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




  PATENT REFORM IMPLEMENTATION AND NEW CHALLENGES FOR SMALL BUSINESSES

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

                                HEARING

                               before the

                      COMMITTEE ON SMALL BUSINESS
                             UNITED STATES
                        HOUSE OF REPRESENTATIVES

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                               __________

                              HEARING HELD
                              MAY 15, 2013

                               __________



[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


            Small Business Committee Document Number 113-017
              Available via the GPO Website: www.fdsys.gov



                                _____

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                   HOUSE COMMITTEE ON SMALL BUSINESS

                     SAM GRAVES, Missouri, Chairman
                           STEVE CHABOT, Ohio
                            STEVE KING, Iowa
                         MIKE COFFMAN, Colorado
                       BLAINE LUETKEMER, Missouri
                     MICK MULVANEY, South Carolina
                         SCOTT TIPTON, Colorado
                   JAIME HERRERA BEUTLER, Washington
                        RICHARD HANNA, New York
                         TIM HUELSKAMP, Kansas
                       DAVID SCHWEIKERT, Arizona
                       KERRY BENTIVOLIO, Michigan
                        CHRIS COLLINS, New York
                        TOM RICE, South Carolina
               NYDIA VELAZQUEZ, New York, Ranking Member
                         KURT SCHRADER, Oregon
                        YVETTE CLARKE, New York
                          JUDY CHU, California
                        JANICE HAHN, California
                     DONALD PAYNE, JR., New Jersey
                          GRACE MENG, New York
                        BRAD SCHNEIDER, Illinois
                          RON BARBER, Arizona
                    ANN McLANE KUSTER, New Hampshire
                        PATRICK MURPHY, Florida

                      Lori Salley, Staff Director
                    Paul Sass, Deputy Staff Director
                      Barry Pineles, Chief Counsel
                  Michael Day, Minority Staff Director






















                            C O N T E N T S

                           OPENING STATEMENTS

                                                                   Page
Hon. Sam Graves..................................................     1
Hon. Nydia Velazquez.............................................    10

                               WITNESSES

Dennis D. Crouch, Associate Professor of Law, University of 
  Missouri Law School, Columbia, MO..............................     2
Jeff Grainger, Managing Partner, The Foundry, LLC, Menlo Park, 
  CA, testifying on behalf of the Medical Device Manufacturers 
  Association....................................................     4
John R. Thomas, Professor of Law, Georgetown University, 
  Washington, DC.................................................     6
Mark Grady, Founder and President, INdigital Telecom, Fort Wayne, 
  IN.............................................................     8

                                APPENDIX

Prepared Statements:
    Dennis D. Crouch, Associate Professor of Law, University of 
      Missour Law School, Columbia, MO...........................    22
    Jeff Grainger, Managing Partner, The Foundry, LLC, Menlo 
      Park, CA, testifying on behalf of the Medical Device 
      Manufacturers Association..................................    31
    John R. Thomas, Professor of Law, Georgetown University, 
      Washington, DC.............................................    36
    Mark Grady, Founder and President, INdigital Telecom, Fort 
      Wayne, IN..................................................    39
Questions for the Record:
    Questions and Responses Submitted for the Record by Rep. 
      Bentivolio to Mr. Grainger.................................    44
    Questions and Responses Submitted for the Record by Rep. 
      Bentivolio to Mr. Thomas...................................    49
    Questions and Responses Submitted for the Record by Rep. 
      Bentivolio to Mr. Crouch...................................    54
Additional Material for the Record:
    National Retail Federation - NRF.............................    62

 
  PATENT REFORM IMPLEMENTATION AND NEW CHALLENGES FOR SMALL BUSINESSES

                              ----------                              


                        WEDNESDAY, MAY 15, 2013

                  House of Representatives,
               Committee on Small Business,
                                                    Washington, DC.
    The Committee met, pursuant to call, at 1:05 p.m., in Room 
2360, Rayburn House Office Building, Hon. Sam Graves [Chairman 
of the Committee] presiding.
    Present: Representatives Graves, Luetkemeyer, Mulvaney, 
Hanna, Schweikert, Bentivolio, Rice, Velazquez, Chu, and 
Schneider.
    Chairman Graves. Good afternoon. We will go ahead and call 
the hearing to order. The Ranking Member is going to be a 
little bit late but she said for us to go ahead and get started 
so we didn't delay you all. But I want to thank all of our 
witnesses for taking time away from their jobs and making the 
trip to Washington. Some of you have come a long way, and we 
obviously look forward to your testimony.
    Since the founding of this great Nation, intellectual 
property rights have been protected as a way to inspire 
innovation and perpetuate economic growth. Our Founding Fathers 
enumerated this within our Constitution. And last Congress, we 
passed the America Invents Act, which represents the most 
significant reform to the American patent system in over 50 
years.
    The AIA included historic changes such as moving to a 
first-to-file system, as well as revisions in patent fees and a 
post-grant review process. These reforms help strengthen our 
patent system to ensure that the United States remains the 
world leader in innovation.
    In the patent arena, small firms play a critical role in 
developing innovation, producing 16 more patents per employee 
than big businesses do. Obtaining a patent is equally critical 
for small businesses in their ability to attract startup 
capital and grow their businesses. According to the United 
States Patent and Trademark Office, it takes more than 31 
months to process a patent application. The AIA was passed to 
help reduce this backlog while also improving the overall 
quality and strength of the patent system. For small firms, 
this is vitally important and it helps expedite the development 
of businesses and, in turn, aids in creating new jobs.
    However, as expected with major policy initiatives, there 
will be challenges and some obstacles. As Chairman, I have 
frequently heard from inventors and small businesses about the 
changes to the patent system and opportunities to address the 
new challenges.
    Despite the substantial progress made under the AIA, many 
firms have expressed concerns about patent assertion entities, 
PAEs, or patent trolls, as they are often called. Patent trolls 
attempt to bring frivolous patent claims against all types of 
businesses, which hinder innovation and economic growth. Recent 
studies found that the direct cost of these litigation cases 
was approximately $29 billion in 2011, with 55 percent of those 
costs attributed to firms with less than $10 million in 
revenue. For small businesses, the costs of litigation are 
particularly harmful, and it turns their limited monetary 
resources away from building that next great product or 
service, whatever that may be.
    While it is important that those with valid infringement 
claims protect their intellectual property, one must carefully 
examine if merely receiving a demand letter will cause a small 
company to shut its doors rather than challenged the validity 
of the claim to ensure its merits.
    With that, again, I appreciate all of you being here, and 
we will start right out with our first witness. Our first 
witness is going to be Dennis Crouch.
    Mr. Crouch is an Associate Professor at the University of 
Missouri School of Law, where he specializes in patent law. In 
addition to his work educating new legal minds, Mr. Crouch also 
authors Patently-O, which Business Week called the most widely 
read patent blog. As a leading expert in the patent community, 
we appreciate you being here today, and we look forward to 
hearing your testimony.

