[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]



 
ABUSIVE PATENT LITIGATION: THE IMPACT ON AMERICAN INNOVATION AND JOBS, 

                        AND POTENTIAL SOLUTIONS
=======================================================================



                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON

                     COURTS, INTELLECTUAL PROPERTY,

                            AND THE INTERNET

                                 OF THE

                       COMMITTEE ON THE JUDICIARY

                        HOUSE OF REPRESENTATIVES

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 14, 2013

                               __________

                           Serial No. 113-13

                               __________

         Printed for the use of the Committee on the Judiciary


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




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                       COMMITTEE ON THE JUDICIARY

                   BOB GOODLATTE, Virginia, Chairman
F. JAMES SENSENBRENNER, Jr.,         JOHN CONYERS, Jr., Michigan
    Wisconsin                        JERROLD NADLER, New York
HOWARD COBLE, North Carolina         ROBERT C. ``BOBBY'' SCOTT, 
LAMAR SMITH, Texas                       Virginia
STEVE CHABOT, Ohio                   MELVIN L. WATT, North Carolina
SPENCER BACHUS, Alabama              ZOE LOFGREN, California
DARRELL E. ISSA, California          SHEILA JACKSON LEE, Texas
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                     JUDY CHU, California
TED POE, Texas                       TED DEUTCH, Florida
JASON CHAFFETZ, Utah                 LUIS V. GUTIERREZ, Illinois
TOM MARINO, Pennsylvania             KAREN BASS, California
TREY GOWDY, South Carolina           CEDRIC RICHMOND, Louisiana
MARK AMODEI, Nevada                  SUZAN DelBENE, Washington
RAUL LABRADOR, Idaho                 JOE GARCIA, Florida
BLAKE FARENTHOLD, Texas              HAKEEM JEFFRIES, New York
GEORGE HOLDING, North Carolina
DOUG COLLINS, Georgia
RON DeSANTIS, Florida
KEITH ROTHFUS, Pennsylvania

           Shelley Husband, Chief of Staff & General Counsel
        Perry Apelbaum, Minority Staff Director & Chief Counsel
                                 ------                                

    Subcommittee on Courts, Intellectual Property, and the Internet

                 HOWARD COBLE, North Carolina, Chairman

                TOM MARINO, Pennsylvania, Vice-Chairman

F. JAMES SENSENBRENNER, Jr.,         MELVIN L. WATT, North Carolina
Wisconsin                            JOHN CONYERS, Jr., Michigan
LAMAR SMITH, Texas                   HENRY C. ``HANK'' JOHNSON, Jr.,
STEVE CHABOT, Ohio                     Georgia
DARRELL E. ISSA, California          JUDY CHU, California
TED POE, Texas                       TED DEUTCH, Florida
JASON CHAFFETZ, Utah                 KAREN BASS, California
MARK AMODEI, Nevada                  CEDRIC RICHMOND, Louisiana
BLAKE FARENTHOLD, Texas              SUZAN DelBENE, Washington
GEORGE HOLDING, North Carolina       HAKEEM JEFFRIES, New York
DOUG COLLINS, Georgia                JERROLD NADLER, New York
RON DeSANTIS, Florida                ZOE LOFGREN, California
KEITH ROTHFUS, Pennsylvania          SHEILA JACKSON LEE, Texas

                       Joe Keeley, Chief Counsel

                   Stephanie Moore, Minority Counsel


                            C O N T E N T S

                              ----------                              

                             MARCH 14, 2013

                                                                   Page

                           OPENING STATEMENTS

The Honorable Howard Coble, a Representative in Congress from the 
  State of North Carolina, and Chairman, Subcommittee on Courts, 
  Intellectual Property, and the Internet........................     1
The Honorable Melvin L. Watt, a Representative in Congress from 
  the State of North Carolina, and Ranking Member, Subcommittee 
  on Courts, Intellectual Property, 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 Courts, Intellectual 
  Property, and the Internet.....................................     5
The Honorable Bob Goodlatte, a Representative in Congress from 
  the State of Virginia, and Chairman, Committee on the Judiciary     6

                               WITNESSES

Mark Chandler, Senior Vice President and General Counsel, Cisco 
  Systems, Inc.
  Oral Testimony.................................................     9
  Prepared Statement.............................................    12
Janet L. Dhillon, Executive Vice President, General Counsel and 
  Corporate Secretary, JCPenney Company, Inc.
  Oral Testimony.................................................    35
  Prepared Statement.............................................    37
John Boswell, Senior Vice President and General Counsel, SAS 
  Institute, Inc.
  Oral Testimony.................................................    42
  Prepared Statement.............................................    44
C. Graham Gerst, Partner, Global IP Law Group, LLC
  Oral Testimony.................................................    49
  Prepared Statement.............................................    51
Philip S. Johnson, Chief Intellectual Property Counsel, Johnson & 
  Johnson
  Oral Testimony.................................................    55
  Prepared Statement.............................................    57
Dana Rao, Vice President of Intellectual Property and Litigation, 
  Adobe Systems
  Oral Testimony.................................................    78
  Prepared Statement.............................................    80

          LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING

Material submitted by the Honorable Melvin L. Watt, a 
  Representative in Congress from the State of North Carolina, 
  and Ranking Member, Subcommittee on Courts, Intellectual 
  Property, and the Internet.....................................   113

                                APPENDIX
               Material Submitted for the Hearing Record

Prepared Statement of the Honorable Melvin L. Watt, a 
  Representative in Congress from the State of North Carolina, 
  and Ranking Member, Subcommittee on Courts, Intellectual 
  Property, and the Internet.....................................   147
Prepared Statement of the Honorable George Holding, a 
  Representative in Congress from the State of North Carolina, 
  and Member, Subcommittee on Courts, Intellectual Property, and 
  the Internet...................................................   158
Material submitted by the Honorable Jason Chaffetz, a 
  Representative in Congress from the State of Utah, and Member, 
  Subcommittee on Courts, Intellectual Property, and the Internet   160
Letter from C. Graham Gerst, Partner, Global IP Law Group, LLC...   167
Letter from Bill Hughes, Senior Vice President, Government 
  Affairs, Retail Industry Leaders Association (RILA)............   169
Submission entitled ``The Costs and Benefits of United States 
  Patents''......................................................   171
Letter from the Coalition of Patent Fairness.....................   217
Prepared Statement of the American Bankers Association...........   220
Letters from John Lindgren, President and Chief Executive 
  Officer, MOSAID Technologies Incorporated......................   222
Prepared Statement of Bruce Lehman, on behalf of 
  TeleCommunications Systems, Inc................................   229
Response to Questions for the Record from Mark Chandler, Senior 
  Vice President and General Counsel, Cisco Systems, Inc.........   234
Response to Questions for the Record from Janet L. Dhillon, 
  Executive Vice President, General Counsel and Corporate 
  Secretary, JCPenney Company, Inc...............................   236
Response to Questions for the Record from John Boswell, Senior 
  Vice President and General Counsel, SAS Institute, Inc.........   239
Response to Questions for the Record from C. Graham Gerst, 
  Partner, Global IP Law Group, LLC..............................   243
Response to Questions for the Record from Philip S. Johnson, 
  Chief Intellectual Property Counsel, Johnson & Johnson.........   249
Response to Questions for the Record from Dana Rao, Vice 
  President of Intellectual Property and Litigation, Adobe 
  Systems........................................................   258


ABUSIVE PATENT LITIGATION: THE IMPACT ON AMERICAN INNOVATION AND JOBS, 

                        AND POTENTIAL SOLUTIONS

                              ----------                              


                        THURSDAY, MARCH 14, 2013

                        House of Representatives

            Subcommittee on Courts, Intellectual Property, 
                            and the Internet

                       Committee on the Judiciary

                            Washington, DC.

