity and incredibly costly.
    Ms. Lofgren. Mr. Cassidy, you may have a counterpoint of 
view on the FTC suggestion.
    Mr. Cassidy. Our main point is not that there may not be 
lurking problems and issues that deserve the attention of 
Congress but that the horror stories have not arisen to the 
level that congressional action is needed.
    To date, the ITC has been careful in applying both the 
domestic industry requirements to shield companies from 
nuisance lawsuits and we believe has been careful in applying 
the public interest factors and has been flexible in the way it 
has applied its remedies.
    Ms. Lofgren. Thank you, Mr. Cassidy.
    EBay also is headquartered in the 16th congressional 
district, and I think they did a tremendous service for the 
country in spending the money to bring that case really to stop 
shakedowns, is what it was about. And the question is--we have 
a shakedown situation here that has migrated to the FTC and how 
can that be fixed.
    Here is a question: Could the ITC have the same kind of 
hearing we are? Have they reached out to you, Professor, to see 
whether they could heal themselves? And is that something that 
we might suggest to them that might lead to a suitable 
resolution faster than the ordinary legislative process?
    Ms. Chien. That is a great question, and I think if you 
look at their case law you see that they are considering the 
input that they are getting from different quarters and trying 
to use that to reflect their decision making.
    But the problem is that they have to wait for the right 
cases to come forward. They have to take them forcefully. They 
need to take a strong line. And I think they have been 
reluctant to do that because they do not see themselves as a 
policymaking body. So I do think that Congress can play a 
constructive role in holding oversight hearings and talking to 
ITC and reminding them of what the basis is.
    As to these comments about, for example, domestic industry 
which I think have been very compelling in hearing the stories 
of companies that have affected by IT actions. If you look in 
the congressional history, there is an emphasis that favors 
production-based licensing over revenue-based licensing, as 
these gentlemen have put it. In the Coaxial Cable decision, the 
ITC has acknowledged that, but they didn't take a strong line 
in saying this is what we are going to do in the future. They 
said, this is going to be case by case, and they didn't send I 
think the strong message that they could have. So I do believe 
that within their statutory power and with some encouragement 
they could try to reform some of their own----
    Ms. Lofgren. Mr. Chairman, my time has expired, and we can 
discuss this further, but I would love to see some kind of 
interface between us and the commission, if that is possible to 
do. I think we might have some real benefit for the process.
    Mr. Goodlatte. If the gentlewoman would yield, I think the 
gentlewoman has a good suggestion. And I won't speak for the 
Ranking Member, but I think there is interest in a bipartisan 
fashion to communicate with the commission and offer some of 
our ideas and ask them if there is such a process they could 
pursue.
    Ms. Lofgren. Thank you, and I yield back.
    Mr. Goodlatte. I thank the gentlewoman.
    The Chair is pleased to recognize the gentleman from 
Nevada, Mr. Amodei.
    Mr. Amodei. Thank you, Mr. Chairman. I yield my time back.
    Mr. Goodlatte. The gentleman yields his time back.
    The Chair will move over to gentleman from Pennsylvania, 
Mr. Marino.
    Mr. Marino. I yield back.
    Mr. Goodlatte. He yields back as well.
    So we will turn to the gentlewoman from California, Ms. 
Chu, for 5 minutes.
    Ms. Chu. Thank you, Mr. Chair.
    I would like to ask Mr. Rubin. You spoke at length 
regarding Cisco's experience defending a patent suit against a 
nonpracticing entity, also known as ``troll,'' in the ITC. Can 
you provide us with additional details about the suit? Did the 
entity have jobs in the U.S.? Did it invest in R&D?
    Mr. Rubin. The short answer is, no, it did not. We were 
already engaged in litigation with that company in Federal 
district court in Delaware when this entity decided to sue in 
the ITC. At the time it brought the lawsuit it quickly tried to 
open one office in Plano, Texas. It had one employee in the 
United States. And it did that because it felt like it needed--
correctly needed to meet the domestic industry requirement, and 
that is why it opened that particular office.
    Their view was that the litigation in Delaware was moving 
too slowly, and so they wanted to bring the case as well in the 
ITC. But I think the thinking was, well, Cisco is not going to 
want to defend this case in two different forums. We will be 
able to deluge Cisco with discovery requests. And, in fact, 
that is what they did. And, ultimately, as I said before, Cisco 
spent $13 million defending itself in the ITC in a case that 
was ultimately voluntarily dismissed.
    So it really turned the case into the world's most 
expensive dress rehearsal. Because now we are back in Delaware 
where the case started, litigating these exact same issues. And 
I think that is why it is emblematic of the problem here. When 
you have the ability to bring cases in Federal court and the 
ITC, it doubles or potentially triples the cost with really 