  STATEMENTS OF DENNIS D. CROUCH, ASSOCIATE PROFESSOR OF LAW, 
 UNIVERSITY OF MISSOURI SCHOOL OF LAW; JEFF GRAINGER, MANAGING 
PARTNER, THE FOUNDRY, LLC, TESTIFYING ON BEHALF OF THE MEDICAL 
DEVICE MANUFACTURERS ASSOCIATION; JOHN R. THOMAS, PROFESSOR OF 
    LAW, GEORGETOWN UNIVERSITY; AND MARK GRADY, FOUNDER AND 
                      PRESIDENT, INDIGITAL

                 STATEMENT OF DENNIS D. CROUCH

    Mr. Crouch. Thank you, Mr. Chairman, for having me, ranking 
member, Members of Congress. Usually we think of patents as a 
form of intellectual property that is a form of property 
rights. But small businesses often see the patent system more 
as a set of regulations. And in fact, really, these days it 
might be called a morass of regulations. That is, regulations 
in terms of obtaining patent protection, enforcing those 
patents, a morass of difficulty in terms of figuring out how to 
make a product without infringing patents, and as the chairman 
mentioned, the difficulty in terms of litigating and 
challenging patents and fending off litigation from patent 
trolls.
    Now, regulations require expertise, they require contacts, 
they require money. And all of those are elements that are in 
short supply among small businesses. And so it is no surprise 
that small businesses are complaining about the patent system. 
Now in my view, the greatest problem and the keys to any kind 
of solution, whether it be legislative, through the courts, or 
through the Patent Office, is in thinking about how to reduce 
this regulatory burden. And in particular, I think the greatest 
problem and the best way to address this is by thinking about 
clarity and transparency in the patent system.
    We have a problem with the patent system today in that 
innovators, patent attorneys, and patent applicants have a 
strong incentive to hide the ball when they are filing for 
patent protection. That is, in essence, to disguise or not 
fully disclose or point out the particular innovation that they 
are trying to protect and draft patent claims that are intended 
to delineate the scope of their property rights, but in fact, 
do so in a way that is ambiguous that leads to some confusion 
down the line.
    And so my proposal and my idea for the best way to address 
the patent system is to figure out ways and focus especially at 
the Patent Office on clarity in patent rights, clarity in the 
scope of rights, clarity in defining who owns patent rights, 
and clarity in defining exactly what innovation has been 
developed. With that clarity, I certainly believe we can move 
toward a system where strong patent rights will be available, 
it will be easier to determine bad patents, invalid patents, 
and invalidate those. And although no with one enjoys paying 
licensing fees, it is a much more straightforward path when you 
understand the scope of a patent and it is easy to tell that 
your particular project does, in fact, infringe that patent.
    Now I want to change gears just one minute and think about, 
in particular, small businesses. Now in preparation for this 
Committee hearing, I did some amount of research in terms of 
patenting amongst small business entities and I found one 
interesting, although perhaps not entirely surprising, finding 
that the percentage of patents being obtained by small 
businesses in this country has dropped significantly over the 
past 15 years or so from about 30 percent; that is, 30 percent 
of issued patents in 2000 were issued to companies or 
individuals designated as small entities. Today, that number is 
down to about 20 percent. So it dropped from 30 percent to 20 
percent.
    Now in fact, in looking at these numbers more particularly, 
I found that the decrease was not actually a decrease in the 
number of patents being filed by small entities, but just that 
large entities greatly increased their filings. And so, in a 
sense, it is not like they are falling behind by staying 
steady.
    My view, although I did not develop particular data on 
this, my hunch is that this decrease in patenting is more a 
result of the regulatory burden, the difficulty of obtaining 
and enforcing patent rights, than it is on any lack of 
innovation among small companies. And I am sure we will get 
more testimony on that front.
    Now there are two particular points of data that also come 
out from this that have to do, in a sense, with American 
ingenuity. One is that the vast majority of small entity filers 
in the United States are United States-based small companies, 
whereas the majority of large entities that are filing for 
patent protection in the U.S. are actually foreign entities. 
And what that means is that any focus, any help that is given 
to small entities has a particular effect that is primarily 
addressed toward U.S. companies.
    Although my students would understand I could go on for a 
long time, but I will stop here and look for any questions as 
we move on.
    Chairman Graves. Thank you, Mr. Crouch.
    Our next witness is Jeff Grainger. Mr. Grainger is the 
managing partner for The Foundry, which is a medical device 
incubator located in Menlo Park, California. In this capacity, 
Mr. Grainger helps transition numerous innovative ideas into 
successful medical device startups. In addition, Mr. Grainger 
is a patent attorney and inventor, holding over 30 patents 
himself. He is testifying on behalf of the Medical Device 
Manufacturing Association. I thank you for coming all the way 
from California.