    The Subcommittee met, pursuant to call, at 11:36 a.m., in 
room 2141, Rayburn Office Building, the Honorable Howard Coble 
(Chairman of the Subcommittee) presiding.
    Present: Representatives Coble, Marino, Goodlatte, Chabot, 
Issa, Poe, Chaffetz, Amodei, Farenthold, Collins, DeSantis, 
Rothfus, Watt, Conyers, Johnson, Chu, Deutch, Bass, Richmond, 
DelBene, Jeffries, Nadler, Lofgren, and Jackson Lee.
    Staff Present: (Majority) Vishal Amin, Counsel; Olivia Lee, 
Clerk; and (Minority) Stephanie Moore, Minority Counsel.
    Mr. Coble. The Subcommittee will come to order. Without 
objection, the Chair is authorized to declare recesses of the 
Subcommittee at any time.
    We welcome all of our witnesses and others in the audience 
today.
    Let me go off the record for a moment.
    [Pause.]
    Mr. Coble. Good morning, again. And as Yogi Berra once 
said, it is deja vu all over again.
    Although the ink from the American Inventors Act of 2011 is 
still setting, the first topic for our Subcommittee in the 
113th Congress is patent litigation.
    In 1999, the American Inventors Protection Act dealt with 
submarine patents, and although the recently enacted landmark 
legislation, Leahy-Smith America Invents Act, is in the process 
of overhauling our patent system, frivolous patent litigation 
continues to stifle innovation and job creation.
    Patent assertion entities, or patent trolls, appear to be 
at the root of many problems. The Leahy-Smith America Invents 
Act of 2011 reestablished the U.S. system as a global standard. 
The U.S. Patent and Trademark Office has been working 
diligently for the past 18 months implementing many of AIA's 
provisions, and we probably will not fully realize its 
innovative benefits and related job growth until this 
implementation process has run its course.
    That being said, the AIA has not resolved all of the drag 
created by frivolous patent lawsuits. It is my belief that a 
number of patents that have been issued or are currently being 
reviewed under the old system have enabled patent trolls to 
game the system.
    Patent trolls have also sought out weak or overbroad 
patents to foster more litigation. To ensure that the American 
economy does not suffer due to the legal gamesmanship that is 
currently taking place, it is important for us to consider ways 
to remedy the situation.
    There are many ideas out there to deal with various aspects 
of abusive patent litigation. One idea is the SHIELD Act which 
would allow fee shifting in certain patent cases to the 
prevailing party who asserts invalidity or no infringement of 
the patent.
    Although another idea deals with patent discovery abuse, 
that would limit discovery to court documents and require the 
party seeking initial discovery to bear the cost.
    Another idea deals with providing stays of action against a 
nonmanufacturing party in patent cases.
    Apart from the legislative process, there may also be ways 
that our courts, the U.S. Patent and Trademark Office, and 
litigants can help remedy the patent troll phenomenon. All 
options should be on the table, it seems to me, for 
consideration.
    Another tangential issue that is not a priority for today's 
hearing, but I am concerned, is the result of patent litigation 
deals with federally mandated services. These services transmit 
the caller's location alongside the 911 call and PAEs or patent 
trolls have found secure, wireless technology to be fertile 
ground. This is unfortunate and could seriously undermine 
public safety.
    Needless to say, we have an excellent panel for today's 
hearing, with far more insightful and enlightening testimony on 
how we can curtail abusive patent litigation in America.
    At this juncture, I am going to reserve the balance of my 
time and recognize the Ranking Member, the distinguished 
gentleman from North Carolina.
    But first of all, Mel, if you will, let me swear in the 
witnesses, if you would.
    Each of the witness's written statements will be entered 
into the record in its entirety.
    I ask that each witness summarize his or her testimony in 5 
minutes or less, if possible. You will not be keelhauled if you 
violate that, but we would like for you to stay within the 5-
minute rule, if possible.
    To help you stay within that time, there is a shining light 
on your table. When the light switches from green to yellow, 
you have will have 1 minute to conclude your testimony. When 
the light turns red, it signals the witness's 5 minutes have 
expired.
    I will begin by swearing in our witnesses before 
introducing them.
    If you would, please, all rise?
    [Witnesses sworn.]
    Mr. Coble. Let the record reflect that the witnesses 
answered in the affirmative.
    We appreciate it. You may be seated. It is good to have you 
with us.
    Now, I am pleased to recognize the distinguished gentleman 
from North Carolina, Mr. Mel Watt, for his opening statement.
    Mr. Watt. Thank you, Chairman Coble.
    And of course, this is our first opportunity to 
congratulate you publicly on your Chairmanship and note how 
pleased I am that two North Carolinians sit at the leadership 
of this important Subcommittee. I also am looking forward to 
working with Vice Chairman Marino.
    I also want to acknowledge that one of our----
    Mr. Coble. If you will suspend for a minute, Mel? I am 
sorry, Mel.
    When I depart, the gentleman from Pennsylvania will assume 
the Chair.
    Mr. Watt.
    Mr. Watt. Also, I want to recognize that one of our 
witnesses today is from one of our North Carolina constituent 
companies, SAS, which was very helpful to us during the debate 
leading up to the passage of the patent reform legislation in 
incorporating the joinder provisions that were designed to 
address some of the issues we continue to examine today.
    ``Critics of the patent system, including many high-tech 
and software companies, believe that trolls contribute to the 
proliferation of poor quality patents. Ultimately, these 
critics assert trolls force manufacturers to divert their 
resources from productive endeavors to combat bogus 
infringement suits. Other companies and individuals argue that 
licensing is a standard and time-honored component of the 
patent system. They also assert that some proposals to change 
certain provisions in the Patent Act will disadvantage many 
legitimate companies, vendors, and universities.''
    If this characterization of the debate resonates, it is 
with good reason. Those were the words of then-Chairman Smith 
at a hearing of the Subcommittee entitled, ``Patent Trolls: 
Fact or Fiction?'' June 15, 2006.
    Then-Ranking Member Howard Berman made a statement at that 
time, at the same 2006 hearing, that still resonates today, at 
least with me. He said, ``Perhaps the place to start at this 
hearing is not the question of whether patent trolls are fact 
or fiction, but rather the definitional question of what is a 
patent troll.''
    Almost 7 years later, some things have changed and some 
things have remained the same. There is widespread 
acknowledgment that so-called patent trolls or patent assertion 
entities do exist and that they impose a substantial cost on 
innovation for the companies caught in their crosshairs by 
engaging in litigation strategies that game the system.
    Much has been done to address these abusive practices. In 
2006, the Supreme Court, in eBay v. MercExchange, arguably made 
it decisively more difficult for patent assertion entities to 
obtain injunctions against infringing products where money 
damages were sufficient to remedy the infringement.
    This arguably made litigation in Federal court for the 
purposes of extracting unwanted settlements less attractive, at 
least in so far as it thwarted or frustrated the ability of 
companies to continue to produce the product in question.
    The Federal Circuit has increasingly issued orders of 
mandamus to address venue abuse, disrupting the tactic of forum 
shopping and the dubious joinder of defendants with tenuous 
connections to the claim.
    The America Invents Act also sought to curtail the practice 
of joining unrelated defendants who, based on entirely 
different acts, are accused of infringing the same patent.
    The America Invents Act also gave the Patent and Trademark 
Office additional tools to enhance patent quality. Of note are 
the post-grant review procedures that will allow early 
challengers to weed out poor quality patents.
    The PTO has also embarked upon a process to aid in 
deciphering ownership. This real party in interest proposal 
will require patent applicants to disclose and update real 
parties in interest information, including transfer of 
ownership throughout patent prosecution. This will add 
transparency to the process and enable patent users to identify 
whether and from whom they should seek to license.
    This will also undercut the ploy of hiding ownership until 
infringement occurs when then suing to enforce the patent.
    So 6 years since the patent troll hearing, much has been 
done that acknowledges and tackles certain behaviors that must 
be discouraged. But acknowledgment of the problem does not 
expose its magnitude, or enlighten us on the specific entities 
that are at the root of the problem.
    This definitional problem, highlighted by Mr. Berman years 
ago, was recently echoed by Federal Court Judge Randall Rader 
in a recent speech, when he said that a patent troll can be 
``anybody who asserts a patent far beyond the value of its 
contribution to the art.''
    He went on to say, ``That means any institution can be a 
troll.''
    Nor has the marketplace helped in streamlining our task. 
Late last year, a group of 12 high-profile companies together 
with a much-maligned patent troll purchased Kodak patents for 
over $500 million, saving it from bankruptcy. News reports 
indicate that the patent troll will retain ownership of the 
patents.
    Under the deal, the 12 companies will be immune from suit 
on those patents for which they were alleged infringers at the 
time of the purchase. The purchase undoubtedly saved thousands 
of jobs and it insulates innovative companies from what would 
have been viewed as normal litigation had Kodak been able to 
survive without the sale to press its claims.
    But it also enables a non-practicing entity to pursue 
litigation against other infringers on patents duly acquired 
from Kodak.
    The GAO response to the mandate in the America Invents Act, 
that it study patent troll litigation, underscores the problem 
of defining both the entities and activities that ought to be 
scrutinized.
    Although the GAO study has yet to be released, and they 
continue to work to meet the mandate, they initially questioned 
the existence of reliable data or reliable methods to identify 
trolls. When anyone can be a troll, the task of Congress to 
craft legislation targeting only trolls becomes elusive.
    Proposals have emerged to target specific entities, like 
the SHIELD Act. Others aim at specific phases of litigation, 
like e-discovery. Others directly challenge patentability 
altogether, specifically they call to eliminate or restrict 
software patents. And one proposes to give judges greater 
latitude to impose attorneys' fees or other sanctions by 
lowering the exceptional case standard under current law.
    While I believe that there is abuse in patent litigation, 
particularly in suits against downstream users, we should be 
cautious in considering remedies that focus on disincentivizing 
poorly defined entities without examining the collateral 
effects on the system as a whole.
    Moreover, I am concerned that an insular view that only 
seeks to deter one class of conduct without examining the 
incentives that may unintentionally be provided to others is 
wrongheaded and may result in today's prey becoming tomorrow's 
predators.
    Erecting overly broad barriers to enforcing patents could 
lead to infringers having little or no incentive to respect the 
patent owner, which would, in turn, destabilize the marketplace 
and devalue patents.
    In a letter to the Subcommittee, which I offer for the 
record, renowned civil rights procedure and Federal courts 
expert, Professor Arthur Miller, reminds us that, ``From its 
inception, the U.S. system was designed to encourage people to 
buy and sell patents, because doing so enabled the ordinary 
worker or inventor that didn't have capital to commercialize 
his or her own discoveries to still participate in the economic 
upside of inventing and publishing those inventions.'' This 
ability to license patent rights turned inventing into a career 
path for thousands of people--but technically creative 
citizens.
    As we continue to examine the competing data and explore 
possible solutions, I hope that we will do so with all that 
background in mind. While we should seek meaningful reforms, I 
believe that measures that would up-end or create more 
uncertainty and litigation about definitions in other parts of 
the judicial system are ill-advised.
    I thank the Chairman for his indulgence, and I yield back, 
and look forward to listening to the witnesses.
    Mr. Coble. I thank the gentleman.
    The Chair recognizes the distinguished Ranking Member of 
the full Committee, the gentleman from Michigan, Mr. Conyers.
    Mr. Conyers. Thank you, Chairman Coble.
    I come here with a couple problems, and I apologize to this 
distinguished group of witnesses that have to listen to us 
first. And then after you are thoroughly exhausted, we listen 
to you.
    But I do want to commend you, Chairman. We have a pretty 
even distribution of the witnesses here. We have two people 
with us that have some reluctance about the SHIELD Act and 
patent assertion entities.
    But let me get to the heart of the matter, as far as I am 
concerned.
    We have a measure before us that the plaintiff pays and the 
defendant, who might be the alleged patent infringer, pays 
nothing, and this is disturbing.
    We have a situation in which, in this kind of system, the 
corporations can pressure injured parties into settlements, 
because the dangers are so much greater for a small business. 
And I hope we have some discussion about that.
    In my view, so far, the law already provides a balanced 
approach to fee shifting. And to the extent the bill is 
designed to protect against meritless claims of patent 
infringement, I suspect that the tools to deal with this 
already exist.
    So I am going to listen carefully, but, if in the course of 
your presentation or discussion that we will share with each 
other, I want to try to find out if most of you agree with me 
that current patent law already allows a judge to award 
attorney fees for meritless cases, patent law allows that a 
court may award reasonable attorney fees for the prevailing 
party in exceptional cases.
    And most of all, why can't we fix this problem by improving 
patent quality and notice of patent ownership? What is the big 
deal?
    The America Invents Act directed the GAO to study the 
consequences of this kind of litigation and will soon make 
recommendations. And so we look forward to reviewing these 
findings.
    The final rules of the America Invents Act were implemented 
last September, and I think they will help address this abusive 
behavior. So we should work with PTO, all of us, to require 
better notice requirements of patent ownership to enable folks 
to avoid infringement.
    This Congress can make sure that, going forward, the Patent 
and Trademark Office retains its fees, all of its fees, to hire 
more patent examiners to allow them to find all of the relevant 
prior art for every patent application.
    So I am happy to join you. I invite your best thinking on 
this subject, and I thank the Chairman for allowing me this 
time and return the balance of it.
    Mr. Marino [presiding]. Thank you, Mr. Conyers.
    The Chair now recognizes the Chairman of the full Judiciary 
Committee, Congressman Goodlatte.
    Mr. Goodlatte. Thank you, Mr. Chairman.
    During the last Congress, we passed the America Invents 
Act. That bill was the most significant reform to our patent 
system in my lifetime. The AIA modernizes our patent system and 
sets it on the right path for decades to come.
    The AIA included a number of provisions that went directly 
to addressing the issues surrounding patent quality. The PTO 
has new programs in place to ensure higher quality patents that 
can stand up to review, setting the bar higher so that quality 
control starts on the front end rather than relying on the 
Federal court system to fix problems.
    The U.S. patent system is designed to be fair, meeting our 
international obligations and not discriminating against any 
field of technology.
    The strength of the U.S. patent system relies on the 
granting of strong patents, ones that are truly novel and 
nonobvious inventions, those that are true innovations and not 
the product of legal gamesmanship.
    An example of a positive retrospective provision from the 
AIA is the work being done to implement a transitional program 
to correct the egregious errors made in the granting of a wide 
range of business method patents.
    This program will provide the PTO with a fast, precise 
vehicle to review low-quality business method patents, which 
the Supreme Court has acknowledged are often abstract and 
overly broad. This program will make our patent system stronger 
and better, and it may even make sense to make it permanent in 
the future and expand its applicability to other 
nontechnological patents.
    While the AIA paved the way for higher quality patents on 
the front end, there were a few issues that were left on the 
cutting room floor during the last Congress that could help go 
more directly to the immediate issues surrounding patent 
assertion entities, or patent trolls.
    Abusive patent litigation is a drag on our economy. 
Everyone from independent inventors to startups to mid- and 
large-sized businesses face this constant threat.
    The tens of billions of dollars spent on settlements and 
litigation expenses associated with abusive patent suits truly 
represent wasted capital, wasted capital that could have been 
used to create new jobs, fund R&D, and create new innovations 
and technologies that would promote the progress of science and 
useful arts.
    Nonpracticing entities are those that hold patents, but do 
not practice or produce an actual product based on those 
patents. The term ``NPE'' covers everything from universities 
to high-technology companies that focus on R&D, but monetize 
their research through legitimate licensing.
    But within that universe, there are a specific subset of 
entities, PAEs, which oftentimes acquire weak or poorly granted 
patents and proceed to send blanket demand letters, or file 
numerous patent infringement lawsuits against American 
businesses with the hopes of securing a quick payday.
    Many of these PAEs file lawsuits against small- and medium-
size businesses, targeting a settlement just under what it 
would cost for litigation, knowing that these businesses will 
want to avoid costly litigation and probably pay up.
    PAE lawsuits claim ownership over basic ideas, such as 
sending a photocopy to email, podcasting aggregated news 
articles, offering free Wi-Fi in your shop, or using a shopping 
cart on your Web site.
    Something is terribly wrong here. The patent system was 
never intended to be a playground for trial lawyers and 
frivolous claims. We need to work on reforms to discourage 
frivolous patent litigation and keep U.S. patent laws up-to-
date.
    Abusive patent troll litigation strikes at the very heart 
of American innovation and job creation, and that is why 
Congress, the Federal courts, and the PTO should continue to 
take the necessary steps to ensure that the patent system lives 
up to its constitutional underpinnings.
    I look forward to hearing from all of our witnesses on the 
issue of abusive patent litigation and potential solutions to 
this growing problem in order to ensure that we continue to 
promote American ingenuity, innovation, and jobs.
    Thank you, Mr. Chairman.
    Mr. Marino. Thank you, Chairman.
    Initially, I am going to introduce each of our witnesses. I 
want to thank you for being here today. Once you are 
introduced, then you will have up to 5 minutes to make an 
opening statement. You do not have to take 5 minutes, and I 
reserve the right to determine whether I will use the 
keelhauling if one goes over 5 minutes, particularly with us up 
here.
    So to begin with, our first witness today is Mr. Mark 
Chandler, Senior Vice President, General Counsel, and Secretary 
of Cisco Systems, Inc. Mr. Chandler leads a team of 250 
professionals and has served in that role since 2001. Prior to 
his current position, he was the company's managing attorney 
for the Middle East and African region, based in Paris. Mr. 
Chandler joined Cisco in 1996, when the company acquired 
StrataCom, where he served as General Counsel. Mr. Chandler 
received his bachelor degree in economics from Harvard College 
and his law degree from Stanford Law School.
    Welcome, Mr. Chandler.
    Mr. Chandler. Thank you, Mr. Chairman, Ranking Member Watt, 
Chairman Goodlatte.
    Mr. Marino. I am to go through and introduce everyone.
    Our second witness is Ms. Janet Dhillon, Executive Vice 
President, General Counsel, and Secretary for JCPenney, Inc. 
Prior to joining JCPenney in February 2009, she served for 5 
years at U.S. Airways as Senior Vice President and General 
Counsel. In that role, she directed the airline's corporate 
governance and legal affairs, including litigation, commercial 
transaction, and regulatory matters. Ms. Dhillon received her 
J.D. from UCLA Law School and her bachelor's degree from 
Occidental College, graduating magna cum laude.
    Our third witness is Mr. Boswell, Senior Vice President, 
Chief Legal Officer, and Corporate Secretary of SAS, pronounced 
``sass,'' Institute, where he manages a group of 40 attorneys 
and 220 staff members globally. He joined SAS in 1991 as a 
Senior Marketing Counsel, where he authored many of the 
company's standard license agreements. Mr. Boswell's prior 
experience includes serving as President of Vista Development, 
a software company, and General Counsel and Secretary for 
Raima, another software company. Mr. Boswell attended the 
University of South Carolina at Columbia, where he received 
both his law degree and bachelor's degree in philosophy.
    Our fourth witness is Mr. Graham Gerst, partner at the 
Global IP Law Group, where he specializes in patents including 
sales, licensing, and litigation. Before joining Global IP Law 
Group in 2009, he served as Senior Counsel to the Deputy 
Attorney General at the Department of Justice, handling 
technology-related security matters, international IP 
enforcement, and computer forensics. He also served as Special 
Assistant U.S. Attorney and as Deputy U.S. Coordinator for 
International IP Enforcement. Prior to that, Mr. Gerst spent 9 
years as partner at Kirkland and Ellis, specializing in patent 
litigation. Mr. Gerst received his--good point, Mr. Nadler.
    Okay, I think we got it. Thank you.
    Mr. Gerst spent 9 years as partner at Kirkland and Ellis, 
specializing in patent litigation. Mr. Gerst received his J.D., 
cum laude, from the University of Chicago Law School and 
bachelor's degree, cum laude and with honors, from Williams 
College.
    Our fifth witness is Mr. Philip Johnson, Senior Vice 
President and Chief Intellectual Property Counsel at Johnson & 
Johnson, where he manages a group of 100 patent attorneys in 
the United States and in Europe. Prior to joining Johnson & 
Johnson in January 2000, he worked in the private sector for 27 
years. Mr. Johnson also served as trial counsel in more than 
100 patent cases, with more than 50 cases resulting in reported 
decisions in the Federal District Courts. Mr. Johnson received 
his bachelor of science degree, cum laude, from Bucknell 
University and his law degree from Harvard Law School.
    Last but not least, our sixth witness and final witness is 
Mr. Dana Rao, Vice President and Associate General Counsel for 
Intellectual Property and Litigation for Adobe Systems. Prior 
to joining Adobe, he served as Associate General Counsel of 
Intellectual Property at Microsoft for 11 years. Mr. Rao 
received his BSEE, bachelor of science in electrical 
engineering, degree from Villanova University and his J.D. from 
George Washington University Law School. Mr. Rao also worked as 
an engineer at GE Astro Space before attending law school.
    I want to welcome you all and thank you for being here. And 
we will begin with no more than 5 minutes with Mr. Chandler.
    Thank you.

 TESTIMONY OF MARK CHANDLER, SENIOR VICE PRESIDENT AND GENERAL 
                  COUNSEL, CISCO SYSTEMS, INC.

    Mr. Chandler. Mr. Chairman, Ranking Member Watt, Chairman 
Goodlatte, Members of the Subcommittee, I apologize for my 
jumping the gun, but I am eager to testify before you today 
about abusive patent litigation.
    Mr. Marino. That is quite all right. I think I led you on 
there for a moment, so I apologize.
    Mr. Chandler. This Subcommittee and the Judiciary Committee 
as a whole have consistently shown leadership on a bipartisan 
basis in addressing problems in the patent system, and for 
that, we are grateful.
    I have testified previously on the economically destructive 
nature of certain aspects of patent litigation. In fact, since 
the first time I testified on this issue in 2006, Cisco has 
spent a third of a billion dollars in legal fees alone related 
to this type of litigation.
    This problem has now spread to my customers and partners, 
retailers like JCPenney, as well as small businesses, 
hospitals, auto companies, the telecom companies that use our 
equipment. In short, this problem has now spread from Silicon 
Valley to Main Street.
    I am here today in support of three legislative changes: 
first, passage of the SHIELD Act or other means to discourage 
the procedural abuses that feed this litigation; second, 
completing a technical fix to the post-grant opposition 
provision that was in the AIA; and third, slowing down patent 
assertion entity, or PAE, use of the International Trade 
Commission as another shakedown mechanism.
    As general counsel of Cisco, I am responsible both for 
intellectual property and for litigation for the world's 
largest manufacturer of telecom equipment. This year, we expect 
to receive our ten-thousandth U.S. patent, a reflection of our 
long-term investment in telecom innovation, and our commitment 
to a strong patent system.
    However, despite spending over $6 billion per year on R&D, 
employing over 20,000 engineers in the U.S., we currently spend 
more than $50 million a year on legal fees, fighting about 50 
PAE litigations, a phenomenon that did not exist for us a 
decade ago. We have virtually no patent litigation with 
companies that make products.
    In one current matter, a PAE, which bought nearly expired 
patents from a large chip manufacturer, has targeted 13,000 
entities, including small businesses, retirement homes, 
children's health clinics, restaurants, which happen to offer 
Wi-Fi to their customers using equipment supplied by Netgear, 
Motorola, my company, and others.
    Tellingly, much of that equipment is already licensed, 
because they include chips costing just a few dollars apiece 
that are made by licensed manufacturers.
    This PAE tells these targets, however, that unless they pay 
up $2,000 or $3,000 per location within 2 weeks, they will be 
sued and have to engage counsel to review thousands of pages of 
documents.
    While we are pursuing our rights against this PAE in court, 
this case is just a symptom, sort of like lab mice running 
through a maze and--actually, I wanted to say ``rats'', but my 
staff asked me to soften it--like lab mice running through a 
maze because there is food at the end, PAEs simply follow the 
incentives in their ecosystems. It is up to Congress to 
redesign the maze to remove the incentive for antisocial 
behavior, so that patents are used to defend actual markets for 
real products.
    First, we need to fix the cost asymmetry by making PAEs pay 
when they bring litigation on weak patents and drive costs up 
by abusing discovery or using procedural games. The SHIELD Act 
starts us down that road, and we command you, Congressman 
Chaffetz, and also Congressman DeFazio, for your efforts in 
that regard.
    For instance, PAEs would be more likely to voluntarily stay 
their patent litigation if the patent office has found cause to 
commence a reexam if they are the ones who face both sides' 
costs for fruitless litigation if the patents are invalidated.
    Now that the AIA has speeded up the time for reexams, there 
is no excuse for refusing such a stay.
    Second, many asserted PAE patents are weak, either because 
they are invalid or cover very narrow inventions. PAEs 
ultimately lose 92 percent of the time of the court, versus 60 
percent for other plaintiffs.
    The AIA, as passed for this by this Committee, included a 
new procedure to challenge weak patents when they are first 
issued. But somehow the language changed to raise an 
unreasonable estoppel bar to those challenges before it was 
voted on the floor. Congress should fix what leaders in both 
chambers have called a scrivener's error.
    Third, many PAEs now use the ITC as an additional shakedown 
forum. The ITC's mission is to protect U.S. industries and 
universities by excluding foreign knockoffs. PAEs use the ITC 
as leverage for larger settlements.
    Face it, they do not want an injunction; they do not make a 
product. They just want the money.
    We recently spent $13 million defending ourselves in the 
ITC against a Canadian PAE called MOSAID, using a patent 
originally created in Israel, but trying to keep our products 
out of the United States, which the ITC judge ultimately called 
out for its ``wrongdoing'' for improperly trying to concoct a 
domestic industry.
    Finally, we need more clarity on how damages should be 
calculated, as uncertain damage awards are one of the biggest 
incentives for patent profiteering. We applaud Chief Judge 
Rader, Judge Posner, and others' efforts to focus damage 
calculations on the value of the invention itself, rather than 
on systems which use the inventions.
    In conclusion, the $50 million my company spends annually 
on patent litigation does not grow on trees. To meet my budget, 
I have reduced the number of new patent filings we make each 
year from 1,000 to 700, in order to fund the litigation.
    This isn't a trade-off American industry should face. We 
ask for your help in having the patent system operate as it did 
for over 200 years before being transformed by 21st-century 
financial operators into a casino unrelated to innovation.
    Thank you.
    [The prepared statement of Mr. Chandler follows:]
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
                              Appendix A:

            RPX Research Patent Litigation Data (2006-2012)









                              Appendix B:

                     ITC Working Group white paper









                               __________
    Mr. Marino. Thank you, Mr. Chandler.
    Ms. Dhillon, please.

   TESTIMONY OF JANET L. DHILLON, EXECUTIVE VICE PRESIDENT, 
GENERAL COUNSEL AND CORPORATE SECRETARY, JCPENNEY COMPANY, INC.