very little benefit.
    Ms. Chu. In fact, you stated that companies have been able 
to achieve settlements far beyond what they would have been 
entitled to receive if they were sued in U.S. court. Can you 
give an example of those settlements?
    Mr. Rubin. Well, our company has faired reasonably well in 
the ITC. But what you have is the threat of injunction in the 
ITC that now no longer exists in Federal district court. And so 
the negotiation is different by sometimes an order of 
magnitude. Because when a company has already made the 
commitment of R&D, has a product out in the market, that 
company is, frankly, vulnerable to any risk of disruption to 
its supply chain, disruption to its sales. And so that is the 
context in which you are negotiating to try to settle the case.
    The irony here, Congresswoman Chu, is the patent assertion 
entities don't even want the exclusion order that they are 
asking for. They want money damages at the end of the day, but 
they feel as though the ITC provides a forum where they are 
more likely to get larger damages.
    Ms. Chu. Mr. Kelley and Mr. Rubin and Professor Chien, 
there has been the critique about the patent adjudication 
substantially increasing partly because of the Supreme Court's 
decision in eBay v. MercExchange. And to back up the point, the 
article published just last year showed that the average number 
of ITC complaints annually has nearly tripled from the previous 
decades. To what do you attribute the rise in cases and what 
should Congress do about it?
    Mr. Kelley. Thank you, Congresswoman, for that question.
    I attribute the rise in those cases at the ITC to the eBay 
case in part because it allowed or it prevented the PAEs from 
going into district court and getting the injunction.
    And I believe it also is attributable in part to the fact, 
as has been discussed, a PAE can get a very heavy hammer to use 
in leverage negotiations with the companies that it is 
litigating against. So I think that that is a big part of why 
we are seeing these rise in cases.
    Ms. Chien. Traditionally, the ITC has been reserved for 
domestic industries against foreign imports. But now that 
everyone makes--or many products are made overseas, it becomes 
easier. Every potential patent defendant becomes a potential 
ITC defendant as well. So I believe that the growth in global 
economy is a major driver as well as the favorable conditions 
for injunctions that the ITC presents.
    As to your question of what Congress can do, I think that I 
am in agreement, I think, with the gentleman from the 
American--on the antitrust side as well that there may be some 
opportunity for the ITC to reform itself with some oversight 
and direction from Congress, but if that is not proven to work 
out that Congress should act to change the statute.
    Ms. Chu. Mr. Rubin?
    Mr. Rubin. I agree with the comments that were made that 
the impetus here is the rise of patent assertion entities, the 
rise of a global economy that requires companies to source 
materials and parts abroad and then the eBay decision. All 
three of those things result in the rise of this kind of 
litigation in the ITC.
    I think the answer is to segregate out what licensing is 
appropriate and what is not and make it very clear that 
licensing efforts that are designed to promote the advancement 
of the technology related to the patent, that is to be 
protected, but not after-the-fact licensing when products are 
already out in the marketplace. And I think that can be done 
statutorily.
    Ms. Chu. Thank you. I yield back.
    Mr. Amodei [presiding]. The Chair recognizes the 
distinguished gentleman, who is also a member of the 
Congressional Baseball Hall of Frame, from the Tarheel State, 
Mr. Watt.
    Mr. Watt. I thank the gentleman for all of that 
introductory comment.
    Let me see if I can approach this and explore some other 
options that might be available.
    Mr. Kelley, you talked about the Beacon case; and Mr. Rubin 
talked about a case in which they spent--what--$17 million----
    Mr. Rubin. Thirteen.
    Mr. Watt [continuing]. Thirteen million dollars only to 
have the cases dismissed. Does ITC have any kind of authority 
to really punish somebody or bite somebody who brings a case 
with faulty intentions such as maybe assessing $13 million in 
cost to the other side or attorneys fees? What discretion does 
the ITC have there to get at this in an absolutely different 
way?
    Mr. Kelley. Thank you for the question, Ranking Member 
Watt.
    I believe that the ITC does have the ability to assess 
sanctions or some other penalties, but in practice and reality 
that is not done. So in the Beacon case that I have discussed, 
after Beacon dismissed the case in the ITC, we sought to get 
sanctions. There were some shenanigans going on in this case, 
and they ultimately withdrew. And there are some procedural 
issues that get in the way of us being able to successfully 
pursue sanctions.
    I like your thinking. I believe that that is one way 
perhaps to go about this, and I believe that the ITC should 
consider perhaps going down that route, and that might prevent 
some of what we consider this frivolous and expensive 
litigation.
    Mr. Watt. What would you think of that approach, Mr. 
Cassidy, as a precursor to legislative action?
    Mr. Cassidy. I think the ITC should have the ability to 