                   STATEMENT OF JEFF GRAINGER

    Mr. Grainger. Thank you. I want to thank Chairman Graves 
and the other Committee members for the opportunity to testify 
today. I am a patent attorney and entrepreneur and have worked 
continuously in startup companies for the past 20 years, almost 
entirely in the medical device field. I currently work for The 
Foundry, which is a medical device incubator in Menlo Park, 
California. What we do is develop new medical technologies. We 
prototype them, we test them. We file for patent protection. 
And then we start new companies to pursue those technologies 
with venture capital funding. We have started 15 companies in 
the past 14 or 15 years, and our companies have created not 
only hundreds of jobs and built value for their investors but 
also improved the lives of thousands of patients who have heart 
valve disease, who have hypertension, or suffered from stroke.
    While the dialogue concerning patent reform has been at 
times dominated by forces that wish to weaken the patent 
system, I am thankful to be able to speak today to help you 
hear another view, which is that of entrepreneurial companies 
that bring new medical treatments to Americans. We depend upon 
a strong patent system that provides fast and efficient 
examination, discourages frivolous patent challenges, and 
imposes serious sanctions on infringers.
    The United States leads the world in medical device 
innovation, and a major source of this innovation is small 
entrepreneurial companies. These companies must raise 
substantial capital in order to develop their products, perform 
clinical studies, and obtain the regulatory approval, all 
before a single device is sold. Investments of more than $50 
million, timelines of more than 10 years from invention to 
commercialization, are common.
    Understandably, investors in medical devices are intensely 
concerned with the ability to obtain strong patent protection. 
They know that after spending the money to blaze the trail to 
bring a new product to market, there will be some period of 
protection before the product can be knocked off by 
competitors. Any change to the patent system that impedes our 
ability to get patents or that weakens the protections that are 
conferred by patents would be a serious detriment to our 
ability to raise the money we need to start medical device 
companies.
    The America Invents Act implemented some significant 
changes to the U.S. patent system. While it is too early to 
tell whether the AIA has been successful as a whole, several 
aspects of the Act clearly improve the patent system for 
innovators, who depend upon a predictable, efficient, and 
competent patent process. The change to first-inventor-to-file 
creates more clarity and certainty by removing nonpublic 
information from the determination of who is entitled to a 
patent. Post-Grant and Inter-Parties Review improve upon 
reexamination by providing a process under specialized judges 
for overturning invalid patents, while including estoppel 
provisions, which ensure that challengers will think twice 
before launching an attack.
    Of all these changes, however, the Track One prioritized 
examination has probably had the biggest impact on our ability 
to get new companies funded. Under Track One, we can get a 
patent application allowed within 1 year. We are now able to 
approach venture capital firms with issued patents in hand, 
rather than a collection of filed applications. As a result, we 
are more likely to get a our companies funded and we spend less 
time and less money getting through negotiations and the due 
diligence process.
    I would like to make a comment about something that did not 
make it into the law. While the AIA gave the Patent Office the 
authority to set user fees and generate the revenues it needs, 
the law fell short in failing to prohibit diversion of these 
revenues. So long as revenue diversion remains a possibility, 
the PTO's budget will be uncertain and the office will be 
unable to do the hiring, the training, and the infrastructure 
improvements that must be done to improve the quality and the 
efficiency of the patent process.
    If there is one issue in which all stakeholders in the 
patent system should be aligned, it is the funding of the 
Patent Office. A fully equipped Patent Office cannot only be 
faster and more efficient, but it can focus on improving the 
quality and rigor of patent examination so that those patents 
which are granted have undergone rigorous scrutiny and are 
appropriately limited in scope. This will ensure that patent 
rights are not unfairly wielded to the detriment of innovation, 
and I would urge the Committee to make this prohibition on fee 
diversion a priority.
    In sum, the extraordinary innovation in medical device 
technology is largely the work of small venture-backed 
companies that depend upon strong patent protection to raise 
the funds needed to bring medical devices to commercialization. 
Streamlining and accelerating that examination process, 
improving patent quality, discouraging frivolous patent 
challenges, and imposing serious consequences on infringers are 
essential components of a system that protects and encourages 
this innovation.
    The AIA takes significant steps toward achieving these 
goals, and it should be given a chance to work. However, we 
must fully fund the Patent Office and end diversion of PTO fees 
so it can build an organization that is faster, more efficient, 
and highly focused on issuing quality patents.
    Finally, in addressing the problem of patent assertion 
entities, we must avoid diluting the important rights conferred 
by a patient upon which innovators rely. Rather, we should 
focus on improving the quality and rigor of the patent process.
    It has been an honor to speak to you today. I thank you 
again for inviting me to testify.
    Chairman Graves. Thank you, Mr. Grainger.
    Our next witness is John Thomas who is a professor at 
Georgetown University Law School, where he teaches a course on 
patent law and has published numerous articles and books on the 
subject of intellectual property law. He has served as a 
visiting scholar at the Congressional Research Service for the 
past decade and was named the inaugural Thomas Alvin Edison 
Visiting Scholar at the U.S. Patent and Trademark Office in 
2011. He formally served as a visiting fellow at the Max Planck 
Institute for Foreign and Comparative Patent, Copyright, and 
Unfair Competition Law in Munich, Germany, and is a research 
scholar at the Institute of Intellectual Property in Tokyo, 
Japan.
    Welcome.

                  STATEMENT OF JOHN R. THOMAS

    Mr. Thomas. Thank you, Mr. Chairman and distinguished 
members of the Committee. It is great to have the opportunity 
today to testify before you about patent reform implementation 
and new challenges for small businesses.
    First, I want to thank the Committee and give my 
congratulations to the Committee for enacting the AIA. I think 
it has been a very positive step forward for the patent system. 
I am grateful. When I teach, I no longer have to say here is 
what the rest of the world does with respect to best patent 
practices and here is what we do in the United States, on the 
other hand. So those days are gone. And I think the Committee 
did a wonderful job of protecting the interest of small 
businesses by maintaining the small business discount, the 
small entity discount at the PTO, and introducing a micro 
entity discount that is even steeper for the aid of small 
businesses.
    For example, the fee to file a patent application for a 
micro entity is only $70. So this committee has represented 
small firms very well.
    Consideration of patent reform implementation in large 
measure involves a consideration of what is going on at the 
USPTO. And as someone who has been critical of the agency at 
times in the past, I do want to report a very highly favorable 
impression about what the agency has done. I think they have 
met the deadlines, they have implemented the law in a timely 
and transparent manner, and they deserve a lot of 
congratulations for doing that.
    I further observe that the agency has reduced its first 
office action pendency to 18.7 months and has cut its inventory 
of filed but unexamined applications to under 600,000 cases, 
which, again, are pretty impressive accomplishments given its 
implementation of the AIA as well. The USPTO also has a large 
number of programs to help small businesses. There is an Office 
of Innovation and Development--it is right as you go in the 
agency in the Madison Building--that helps small businesses. 
There is an Ombudsman, an Inventors' Assistance Center. And the 
agency is very active in the conferences to help independent 
inventors.
    Obviously, a lot of these programs are in jeopardy, or at 
least being scaled back, because of sequestration. And I would 
like to associate myself with the comments of Mr. Grainger 
about the importance of the agency getting the funding and how 
important that was in the enactment of the AIA. Obviously, the 
Office of Management and Budget has reportedly reasoned that 
the fees that the USPTO collects are, in fact, subject to 
sequestration, which for many of us was a surprising ruling. We 
will see what impact that has on the ability of the USPTO to 
maintain an environment for innovation that takes us as a world 
leader.
    The cost of certain USPTO post-grant proceedings is another 
area of concern for small businesses. The new Inter Parties 
Review proceeding costs at least $8,000. The minimum fee for 
Post-Grant Review is $12,000. As you know, these are mechanisms 
for companies to challenge patents at the USPTO in an 
administrative opposition system that gets them out of court 
and also enlists the expertise of the agency. Obviously, these 
are high-cost proceedings. So one issue is, is it pricing small 
businesses out.
    Patent trolling remains another big issue for businesses of 
all sizes in the United States. In the 113th Congress, there 
are two bills right now that seem to be addressed toward patent 
trolling. One is the SHIELD Act that would create a fee 
shifting system where the loser would pay the attorney fees of 
the victor in patent litigation. Fee shifting seems to be a 
fairly good mechanism. It is used abroad, where trolling seems 
to be less of a problem. But it also might discourage small 
businesses from bringing meritorious cases, because patent 
litigation is notoriously uncertain. So if they have to pay the 
loser's fees, they may not be as willing to assert their 
rights.
    Another bill, the Patent Quality Improvement Act, would 
essentially expand the transitional program for covered 
business method patents, increasing the array of patents to 
which it applies and getting rid of its sunset provision. 
Again, harnessing the expertise of the Patent Office, keeping 
people out of the courts seem like good ideas. Of course, one 
thing is when patents survive these proceedings, advocates can 
argue, Look, this patent was initially allowed by the Patent 
Office, and they looked at it again, and it is still a valid 
right. That sometimes can make patents a little more 
troublesome. They are galvanized by going through again.
    So thinking about how to deal with patent trolling is a 
complicated problem. I am not sure it is amenable to a quick 
fix. It is something that I think is systematic with our patent 
system.
    Just one more issue to raise and a concern to small 
business is the so-called integrity loophole over the respect 
of post-grant proceedings. Post-grant proceedings at the USPTO, 
while they are pending, sort of place a cloud of title on the 
patent. While this thing is being issued, it is a moving 
target, is it going to survive? What are the claims going to 
look like? One concern for small businesses, if opponents of 
the patent vote fraud or engage in misconduct in requesting the 
proceeding, what remedy is available to small businesses whose 
patents have been challenged for this period of time? Often, 
the patents come out many years later, unscathed, but those 
years don't come back, technology has moved on. Recent judicial 
holdings have said there is no remedy for patent holders.
    So one thing Congress may wish to consider is legislation 
that would allow an aggrieved patent holder to obtain relief 
against parties that have challenged their patients in an 
inappropriate way.
    Mr. Chairman, members of the Committee, I appreciate the 
invitation to come here today, and I look forward to working 
with you as you consider patent reform issues.
    Thank you.
    Chairman Graves. Thank you, Mr. Thomas.
    Our next witness is Mark Grady. Mr. Grady is founder and 
president of INdigital Telecom in Fort Wayne, Indiana. 
INdigital was formed in 1995 and was selected by the Indiana 
Wireless 911 Advisory Board to build an innovative, new e-911 
network to bolster public safety. As a patent holder himself, 
Mr. Grady understands the benefits and challenges still 
existing for small, innovative companies under the new patent 
system.
    Welcome, Mr. Grady, and thanks for coming in.