    Ms. Dhillon. Thank you. Good afternoon. And I appreciate 
the opportunity to appear before you this afternoon.
    Every day, stories are written about patent lawsuits 
between large technology companies, but very little is reported 
about the abusive patent lawsuits filed against retailers like 
JCPenney.
    Through my testimony, I hope that the Subcommittee will 
have a better understanding of the constant struggle by 
JCPenney and other retailers to contain the damaging effects of 
abusive lawsuits that are brought by an ever-growing group of 
increasingly sophisticated and well-financed patent trolls.
    My name is Janet Dhillon. I am the executive vice 
president, general counsel, and corporate secretary of 
JCPenney. JCPenney is a 111-year-old company. We operate 1,100 
stores in 49 states, and we employ over 100,000 team members.
    Our business model is simple. We sell quality, affordable 
men's, women's, and children's apparel and footwear, and a 
collection of home products. While our business model is 
simple, the means that we use to promote and deliver our 
products and services to our customers is not.
    As customers embrace and utilize technology in their daily 
lives, they expect retailers to do the same. And, therefore, to 
support and deliver the services to our customers, we are 
employing innovative technology to heighten the shopping 
experience, both in our stores and online.
    When I joined JCPenney over 4 years ago, we had no patent 
cases, and I did not expect that we ever would. We are a 
department store. But over the past 4 years, the company has 
had to defend or settle over two dozen patent infringement 
lawsuits that have absolutely nothing to do with what we sell. 
These suits forced the company to invest in an infrastructure 
to defend these cases and to hire sophisticated outside counsel 
who charge well for their services.
    And the number of lawsuits is just continuing to grow. In 
2012, the number of patent suits increased over the 3,600 that 
had been filed in 2011. And for the first time, a majority of 
these cases were filed by patent trolls.
    The fact that our company headquarters is in the Eastern 
District of Texas, and that we are increasing our use of 
technology, are two reasons that JCPenney has become a target. 
The other core problem is that patent trolls attempt to extend 
the reach of the issued patent far beyond the metes and bounds 
of what is allowed by the PTO.
    Please understand, JCPenney is a responsible user of 
technology. We pay the license fees that we owe when we license 
technology. But what patent trolls are attempting to do is 
something fundamentally different from the way the process was 
designed to work.
    The PTO awards the inventor a narrow invention, but long 
after the issuance, most times near the end of the life of the 
patent, the patent is acquired by the troll who then attempts 
to enforce the patent far beyond what the invention intended.
    We have been sued for displaying catalog images and having 
drop-down menus on our Web site, activating gift cards at the 
point-of-sale, being able to browse our mobile Web site on a 
phone, or enabling the customer to put her purchases in an 
electronic shopping bag.
    We have also been subject to multiple claims for providing 
information regarding our store locations on a mobile phone.
    These patents date back to the late '80's and the early 
'90's, have had multiple owners with minimal or no continuing 
involvement by the actual inventor.
    Defending suits against broadly asserted patents that are 
15 to 25 years old is very difficult. The trolls know that the 
evidence necessary to invalidate these patents has been 
discarded, potential witnesses have died, memories have faded, 
and that reconstructing the prior art can be almost impossible, 
and in all cases is extremely expensive.
    And the cost of defending these suits is why we have to 
settle so many of them without a judgment on the merits, which 
means that the companies often settle even though there is no 
actual infringement, and the patent holders are compensated far 
beyond what they have invested to acquire these patents.
    A study by the American Intellectual Property Law 
Association reported that the median cost of litigating a 
patent case, asserting a single patent through trial, is 
between $650,000 and $5 million. The discovery phase alone 
costs between $350,000 and $3 million.
    In the retail business, our margins are already thin and 
the decision to settle or go to trial and spend millions of 
dollars litigating what we know is a junk patent has to be 
weighed against growing our business.
    Unlike retail, patent trolls do not manufacture or sell any 
product to American consumers. They do not build stores. They 
do not contribute to charities in our communities. They do not 
create local jobs. And they do not participate in civic 
organizations.
    JCPenney does all of those things. What patent trolls do is 
produce lawsuits against retailers and other businesses just to 
enrich themselves.
    At the end of the day, companies like ours have to ask a 
simple question: Do we pay to settle, or do we spend millions 
of dollars to invalidate patents that we know are simply junk 
and that we are not infringing on in the first place?
    It is a situation that no general counsel should have to be 
put in to, but it is something that I and my colleagues face on 
a regular basis. That is why I look forward to continuing this 
dialogue with the Committee in hopes of finding some solutions 
to curtailing these abusive suits, while maintaining a robust 
patent system.
    Thank you.
    [The prepared statement of Ms. Dhillon follows:]
    
    
    
    
    
    
    
    
    
    


                               __________
    Mr. Marino. Thank you, Ms. Dhillon.
    Mr. Boswell, please.

 TESTIMONY OF JOHN BOSWELL, SENIOR VICE PRESIDENT AND GENERAL 
                  COUNSEL, SAS INSTITUTE, INC.

    Mr. Boswell. Mr. Vice Chairman Marino, Ranking Member Watt, 
Members of the Subcommittee, SAS is a privately held software 
company based in the great State of North Carolina.
    We have been in business since 1976. We do our software 
development in North Carolina and in Texas.
    The only time SAS ever gets sued for anything, we are being 
sued by a patent troll.
    Now, we have never lost a patent troll case, but that does 
not mean we are not losing. Patent trolls are business 
terrorists. Their weapons of mass destruction are software and 
business method patents with fuzzy boundaries that can be 
asserted against many different products, many different 
companies, in many different ways.
    And the terror is not really the threat of losing the case. 
It is the cost to fight.
    Patent trolls have no employees. They make nothing. They 
sell nothing. They have no witnesses. Therefore, they are 
immune from the discovery burden.
    Given that patent trolls are immune from the discovery 
burden, their strategy is to make discovery as broad and 
expensive as possible. Patent troll cases are filed in 
jurisdictions that allow broad discovery and that do not decide 
dispositive motions, including motions to transfer, until most 
of the money for discovery has already been spent. In other 
words, when the case is filed, the defendant has already lost.
    In a recent case, we actually won the case on summary 
judgment, but we had to spend over $8 million to get there. 
$1.5 million of those dollars was paid to an outside consultant 
simply to collect electronic documents. We had to collect over 
10 million documents because the judge allowed that level of 
discovery.
    The plaintiff in the case listed as possibly relevant 1,873 
documents. Had the case gone to trial, probably 20 or 30 of 
those documents might have shown up.
    The stack of documents that might possibly have been 
relative, I did the math: 8 inches tall. The stack of 
documents, if we had had to print them out, that we had to 
collect, if you took the World Trade Center and put the 
Washington Monument on top of it, the stack of documents would 
have been higher than that.
    That is abuse.
    Now, to be clear, SAS is not in favor of ending the ability 
for legitimate inventors to enforce their patents in Federal 
court. That is not what this is about at all.
    It is about ending abusive litigation tactics by entities 
that are not advancing the idea behind the patent system. They 
are not advancing knowledge and advancing society. They are 
taking advantage and being opportunistic through weakness in 
the patent system, and they are extorting money from the very 
companies that are advancing, that are inventing, that are 
hiring people, that are moving the economy forward.
    And ladies and gentlemen, this is completely a Federal 
Government problem. We are being sued on patents that should 
have never been issued, that were issued by a Federal agency. 
We are being sued in Federal courts that are allowing this 
abuse to happen. And unfortunately, this has been going on for 
some time.
    So I disagree with some of my colleagues who are going to 
advocate ``let's just wait and see if this will all work itself 
out. I don't think we need to do anything.'' No, if the courts 
were going to fix this, they would have done so already.
    There are many good ideas being discussed, some of which 
Chairman Coble mentioned. One that I think bears serious 
consideration is an idea that we sort of borrowed from Chief 
Judge Rader, and that is the only thing you really need to 
decide a patent case is, what does the patent say and what does 
the product do? And if you share the information around that, 
you should be able to decide your patent case.
    If you want more discovery than that, fine. You just have 
to pay for it.
    In that way, patent cases that should go forward, can go 
forward. We do not have to worry who is or isn't a patent troll 
or a patent assertion entity. It will rein in abusive 
discovery, whether it is done in the patent troll litigation or 
in any other litigation.
    If we did that, and if, additionally, we made sure that 
judges first decided motions to transfer before you had to go 
through the process of paying for discovery, so they would 
decide whether you should be there at all before you had to pay 
for it, I think that we would go a long way to ending abusive 
patent tactics.
    But unfortunately, or maybe fortunately, only you can help 
us. And that is why we are here.
    Thanks.
    [The prepared statement of Mr. Boswell follows:]
    
    
    
    
    
    
    
    
    
    


                               __________
    Mr. Marino. Thank you, Mr. Boswell.
    The Chair recognizes Mr. Gerst, please.

            TESTIMONY OF C. GRAHAM GERST, PARTNER, 
                    GLOBAL IP LAW GROUP, LLC

    Mr. Gerst. Thank you very much.
    My firm, the Global IP Law Group, represents the broadest 
range of interests represented on the panel today. We have 
represented very large technology companies like Alcatel-
Lucent, Motorola Mobility, and Nortel Networks. We also 
represent midsized and small companies, including many 
startups. And we also represent non-practicing entities.
    What I hope to do today is highlight how changes at one end 
of the spectrum can have ramifications throughout the system 
that are unanticipated.
    Any large system is going to have problems and 
inefficiencies, and the patent system is no exception. But you 
run the risk of unintended consequences for the system as a 
whole in trying to fix those limited problems.
    And let's remember that this is the system that is, 
overall, working very well. That is something that often gets 
lost.
    The Founding Fathers included the patent system in the U.S. 
Constitution to encourage innovation. Today, we have the 
strongest patent system in the world, and at least part in 
relation to that, or part as a result of that, we have the most 
innovative economy in the world. And we need continuing 
innovation to maintain the strength of our economy.
    Changes that weaken our patent system put future innovation 
at risk. It is the sort of risk that isn't immediate or that 
makes for good stories in the newspaper. The biggest issue our 
patent system does face is the cost of litigating patent 
disputes, which creates two problems. One is the opportunity to 
sue simply to get a settlement that is less than the cost of 
litigation, and numerous of my fellow panelists have already 
talked about this, and that will continue during the remainder 
of the panel here today.
    The second problem is less talked about, and that is that a 
lot of companies that cannot afford to protect their own 
investments in innovation by asserting their own patents. 
Moreover, because of recent changes to the Federal Circuit in 
damages law and related to injunctions, those costs are even 
more difficult to justify.
    When I had lunch with the chief IP counsel at a sizable 
company, he said that he no longer considers the NPEs anything 
more than a nuisance. But he is worried that his company, which 
relies on innovation to distinguish itself, cannot use it 
patent portfolio because of the costs and the weakened 
remedies. And a couple weeks ago, I was at an event where the 
chief patent counsel for Conair said much the same thing.
    This is part of the reason why the statistics about how big 
a percentage of patent cases are brought by NPEs, why that 
statistic exists. It is because a lot of small and midsize 
companies cannot afford to bring their own patent cases.
    What is not an issue for the patent system is the existence 
of NPEs. NPEs are not new, and they do fill a valuable role in 
the patent system by helping to reward innovators. My firm 
recently represented a technology company that was one of the 
lead developers of electronic communication technology in wide 
use today.
    That company invested in the development incentivized by 
the promise its patents would ultimately prove very valuable. 
We, ultimately, sold those patents to one of a group of NPEs 
that were the only ones really willing to give what approached 
fair value for those patents, thereby rewarding those 
innovators.
    In addition, NPEs provide a way to recirculate capital to 
investors. In the situation I just described, I know that major 
investors in that company have circulated some of those 
earnings from that patent sale back to other innovative 
companies.
    And finally, by acquiring patents, non-practicing entities 
keep the market liquid and keep patent values up, which is 
valuable to companies that use their patents as collateral. 
That includes large companies, like the recently concluded 
Alcatel-Lucent deal, and small startups.
    What can Congress do to improve this system? It can make 
changes that are limited and target particular behaviors, but 
minimize the risk to the system from unintended consequences.
    I would echo what Mr. Chandler said about changing the law 
regarding injunctions at the ITC. But that is a limited change, 
and it creates consistency through the patent system.
    In addition, the creation of a small claims patent court 
would help some of the problems with companies being able to 
enforce their own patents, which are blocked today by the cost 
of litigation. And continuing to fund the PTO to improve patent 
quality is important.
    What Congress should not do is engage in getting into the 
business of dictating to the Federal courts about how to manage 
Rule 11 sanctions and discovery costs. Those issues are best 
done in a very tailored, measured fashion that the courts are 
in the best position to determine.
    In addition, the SHIELD Act is something that I would 
advocate Congress not pursue. It is wrong on a whole number of 
levels. But it targets entities, not activities. And it would 
have a whole host of unintended consequences.
    If Company A buys Company B, the patents of Company B would 
automatically be subject to the rules of the SHIELD Act. In 
addition, in the Alcatel-Lucent deal that we recently 
concluded, if something terrible were to happen to Alcatel-
Lucent and it were to go bankrupt and the lenders took control 
of that patent portfolio, those patents would be subject to the 
SHIELD Act.
    Finally, the SHIELD Act, if it helps anybody, it helps big 
non-practicing entities. Those big, non-practicing entities, 
and you know the names of them, have the money to post bonds 
for these litigations. It would basically eliminate the 
competition they have from smaller non-practicing entities.
    Finally, there has been talk about a straight loser pay 
system for all patent cases. That would just aggravate the 
problem of small and midsize companies being able to enforce 
their own patents.
    Thank you very much.
    [The prepared statement of Mr. Gerst follows:]
    
    
    
    
    
    
    
    


                               __________
    Mr. Marino. Thank you, Mr. Gerst.
    The Chair recognizes Mr. Johnson, please.

  TESTIMONY OF PHILIP S. JOHNSON, CHIEF INTELLECTUAL PROPERTY 
                   COUNSEL, JOHNSON & JOHNSON

    Mr. Johnson. Thank you, Mr. Chairman, Ranking Member Watt, 
and Members of the Subcommittee. I appreciate being invited 
here today to give the views of the Coalition for the 21st 
Century Patent Reform, a broad and diverse group of nearly 50 
corporations, including 3M, Caterpillar, Eli Lilly, General 
Electric, Procter & Gamble, and my company, Johnson & Johnson.
    Our coalition advocates for patent reforms that foster 
investment, innovation, and job creation, and that promote 
vigorous competition in bringing new products and services to 
American consumers.
    The issue of patent litigation abuse is simply not a new 
one. Over the last 6 years, both the Supreme Court and the 
Federal Circuit have issued important decisions addressing the 
criticism that our courts unduly favor of the assertion of 
vague or overbroad patents by non-practicing entities.
    These decisions restrict the availability of patent 
injunctions to NPEs, mandate transfer of patent cases to more 
convenient and less NPE-friendly jurisdictions, clarify the 
damages may be awarded based only on the value of the invention 
rather than on the entire system on which the invention is only 
a small component, clarify that innocent infringers may not be 
subjected to treble damages, and strengthen existing patentable 
subject matter, written description, and enablement 
requirements to ensure that overly vague and ambiguous patents 
will not be upheld.
    In early 2011, Congress passed the pilot patent court bill 
to establish a 10-year pilot program to test the concept that 
patent cases can be better handled and abuses deterred by 
District Court judges specializing in them.
    This initiative is now being implemented and is already 
yielding fruit in the form of a number of proposals for courts 
to limit the amount and cost of discovery in patent cases, and 
to actively deter and punish litigation abuse.
    Congress acted again later in 2011 by passing the AIA, 
which included many additional provisions now going into effect 
to lessen the opportunity for abusive patent litigation. The 
AIA revamped the criteria for patentability, authorized the 
public to participate in the patent examination process, and 
increased patent office funding, all to ensure that future 
issued patents will be of the highest possible quality.
    The AIA also created several new procedures to allow 
members of the public, including those who are being sued for 
infringement, to quickly and inexpensively challenge a patent's 
validity before a panel of administrative law judges in the 
patent office.
    It also eliminated NPE marking suits, mandated that patent 
plaintiffs could no longer indiscriminately join unrelated 
parties in a single lawsuit, and provided for further as of yet 
uncompleted study of issues relating to NPE patent assertions.
    As Congress recognized in authorizing a study into NPE 
litigation, little empirical evidence existed to confirm or 
refute claims that NPEs bring a disproportionate percentage of 
specious patent suits.
    Unfortunately, specious claims and specious defenses have 
always been a part of patent litigations and can be perpetrated 
by any party, if so inclined. Fortunately, courts already have 
the power to award attorneys' fees in exceptional patent cases, 
and in our experience are willing to do so when a party engages 
in reprehensible litigation conduct.
    This does not mean that everything that could be done to 
deter patent litigation misconduct has been done. Other 
remedies have been suggested during the consideration of the 
AIA that include lowering the standard for fee shifting, so it 
is easier for judges to award fees to the prevailing party, and 
automatically staying suits against customers and users where 
the original provider of the product or service accused of 
infringement elects to bring a suit to resolve the issue with 
the patentee.
    Our coalition continues to view these approaches as having 
merit. In my written testimony, we make specific legislative 
recommendations for the Subcommittee to consider.
    Otherwise, our coalition believes that Congress should 
monitor the effects of these numerous remedies, which have 
already been enacted, to see how they do. Congress has already 
gone a long way toward fixing the problem of patent litigation 
abuse. To further modify the system at this time would run the 
risk of chilling innovation and the jobs that flow from it by 
making reliable patent import enforcement substantially less 
certain.
    I thank you for the opportunity to testify here today, and 
I would be happy to answer any of your questions.
    Thank you.
    [The prepared statement of Mr. Johnson follows:]
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    