shift fees and otherwise impose the ordinary sanctions that 
district courts are allowed to impose against litigants who are 
acting in bad faith, absolutely.
    Mr. Watt. And do you--let me be clear. Do you acknowledge 
that some of these cases are being brought in bad faith? I 
mean, you walked a pretty tight line there. You said we 
shouldn't be acting yet. It is not at crisis proportions. But 
do you acknowledge that there is some gaming of the system?
    Mr. Cassidy. I think all of litigation is gaming the 
system, generally.
    Mr. Watt. I agree with you that there is a lot of gaming of 
the system in all litigation.
    Mr. Cassidy. But to answer your question, I am not aware 
personally of a single bad-faith litigant.
    Mr. Watt. You don't think this case--either of these two 
cases that these gentleman have described were brought in bad 
faith?
    Mr. Cassidy. No, sir. I have no evidence whatsoever to draw 
that conclusion. I think in each case the correct outcome was 
reached; and I think, for better or for worse----
    Mr. Watt. $13 million in cost?
    Mr. Cassidy. Yes, sir. And I think some of the same law 
firms that represent Cisco represent Tessera, and they are 
expensive.
    But it is a part of our system to allow people into court 
and into the ITC at a very low threshold. That is one the 
fundamental parts of the American civil justice system that we 
fought a revolutionary war to obtain, and every district court 
judge knows there are going to be nuisance cases brought, there 
are also going to be strike suits brought----
    Mr. Watt. They also have some pretty aggressive sanctioning 
capacities, and they use them quite often to discourage people 
from gaming the system. And so it sounds like maybe perhaps in 
our discussions if we create a dialogue with ITC or have that 
opportunity, that might be at least one option that can be 
looked at.
    Did you have a comment, Professor?
    Ms. Chien. I just think it is a very interesting proposal 
or idea. And I would just say I have done some empirical work 
and I think Mr. Cassidy is right, that nuisance suits have 
existed since Justinian time. They have always been around. And 
Europe has tried with the English rule, fee shifting, and other 
jurisdictions have studied a lot of different jurisdictions 
that have tried to do it.
    And I think it is hard, that I think that judges are 
reluctant to say any litigant is bringing their case in bad 
faith. They want to give everybody an equal chance. So it is 
hard to tell before the fact if somebody is bringing something 
in bad faith, and so I think the problem with these rules is 
that they don't deter as much as they should.
    Mr. Watt. Okay, well, I thank all of you for testifying.
    I will yield back. It is not my role to thank the panel, 
but I thank you anyway. Good hearing.
    Mr. Amodei. Thank you.
    I would like to thank our witnesses on behalf of myself and 
the Ranking Member today.
    Mr. Watt. You want to ask questions? You are the last 
person on---
    Mr. Berman. Me? This hearing goes on because I showed up?
    Mr. Watt. One could say that, but one could also say it was 
a worthy purpose for the hearing to go on because you showed 
up.
    Mr. Amodei. In keeping with responsibility where it is due, 
the Chair now recognizes either for purposes of questions or 
yielding back the distinguished gentleman from the Golden 
State.
    Mr. Berman. Ten seconds.
    Mr. Watt. Now you really are holding us up.
    Mr. Cassidy. Mr. Chairman, during that time may I ask that 
two documents that I incorporated into my testimony--my 
prepared testimony be submitted to the record? A letter to the 
ITC from the Innovation Alliance and a white paper we wrote on 
the ITC.
    Mr. Amodei. Without objection, they will be included as 
part of the record today.*
---------------------------------------------------------------------------
    *The material referred to is available in the Appendix.
---------------------------------------------------------------------------
    Mr. Watt. And since we are trying to give Mr. Berman more 
time, let me ask unanimous consent to insert three articles 
from Professor Rudolph Peritz: one called ``Intellectual 
Property Rights as State-Initiated Restraints of Competition--
or State-Initiated Competition;'' two, ``Patents and Payoffs or 
How Generics are Kept Off the Market;'' and, three, 
``Competition Within Intellectual Property Regimes--the 
Instance of Patent Rights.'' And also a submission of views by 
Kevin H. Rhodes for the Coalition for 21st Century Patent 
Reform and 3M Company.
    Mr. Amodei. Without objection, they will be included in the 
record of today's hearing.*
---------------------------------------------------------------------------
    *The material referred to is available in the Appendix.
---------------------------------------------------------------------------
    Mr. Berman?
    Mr. Berman. I am getting some of this secondhand, as you 
might imagine, and I apologize for not being here during the 
whole testimony, and I thank you very much for indulging me 
here to just catch up.
    There was one particular issue that I am told there may or 
may not have been agreement on, and basically it is that Mr. 
Cassidy testified that he was open to addressing--address some 
of these issues at the ITC if there was some remedy that was 