                    STATEMENT OF MARK GRADY

    Mr. Grady. Good afternoon, Chairman Graves and Ranking 
Member Velazquez. Members of the Committee, thank you for 
having me today. I am Mark Grady, and I will tell you a little 
bit about our company. INdigital operates in rural areas of 
Michigan, Ohio, and Indiana. We serve the public, many of whom 
are represented by members on this committee. Thank you for 
inviting me to share my small business perspective for the 
reformed patent system. My full testimony is on file and I hope 
you find it useful in conjunction with these brief remarks 
today.
    INdigital Telecom is a specialized type of telephone 
company, a 911 system service provider. Wireless, Voice over 
IP, and legacy telephone companies send 911 calls from their 
customers to our network, and we make sure these calls are 
connected to the right local 911 authority so that emergency 
help can arrive as soon as possible. 911 services are currently 
undergoing a revolution in technology. Public safety, homeland 
security, and first responders are all moving from legacy 
systems created the 1970s to modern digital and Internet-based 
systems. You may have heard these called Next Generation or 
NG911.
    In the race to better create NG911 systems, small business 
innovators like INdigital face a number of IP-related 
challenges. We need a strong patent system to help us monetize 
our inventions. For this reason, the reforms of the American 
Invents Act have helped make applications more affordable and 
changes such as first to file and provisional patent concepts 
make the decision to file a patent easier. We look forward to 
other refinements that will raise patent quality.
    Even so, we are not patent experts and INdigital is not 
patent-centric. Our business succeeds by putting a working 
product or service into our customers' hands, not just by 
filing patents whenever technically feasible. For our small 
business, the biggest challenge today is the inappropriate 
assertion of poor quality, overly broad patents.
    As public safety providers transition to NG911, we see 
aggressive patent assertion happening in an unexpected place--
against the public safety community and 911. For example, a 
company that INdigital works with acquired another entity that 
owns a patent issued many years ago. This happened before the 
patent quality improvements of the AIA. The concepts in the 
patent are very common in telecommunications and not at all 
specific to public safety. However, this company has unleashed 
a patent assertion firm to seek enforcement against many 
providers, including INdigital. The old patent had its 
allegation based on a simple notion that INdigital provides 911 
service.
    Letters have been sent to our existing and potential NG911 
customers, making the claim that INdigital is, or soon will be, 
infringing on the patent. In one case, a potential customer was 
forced to put its project on hold and start over in protective 
response to getting the letter.
    We are increasingly concerned this will become a trend, 
particularly as new technologies already commonly in use by the 
public such as text messaging and sending pictures are being 
incorporated into NG911 systems. The recent terrorist bombing 
in Boston is a horrific and unfortunate example of how public 
safety and first responder access to video and related 
information directly from the public could and did greatly 
enhance emergency response in homeland security, thereby saving 
lives and property.
    We need to work hard to implement this kind of technology 
into new NG systems, but first, we need this Committee to help 
level the playing field as it relates to 911 and intellectual 
property disputes.
    To begin, patent law should recognize both 911 and NG911 as 
essential government services. All 911 patent litigation should 
be managed under an existing patent statute, 28 U.S. Code 
Section 1498. This will help defer frivolous lawsuits while 
ensuring that legitimate patent holders can monetize their 
patents.
    Next, every patent complaint should contain a detailed 
explanation of the infringement claims. It is simply unfair to 
burden small businesses like ours with patent allegations that 
are no more substantive than a TV commercial.
    Whatever other conclusions you have from this hearing, our 
request is that this committee take prompt action to address 
these frivolous 911-related lawsuits while protecting valid 
patent holders.
    Thank you very much for your time, and I look forward to 
your questions.
    Chairman Graves. Thank you very much. We will start our 
questions with Mr. Bentivolio.
    Mr. Bentivolio. Thank you, Mr. Chairman.
    Gentlemen, before we discuss the merits of the AIA as it 
concerns small business, I would like to begin with a more 
fundamental question. The AIA changed our system from a first-
to-invent system to a first-to-file system. I fear we have 
overlooked a basic question here. Article 1, Section 8 Clause 8 
of the Constitution is the foundation upon which our entire 
patent system rests. And the language of the clause is as clear 
as it is plain: ``the Congress shall have the power to promote 
the progress of science and useful arts by securing for limited 
times to authors and inventors the exclusive right to their 
respective writings and discoveries''.
    Please note the terms ``inventors'' and ``discoveries'' 
does not say the first person who files. And nobody could 
possibly believe the founders intended the word ``inventor'' to 
mean anything other than he or she who discovers a given 
invention. The dictionary is clear what a discovery is. Once 
someone else has discovered something, it cannot be discovered 
again.
    My question to the three patent lawyers here is this: If 
you were tasked to defend the constitutionality of the AIA in 
court, when the AIA clearly takes the right of patent away from 
the inventor to instead upon the first person to file, even 
when it can be determined that or she is not the first 
inventor, could you do it, and if so, how?
    Mr. Thomas. I think the current system is highly 
defensible, sir, the reason being it is the first inventor to 
file. So it is someone who has invented the technology herself 
and has submitted an application. Even prior to the AIA, if I 
invented and kept something as a trade secret for years, and 
Professor Crouch then filed, I would not get the patent and 
Professor Crouch would. So in fact, the patent law has long 
been the case in the United States that the patent proprietor 
is not necessarily the first inventor in the manner that you 
seek. The bottom line is it has to be the inventor herself and 
someone who has not derived it from another who seeks the 
patent. Thus, I believe that the first-to-file system comports 
with our Constitution.
    Mr. Bentivolio. Right. But you can't just change the 
meaning of the word ``inventor'' in the Constitution 224 years 
later. The Constitution doesn't even use the word ``patent.'' 
Clause 8 specifically says Congress's job is to protect the 
discoveries of inventors. You can't just say an inventor now 
means he or she who files. In Kendall v. Windsor (1859), the 
Supreme Court held that only writings and discoveries of 
authors and inventors may be protected.
    You can think this over and respond on the record. My time 
is short and I would like to talk about solutions.
    Mr. Thomas. Well, again, it seems to me that you have to be 
the first to file, but you actually have to be an inventor. So 