                               __________
    Mr. Marino. Thank you, Mr. Johnson.
    The Chair recognizes Mr. Rao, please.

TESTIMONY OF DANA RAO, VICE PRESIDENT OF INTELLECTUAL PROPERTY 
                 AND LITIGATION, ADOBE SYSTEMS

    Mr. Rao. Mr. Chairman, Ranking Member Watt, and other 
distinguished Members of the Subcommittee, thank you for 
inviting me to testify on this important issue.
    I am appearing before you on behalf of Adobe and BSA, the 
Business Software Alliance. I oversee all aspects of Adobe's 
intellectual property and litigation matters.
    The focus of this hearing is very important, enhancing our 
patent system to promote innovation and make sure patents are 
not used opportunistically in ways that disrupt the 
marketplace. Some may say that the problems in PAEs today are 
software patents, and that the solution is to stop granting 
patents on software or to make it harder to get such patents. I 
do not agree with those proposals and believe they do not 
appreciate or address the actual nature of the litigation that 
our industry faces today.
    There are important steps we can take. We do need to 
address the asymmetry of incentives in our patent litigation 
framework, and we have to improve the quality of our already 
strong patent system.
    For 30 years, Adobe has pushed the boundaries of computing, 
publishing, and printing. With over 11,000 employees and over 
3,000 patents and pending applications, it should come as no 
surprise that Adobe is a strong supporter of the patent system.
    Congress and the courts have acted with vision and 
foresight by protecting software with intellectual property 
rights. The creation of these rights has led America to have 
the leading software companies in the world, companies that 
contribute over $400 billion to our gross domestic product. And 
patents help protect that investment.
    Recent trends in patent litigation have created a serious 
problem for Adobe. This is a new problem. Lawsuits by patent 
assertion entities, or PAES, take advantage of the lopsidedness 
in our litigation system, where it is more expensive to win 
than lose.
    We recently took a case from a PAE to trial. We won. There 
is no infringement, no damages. But it cost us $4 million to 
prove that point.
    Studies show that PAEs lose at trial 90 percent of the 
time, but who can afford to prove it? Adobe's customers are now 
the targets of PAEs.
    Since 2009, Adobe has received more than 100 
indemnification requests from our customers. The PAEs target 
the end-users, small retailers all across the country.
    One of our customers was recently sued. The PAE 
immediately, after filing the complaint, offered to settle for 
just a few thousand dollars. There is no way our customer could 
answer that complaint for less money than that.
    The nature of the patent is irrelevant. After reaching a 
few low-cost settlements, the PAEs acquire a new asset and 
repeat the process all over again. These repeat serial patent 
aggregators are manipulating our patent system, but they are 
only adding cost, not innovation, to our economy.
    We recommend the following actions. We believe Congress can 
make important changes that will help curb abusive litigation. 
I note that patent law already permits shifting fees to address 
abuse of process, as was mentioned before. If there is an 
exceptional case, a court can shift fees under 35 USC 285. 
However, the way it is currently applied, it is a high standard 
rarely met.
    Let's clarify this law. When a court sees litigation with 
these telltale signs--high demands, low settlements, no 
practice in the field of the patent--the court can act.
    Similarly, strengthening Rule 11 of the Federal Rules of 
Civil Procedure would also help. Rule 11 serves a similar 
purpose. Unfortunately, it suffers the same problems.
    We can also look at more focused fee shifting, such as 
being proposed in the SHIELD Act or the SAS proposal around 
discovery costs that was mentioned earlier.
    SHIELD focuses on shifting fees if there is an assertion 
without any exploitation. That is a good focus: Is the 
plaintiff really using the patent system to validate a property 
interest, or are they taking advantage of issues inherent in 
our litigation system?
    In any solution, it is imperative that the PAEs face 
significant financial exposure if they are found to violate the 
standard. Preferably, this determination is made as early as 
possible in the litigation. Otherwise, the defendants will 
still settle in the face of a low-cost offer.
    And the approach also has to protect the rights of those 
seeking legitimate access to the courts. We note the SHIELD Act 
does have provisions in place explicitly protecting the 
original inventors of the patent and universities. We applaud 
that approach and look for such protections in any bill that is 
passed.
    Finally, we can also continue to improve the quality of 
patents. A clear patent is a good patent for the public and the 
public interest. Using the new tools in the AIA, patent quality 
is on the rise, and we commend PTO leadership. They have 
offered various proposals now on increasing the clarity of 
claims, and Adobe supports those.
    The AIA also established mechanisms for challenging 
recently granted patents through procedures of the U.S. PTO. 
These have a real chance in helping address the questionable 
patents before they even enter the marketplace.
    We need to continue to focus on improving examiner access 
to prior art, especially in the software area where it 
difficult to find the best prior art merely by searching the 
patent database. The crowdsourcing efforts they have introduced 
go a long way in helping that problem.
    Mr. Chairman, Ranking Member Watt, and Members of the 
Subcommittee, I thank you again for giving me the opportunity 
to testify before you, and I look forward to answering your 
questions.
    [The prepared statement of Mr. Rao follows:]
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    