needed. And Mr. Rubin in his testimony described a situation 
with a Canadian patent--Canadian asserting a patent presumably 
showing it isn't quite as simple as about a domestic industry. 
Is that the kind of an issue that you think becomes problematic 
in terms of the current way the ITC is working?
    Mr. Cassidy. I think the intent of the ITC was not in its 
creation to govern American companies--but rather to govern 
importation when it comes to the matters we are discussing here 
under Section 337. And I think, as other panelists would 
readily agree, the world has changed and we all import. Every 
manufacturer virtually imports. And when you import something 
into the United States, that is not a right, that is a 
privilege, and it comes with certain responsibilities. And I 
think it is settled law that importing an infringing good of--
infringing a valued patent is an unfair trade practice.
    The question is, should we rewrite the law so that if you 
have to be headquartered in the United States you can import 
and not be subject to those rules? I don't think anyone is 
proposing that. But I think in working toward something that 
makes more sense and takes on the character of a 21st century 
ITC we would have to look very carefully at who is an American 
company and what rights come with that when one imports.
    I don't think there is an easy solution at all. And to be 
candid, notwithstanding the significant issues that are raised 
here, none of these specific proposals are compelling to a 
company and to an alliance that represents people who invent 
for a living, who instead of manufacturing create things and 
leave it to others to implement them. It is an important part 
of our economy.
    Mr. Berman. Look, I shouldn't even be taking everybody's 
time, because I wasn't here for the whole testimony. But my 
assumption is it was certainly part of both the Chair's and the 
Ranking Member's opening statements, which I did hear, there is 
something that seems inappropriate that in the context of 
importation things can happen that in the context of the 
general patent system don't always happen. And it seems to me 
that was the quandary that this hearing was trying to sort of 
develop, delve into. Is that an unreasonable reaction?
    Mr. Cassidy. No.
    Mr. Berman. Okay. I think I will stop there.
    Mr. Rubin. I would just conclude, Congressman Berman, that 
the problem we are seeking to address is jurisdictional in 
nature. Who can be a complainant in the ITC?
    Like Mr. Kelley, I like Congressman Watt's idea about 
thinking about other sanctions. Are there other things that we 
can to do strengthen this?
    At the end of the day, nobody is taking away a patent 
assertion entity's right to go to court. The Federal district 
court, that forum is readily available, and dozens of cases are 
filed every day.
    The only question here is who can be a plaintiff, who can 
be a complainant in the ITC and you need a domestic industry. 
So the question to Mr. Cassidy's point about what is a U.S. 
industry, what is an American company, who has a U.S. industry 
worthy of protection, that is really the issue we are dealing 
with today; and I think the proposals that have been made 
actually can quite help solve that problem.
    Mr. Berman. I guess another jurisdictional issue is ours 
with the Ways and Means on ITC.
    Thank you very much. I appreciate you indulging me here.
    Mr. Amodei. Thank you.
    I would like to thank our witness for your testimony today.
    Without objection, all Members will have 5 legislative days 
to submit any additional materials for inclusion into the 
record in addition to those that we have already dealt with.
    Finally, without objection, all Members will have 5 
legislative days to submit to the Chair additional questions 
for witnesses, which we will forward and ask the witnesses to 
respond as promptly as they can so that their answers may be 
part of the record of the hearing today.
    With that, again I want to thank you gentlemen and lady for 
coming here today and being witnesses; and this hearing is 
adjourned.
    [Whereupon, at 11:43 a.m., the Subcommittee was adjourned.]



                            A P P E N D I X

                              ----------                              


               Material Submitted for the Hearing Record

 Attachments to the Prepared Statement of Colleen V. Chien, Professor, 
                 Santa Clara University School of Law*
---------------------------------------------------------------------------
    *Two additional attachments submitted by this witness are not 
reprinted in this record but are available at the Subcommittee and can 
be accessed at:

      http://ssrn.com/abstract=1150962   and   http://ssrn.com/
---------------------------------------------------------------------------
      abstract=1856608



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     Material submitted by Bernard J. Cassidy, General Counsel and 
          Executive Vice President, Tessera Technologies, Inc.




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Material submitted by 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



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           Letter from Catherine A. Novelli, Vice President, 
                Worldwide Government Affairs, Apple Inc.



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