if I steal the invention from Professor Crouch and file, I am 
not an inventor and I won't get the patent. So I will stick to 
my guns on that one. Thank you.
    Mr. Bentivolio. I yield back my time. Thank you very much.
    Chairman Graves. Ms. Velazquez.
    Ms. Velazquez. Thank you, Mr. Chairman. Let me take this 
opportunity to thank all the witnesses for being here. I am 
sorry I got here late. I was in another meeting.
    I would like to address my first question to both Mr. 
Crouch and Mr. Thomas.
    This week, the Supreme Court ruled for Monsanto in a 
landmark case regarding its patent of a genetically modified 
soybean seed. It found that self-replicating products can be 
expansively protected from patent infringement. I would like 
for you to comment on the impact of this ruling.
    Mr. Crouch. I will start. When I think about Monsanto's 
patents on their Roundup-Ready genetically modified seeds, the 
kind of future impact for that technology in particular is most 
interesting, not because of the Supreme Court decision, but 
because over the next couple of years, and now I think less 
than 2 years, the patents covering those innovations will all 
expire. And what that means is that anyone then who would like 
to can genetically modify whatever plant they want to by adding 
those genes into those seeds.
    And so while Monsanto has really had that technology locked 
down for the past 20 years and not allowed kind of Roundup 
Ready tomatoes, Roundup Ready whatever crop you want, that is 
now potentially going to change, and that is going to have a 
dramatic marketplace effect and we just don't know where that 
is going to go.
    Ms. Velazquez. In terms of short term, do you think it will 
hurt consumers?
    Mr. Crouch. And I think that the Supreme Court decision, 
which was a 9-0 decision, was entirely expected. It would have 
been a very surprising decision, just because although the 
technology at issue are these genetically modified seeds that 
raise some political concern about whether that is patentable, 
the particular legal doctrine was quite clear, in my 
estimation, and so no one expected really that to be 
overturned.
    Ms. Velazquez. Okay.
    Mr. Thomas. My views are the same of those of Professor 
Crouch. I understand that self-replicating technologies raise 
complex issues of intellectual property and agricultural 
policy, and farmers have often cited the traditional right to 
save seed and replant. And they can continue to do so, just not 
with someone else's patented seed. Again, it is a time-relative 
right, as Professor Crouch said, and soon the other case is 
effectively going to be moot.
    Thank you.
    Ms. Velazquez. Mr. Crouch, the USPTO reduced the backlog of 
applications from 722,000 in December, 2011, to 607,000 in 
March of this year. During the same time, the number of 
examiners increased by 22 percent. Is it correct to assume that 
this decrease in the backlog is due to an increase in the staff 
or is there some speculation out there saying that it looks 
like they are applying a less rigorous approach when it comes 
to evaluating those applications?
    Mr. Crouch. I think that is a difficult question to fully 
answer. Certainly, the throughput at the Patent Office is a 
function of the number of examiners they have. Although the 
recent rise in examiners--when you have a new examiner, it 
takes some amount of time before they become kind of an 
efficient worker in that system.
    One thing that has happened at the Patent Office in terms 
of decreasing the number of pending unexamined applications is 
that the Patent Office has, in essence, shifted focus toward 
those to reduce that particular backlog, but there is a 
different stack that is growing. And those are the ones that 
are kind of partially examined.
    To answer your questions bluntly, though, there has been a 
significant increase in the percentage of patent applications 
that are issued as opposed to those being abandoned. And so 
that is absolutely true. And what is unclear is whether have we 
gone too far in that direction or not?
    Ms. Velazquez. Would you say that the bar has been lowered 
for patent approvals?
    Mr. Crouch. One thing that has certainly happened in the 
patent system is that this has very much become a major 
business and patents are more valuable than ever today. And so 
one reason that why there is a higher grant rate is that folks 
are putting more effort into the patents themselves and making 
better documents and thinking more about the patentability. But 
certainly, it is also true that a significant number of patents 
issued that should never have issued. And that is something 
that the Patent Office has to address. I think Mr. Grainger and 
Professor Thomas thought about that in terms of funding of the 
Patent Office in terms of ensuring that they are capable of 
doing this examining activity.
    Ms. Velazquez. Thank you.
    Mr. Grainger, you note the benefits that the expedited 
Track One process has for your companies. Could this two-track 
system create an advantage for those companies with deeper 
pockets while adversely impacting those unable to afford the 
higher fees, advocated with Track One?
    Mr. Grainger. Thanks for your question. So we are the 
companies without the deep pockets, usually. We are in that 
position. And so I feel that the cost of that added filing fee 
is not a deterrent to using that system, and it is well worth 
it. It is an extra $2,400 for a small entity. For a micro 
entity it might be less. But in any event, I think it is an 
investment definitely worth making. Actually, I think the 
larger companies probably aren't using it as much, would be my 
hunch. Dennis may have the data.
    Ms. Velazquez. That they are not.
    Mr. Grainger. Right. I think smaller entities tend to want 
to get their patents faster because they need the funding to 
move forward.
    Mr. Crouch. That is right. And to establish the credibility 
with investors and others. And the Patent Office did just 
reduce the fee down to $2,000. So it is now slightly cheaper.
    Ms. Velazquez. Thank you, Mr. Chairman.
    Chairman Graves. Mr. Mulvaney.
    Mr. Mulvaney. Thank you, Mr. Chairman. Thank you, 
gentlemen, for being here today.
    Let's talk a little bit about the AIA and the impact that 
it has had. Personally, for me, having come out of a real 
estate background, I always liked the first to file system 
because it brought a certain certainty. I think if we try to 
run a real estate-based economy under a program where the first 
to think they had acquired it but didn't tell anybody else 
about it would be an absolute disaster. So I was somewhat 
sympathetic to the folks who wanted to see the first-to-file 
system take place.
    Mr. Grainger, I will start with you because it sounds like 
you are probably as plugged into the small business community 
here as anybody. I got the impression from your testimony you 
think the impact on small business specifically of the AIA has 
been positive. Am I reading that correctly?
    Mr. Grainger. Absolutely. That is my experience and 
impression. There are many aspects to the AIA, but I think the 
clarity that you get from first inventor to file is excellent 
because we now know when we look at a patent application 
exactly when the priority of that document begins. We don't 
have to wonder whether did they invent some time earlier than 
that. So that clarity really helps us help our investors 
understand who is going to own this intellectual property.