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    Mr. Marino. Thank you, sir.
    We are now going to move to the questioning from the panel. 
I ask my colleagues to do their best to keep those statements 
and questions at 5 minutes.
    And the Chair now recognizes the Ranking Member of the 
Subcommittee, Congressman Watt.
    Mr. Watt. Mr. Chairman, I think I am going to pass and go 
last. So if Mr. Johnson is ready, I will defer to him.
    Mr. Marino. The Chair recognizes Mr. Johnson, Congressman 
Johnson.
    Mr. Johnson of Georgia. Thank you, sir.
    Mr. Marino. My traveling companion.
    Mr. Johnson of Georgia. Yes.
    At this time, I would like to, while reserving my 5 
minutes, yield to the lady from California, Congresswoman 
Lofgren, if that is acceptable.
    Mr. Marino. The Chair recognizes Congresswoman Lofgren.
    Ms. Lofgren. Thank you, all of you. I am sorry to be late. 
I was meeting with John Chambers, so I know that Mr. Chandler 
will forgive me for that.
    And also, to have Adobe also in my district, represented 
here, is awesome.
    And, of course, Mr. Johnson. We have worked together.
    I have this one question, if I can. Mr. Chandler, I read 
your testimony, which was excellent. You mentioned in the 
testimony that there was a patent troll threatening small 
businesses with Wi-Fi patents that have already been licensed. 
I am interested in this case, the specifics of this case. Could 
you even tell us who is doing this?
    And I will end very promptly, because I do not want to 
abuse Mr. Johnson's courtesy to me.
    Mr. Chandler. Sure. Thank you very much.
    The company involved is called Innovatio, but it is one 
individual who is a former intellectual property counsel at a 
chip manufacturer called Broadcom who bought 31 patents that 
were nearing expiration. They were no longer useful for 
protecting in the marketplace that Broadcom was in. Broadcom 
had broadly cross licensed them to other chip companies--
Qualcomm, STMicro, Agere, and others.
    And the Wi-Fi chips involved sell for a few dollars apiece 
and are used by manufacturers to create devices that allow 
people to use wireless Internet. Many of the patents had been 
declared by Broadcom to be standards essential and had been 
given to standards bodies on that basis.
    Because they could not go to the chipmakers or did not want 
to go to the chipmakers, because they would have gotten a 
royalty of a few cents apiece, and manufacturers like us or 
Motorola Solutions or Netgear would have said go talk to the 
chip people, they decided to try to intimidated 13,000 small 
businesses around the country, similar to a scheme of telling 
people that they can't collect their Social Security benefits 
unless they sign up for a certain service. That type of scam 
has been well known for a long time.
    By offering a license, in many cases, for products that 
were already licensed--but if you run a cafe, and Caribou 
Coffee was one of the companies they want to. Caribou does not 
know what chips are in the boxes that are in their closets that 
offer Wi-Fi.
    And the choice was pay $2,000 or $3,000 per location, or we 
will sue you. And if you want to defend it, you can. Here are 
the documents you need to review, and it listed the length of 
each document, adding up to thousands of pages. And it told 
people what it would cost to litigate a patent case. So many of 
them just paid up.
    Now, we were pretty outraged that our customers were being 
treated that way. My first job as general counsel really is to 
make sure our customers get taken care of. So we brought an 
action against them for breach of contract, because they did 
not fulfill the obligations to the standards bodies that 
Broadcom had put out, and also for racketeering.
    The breach of contract claims are moving forward. The judge 
in the case decided that they were petitioning the government 
by bringing this patent litigation or by preparing for 
litigation. And since Innovatio did not know for sure whether a 
particular customer's Wi-Fi device included a licensed chip or 
not, he did not view it as enough of a sham to allow the 
racketeering claim to go forward.
    But I think the case illustrates well the way a financially 
driven operator will use the procedural opportunities in the 
patent system to try to shake down people who really do not owe 
any money. And that is where I think the focus of the Committee 
should be, on how to fix these procedural abuses so that 
companies that are really aiming only at litigation--it is 
their only business--cannot establish the value of a patent, as 
Mr. Gertz described, because of the litigation value, but to 
get that value tied back not to procedural abuse, but tied back 
to what the value of the invention is.
    Ms. Lofgren. Thank you very much. I was just listening, and 
the testimony was uniformly excellent.
    I do not know what the remedies are. But as I am listening 
to you, I am thinking maybe we ought to have a vexatious 
litigant statute, as we do in California, as an additional part 
of our arsenal in the Federal system.
    And with that, I yield back, Mr. Chairman. Thank you for 
letting me go out of order.
    Mr. Marino. Thank you, Congresswoman.
    The Chair now recognizes Mr. Chaffetz.
    Mr. Chaffetz. Thank you, Mr. Chairman. And I appreciate the 
panel and all the expertise that has come here before us.
    I think, clearly, with the one example of Mr. Gerst's 
testimony, we have exemplified the idea that there is a major 
problem here. It is a Federal problem. It is something that can 
be remedied. It is something that must be addressed.
    I thought, actually, Ranking Member Conyers made an 
important point that I want to respond to. One of the 
assertions that he said is that we have to be careful that we 
are protecting the little guy so that they have some resources 
and the ability to go after some of the big boys. But then we 
also have to make sure that there is some balance there.
    There is a statistic that I think is particularly pertinent 
here. Look, I introduced the SHIELD Act with Congressman 
DeFazio in a bipartisan way. I think it is a great piece of 
legislation. If it needs further perfection or input, we are 
totally open to that. But we want to help solve this problem.
    But interestingly, statistically, 55 percent of unique 
troll defendants made $10 million or less. Now, I appreciate, 
we have some big companies here, from Adobe to Cisco and 
others, that are very important. They are part of the growth of 
this country. They are a success in our economy that is 
thriving. We have to make sure that they continue to thrive 
globally.
    But think about that: 55 percent of the defendants are 
making less than $10 million. And they need to be able to 
defend themselves.
    So, Mr. Gerst, to suggest that everything is fine. Your 
quote was that it is working well. It is not working well for 
those people. They do not have the resources that Cisco has.
    And the SHIELD Act, if a company inventor does at least one 
of the following things, nothing changes: They are the original 
inventor or assignee; they are involved in exploitation of the 
patent; they are a university or tech transfer organization. It 
does not affect them.
    But there are trolls out there. There are problems out 
there.
    Sixty trolls brought 62 percent of the 2012 patent 
litigations--62 percent. That is what is going on in our 
courts.
    A Boston University study found that NPE litigation is 
growing rapidly, affecting 5,842 defendants in 2011. The direct 
costs of NPE patent assertions are substantial, totaling about 
$29 billion. And 55 percent of those defendants are making less 
than $10 million. There is a huge, massive problem that we can 
solve with a very simple, straightforward approach.
    I think I would go first, actually, to Mr. Chandler. Again, 
there are some that doubt that there is a problem. If you 
could, in your own way, because you are dealing with lots of 
vendors, you have a lot of suppliers, people contracted, give 
us a perspective, if you can, also, on what the little guys are 
going through, because I think Mr. Conyers brings up an 
important point, but I think that is an argument actually in 
favor of the SHIELD Act, not in opposition to it.
    Mr. Chandler. Well, I agree with you. Just to add to the 
information you just shared, from 2005 to 2011, 82 percent of 
the targets of the non-practicing entities, the PAEs, had less 
than $100 million of revenue, as opposed to Cisco.
    You are right. We have the resources to defend ourselves. I 
was able to spend a third of a billion dollars on legal fees in 
the last 6 years on suits with companies that do not produce 
products.
    I think the key focus ought to be on the procedural abuses 
that run up the costs. I think Mr. Boswell spoke very 
effectively about the discovery costs and the imbalance in 
discovery.
    In that ITC case I referred to, we produced over 3 million 
documents, had to provide over 20 of our employees as 
witnesses, all before the ITC ever even looked at the issue of 
domestic industry and threw them out.
    I had $13 million of expense there.
    So I think you find a situation where--I have one case that 
is in trial right now, as a matter of fact, where all of the 
patents in suit have been subject to reexam and at least 
partially declared invalid. And yet, the case is proceeding.
    Those reexams are moving much more quickly, thanks to the 
America Invents Act. I think that when a party makes a decision 
they want to go ahead, even though a case is in reexam, they 
ought to be bearing the cost of the litigation. The same with 
the discovery approach that Mr. Boswell referred to.
    Mr. Chaffetz. And, Mr. Boswell, you gave a very vivid 
explanation of the problem and challenges that you are facing.
    I want to have, given the remaining seconds that I have, 
the gentlewoman from JCPenney to give us her perspective, 
because this is not a problem that is just in the tech sector. 
Again, tech is one of the most important, thriving parts of our 
economy. Let's talk about outside of tech, because it is also 
affecting them.
    Ms. Dhillon. Thank you. And I do agree with your comments.
    As I indicated, retailers and other businesses that are not 
typically what you would think of as high-tech companies are 
being seriously affected by the menace of the patent trolls.
    I think that a number of the proposals that have been put 
forward here today could definitely help retailers like 
JCPenney and other companies that are similarly situated. And I 
think, in particular, what is important is looking at 
limitations around suits against downstream users before the 
litigation against the licensor has been fully exhausted.
    Mr. Chaffetz. Thank you.
    Thank you, Mr. Chairman. I yield back.
    Mr. Marino. Thank you. The Chair will now recognize 
Congresswoman Chu from California.
    Ms. Chu. Thank you, Mr. Chair.
    Mr. Chandler, I am concerned and outraged by these 
frivolous suits that are filed against the end-users of 
products, these 13,000 demand letters that were levied against 
those who rightfully purchased your products, such as wireless 
routers.
    My question is, do the patent trolls have an actual legal 
claim against the customers? Would it actually even stand up in 
court?
    Mr. Chandler. Well, certainly not if they are already 
licensed. But the patent statutes, I think, appropriately, will 
allow anyone who makes, uses, or sells, a product that 
infringes to be subject to suit, and so that can include anyone 
in the chain of distribution.
    But what the assertion entities want to do is sue the 
people as far down the user chain as possible, because they 
have a bigger revenue base.
    Why sue the maker of the chip that is a $5 chip that 
Broadcom might have licensed to get a royalty that is $.50 when 
you can sue a Cisco that sells a box for $100 that allows Wi-
Fi.
    But why stop there? Why not sue the coffee shop and try to 
get some of their revenue?
    That is an issue of how damages are calculated. And what we 
need to do is move toward much more clear standards, so that, 
in advance, it is known what that revenue base is that will be 
subject to the patent infringement claim. Even if you sue 
Caribou Coffee, the damages should still be based on the value 
of that chip. That is the unit that includes the patented 
invention.
    And until the courts or the Congress make clear that that 
is the only way that the damages will be calculated, there will 
still be an incentive for these assertion entities to go for 
the biggest possible revenue base and to be suing innocent end-
users who have very little means to defend themselves.
    Ms. Chu. Should there be a test case in court?
    Mr. Chandler. Well, there are cases moving forward. Chief 
Judge Rader at the Federal Circuit helped with this a few years 
ago. Judge Posner of the Court of Appeals, sitting by 
designation on a District Court case, made this clear.
    But at the moment, the law of the land is a case called 
Georgia-Pacific that gives the jury very wide latitude in 
looking at 15 different factors. Because of the uncertainty 
that that causes, at this point, it is a casino when you walk 
into litigation. You have no idea how those damages will be 
calculated, and that creates a huge incentive to settle, 
especially when you look at the cost of litigation.
    So there are cases out there. I think that is one that 
courts are going to work through. We tried very hard with the 
Congress for over 7 years to work on it, and very hard to 
balance the various interest groups. Our hope is the courts 
will fix that in years to come, if Congress does not.
    Ms. Chu. And is there a way that the end-user could protect 
themselves?
    Mr. Chandler. Well, I think Mr. Johnson made some very 
helpful observations on that. One thing that Congress could 
perhaps provide is that the end-users could force the cases to 
be stayed, so that the litigation would be with the 
manufacturer of the device. And we would certainly be open to 
working with Mr. Johnson on a proposal that could work for all 
industries, that maybe Congress could enact.
    Ms. Chu. Yes, sir, in fact, I do want to pursue that with 
Mr. Johnson.
    You said that a solution would be allowing suits against 
manufacturers of the allegedly infringing products to take 
precedence over suits against the customers, and that then a 
manufacturer would have the right to pursue a separate suit, or 
intervene in an existing suit.
    If your solution is enacted, do you foresee companies 
willingly intervening in an existing suit or pursuing suits on 
their own? And what would be the incentive for them to 
intervene?
    Mr. Johnson. Well, I think whether they institute new suits 
or choose to intervene may depend a lot on the venue of the 
original suit, and their view of the convenience of the forum.
    I think quite frequently the manufacturers would bring 
suits, probably declaratory judgment (DJ) suits, and their home 
jurisdictions, where it would be convenient to pursue them. And 
if that would result in the automatic stay of the customer 
suits, then I think it would be an expeditious way and a less 
expensive way to resolve the litigation.
    And Mr. Chandler and our other witnesses point out, it 
would avoid large numbers of litigations against very small 
users who are not in a position to join the issue, and it would 
allow one lawsuit to resolve the matter once and for all.
    Ms. Chu. And would companies even know about these demand 
letters?
    Mr. Johnson. Excuse me?
    Ms. Chu. Would companies even know about the demand letters 
being sent to the end-users?
    Mr. Johnson. Yes. Usually, I think most of us who make and 
sell products find that our customers are pretty quick to let 
us know when they have been sued.
    Ms. Chu. Thank you. I yield back.
    Mr. Marino. Thank you.
    The Chair now recognizes Congressman Issa from California.
    Mr. Issa. Thank you. I will follow up with Mr. Johnson.
    Do you envision any kind of test for the question of 
whether a DJ would take precedent? For example, would there 
have to be a relationship between the retailer which you have a 
responsibility to indemnify him? And could that be a test, if 
we were to enact it into law, that could codify that?
    Mr. Johnson. I do think we would have to look closely as we 
move forward in developing legislation, because there are a 
variety of relationships between suppliers and their customers, 
and there may, as you point out, be indemnities. There may be 
UCC implied indemnities. And there may be some situations where 
the components have been supplied pursuant to the 
specifications of the customer where it would not be 
appropriate.
    Mr. Issa. Well, I want to thank you for that answer, 
because that begs the point for us in legislation.
    I would not want to see an automatic stay, based on the 
manufacturer's DJ. In fact, there could be a material 
difference in the two cases, and if I were a retailer, or 
someone else in the supply chain, I wouldn't want to be 
prejudiced by a case being argued somewhere else. On the other 
hand, you do not be prejudiced by it.
    But I do think you are onto something very important. As a 
manufacturer, they never shopped my venue. As a patent holder, 
I have to be honest, when I found myself with Chrysler in a DJ 
in Detroit, I was not happy, so I am well-aware why each of us 
would look at that.
    Let me go back to Mr. Chandler. Currently, we do have this 
dilemma that the ITC is where you go for an exclusion/
injunction. And you go to District Court for damages and you 
use one against another.
    It is an oddity of Congress that we have jurisdiction over 
one part. Another Committee has primary jurisdiction over 
another. The two questions I have for you are, should we as a 
Congress actively take on to resolve this, so that never again 
could somebody essentially shop both to the detriment of, to be 
honest, cost to the government, and for a resolution not 
envisioned post-eBay?
    Mr. Chandler. Certainly, there has been a trend in the last 
5 years, since the eBay decision, to a very significant 
increase in the caseload in the ITC, both in terms of the 
number cases and the number of defendants involving 
nonpracticing patent industries.
    Mr. Issa. And I do not want to limit it to nonpracticing. 
If you take the Qualcomm-Broadcom suit, you had two large--and 
there were others. There was Kodak. There were others. You have 
large domestic entities in which they clearly both are 
domestic, and importation is simply a matter of a portion of 
the supply chain in America today, including for your company.
    Those are really the cases where I want to know, because we 
can talk about trolls. We can talk about people who do not 
manufacture. The ITC requires there be a domestic entity in 
order to get standing.
    But let's assume that you are talking about two S&P 500 
companies, substantial assets, more than enough to pay any 
damages. And yet one of them goes to the ITC in order to, 
essentially, twist the knife and get a settlement. It could be 
your company doing it to somebody else, on occasions.
    Mr. Chandler. The ITC has a specific mandate to move 
quickly to stop foreign knockoffs from coming in. Now, some 
parts of the supply chain, as you alluded to, there simply are 
no domestic sources of components. And the fact that a very 
small component of an essentially domestic product comes from 
abroad, and is alleged to infringe, can subject you to the ITC.
    I wouldn't say that the ITC's reason for existence is 
obsolete. And, certainly----
    Mr. Issa. No, and I'm not suggesting.
    And my time is very limited. What I am suggesting is that, 
currently, in some of the cases I mentioned, the ITC told us 
they were without power to do anything other than to use the 
sledgehammer they were given. And we, in the Congress, have the 
ability to give them an additional tool.
    For example, the ITC finding that there is substantial 
domestic assets sufficient to pay any damages could choose to 
stay their case, and recognize that their need is only when, if 
you will, there is an import situation in which money is not 
going to be paid because there is not as substantial import.
    And to be honest, the Open Act, something that I sponsored 
in the last Congress, and will re-drop in this Congress, 
envisions that, in the case of intellectual property--classic 
movies, music--that the ITC may have a greater role, because it 
is, by definition, coming from entities that you can't touch 
other than through exclusion.
    Mr. Chandler. I agree with you completely that 
rationalization of the dual jurisdiction and duplicative 
litigation would make an awful lot of sense. There is no reason 
that these cases need to be carried out in two different fora 
simultaneously.
    Mr. Issa. Thank you, Mr. Chairman.
    Mr. Marino. Thank you.
    The Chair recognizes Congressman Deutch from Florida.
    Mr. Deutch. Thank you, Mr. Chairman.
    Mr. Chairman, I want to thank all the witnesses for 
appearing today. It is actually very helpful hearing.
    And I understand there are a number of elements in our 
patent system that have contributed to the troll problem that 
so many of you have already discussed. And patent quality, 
particularly in emerging technologies, has been a problem with 
PTO. That has come up, today, as well. And I know it is an 
issue that they have been working on to remedy.
    But even if we assume that, going forward, the quality of 
all new patents is unimpeachable, there is still a question of 
what to do in the interim to deal with vague patents, overbroad 
patents that have already been issued.
    So there are lots of proposals, lots of ideas. You have 
laid out some. The SHIELD Act has been introduced by my 
colleagues as a way to, in that case, limit litigation using 
the questionable patents.
    I remember the discussions that we had during the America 
Invents Act about reexamination of limited types of patents. 
Everyone that I have talked to about this troll problem, all 
