[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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Available via the World Wide Web: http://judiciary.house.gov
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COMMITTEE ON THE JUDICIARY
LAMAR SMITH, Texas, Chairman
F. JAMES SENSENBRENNER, Jr., JOHN CONYERS, Jr., Michigan
Wisconsin HOWARD L. BERMAN, California
HOWARD COBLE, North Carolina JERROLD NADLER, New York
ELTON GALLEGLY, California ROBERT C. ``BOBBY'' SCOTT,
BOB GOODLATTE, Virginia Virginia
DANIEL E. LUNGREN, California MELVIN L. WATT, North Carolina
STEVE CHABOT, Ohio ZOE LOFGREN, California
DARRELL E. ISSA, California SHEILA JACKSON LEE, Texas
MIKE PENCE, Indiana MAXINE WATERS, California
J. RANDY FORBES, Virginia STEVE COHEN, Tennessee
STEVE KING, Iowa HENRY C. ``HANK'' JOHNSON, Jr.,
TRENT FRANKS, Arizona Georgia
LOUIE GOHMERT, Texas PEDRO R. PIERLUISI, Puerto Rico
JIM JORDAN, Ohio MIKE QUIGLEY, Illinois
TED POE, Texas JUDY CHU, California
JASON CHAFFETZ, Utah TED DEUTCH, Florida
TIM GRIFFIN, Arkansas LINDA T. SANCHEZ, California
TOM MARINO, Pennsylvania JARED POLIS, Colorado
TREY GOWDY, South Carolina
DENNIS ROSS, Florida
SANDY ADAMS, Florida
BEN QUAYLE, Arizona
MARK AMODEI, Nevada
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
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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.*
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*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
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Material Submitted for the Hearing Record
Attachments to the Prepared Statement of Colleen V. Chien, Professor,
Santa Clara University School of Law*
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*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/
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abstract=1856608
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Material submitted by Bernard J. Cassidy, General Counsel and
Executive Vice President, Tessera Technologies, Inc.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
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
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Letter from Catherine A. Novelli, Vice President,
Worldwide Government Affairs, Apple Inc.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]