    Mr. Mulvaney. I think you also mentioned that the number of 
patents applied for by small business entities has actually 
stayed the same or gotten slightly larger. Everybody else has 
gotten larger as well. So the percentage has gone down. But 
small businesses are still actively engaging in protecting 
themselves through applications for new patents.
    Mr. Grainger. I will say in my industry, that is the case. 
I also think in the information technology industry there has 
been so much focus on the importance of patents, for better or 
for worse, in the last few years, that now they are focusing 
much more on filing than in the past.
    Mr. Mulvaney. Ms. Velazquez asked you about some of the 
improvements at the U.S. Patent Office. Is that related 
directly to the passage of the AIA or is there a different 
justification or rationale behind that? That is to everybody. 
Have we have seen the backlog go down? We have seen the fast 
track systems used. Can the AIA take credit for these or would 
these be separate and apart from the passage?
    Mr. Crouch. I think in the time since the passage of the 
AIA, the biggest change to the Patent Office has been that they 
have had more money. And that was part of the AIA in that there 
was an immediate, I believe, 15 percent surcharge; they were 
able to add to fees. And then, in addition, since then they 
have been able to set their own fees in a way that essentially 
structures their budget in a way that allows them to examine 
this backlog of patents.
    Mr. Mulvaney. What I am hearing from Mr. Grainger is that 
addition of those fees have not deferred small businesses from 
continuing to take advantage of applying for patents. Is that 
correct?
    Mr. Grainger. That is certainly my experience.
    Mr. Mulvaney. Who was it that said--and I apologize I don't 
remember--the sequester has been ruled to apply to fees of the 
Patent Office. Was that you, Mr. Thomas?
    Mr. Thomas. It was, sir.
    Mr. Mulvaney. Are you aware of whether any other fees, 
fines, those types of things, similar types of moneys that are 
collected by other agencies have been treated the same or is 
the U.S. Patent Office being treated differently here?
    Mr. Thomas. Regrettably, I am not an expert on that point. 
But I am of the strong conviction that the amount of funding 
that's being discussed to be taken away from the agency means 
that that 600,000 application backlog is going to go right up 
and there are going to be a lot of other problems. I wish I had 
more information, but that is the best I know.
    Mr. Mulvaney. I understand.
    I will finish with you, Mr. Thomas.
    You had mentioned in your testimony the SHIELD Act. And I 
was just wondering if you might want to talk a little bit more. 
I got the impression that generally you were in favor of it, 
but there were certain risks involved with it. This is the 
program that would essentially create a loser pay system within 
the patent infringement area of lawsuits. Tell me quickly--I 
have got a minute left--tell me the advantages and 
disadvantages, the risks and the benefits.
    Mr. Thomas. Right. So to remind the Committee, the SHIELD 
Act mandates an attorneys fee award in favor of any party that 
prevails on either validity or non-infringement, with 
exceptions for initial assignees of a patent, universities, and 
companies that spend substantial resources on the production or 
sale of the patented invention. That means litigants would have 
to post a bond before they could even get into the courthouse.
    One of the issues with fee shifting, it certainly would 
discourage suits that may not be all that meritorious, but even 
a patent owner who brings a suit, it is a very close case, it 
is a meritorious case, it is just you lose--litigation has its 
uncertainties--would have to pay fees. So the risk is that it 
really targets specific classes of patent proprietors rather 
than really going at what I think we probably should be doing, 
is behaviors. So, in other words, identifies actors by their 
status, not by their behavior.
    Mr. Mulvaney. How would you respond to Mr. Thomas? I am 
generally in favor of loser pay systems. How would you respond, 
though, to the criticism that having to post a bond would 
actually have a chilling effect disproportionately on small 
businesses in terms of pursuing their patent rights?
    Mr. Thomas. I believe that is correct. I would agree with 
that assertion.
    Mr. Mulvaney. Thank you, Mr. Chairman.
    I yield back.
    Chairman Graves. Ms. Chu.
    Ms. Chu. Well, as a member of the Intellectual Property 
Subcommittee in the Judiciary and a member of the Committee 
that marked up the America Invents Act, I commend Chairman 
Graves for convening this hearing to discuss how this bill 
affects the small businesses of America, and to commend all of 
you witnesses for the testimony. I found it to be very 
valuable.
    In the Judiciary Committee, we are closely following the 
patent troll issue. From our examination, we have learned 
patent assertion entities don't have a favorite target. They 
are not just going after the large businesses but the small 
ones, and even individual customers.
    Now, Mr. Grady, you mentioned that your business is a 
victim of patent privateering in which a competitor company 
transfers patents to patent assertion entities and provides 
incentives to assert them against their competitors. Companies 
like Google and BlackBerry are also victims of this and are 
speaking out. But small businesses do not have the resources of 
these companies to fight these frivolous infringement lawsuits.
    Can you tell us about your experience in fighting the 
patent assertion case and did this assertion entity file suit 
and how much your company spent on legal fees?
    Mr. Grady. They have not yet filed suit. We have only been 
threatened. We have spent about $45,000 so far in legal fees 
and internal time to try and protect any damage to the company 
for the alleged infringement. So it has been very difficult. We 
don't know yet what the claim is. We think that it is likely to 
be a very simple concept.
    What we have in the 911 space is that there was not a lot 
of technology that was patented in the 911 sector, it was all 
based on industry standards. So now we have got this tide that 
has turned that we have these PAE issues that we are battling. 
And what I am sort of asking for is a carve-out, that public 
safety be given a little bit of laser-like precision in 
protection, that it be governed by the Federal court as opposed 
to civil.
    Ms. Chu. Mr. Grady and also others on the panel, I would 
like to ask this question about patent trolls targeting end 
users. In a Judiciary Committee hearing recently, I was 
outraged to hear that Sysco reported that 13,000 of its 
customers got demands from patent trolls. And these were 
customers that simply were using routers. They were the end 
users of these routers.
    I wonder if you have experience with end users getting 
these types of baseless patent infringement cases and what your 
customer base has received, have any of them resorted to paying 
settlement fees to avoid litigations, and is there something 
that Congress should do to protect consumers from patent trolls 
that go after end users such as your clients?
    Mr. Grady. I will respond to that, too. We use a good bit 
of Sysco equipment in our business, and yes, our end user 
customers have received demand letters, both for Sysco 
equipment and for other digital subscriber line or DSL 
equipment. Most businesses, I think, that are served by small, 