the folks who have been in office, people that we have met 
with, seem to agree that there is no silver bullet here. There 
is no one thing that can be done.
    We have to look at all the options to minimize abuses. But 
there would also be unintended consequences, if we are not 
careful.
    Mr. Gerst, you spoke about the unintended consequences that 
would stem from the SHIELD Act. If we had this fee-shifting 
provision, the impact that that would have on small and medium-
size businesses would be exactly the opposite of what we would 
want to encourage and the kind of innovation that we are 
actually trying to encourage, by having these discussions to 
begin with.
    Mr. Rao, I wanted to ask you about one small aspect of the 
entire ecosystem. I understand it is not a significant issue in 
this whole broad discussion. But I think the troll problem in 
the patent system as a whole would benefit from greater 
transparency, significantly greater transparency.
    And in my background, coming from real estate law, there 
was always very obvious title for all property. Records were 
kept up to date. They were easily searchable. And similarly, I 
understand the copyright has diminished remedy for failure to 
register in a timely manner.
    But in the patent world, in the patent universe, the 
records seem woefully lacking.
    Why can't we--let me phrase it more positively. Is there a 
way to have a more transparent system to record patents, so we 
know who it is who we are talking about, we know who these 
trolls are, and there's a clear line, and that we don't 
simply--they don't simply wait until there is a lawsuit to go 
ahead and record an order for them, to proceed?
    Mr. Rao. Thank you for the question.
    Absolutely, I think there is a way to address this problem. 
And we think it is a problem.
    We think that the large patent aggregation entities are 
typically holding the patents in other names or shell 
companies, because they don't want to draw attention to the 
size of their portfolio. And they also want to ensure that 
there is not declaratory judgment actions are reexamination 
proceedings initiated against them. And by hiding the true 
ownership of the patents, that is their way of avoiding that 
problem.
    The PTO has suggested some process for identifying the real 
party of interest. For example, having the patent holders 
record the current assignee status at the time of maintenance 
fee renewal. That seems to be a very low-cost way of providing 
up-to-date information about who the true owner of the patent 
is, because you already have to interact with the patent office 
at that time.
    There has been some concern about real party in interest 
causing a burden on patent holders, but I think that if you 
take the PTO's approach, I think the burden is low, and I think 
the benefit to the public is pretty high.
    And not only do we want that transparency at the time of 
when they own the patent. We would also like to have a little 
more transparency when we are being sued. We find that our 
discovery is also limited into finding out who is suing us.
    And we feel that, as defendants, we should know who is 
getting the ultimate economic benefit from the patents that are 
being asserted against us.
    Mr. Deutch. Also, what is the best way to do that? What 
would that look like?
    Mr. Rao. Right now, there is a corporate disclosure 
statement you have to file, Rule 7.1. It is fairly nominal, the 
information you have to provide.
    So we could strengthen that and require disclosure of all 
the entities that are getting an economic interest in the 
pattern that is being asserted. That would really help us 
understand who is asserting the patents against us.
    Mr. Deutch. What about the idea of diminished remedies for 
failure to provide the necessary transparency?
    Mr. Rao. What the remedies would be for failing to disclose 
it?
    Mr. Deutch. Limiting the remedies in the event that they 
don't disclose?
    Mr. Rao. I think that is a solution that has merit. I think 
that if you are unwilling to state that you own the patent, I 
think, like you mentioned in real estate law, there should be a 
prohibition or limitation on your ability to assert the patent, 
just like it is in copyright.
    Mr. Deutch. Thank you.
    Thank you, Mr. Chairman.
    Mr. Marino. Thank you. The Chair now recognizes Mr. Holding 
from North Carolina.
    Mr. Holding. Thank you, Mr. Chairman.
    Mr. Boswell, you used some pretty strong language referring 
to patent trolls as business terrorists. Perhaps that might be 
a bit strong.
    But I will say that you look at their activity, and it 
doesn't take too much imagination to imagine it as criminal 
activity. Perhaps I have spent too much time with criminals 
over the past 10 years, and I am thinking about it in that 
context. But a protection racket where ``we won't sue you if 
you just give us a little bit of money'' isn't too far removed 
from ``we won't burn down your business if you just give us a 
little bit of money this week.''
    It is one of the oldest criminal activities in the 
business--the protection racket.
    You were talking about discovery and the cost of discovery, 
and that being a weapon, an instrument of terror.
    Other than the cost of discovery, the AIA looked at the 
issue of joinder and at the issue of what was driving venue. 
How has that been working? How has that solution been received? 
And how is it working?
    Mr. Boswell. Well, I believe when Congress passed the 
joinder position, the intent was to allow the traditional venue 
rules to operate. Prior to that, patent trolls would sue 20 or 
30 defendants in a favorable jurisdiction, because venue wasn't 
appropriate anywhere, so they would sue them wherever they 
wanted to, which would be the best venue for the patent troll.
    The idea, I believe, behind the joinder provision was to 
allow the traditional rules of venue selection to operate. You 
had to sue the defendant where it was appropriate to sue the 
defendant.
    Unfortunately, that hasn't been our experience. We have no 
connection to the Eastern District of Texas. And in the last 
case we were sued, we were sued in the Eastern District of 
Texas. We made a motion to transfer. But unfortunately, that 
motion sat, but discovery had to start.
    And so, if what happens is a motion to transfer doesn't get 
heard until so much discovery has happened that, in the 
interest of judicial economy, the case should stay there, then 
I think that the courts are thwarting what the America Invents 
Act intended to have happen. And I know that that issue was 
just looked at in an EMC case that went up to the Federal 
Circuit Court of Appeals.
    So without requiring that motions to transfer be heard 
first before the burden of discovery attaches, then I think one 
of the main provisions that the America Invents Act hoped to 
accomplish didn't get accomplished.
    Mr. Holding. It seems like the Eastern District of Texas is 
the most popular venue. And I think I read somewhere in the 
materials that the number of cases being filed in the Eastern 
District of Texas is up 104 percent in the last 2 years. Is 
that correct?
    Does anyone know that statistic?
    Mr. Boswell. I didn't see that statistic. I know the 
greatest patent filing day in the history of the world was the 
day before the America Invents Act went into effect. And that 
happened in the Eastern District of Texas.
    Mr. Holding. Mr. Gerst, I assume you practice in the 
Eastern District of Texas. You take cases there, and so forth.
    Mr. Gerst. I have, Congressman.
    Mr. Holding. What makes the Eastern District of Texas so 
different from everywhere else? Why is it such a favorite 
jurisdiction?
    Mr. Gerst. That is a great question.
    I think there are a few reasons, and the reasons have 
evolved over time. I think, first, early on, you had some jury 
verdicts there that were very pro-plaintiff, and so you started 
to see more activity taking place there. You also had a court 
that issued local patent rules that made it more 
straightforward, and you had a very patent sophisticated set of 
judges down there, who knew patent law and----
    Mr. Holding. Let me interrupt. Do they have different local 
rules in the Eastern District of Texas than they have in the 
other Federal districts of Texas? Are they much different from 
Federal districts in general?
    Mr. Gerst. At this point, I haven't compared them. But the 
Eastern District of Texas was one of the first jurisdictions to 
institute----
    Mr. Holding. How many judges are there in the Eastern 
District of Texas?
    Mr. Gerst. I believe there are two.
    Mr. Holding. And is there anyone that is particularly 
inviting to plaintiffs?
    Mr. Gerst. Now that I am aware of. I haven't looked into 
that.
    Mr. Holding. So two judges in one Federal district are 
attracting all of the patent troll litigation that can possibly 
be attracted. Doesn't that seem a bit odd?
    Mr. Gerst. One of the big reasons, that I didn't get a 
chance to get to about why so many of the cases go there, is 
that the Eastern District of Texas has tended not to stay 
patent cases pending reexamination.
    So a standard tactic employed by a lot of defendants is to 
put the patent in for reexamination and you move for a stay. 
Under the old rules, it would stay the case for, essentially, 2 
years. The Eastern District of Texas did not do that.
    I know I filed a motion to stay a case pending 
reexamination that I thought should have been granted, and it 
was not. It was very difficult to do in the Eastern District of 
Texas.
    That is why there are so many patent cases there.
    Mr. Holding. Thank you.
    Thank you, Mr. Chairman.
    Mr. Marino. Thank you. The Chair now recognizes Mr. 
Richmond from Louisiana.
    Mr. Richmond. Thank you, Mr. Chairman.
    I would just say, before I start, that I thought Congress, 
that we get called some bad names, but today I have heard rats, 
terrorists, criminals, and now we have added arsonists and 
protectionists to the list. So it kind of makes me feel good up 
here. [Laughter.]
    I will start with you, Mr. Chandler, because in the 
beginning, you mentioned the case in which the judge ruled that 
the First Amendment protected the action. And we are here today 
to talk about maybe remedying that.
    But if the judge is ruling that the Constitution trumps, 
what can we do beside a constitutional amendment to affect his 
ruling, if he is ruling that it is protected by the First 
Amendment?
    Mr. Chandler. Yes, I will say that I said lab mice and not 
rats, and it was an analogy.
    In that particular case, we were dealing with a set of 
facts that we thought constituted racketeering. And I think 
access to justice is an extremely important principle and the 
right to petition the government is as well. And the legal 
doctrine applicable to that is called Noerr-Pennington, that 
allows people to bring litigation and have that be a 
petitioning activity.
    There is an exception to that, if litigation is sham, if 
the only purpose of it is to use the litigation process to 
extract some benefits.
    In this particular case, because some of the customers that 
these people were suing or threatening to sue might have had 
equipment that wasn't licensed, the judge said it wasn't a 
complete sham, and, therefore, he wouldn't apply the 
racketeering statute to the activity that these people had 
undertaken.
    At the same time, the range of procedural games that are 
played by these financial operators--and you have to 
understand, many of these patent assertion entities are funded 
by hedge funds or other private equity groups at this point. 
MOSAID, for instance, is private equity owned, the one that we 
spent $13 million with at the ITC.
    And they are really in the business of only litigating. And 
so the only thing they care about is how they can manipulate 
the procedures.
    So we certainly don't propose a constitutional amendment, 
or anything that would limit access to justice. But we do think 
some of the procedural games that are played in the patent 
world can be remedied effectively by Congress.
    I think Mr. Johnson and I agree on at least one of them. 
And we also support what Congressman Chaffetz is undertaking 
and look at ways that the SHIELD Act could be used to address 
some of these procedural problems.
    Mr. Richmond. Ms. Dhillon, two questions for you. I will 
start with the first one, which is, in your testimony you 
discussed the range of areas in which you have been sued--
displaying catalog images, dropdown menus, and all those 
things. At the end of it, you mentioned that patents date back 
to the late '80's, mid-'90's. They have had multiple owners 
with no continuing involvement of the actual inventor.
    But when you mention that, I guess what stood out to me, 
and I wanted to give you a chance to elaborate, was that you 
didn't deal with the merits of the litigation. And I am trying 
to figure out, if the fact that they are old and they are not 
very active, and the person who created it has no involvement, 
should that be pertinent to the lawsuit?
    Ms. Dhillon. Absolutely. And please understand, whenever we 
receive one of these suits, we do an analysis to determine, do 
we think we are actually infringing on the patent? And if we 
do, as I indicated, we and most companies are responsible 
utilizers of technology. If we have overlooked something, and 
we are infringing, we will compensate to make up for that 
infringement.
    But in the cases I described, our conclusion was that we 
were not infringing on these patents, but the difficulty, 
particularly when the patents are that old and when the owners 
of the patents have transferred ownership so much, is to be 
able to develop the evidence to establish the prior art 
defense. Going back that far in time it is extremely difficult 
for companies like mine, and very expensive.
    Mr. Richmond. Which leads me to the question of do you 
think there should be a different standard, not a carve out, 
but a specific issues or legislation to address retailers?
    Ms. Dhillon. Well, I think that it would be helpful to have 
reforms around end-users. So I am most familiar with retailers, 
but other witnesses have referenced, for example, restaurants 
and the like, and I think that they are in a similar situation 
to ours.
    Limitations around suits against end-users, until there has 
been a resolution, vis-a-vis the vendor or the licensor, in the 
first instance, would do a lot to protect end-users like 
JCPenney.
    Mr. Richmond. I see that my time has expired, Mr. Chairman. 
I yield back.
    Mr. Marino. Thank you.
    The Chair recognizes Congressman Farenthold from Texas.
    Mr. Farenthold. Thank you, Mr. Chairman.
    I apologize if I re-ask a question. The Governor of Texas 
was in for lunch, and you don't upset Mr. Perry by no-showing 
on him.
    I did want to talk a little bit about the patent assertion 
entities. In Texas, if you buy groceries, there's a pretty good 
chance you buy them from HEB. It is a big grocery store chain 
in Texas. And believe me, they get plenty of my money.
    But one of the reasons the prices might be so high is they 
tell me that they were approached by one of these entities for 
a device that reads checks. They bought it off the shelf and 
plugged it into their system. And they are basically saying 
settle with us now, or we will run this through litigation, and 
it will be 10 times the cost. JCPenney has mentioned that it is 
happened to them.
    My fear is I have a lot of electronics. I have Adobe 
Photoshop Touch on my iPad. If you guys unintentionally have 
something in there that is infringing, you would expect the 
patents to be asserted against you. But if I take this to its 
logical conclusion, they can come sue me for more than I paid 
for my iPad, more than I paid for the software on my iPad, and 
potentially more than I made this month. Do you think that is 
accurate statement?
    Mr. Rao. Unfortunately, they are allowed to sue you. That 
is correct.
    They are allowed, as Mr. Chandler mentioned earlier, they 
are allowed to sue the user of technology, if that method is 
patented. That is the law today.
    I think the question, of course for you, particularly, is 
damages. But I think Adobe, generally, we stand behind our 
software, as mentioned before. We work with our suppliers and 
our customers, and when we find that someone is accusing 
Photoshop of infringing a patent, we will step in and 
intervene.
    Mr. Farenthold. And you have been approached by customers 
to do this?
    Mr. Rao. We have. Safeway, another grocery store, has asked 
us to do this. REI has asked us to do this. L.L. Bean has asked 
us to do this. Pacific Sunwear has asked us to do this. Small 
retailers are asking Adobe to step in.
    Mr. Farenthold. So, what percentage of your patent 
litigation comes from these patent assertion entities?
    Mr. Rao. About 85 percent of our patent litigation.
    Mr. Farenthold. Eighty-five percent.
    I am a little bit concerned. I guess it is enlightened 
self-interest, because I am an early adopter of technologies. 
But would a solution be legislatively create an end-user 
exemption where, if I go buy something off the shelf and don't 
modify it and use it the way it was intended and just plug it 
into the USB port of my computer, or plug it into the wall, or 
whatever I do, I will go down the line, does anybody see any 
problems with that? Would that be at least a stopgap solution? 
Anybody want to take a stab at that?
    Mr. Johnson.
    Mr. Johnson. Under the Uniform Commercial Code, there is 
already an implied obligation, implied indemnity against 
noninfringement from a manufacturer to a customer.
    And the prevailing jurisprudence is that customer suits 
like those we are talking about should be stayed in favor of a 
manufacturer resolving the issue.
    Mr. Farenthold. I guess my fear is, and I practiced law for 
a while, and one of my lines to my client--you can beat the 
rap, but you can't beat the ride.
    Mr. Johnson. Well, that is exactly the problem, that some 
courts have ignored that jurisprudence, which is why a 
statutory fix may be required in order to get rid of this 
problem.
    But I don't think that you have to wholesale deprive a 
patent owner of a right where there really is an infringement 
in order to do that. It may be that you have unintended 
consequences, because the only person who could be sued might 
be the one you would exempt, and you wouldn't want to do that.
    Mr. Gerst. Congressman, if I could just echo that? There 
are certain patent claims that are called method claims that 
are only infringed, in some cases, by the end-user. And so that 
is the issue that Mr. Johnson is speaking of. So that adds 
complexity to what you are trying to achieve.
    Mr. Farenthold. All right, well, I appreciate it. I see I 
am just about out of time, so I will yield back.
    Mr. Marino. Thank you.
    The Chair now recognizes Mr. Jeffries from New York.
    Mr. Jeffries. Thank you, Mr. Chairman.
    I want to express appreciation for the presence of the 
witnesses to speak on such a very significant issue. I share 
their concern, as I think all of my colleagues do, with making 
sure that unnecessary or unjustified litigation doesn't stifle 
innovation and entrepreneurship. And I think this is something 
that we have to confront.
    Obviously, there are various ways to get at the problem, 
and the remedy here is going to be what we all need to find 
common ground on, to determine the best way to address what I 
think is universally or almost universally recognized as a 
legitimate problem.
    And there seems to be at least five different potential 
remedies, and I want to get into the details related to a few 
of those.
    But you have the loser pay. You have expedited discovery. 
You have the possibility of shifting burdens. You have enhanced 
standing as a possibility. And then lastly, I guess, improving 
or strengthening the Rule 11 requirements.
    But I want to hone in on the notion, and I guess the proper 
expression is patent assertion entities. I was hesitant at the 
very beginning of this hearing to use the word patent trolls, 
thinking that perhaps it was an unnecessarily aggressive 
expression. But, as my good colleague from New Orleans has 
catalogued so thoroughly, apparently, that may be the kinder, 
gentler way to approach these individuals.
    But I guess, Mr. Rao, from the standpoint of the subset of 
individuals who fall within this category as plaintiffs, who 
are bringing litigation, how many of those matters eventually 
go to trial? I understand that many don't, because of the cost 
of litigation resulting in settlement. but how many of those 
matters--and anyone else can answer--but how many of those 
matters go to trial?
    Mr. Rao. As a whole, very few patent litigations go to 
trial. They settle. In the NPE cases, at least in Adobe's 
experience, very few historically have gone to trial. So I 
would say the vast majority end up being settled.
    And that is part of the problem, that you have highlighted, 
that the cost of defense is higher than the money they are 
asking for. And the current group of patent plaintiffs, they 
are not looking to have the patents scrutinized. They are 
merely hoping to get you to pay.
    Mr. Jeffries. I gather you support a strengthened Rule 11 
requirement. Is that correct?
    Mr. Rao. That is correct.
    Mr. Jeffries. So the reason I asked the question, and I 
gather--in other words, in order for the Rule 11 sanctions to 
kick in, there has to be some decision along the way, in the 
litigation, whether that was a motion to dismiss that was 
granted, summary judgment granted, or withdrawal perhaps, or a 
decision at trial.
    And so the question for me is, how do you get to the point, 
if you are going to enhance the Rule 11 requirements, you are 
still going to have to arrive at the decision. And so it seems 
like you can't simply enhance the Rule 11 requirements. Perhaps 
we need to look at either enhanced standing to make sure that 