independent telephone companies were targeted by that. And a 
lot of those end users got demand letters as well. Frequently, 
they refer them to us. We referred them to the vendor that we 
purchased them from, and tried to dispute the claim informally 
as much as we could. But it has been an ongoing problem.
    Ms. Chu. And do you know if anybody has paid these fees?
    Mr. Grady. Not to the best of my knowledge. I was involved 
in a matter in 2002 prior to AIA where a small business was hit 
with a shopping cart violation proceeding, and we successfully 
defended would against that.
    Ms. Chu. Anybody else on the panel?
    Then, Mr. Thomas, you acknowledge that the U.S. Patent 
Office is considering small businesses in a more improved way 
through the America Invents Act. And I successfully amended the 
bill to create a pro bono program designed to help financially 
undersourced independent inventors and small businesses. Are 
you familiar with the pro bono program and how it helps small 
businesses? If so, do you think there are improvements that can 
be made to not only sustain the program but make it more 
successful?
    Mr. Thomas. I am familiar with the program. I believe it is 
very beneficial. It is my understanding it is up and running in 
several regions of the country. The USPTO has augmented that 
with a 1-800 help line that is staffed by retired senior 
examiners. They come on in and help people who are having 
trouble getting their applications through. They have inventors 
conferences all over the country that people are attending. So 
I think the pro bono program, it is just starting, so I think 
it is early days before we can assess it fully. Again, with 
sequestration, it means these programs are going to be scaled 
back.
    Ms. Chu. Okay. Thank you. I yield back.
    Chairman Graves. Mr. Hanna.
    Mr. Hanna. Thank you, Chairman.
    This is for anybody, but maybe Mr. Grainger. Patent 
trolling. I guess the overlying assumption is it is a bad 
thing. But there have been estimates that less than 8 percent 
of the total number of cases brought would actually survive in 
court. Can you talk about what that means? It seems like 
profiteering, pirating, yet people still opt to pay fees to 
settle it. So the whole thing is kind of this mix-match of 
leverage, disproportionate and unfair. Can you just talk about 
that, if you think I am at all right in that?
    Mr. Grainger. I would say at the outset that patent 
assertion entities, or trolls, have not been a big issue in the 
medical device industry. However, reportedly, some of the 
biggest trolls out there, some of these organizations that 
collect intellectual property, are amassing war chests of 
medical device-related, health care-related patents. So we may 
see this in the future.
    My view is that needs to be addressed on two fronts: One 
would be just the Patent Office doing a better job so that 
overly broad patents are not issued in the first place. And 
maybe there needs to be some sort of systemic reexamination of 
patents in certain art spaces, particularly in the computer 
software space. But in addition, what really makes the whole 
troll industry thrive is that everybody settles. And if you can 
get at that problem----
    Mr. Hanna. It works in the legal profession.
    Mr. Grainger. Maybe there could be a pool created for 
companies to collaborate in defense of these claims, and also 
maybe an insurance scheme has been proposed to fund defending 
rather than just settling. If you----
    Mr. Hanna. What you are saying is it is unbalanced and 
there is no one on your side if you were that victim?
    Mr. Grainger. Right.
    Mr. Hanna. Mr. Thomas.
    Mr. Thomas. I tend to agree with your assessment, and I am 
impressed the Committee is aware of this issue at this level of 
detail. I think there was an effort in the AIA to deal with 
trolling, in terms of having rigorous post-grant reviews at the 
agency that would get suspect patents before them.
    Obviously, the price of the proceedings is high. Also, it 
is a public goods problem. Many are accused of infringement; 
who is actually going to lead the charge to invalidate the 
patent. Why should I do the effort if I can get Professor 
Crouch to do it. That also tends to be an issue. Again, I think 
quality patent grant and an effective and efficient revocation 
proceeding at the agency may be the way to go.
    Mr. Hanna. Is there a good side to it? Why would you pursue 
a patent to basically take it if you didn't have an opportunity 
to do something more with it? I know that may be beside the 
point.
    Mr. Thomas. There are many different flavors of patent 
trolls, which makes it difficult to elucidate this problem. 
Some are startup companies, some are universities, some are 
companies that are marketing other products but not that 
particular product. So we have a lot of different kinds of 
patent assertion entities, or non-practicing entities to deal 
with. The good side can be sure, it is a small company that 
wants to market its product, just hasn't done it yet. But short 
of sorting out behaviors that we like and those that we don't, 
I think----
    Mr. Hanna. Is it possible that if you lose a lawsuit, you 
should pay more than the cost? That there should be some 
compulsory damages associated with it?
    Mr. Thomas. Absent an antitrust violation or sham 
litigation, we don't currently have such a system. That seems 
to me to be fairly Draconian, but I have to think about it. I 
have never heard that proposal before.
    Mr. Hanna. Thank you. I yield back.
    Chairman Graves. Mr. Rice.
    Mr. Rice. Thank you, members of the panel, for being here 
and testifying today. I have learned a lot about patent law. 
Generally, what I am hearing from you, I think, is that you 
like the effects of the AIA. That you think it is a good law 
and generally a move forward, is that correct? What would you 
do, outside of this trolling issue and potential for loser pay 
and these other types of things you are talking about, what 
would you suggest to make this law better?
    Mr. Thomas. One area that was subject of very significant 
discussion during the debate that led to the enactment of the 
AIA was damages reform. And ultimately, it did not make it into 
AIA. That remains a point of significant concern, especially 
for manufacturers of products of many components. So the notion 
is, I have got my iPhone sitting here, I turn it off, and one 
statistic suggests that one patent out of six relates to a 
smart phone. There are over 200,000 patents that cover this 
phone. So how do courts assess damages when you infringe just 
one patent on functionality in the phone? So manufacturers of 
electronic products, the hard tech companies, are seeking 
clarification of damages, particularly when, again, the patent 
just covers a small part of the product. This is called 
apportionment. Patent lawyers calling that apportioning 
damages. Apportion means something different, I think, to you, 
but to patent lawyers that is what apportionment is. Many 
people think it is unclear. On the other hand, we have medical 
device manufacturers and pharma companies who are concerned 
that are by watering down patent damages, you ultimately 
devalue the entire system.
    Mr. Rice. Is there anybody else on the panel who has any 
ideas about trying to make this AIA any better? Are there fixes 
we can do?
    I am real concerned about American competitiveness and 
jobs. Is there anything we can do to shore it up, make it 