those who were bringing the litigation legitimately have an 
issue, or you shift the burdens, which then perhaps make it 
substantively more difficult to achieve a result, but design to 
shift the burden so that those with legitimate claims can make 
it through the litigation.
    And if you strengthen either of those two requirements, or 
perhaps both, then those who are bringing the litigation, it is 
just a lot easier to determine who is bringing the frivolous 
litigations and then the sanctions can apply.
    If you or any of the other general counsels might comment 
on that?
    Mr. Boswell. Mr. Jeffries, may I respond to that?
    Mr. Jeffries. Yes
    Mr. Boswell. If at the end of the process, the defendants 
had a way to just not lose more. In other words, even if we win 
a case, we have lost, where these cases are filed, we are never 
going to get Rule 11 sanctions. We are never going to cost 
shifting.
    If Congress did something to change that, then we would 
have less incentive to settle. We would be inclined to take the 
cases until you got a decision. And as soon as you do that, the 
entire business model of the patent trolls changes, because 
they use early settlements to fund litigation. And as soon as 
people stop settling, the whole paradigm shifts.
    Mr. Jeffries. Yes, I would suggest that we explore that. 
But to that point, and I am not sure where I am at. I wasn't in 
the institution when Congress--I think it was in 1995--passed 
the Private Securities Litigation Reform Act. But it was an act 
of Congress that was designed to get at this very problem, that 
there was at least a perception that there was excessive 
litigation being brought by individual plaintiffs, not all of 
whom were legitimate.
    Again, I don't know where I fall on this litigation. I have 
been on both sides, on the defendant side and on the 
plaintiff's side, in my prior practice. But it does seem to me 
that it would be helpful for us, for you guys and the 
gentlelady to take a look at its success, what Congress may 
have done right with that litigation, what perhaps hasn't 
worked. And then use that as a basis for perhaps coming up with 
some creative suggestions to get at how to stop the excessive 
litigation.
    Mr. Marino. The gentleman's time has expired. I think he is 
through.
    Mr. Jeffries. Yes. Thank you, Mr. Chairman.
    Mr. Marino. The Chair now recognizes the Chairman of the 
Subcommittee, Chairman Coble from North Carolina.
    Mr. Coble. The late Howard Coble has returned. I thank all 
of you.
    Mel, I want to thank you, and, Tom, for manning the ship.
    Mr. Boswell, good to have you up from Carolina, as Mel 
mentioned earlier.
    Mr. Boswell. It is good to be here.
    Mr. Coble. Curtailing abusive discovery practices could be 
one way to deal with abusive patent litigation. Speak a little 
more specifically to that.
    Mr. Boswell. As I was mentioning just a minute ago, one of 
the challenges is patent trolls have the ability to make it so 
expensive that even if you are sure you are going to win, you 
are going to lose.
    I actually had a conversation with a patent troll where we 
demonstrated without question that there is no way our product 
that they accused could violate their patent. His answer was, I 
don't care.
    Mr. Coble. He just wants to buy his piece, I presume.
    Mr. Boswell. Well, he wanted us to pay him money, so we 
could prevent ourselves of having to go through the expense of 
going through litigating. And he knew and I knew that even if 
we won on all counts, we weren't going to get any of our money 
back, and we were still going to have to pay the cost of 
discovery.
    So I am trying to change the paradigm, so that defendants 
do not have to settle, so they can't be extorted, basically. 
And that is, if you can afford to litigate, then you don't have 
to settle. And that is really the point.
    And as soon as we do that, I think the paradigm shifts in 
the patent troll world.
    Mr. Coble. Thank you, Mr. Boswell.
    I will put this to either or all of the witnesses. Do you 
believe that patent assertion entities are those that 
accumulate large numbers of patents for purely offensive 
purposes should be subject to antitrust scrutiny?
    And we will start with Mr. Chandler.
    Mr. Chandler. I think the patent grant is a monopoly in 
order to encourage progress in science and the useful arts. And 
patent holders try to find various ways to extend the scope of 
that monopoly beyond what the patent grant intends.
    And I think that patent aggregation efforts deserve very 
close antitrust scrutiny for that reason. I think they have the 
impact across whole industries of forcing settlements and 
suppressing competition in ways that are not intended as part 
of the patent grant.
    Ms. Dhillon. I would concur with Mr. Chandler's remarks. I 
know the Department of Justice and the FTC have been looking at 
this very question, and we support that effort, because I think 
that it does raise legitimate issues.
    Mr. Boswell. Yes.
    Mr. Coble. Thank you for your brevity, Mr. Boswell.
    Mr. Gerst. Congressman, I am not an antitrust lawyer. It 
does seem to me, though, that it is hard to conceive that these 
patent assertion entities, non-practicing entities, have 
anything approaching market power, but I am not an antitrust 
lawyer.
    Mr. Coble. Thank you, sir.
    Mr. Johnson. The mere aggregation of patents may have very 
beneficial effects, especially, for example, if it brings 
together conflicting technologies, patents that would conflict 
with each other, to make them available for competitive 
purposes. It could be very beneficial. Or you could aggregate 
patents as we have seen in the Hartford Empire case years ago 
for anticompetitive purposes.
    So I would say it's not the fact of the aggregation, but 
you have to look at what the use and effect is under the 
antitrust laws.
    Mr. Coble. Thank you, sir.
    Mr. Rao. I would agree with that. There are definitely 
proconsumer aspects to patent pooling, for example, for 
standards.
    But I think the larger point that Mr. Chandler mentioned 
about a patent assertion entity who is just aggregating lots of 
patents and using that volume to demand fees I think is worth 
looking at a little more closely.
    Mr. Coble. Thank you, sir.
    Mr. Chairman, I hope you will take note that the red light 
has not illuminated, and I am yielding back.
    Thank you, ladies and gentlemen.
    Mr. Marino. We will give you credit for that in the future, 
Chairman.
    Mr. Coble. Thank you.
    Mr. Marino. You are welcome.
    The Chair now recognizes Congressman Nadler from New York.
    Mr. Nadler. Thank you, Mr. Chairman.
    Mr. Chairman, I have sat here through this hearing. It has 
been very illuminating.
    I have a couple questions.
    Mr. Chandler, getting back to this question, and maybe Ms. 
Dhillon, getting back to this question of end-users. It 
certainly seems unfair to have the end-users, to have the 
Starbucks or whoever, sued.
    What about simply a rule or statute that said that they 
cannot be sued. It goes right up the chain to whoever first 
used to the patent in a productive way? You just implead the 
first user, and it is their problem, and they just get right 
out of the suit?
    Mr. Chandler. Well, I think that Mr. Johnson's proposal in 
that regard, regarding staying of suits with end-users and 
permitting the manufacturers to intervene----
    Mr. Nadler. Why stay it? Why not just dissolve it, 
eliminate it?
    Mr. Chandler. I think that there may be cases where the 
only way to assert a patent would be against the end-user for 
various reasons. And so an automatic elimination of that right 
I think would be a significant change.
    Mr. Nadler. If you gave the plaintiff the right to go 
against whoever originally used it, he could initially sue 
Starbucks. They just get out and say here, and go up the chain. 
They have a right to sue. Even if the original complaint was 
against Starbucks, just get rid of them and give them the right 
to sue whoever first used that technology.
    Mr. Chandler. I think that having patent litigation focused 
on the technology that is described in the patent is the right 
result. And there are going to be a number of different ways to 
skin the cat, and I think the proposal you are laying out is 
one that ought to be in the mix, in figuring out how to do 
that.
    Mr. Nadler. Okay. Thank you.
    Mr. Boswell, in his testimony, Mr. Boswell says essentially 
says, talking about shifting the cost, and the cost here is 
overwhelmingly discovery. And he says the critical discovery 
relates to certain core documents. These core documents include 
the patent at issue, the technical specifications of the 
allegedly infringing product or feature, and the prior art.
    He proposes that in any patent lawsuit, normal rules of 
discovery apply with respect to these core documents; that is, 
the person producing the documents pays the cost of production.
    But he would go one step further. We would propose 
additional discovery is permissible, and that parties could ask 
for whatever documents they need. The difference is that the 
party requesting such other discovery bears the cost of that 
discovery.
    Does anybody object to that? And if so, why? Yes?
    Mr. Johnson. I object to it, or we object to it, the extent 
that it removes the discretion from the courts. Right now, the 
courts have that authority. They have the authority to 
condition the provision of discovery based on whatever 
conditions are appropriate, including paying for the discovery. 
They are the best positioned to get in and figure it out----
    Mr. Nadler. Given the nature of the problem that we have, 
if we define the classes of core documents and said that is 
where the plaintiff pays for the discovery. Beyond that, it is 
different. Or that is where the defendant pays for the 
discovery. Beyond that, it is different.
    What is wrong with saying that to the courts? Why do they 
need further discussion?
    Mr. Johnson. There are all manner of different plaintiffs--
universities, individual inventors, and the like--and all 
manners of lawsuits. The core discovery concept was originated 
by Judge Rader. And the pilot patent courts program is looking 
at that very closely. And they have other management techniques 
as well, to try to avoid excessive discovery.
    Mr. Nadler. But that hasn't worked, obviously.
    Mr. Johnson. Well, it is just getting going. Congress just 
passed the bill in January 2011, and it is now being 
implemented. And they are very active, and we should wait to 
see how they are doing before we try to give them a blunt or 
one-size-fits-all rule.
    Mr. Nadler. Can anyone tell me why they disagree with Mr. 
Johnson on this point?
    Mr. Boswell.
    Mr. Boswell. Because although the courts have that power 
now, I don't think any of us will have ever seen a court that 
has used it.
    Mr. Nadler. Even though it is a brand-new power?
    Mr. Boswell. No, I mean he was saying the courts could do 
that now. But the patent trolls are not filing in any court 
where any judge would do that.
    And I disagree that there would be any problem with our 
proposal. Obviously, I like our proposal.
    And the other point I need to make here is that the idea 
of, well, we are going to study this problem and we have to 
give it time, if we were standing there and someone was 
drowning, we wouldn't say, well, we are going to study the 
problem.
    Mr. Nadler. Congress might.
    Mr. Boswell. We would jump in and save them.
    Mr. Nadler. I said Congress might have a study completed. 
Most people wouldn't. [Laughter.]
    Mr. Boswell. I hope not.
    Mr. Nadler. Thank you. I yield back.
    Mr. Marino. Thank you.
    We are going to go a little bit out of rules procedure 
here. President Obama will be meeting with the Democrat Caucus 
about 2:15 today, as he met with the Republican Caucus 
yesterday.
    So, my colleagues, my Republican colleagues, have 
graciously agreed to allow the rest of the Democrat side to get 
their questions in, so they can get to the meeting. And then we 
will follow up later.
    So I think the next person to have questions is Congressman 
Johnson from Georgia.
    Mr. Johnson of Georgia. Thank you, Mr. Chairman. And thank 
you Members on the other side of the dais here for your 
generosity and graciousness.
    I hearken back to the days when I was growing up. My aunt 
in the backyard, just past the backyard was a bridge that then 
emptied onto the street behind her property. And she would 
always tell us, do not go out there on that bridge, because the 
three little billy goats. The three billy goats, she told us 
that story about the three billy goats and the big, bad troll 
waiting under there.
    And so I understand what a troll is, but I also know that 
every person or entity that files a patent infringement suit is 
not a troll. And I also know that while software is a product 
that can easily be broadened, or expanded, in so far as claims 
are concerned, by those who would file patent lawsuits, this 
legislation that we are looking at, the SHIELD Act, would apply 
to all types of patents, not just those patents.
    And I know that there is abusive behavior occurring in 
patent litigation cases. Many examples of that, even in the 
northern district of Georgia, scanner trolls targeted BlueWave 
Computing and other Atlanta-based businesses for merely using 
an office scanner to scan documents to email.
    BlueWave reportedly received a demand from Project 
Paperless, a patent assertion entity, stating that BlueWave had 
to pay $1,000 per employee for a license to distribute its 
computer architecture, or they would face a lawsuit.
    In this case, BlueWave fought the lawsuit and won in court 
after spending millions of dollars to defend itself. And that 
is something that they should not have to be subject to.
    Finding solutions to this problem is incumbent on the 
courts, businesses, the Patent and Trademark Office, and on 
this Congress. These solutions should both address immediate 
concerns and also be forward-looking to enable the breadth of 
patent claims to be included.
    But we should also be careful to avoid solutions that 
create barriers to the courthouse for some litigants and not 
others.
    I also have concerns with fee shifting and bonding rules 
that would make it prohibitively expensive to enforce a valid 
patent for parties that do not produce materials associated 
with the patent.
    Lastly, although this is, indeed, a worthy issue for our 
consideration, we have to be careful that any legislation in 
this area that we may pass could open the door for other 
alleged reforms that would deny plaintiffs their rights to go 
to court in other tort situations, so-called tort reform.
    We must consider the implications of our solutions in other 
areas, even ones as close as copyright.
    Although we are not considering these questions today, 
these are important issues that we must be mindful of as we 
move forward.
    Lastly, I will say that a patent holder who files a lawsuit 
against a deep-pocketed predator corporation, making money off 
that person's or entity's patents would be covered by this 
legislation, would it not, Mr. Gerst?
    Mr. Gerst. Your question, Congressman, is whether or not a 
company----
    Mr. Johnson of Georgia. Well, whether or not a person or an 
entity filing a claim for patent infringement, they would be 
covered by this act?
    Mr. Gerst. By the SHIELD Act?
    Mr. Johnson of Georgia. Yes.
    Mr. Gerst. Well, if an individual is the inventor, the 
person would be excluded from the SHIELD Act. But if the person 
is not the inventor or one of the other exclusions, that person 
or entity would be affected by the SHIELD Act, yes, 
Congressman.
    Mr. Johnson of Georgia. Thank you.
    Mr. Marino. Thank you.
    The Chair now recognizes Congresswoman Jackson Lee from 
Texas.
    Ms. Jackson Lee. Let me thank the Chairman and the Ranking 
Member. And I do want to thank our colleagues, again, for their 
generosity.
    I remain open on this question. I think the witnesses have 
laid out an able case for both perspectives. And I just want to 
cite some language into the record.
    A Boston University study suggested that NPE litigation has 
had 5,842 defendants in the litigation in 2011, costing about 
$29 billion. And the Boston University study represents that it 
impacts diversion of resources; it delays new products; and 
there is a loss of market share.
    But I think the salient point by Chief Judge Rader out of 
the Fifth Circuit makes the point that really provides 
sufficient shock value, that we all understand that there are 
entities that are created solely for the purpose of litigating 
patents.
    And he follows by saying, which is intrinsically not 
necessarily bad, but that there is an entity or an industry.
    I have a series of questions that, hopefully, will allow 
for some give-and-take. And I think one just factual question 
to Mr. Chandler is to find out what the status of the case was 
that was with Judge Holderman, where you attempted to have a 
rebuttal action. Where is that case at now?
    Mr. Chandler. That is the Innovatio case that I was 
describing to Congressman Lofgren.
    The claims that we asserted against Innovatio for the way 
they have targeted these 13,000 end-users, the breach of 
contract claims related to their refusal to fulfill the 
obligations that attached to those patents that were declared 
to standards bodies are proceeding.
    Judge Holderman granted a motion to dismiss the RICO claims 
that we brought, and we are determining now how to proceed with 
that.
    I understand his decision and respect the reasoning that 
went into it, because of the importance of access to justice 
and the petition right. In that case, we felt that this 
particular plaintiff was well aware that many, many, many of 
the people they were sending letters to were already licensed. 
This guy is an expert on his patents. He used to work on for 
the company he bought them from.
    And we felt he should have been held to account for the 
tactics he was undertaking with innocent, unsophisticated end-
users that he knew many of whom were licensed.
    Ms. Jackson Lee. And you decided not to appeal the 
dismissal proceeding now in the District Court?
    Mr. Chandler. Well, we are in a process of determining what 
the right way is to proceed on that. I do understand the 
judge's opinion. I respect him.
    Ms. Jackson Lee. All right, let me try again to proceed 
with some give-and-take.
    Mr. Gerst and Mr. Johnson seem to be opposed to some form 
of a SHIELD Act legislatively. And so let me try to juxtapose 
Ms. Dhillon and Mr. Chandler.
    Mr. Gerst, what is your answer, then? Would you see this as 
a court solution or a patent office solution, because obviously 
the SHIELD Act is a legislative initiative? What would be your 
solution to a sizable amount of money being spent on this 
litigation?
    Mr. Gerst? And Mr. Johnson as well.
    Mr. Gerst. Yes, Congresswoman, and first, I would say that 
the $27 billion number that you cited in the Boston University 
study, that has been widely refuted. I would recommend that you 
read something by David Schwartz who has written an analysis of 
it that really disposes of that number.
    Unquestionably, as I said during the testimony, the high 
litigation costs pose a problem. And I think a lot of, for 
example, Mr. Boswell's recommendations about trying to get to 
the bottom of that makes sense. I think both Mr. Johnson and I 
posit that the best place to do that, the best place to tailor 
those remedies, are at the courts. And it is being done now at 
the District Court level. The Federal circuit has issued 
guidelines. So, it takes little bit of time.
    Ms. Jackson Lee. My time is short, and I think I got the 
gist of it.
    If Mr. Johnson could be quick, as you get ready to answer, 
let me just pose this question to all of you who have a 
different perspective: For those who are in the high-tech 
industry, the question will be, can you not protect your 
software, do nonobvious inventions that would lead to less 
trolls being able to provide these lawsuits? Are there other 
ways to protect what you have or to define what you have?
    I am going to let Mr. Johnson answer, but with the 
indulgence of the Chair, I hope I can get answers by Ms. 
Dhillon, at least, to tell me why it does not work the way Mr. 
Gerst wants it.
    Mr. Johnson. Would you like an answer to the high-tech 
question?
    Ms. Jackson Lee. No, if you have a quick response to what 
Mr. Gerst just said, because I want to hear from Ms. Dhillon 
and Mr. Rao.
    Mr. Johnson. Congress needs to provide the courts the 
authority to act to take care of the problem, but the courts 
are the best place to take care the problem, in my view, with 
the assistance of the patent office by allowing the return of 
the patent to the patent office, under the America Invents Act, 
to challenge validity when that is appropriate.
    Mr. Marino. The Congresswoman's time has expired and you 
are going to have to be in that caucus, I think before the 
President gets there, or else you do not get in.
    Ms. Jackson Lee. Can I get my answers in writing? Ms. 
Dhillon was supposed to answer quickly.
    Mr. Marino. Yes, we just expect you to give them in writing 
and send them to us.
    Ms. Jackson Lee. Thank you very much.
    Mr. Marino. The Chair now recognizes the Ranking Member of 
the Subcommittee, Congressman Watt from North Carolina.
    Mr. Watt. Thank you, Mr. Chairman. And I thank all of the 
witnesses. It has been an exceptionally good hearing, very 
balanced presentation. I think that is the kind of hearing we 
need on this, to really try to get to the brunt of it.
    Before I forget, I want to ask unanimous consent to submit 
for the record written statements from the Electronic Frontier 
Foundation, the National Retail Federation, Professor Arthur 
Miller, and Professor Christal Sheppard.
    Mr. Marino. Without objection, so ordered.
    [The information referred to follows:]
    
    
    
    
    
    
    
    
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    Mr. Watt. I want to thank my colleagues who have deferred, 
to allow us to get through in time to go see the President.
    And I want to ask a question, which I will really just ask 
all of the witnesses to address in writing, if you do not mind, 
because I think unless we get to some definition of what a 
patent assertion entity is, we are never going--if we define it 
too broadly, we are going to impact adversely a bunch of people 
who we should not be impacting.
    And a lot of what I have heard today, well, not a lot, but 
some of what I heard today, might suggest that the troll or 
patent assertion entity is anybody that we do not like. And we 
obviously have to be very tailored if we are going to craft 
legislation to deal with this. And I am not sure doing it by 
exclusion, which is what Mr. Chaffetz's bill does, and Mr. 
DeFazio's bill does, does it inversely. I am not sure that I am 
comfortable with that.
    So just give me a definition that you think would be 
workable, for legislative purposes, of what a patent assertion 
entity that would be covered by preventing them from proceeding 
in a lawsuit would consist of.
    Because if we cannot define what a troll is for this 
purpose, I do not think we are ever going to be able to pass a 
piece of legislation.
    And I think we have to limit this to patent litigation, 
because, otherwise, we are going to be over into a whole area 
that has been a lightning rod for a number of years. We will be 
back in tort reform and litigation reform. And we have done a 
lot of that.
    But I think this may be unique to the patent area of the 
law. And if we started by having a good definition that we 
could work from, I think we would all be serving ourselves very 
well.
    So with that, Mr. Chairman, I know my green light is still 
on, but the President's red light is approaching quickly, 
because if they are not going to let me in after 2 o'clock, I 
am already in trouble.
    So as important as everybody here is, sometimes the 
President of the United States takes precedence over whatever 
else we are doing. So I hope you all will forgive me.
    That does not mean I think he is more important than you 
all. It just means that I would like to hear what he has to 
say, particularly since there is, ``charm offensive'' going on. 
[Laughter.]
    So I thank you all, and have a great day, and thank you for 
being here, and thank you all for deferring to us.
    Mr. Marino. Thank you, Congressman, for your help today. 
What an appropriate word.
    But the Chair now recognizes the Chairman of the full 
Judiciary Committee, Chairman Goodlatte from Virginia.
    Mr. Goodlatte. Thank you, Mr. Chairman. I know I was 
charmed by Mr. Watt and not at all offended.
    I apologize to the panel for not being here for all of your 
testimony, and I very much appreciate your participation today 
in this important issue, and I do some questions I would like 
to address first, to Mr. Gerst, and then I will ask some of the 
rest of you to comment as well.
    When it comes to the patent system, especially patent 
ownership, do you believe that it is appropriate for entities 
to assert a patent far beyond the value of its contribution to 
the art? Are there or should there be limits to asserting 
patents in litigation?
    For example, is it appropriate for an entity to send out 
vague demand letters en masse without providing specificity as 
to how an individual is infringing on a patent? Should there be 
limitations toward bringing cases against customers or end-
users who are least able to understand the patent system or 
meaningfully respond in litigation?
    Mr. Gerst. Thank you, Congressman.
    There are already limits on what litigants can do in 
litigation, and these are Rule 11 sanctions. You can't make 
assertions that are beyond the scope of the patent, 
unreasonably beyond the scope of the patent.
    And the problem is ex-ante. It is hard to tell exactly what 
that limit is, so you do need to litigate the issue.
    You are also talking about a----
    Mr. Goodlatte. We could provide more specificity, could we 
not?
    Mr. Gerst. Again, Congressman, I think the courts are the 
best place to tailor that and to allow the standard to evolve 
over time, rather than having some standard one-size-fits-all 
that is very difficult to change.
    On the demand letters point, that is a slightly different 
issue. I mean, what you really have there is asymmetry of 
information, right? You have, on the one side, very 
sophisticated patent dealers, and they are approaching 
unsophisticated folks. And the answer may be, then, to try to 
help out the symmetry of information by perhaps giving some 
grant money to entities that will help coordinate and help 
these various targets of this activity coordinate their 
defenses.
    I will tell you those sort of broad-based campaigns, what 
they fear most is coordinated activity. So you don't need, 
necessarily, to change the law. You just provide a way for that 
coordination among defendants who are targets to take place.
    Mr. Goodlatte. It seems an unusual thing for the government 
to provide funds. We do not even know who we would be providing 
it to, since the targets, when you are talking about end-users, 
and companies like JCPenney, it could be anybody.
    But, Mr. Chandler, do you have a view on this?
    Mr. Chandler. Yes, I think that the issue of the broad 
attacks by companies is really driven by procedural 
opportunity.
    I think Ranking Member Watt's question about the definition 
of a patent assertion entity sort of begged the question of, 
why is this activity happening? And it is happening because of 
procedural weaknesses that allow it to go on with impunity.
    And I think the courts have been reluctant to impose the 
sanctions that Mr. Johnson and Mr. Gerst have pointed out they 
have the ability to do today.
    And I think shifting some of the balance on that, so that 
when you have these particular procedural opportunities that 
are being exploited and that have driven the creation of a new 
industry that none of us faced a decade ago, when you address 
those particular procedural defects, there will be a self-
correction.
    I think Mr. Boswell described that as a paradigm shift 
where the ability to, with impunity, extract unearned rents off 
of patents that do not apply----
    Mr. Goodlatte. Got it. Let me interrupt you, because I want 
to get in a couple more questions.
    Mr. Chandler. Sorry.
    Mr. Goodlatte. Ms. Dhillon, as a retailer, JCPenney is not 
sued because of the products it sells, but for the technology 
that it uses. Patent litigation, per se, is obviously not a new 
phenomenon, but the type of abusive litigation that we are 
seeing today is new.
    Why has there been such an exponential growth in these 
types of cases? Is it a result of certain plaintiff-friendly 
judicial districts, or are there other factors in play as well?
    Ms. Dhillon. I think there are number of factors in play. I 
think that there are certain plaintiff-friendly jurisdictions 
that have fueled it. I think that there are, I mention in my 
testimony, some older, more vague patents that have been 
exploited. And I think that nothing translates into success 
like success.
    So I think as NPEs started to gain some traction and others 
saw this as a money-making activity. They essentially have 
jumped onto the bandwagon, to the point where we find ourselves 
in the situation that we are in.
    I think that if the courts were in a position and had the 
ability to remedy these abuses, they would have done so. And 
the fact that we are all sitting here today, explaining the 
situation that we find ourselves in, suggests that the courts 
do not have the tools that they need to contain it.
    Mr. Goodlatte. Mr. Chandler, you recently brought a case 
for you asserted that a PAE was violating RICO laws. I do not 
know if you talk about that already here today, but could you 
speak more about your theory?
    Mr. Chandler. I described it a little bit earlier, but the 
RICO statute was held by Judge Holderman in that case to not be 
usable because he found that some of the 13,000 people might 
not have already had licenses. And, therefore, the petitioning 
right of the patent plaintiffs should be protected. It was not 
enough of a sham to allow the RICO statute to apply.
    But we are going to continue to try to find means to push 
back on behalf of our customers, who are being wrongfully 
victimized in that case.
    Mr. Goodlatte. Does anybody else want to comment on that? 
Nope.
    Thank you, Mr. Chairman.
    Mr. Marino. Thank you.
    The Chair now recognizes Congressman Rothfus from 
Pennsylvania.
    Mr. Rothfus. Thank you, Mr. Chairman.
    And thank you, panel, for a great discussion this 
afternoon.
    I am still trying to quantify the extent of the patent 
troll issue. We have referenced or heard reference to the 
Boston University study.
    I think, Mr. Gerst, you mentioned a Schwartz study. Are any 
panel members aware of any data on the number of patent troll 
claims that have been filed over, say, the past 10 or 15 years, 
actual actions?
    We heard Congressman Chaffetz cite some reference.
    Mr. Johnson?
    Mr. Johnson. Cited in my written testimony is the Price 
Waterhouse litigation study, which specifically focuses on the 
number and success rates of NPE suits that have been brought 
over the last, I believe, 11 years, citing also the success 
rates by industry over several time periods.
    Mr. Rothfus. What are the success rates?
    Mr. Johnson. The success rates, I believe overall for the 
11-year period, is about 24 percent, perhaps 23 percent, if my 
memory serves, compared to 31 to 33 percent.
    Mr. Rothfus. Is that for verdicts or is that for 
settlements?
    Mr. Johnson. These are the percentage of these cases that 
are ultimately successful.
    Mr. Rothfus. That could either mean reaching a settlement 
or verdict?
    Mr. Johnson. I believe that settlements are not included, 
because that does not result in a win or a loss, so these are 
of the decided cases, the cases that go through to final 
decision.
    Mr. Rothfus. Do we have any data on the number of claims 
that may have been subject to Rule 11 sanctions?
    Mr. Johnson. The number of cases that have been subject to 
Rule 11 sanctions, in my experience, is extraordinarily low. 
Mostly, Rule 11 is thought of as a remedy against the attorneys 
rather than against the party.
    More relevant would be the percentage of cases which were 
deemed exceptional, and where fees were awarded as a result of 
that. That is also very low, somewhere, I think, under about 1 
percent.
    And of course, those fees are usually only awarded after 
the case has gone completely through trial. So as to settled 
cases, you would not expect someone with a frivolous case to 
push it through to trial, because there would be no upside in 
doing that.
    And so, therefore, the truly frivolous cases or the cases 
that are brought out without regard to any merit at all are 
brought for the reasons already discussed by many of the 
witnesses here, the plan is to settle them out quickly. The 
last thing they want to do is go on and go through trial.
    Mr. Rothfus. Now, the Price Waterhouse study, would that 
just include claims that were actually filed in court? So, for 
example, they would not consider any number of demand letters 
that may have been set out to various companies?
    Mr. Johnson. No, the Price Waterhouse study does not 
address demand letters. That becomes very problematic because 
there, of course, is a very wide activity of patent licensing, 
very legitimate patent licensing, as some of the witnesses have 
mentioned.
    And so a demand letter could be, ``I have a patent I think 
you might be interested in taking a license under.'' And that 
could be seen as a threat, or it could be seen as a legitimate 
transactional offer.
    A company like ours enters 300 to 500 licenses a year, and 
are happy to do so, because it gives us access to many 
technologies that can be brought together and incorporated in a 
product in order to provide the truly best solution possible.
    Mr. Rothfus. I was wondering if Mr. Gerst or Mr. Johnson 
would have any concerns with the statistics cited by 
Congressman Chaffetz, about 60 trolls having brought 62 percent 
of the patent litigation.
    Is that something we should be concerned about?
    Mr. Gerst. You said 60 trolls have brought?
    Mr. Rothfus. Sixty trolls have brought 62 percent of the 
patent litigation, is what Congressman Chaffetz stated earlier.
    Mr. Gerst. I do not know about the 60 trolls part. I have 
seen data showing that 62 percent of patent cases are brought 
by non-practicing entities.
    And is that a concern? The bigger concern, from my 
perspective, I mean, there is a lot that data does not show. We 
do not know what the optimum level of that activity is. And the 
other issue that I have a concern with is that such a high 
percentage of them are against companies that make $10 million 
or less. That does suggest that is more of the nuisance level 
activity, than otherwise.
    Mr. Rothfus. Thank you. I yield back.
    Mr. Marino. Thank you. The Chair now recognizes Congressman 
DeSantis from Florida.
    Mr. DeSantis. Thank you, Mr. Chairman. Thank you to the 
witnesses.
    You know, I have looked at our litigation system generally, 
and I think there is a big problem of cases being brought that 
really are not patently frivolous, but they are not going to 
win at trial, but it is usually just too expensive to try them. 
So there is just incentive to cut settlements.
    In my view is, if you have been wronged, you should be able 
to be made whole. But if you really do not have a case, I think 
that this is a huge inefficiency in our system. I think people 
contort the system for economic gain.
    But I must say, even with that view coming in, I mean, I am 
a little surprised at how abusive some of this patent 
litigation seems. Some of it seems pretty grotesque.
    Ms. Dhillon, you got to JCPenney 4 years ago. You guys 
didn't have any patent cases at that time?
    Ms. Dhillon. No, we did not.
    Mr. DeSantis. And obviously, any company of your size is 
going to deal with litigation, but has the arrival of patent 
litigation been a huge part of what you are now defending?
    Ms. Dhillon. Yes. It represents now about half of my 
overall legal budget.
    Mr. DeSantis. Did you change your business practices at 
JCPenney from the time that you arrived when there were no 
patent cases to now, when you have patent cases, such that 
maybe people would all of a sudden think that you are 
infringing patents?
    Ms. Dhillon. We have not changed our business practices. I 
think it is being driven by other factors than how we go about 
conducting our business.
    I will say, however, that in response to it, we have 
changed. In response to the wave of patent troll cases, we have 
changed our business practices.
    So for example, in the past, where we might have considered 
licensing technology from a small inventor, the kind of typical 
few guys in a garage who are putting together a very exciting 
idea about technology, but that do not necessarily have the 
wherewithal to defend and indemnify us in the event that a 
troll came after the technology, we are taking a second look at 
that. And there are times when we do not license that 
technology, because we are concerned that that young inventor, 
that startup may not have the wherewithal to defend and 
indemnify us in a patent troll case. And I think that that is a 
very unfortunate thing for innovation in general.
    Mr. DeSantis. And to defend one of these cases, what is a 
ballpark figure price tag?
    Ms. Dhillon. To take a case through trial can be upwards of 
$3 million or more. And that is hard dollar cost. That does not 
also count the amount of time and internal resources that are 
diverted to work on that case. And that is large, because those 
people, then, are not spending time driving our business.
    Mr. DeSantis. And that actually was going to be my next 
question. So if you are having to defend these cases, it is not 
just your legal department and outside counsel who deal with 
it. You actually have to have other folks who are involved with 
the company, now all the sudden their time is diverted from 
trying to be productive and innovative to now having to 
participate in a lawsuit.
    Ms. Dhillon. That is exactly right.
    Mr. DeSantis. Well, thank you, Mr. Chairman. I yield back 
the balance of my time.
    Mr. Marino. Thank you.
    The Chair now recognizes Congressman Collins from Georgia.
    Mr. Collins. Thank you, Mr. Chairman.
    I think what is interesting here in just listening, and I 
apologize for missing some. I heard a lot by watching remotely.
    But the concerns that I have heard so far is stifling 
innovation and looking at the costs that are associated with 
some of these issues of ``are we abusing a patent, taking a 
patent.'' And I want to address several things as we go along 
here, because as I looked through all of your testimony, and 
was reading, some of the things that kept coming up were, 
``let's go back to court.''
    And, Mr. Gerst and Mr. Johnson, especially, ``let's let the 
courts handle this.'' ``Let's go to Rule 11.'' ``Let's look at 
issues of discovery.''
    Just yesterday in this room, we were having another hearing 
on another issue that was not involved in this, and one of the 
issues was changing discovery practices, changing this issue, 
and using Rule 11. And my question was, why do not we use Rule 
11 to fix this?
    A retired-now judge basically said, as judges, we do not 
like to do this. It takes our time, and we do not have--it 
would consume and also being the standard of also punishing 
litigants is too high.
    Looking through all of your testimony, you come up to some 
type at least of a discussion on procedure Rule 11 whether it 
be discovery or others.
    Sort of real quickly, and sort of not feeding off of each 
other, but if this is what we are hearing from judiciary, and 
this is court and IP, so there is a court aspect here as well. 
If we are hearing this problem, we can be saying ``this is a 
solution,'' but in the end, we are putting judges in a position 
where they are going to throw their hands up and say we have a 
problem with this anyway.
    So I would like to hear somebody talk about that. Feel 
free. Have at it.
    Mr. Boswell. Well, I believe, Congressman, I believe that 
while it is important that judges maintain discretion, I think 
there are some hard and fast rules that it would be appropriate 
for Congress to implement, which takes the ball out of judges' 
hands and gives litigants certainty going in, so that they can 
put that into their decisionmaking as to whether they want to 
settle a case, whether they want to sue at all to start with, 
whether they want to proceed through trial. Because as it 
stands right now, particularly in the case of patent trolls, 
they really have nothing to lose if they lose.
    And we would like to see that changed in some way so that 
it is more balanced, so there is not complete disincentive to 
take a case to trial.
    Mr. Collins. Mr. Johnson, do you disagree?
    Mr. Johnson. No, I think we are in agreement. Most places 
in the world, the loser pays. Here it is extraordinarily rare. 
There may be a middle ground that the courts could be 
instructed to use.
    I think you are right, though. My experience in dealing 
with the judiciary is they are reluctant to want to get in to 
deciding whether a defense that lost was meritorious or not.
    Mr. Collins. Mr. Gerst?
    Mr. Gerst. Congressman, if I could just say one additional 
point.
    Leaving aside the whole NPE issue, the risk that you do run 
with these rules is it makes it much harder to assert patents 
for anybody. And the issue I pointed to in my testimony about 
companies that everybody here loves--operating companies, small 
and midsize--they do not have the ability to assert their 
patents to technology. And if you include in these rules things 
like loser pays or shifting discovery costs, it is going to 
make it much harder for those entities to assert their patents 
as well.
    Mr. Collins. Okay, let me just change it a little bit. It 
has been talked around a little bit, but I don't think it's 
actually been discussed a good bit.
    But one of the issues coming in here is the quality of 
patents. And the issue of quality patents is saying it can be 
looked at in a better way.
    In your opinion, is a solution to curb some of the abusive 
litigation, could it be drawn back to a quality of patent 
issue? Is that something that we have looked at and has there 
been enough time to actually see that?
    Mr. Chandler, why don't you start?
    Mr. Chandler. Certainly, over time, the reforms enacted in 
the America Invents Act will result in higher quality patents.
    Mr. Collins. Let me stop you right there. Have we given it 
enough time?
    Mr. Chandler. No. There are steps that need to be taken. 
There are 20 years' worth of backlog of patents that need to be 
properly subject to review.
    And one of the things we could do is have plaintiffs 
encouraged to stay litigation if the patent office found there 
was good cause to reexamine their patents. Right now, they are 
able to push forward with their cases, impose the costs, and 
extract settlements, even if the patent office has 
preliminarily found the patents invalid.
    Mr. Collins. Legal extortion is what you are sort of 
getting at there.
    I will say it if you do not.
    In a sense. And I am not saying they are all invalid.
    And I think the problem, and I think Mr. Watt actually 
explained it, is actually getting to those that have valid 
claims, who are they and who are they not, and then dealing 
with it in a format in which we can move forward and not tie up 
companies' hands and not tie up these issues, and deal with the 
ones who actually have a legitimate concern and complaint.
    So there is a lot more to discuss here. I appreciate you 
being here.
    Mr. Chairman, I yield back.
    Mr. Marino. Thank you.
    I am going to take advantage of my couple minutes to ask 
some questions. I am in the habit of just waiting and going 
last, because I have to be here or the Chairman has to be here.
    But I think my colleague, it looks like he is going to sit 
there and listen to me. Thank you.
    Mr. Collins. I will be right here with you.
    Mr. Marino. We touched briefly on patent privateers, but I 
want to go into it in a little more detail. And we know what 
that patent privateers are companies that outsource their 
patent lawsuits. They are PAEs.
    What is the scope of this? And should such behavior be 
subject to FTC and even, I think more importantly, because I 
was a former United States attorney, DOJ antitrust scrutiny for 
anticompetitive behavior?
    Mr. Rao, would you please respond to that?
    Mr. Rao. Thank you for the question.
    So I think the question about whether or not there is a 
anticompetitive issue with outsourcing your patent enforcement, 
it is a complicated one.
    I think the first issue is patents by themselves is a 
monopoly, and that is anticompetitive by its nature. But it is 
a constitutionally granted monopoly. So there is always an 
anticompetitive aspect of patents.
    And in the case where universities or small inventors want 
to have licensing programs and have technology transfer 
licensing programs, take their patents and license them and 
look to get rewards form that, that tends to seem of 
procompetitive way of getting their technology out there.
    I think that when you stop and look at the bigger 
aggregators who are just out there buying patents by the 
thousands, and then basically walking into your office and 
saying we have 100,000 patents, and you probably infringe a 
couple of them, so pay us, I think there is an aspect of that 
that we need to look at.
    Mr. Marino. Thank you.
    Let us move to discovery, and anyone of you can respond to 
this.
    What do we do about jurisdictions? And judges control their 
own courtroom. They can actually hand out additional rules that 
one has to follow, so if you are in another jurisdiction, you 
better do some studying up on what the judge requires.
    But what we do about the situation that happens a great 
deal of time where a judge allows unlimited discovery?
    Does Congress address that? Or do we seriously say to the 
judicial system, you have to make some changes here.
    Anyone or all of you?
    Mr. Johnson?
    Mr. Johnson. When the Federal Circuit Court of Appeals was 
established in 1982, it is my understanding that the discussion 
was had as to whether or not it should have the authority to 
mandate rules of practice in patent cases, and the conclusion 
was that it should not be able to disturb the rules of the 
regular circuits on procedural matters.
    So while Judge Rader has been very active and the patent 
pilot courts program will be effective, Congress has not given 
the Federal Circuit the authority to promulgate local rules 
that would be applicable across all districts.
    So at this point, if you are in a place where you have a 
particular local set of court rules, you are stuck with them. 
So the way litigants usually handle that is to try to get the 
case in a place where they like the rules.
    Mr. Marino. My point exactly.
    Anyone else want to address that matter, because I do have 
a couple other questions?
    Okay, so the next one, Ms. Dhillon, and of course anyone 
else, how often do we see a court dismissing defendants in 
these types of cases, if there is a litany of them?
    So, Ms. Dhillon, could you respond to that, and anyone 
else?
    Ms. Dhillon. That certainly does happen, and we have been 
successful in being dismissed from cases. But I think it goes 
to the point you made previously, which is, unfortunately, that 
usually happens after we have incurred a great deal of cost in 
the discovery process.
    Mr. Marino. Right. Okay.
    Anyone else? Mr. Boswell?
    Mr. Boswell. As I highlighted earlier in my testimony, the 
issue is not necessarily can you get out, but if you cannot get 
out until the end, it is really somewhat of a moot point. You 
have already lost.
    If the judge will not hear dispositive motions until all 
the discovery is done, in some ways, it does not matter, 
because you have already lost the case.
    Mr. Marino. I am going to ask you to look into a crystal 
ball here.
    We get this legislation passed. It is on the books. It is 
signed, sealed, and delivered. What do you foresee out of this 
legislation happening?
    Do you understand my question?
    Mr. Gerst. Which legislation?
    Mr. Marino. Legislation where we improve what we have 
already done in the reform act. I mean, this is a never-ending 
process. At what point do we stop and draw the line and at what 
point to we say enough is enough?
    So, please, anyone want to respond to that?
    Mr. Rao. I think if we pass something like the SHIELD Act 
or a fee-shifting bill, you would see a number of these patent 
assertion entities drop fairly dramatically.
    I mean, it has been a new phenomenon. I feel like people 
have found a litigation business model that works for them 
right now. If we correct that behavior, they will leave this 
field and find some other nonpatent-related field to employ 
themselves.
    But I think if you change the incentives--it is an economic 
problem--if you change the incentives, I think you will see the 
number of litigations go down.
    Mr. Marino. Anyone else?
    Well, ladies and gentlemen, I want to thank you. This 
concludes today's hearing, and I want to thank all of the 
witnesses for being here.
    [Whereupon, at 2:26 p.m., the Subcommittee was adjourned.]
                            A P P E N D I X

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               Material Submitted for the Hearing Record


























                                






                                

Material submitted by the Honorable Jason Chaffetz, a Representative in 
 Congress from the State of Utah, and Member, Subcommittee on Courts, 
                Intellectual Property, and the Internet




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       Response to Questions for the Record from Mark Chandler, 
     Senior Vice President and General Counsel, Cisco Systems, Inc.






                                

 Response to Questions for the Record from Janet L. Dhillon, Executive 
   Vice President, General Counsel and Corporate Secretary, JCPenney 
                             Company, Inc.








                                

        Response to Questions for the Record from John Boswell, 
     Senior Vice President and General Counsel, SAS Institute, Inc.










                                

      Response to Questions for the Record from C. Graham Gerst, 
                   Partner, Global IP Law Group, LLC














                                

     Response to Questions for the Record from Philip S. Johnson, 
         Chief Intellectual Property Counsel, Johnson & Johnson




















                                

          Response to Questions for the Record from Dana Rao, 
 Vice President of Intellectual Property and Litigation, Adobe Systems






                                 
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