better, and make us more competitive in the world?
    Mr. Crouch. I will step in here. On the damage reform 
point, I think one reason why it didn't get put into the AIA 
was because that traditionally really has been a common law 
question for the courts to decide. And in the lead-up to that 
AIA, the Court of Appeals for the Federal circuit, kind of 
feeling the wind of Congress, made several important decisions 
that have really clarified that law in a lot of important ways.
    Although I believe that the AIA is a good law and an 
important change in terms of clarifying the law, I don't think 
it really addressed the greatest problems in our patent system. 
Patent applications filed today will be under this first-to-
file system. But if someone picks it up--even a patent 
attorney, even one of our Court of Appeals for the Federal 
circuit judges--and reads that patent, likely they won't able 
to tell you what the invention really is. We have a problem in 
our system where folks are filing patent applications that just 
aren't clear what invention are they trying to claim here, what 
have they really come up with? And so it turns out that it is 
currently within the power of our Patent Office to address that 
and to force patent applicants and their own examiners to make 
sure that it is in those documents.
    We had a little talk about real property rights. The nice 
thing about real property rights is you can really tell where 
the boundary line is. With patents today, it is impossible to 
tell where the boundary line is; where does your patent stop 
and where does somebody else's begin?
    If anything could change, that would be the most 
significant change, I believe.
    Mr. Rice. Thank you very much, gentlemen. You have 
something you want to add?
    Mr. Grainger. I would echo that. That is why I go to the 
quality and rigor of the examination process, just making sure 
the patent application clearly tells you what the invention is, 
and is appropriately limited in what it is trying to cover so 
we don't have----
    Ms. Velazquez. Will the gentleman yield?
    Mr. Rice. Absolutely.
    Ms. Velazquez. Thank you.
    Mr. Granger or Mr. Thomas or Mr. Crouch, given the 
statements or comments that you just made, that is why it is so 
important to have the rigor. Do we need legislation to achieve 
that goal?
    Mr. Grainger. Maybe the--my friends in academia could talk 
about that, but I think that the--the law is there. It tells 
you what you need--what the requirements are to get a patent, 
but it is being interpreted loosely and perhaps without, you 
know, sufficient rigor.
    Mr. Crouch. And so I don't think any of us are here--we 
haven't--we don't have any proposed legislation for you today, 
but certainly the way you have to think about the Patent Office 
is as an agency that needs oversight, and that could come from 
strong statutes that clearly tell them what their job is, or it 
can come from oversight from this committee and other 
committees to ensure that they--that the job is being done with 
rigor.
    Ms. Velazquez. Mr. Thomas.
    Mr. Thomas. I agree with what has been said, and I also 
would additionally suggest that the AIA brings about these 
post-grant review proceedings that would provide a means for 
harnessing the energy of the private sector to sort of turn its 
private attorneys general come in and challenge the patents and 
that perhaps we should give that a little bit of time to play 
it through.
    Ms. Velazquez. Thank you. Thank you.
    Mr. Rice. I reclaim. I yield back.
    Chairman Graves. Mr. Schweikert.
    Mr. Schweikert. Thank you, Mr. Chairman. A couple of 
things. First, it is always fun when the people sitting next to 
you have asked the questions you wanted, but let's--before AIA, 
after AIA, you and I are a small business or someone that has 
come up with an invention, we have angel funding. Easier to 
finance, get investment today compared to before the new law?
    Mr. Grainger. I think so, absolutely, because I think, 
number one, we can get our patents done--issued much more 
quickly, so that angel stage, you know, maybe I still got a 
patent application, but 6 months later, I can have a notice of 
allowance in hand.
    Mr. Schweikert. One of the discussions, and this is for 
everyone on the panel, maybe a bit ethereal that was happening 
during the AIA was the ability to almost sell a future on your 
idea, that, look, we are heading towards filing our patent, 
will you help me finance, you know, the additional rigor and 
engineering I need, and because my timeline, are we seeing that 
out there? Are we seeing people being able to raise money on 
the ideas?
    Mr. Crouch. Well, sir, and I think Mr. Granger will likely 
agree with me, but the most common approach is to get--is to 
have some amount of funding and quickly, as quick as you can, 
file your patent application. And this change with the AIA, 
what it allows is not--right, the change that Mr. Grainger is 
referring to is not that we not--not that it is now a first-to-
file system, but under the AIA, you have a right to a--an 
expedited examination if you pay a fee, and so, right, and so 
you--right, so you hope to scrape enough money together to get 
these patent applications and hopefully a patent before, right, 
and then at that point, because you are able to get it quickly 
and because some of the--it is more clear because of the prior 
art, at that point it may well be easier to get funding.
    Mr. Schweikert. For all of you, are you seeing out there in 
the sort of angel-type of investing world, are you seeing more 
structure to be able to do that sort of run fast mechanics 
thing; we are going to put up the money, let's do this 
instantly, not spend, you know, a year contemplating, you know, 
the mechanics and the design.
    Mr. Crouch. And my comment would be that the structure of 
that particular marketplace is much less affected by the impact 
of this particular legal change than kind of the general 
structure of the marketplace and the availability of financing 
in general for small businesses.
    Mr. Schweikert. Everyone agree?
    Just as an aside, AIA had an ombudsman. Anyone have an 
experience with it yet?
    Mr. Thomas. Yeah. The ombudsman is--provides assistance 
when patent applications are sort of--get clogged up. There is 
some problem, the application is not advancing to the agency, 
so there is the ombudsman program. It has been operating. I 
have heard positive things about it.
    Mr. Schweikert. Okay. Last question. Has anyone done a 
study on patents we are seeing, particularly in technology, on 
their lifecycle of value? Is that lifecycle getting shorter and 
shorter and shorter and--or, as you spoke of on, you know, your 
iPhone, you know, that you are holding and is that speed of 
that technology changing the value of these patents?
    Mr. Crouch. So, one study I have done looked at the payment 
of something called maintenance fees. Those are the renewal 
fees that once you get a patent issued every, right--I think 
after 4 years you have to pay a fee, after 8 years, and after 
12 years you have to pay a fee, and these are essentially like 
taxes.
    Mr. Schweikert. Uh-huh.
    Mr. Crouch. And if you don't pay the taxes, you lose your 
patent. And so over the past 15 years or so, the percentage of 
entities that are paying the fees, all of the fees, stretching 
out to the end, has increased, and so that--that is something 
that is going up, and at the same time the actual fees have 
gone up, and so folks are--so, folks are paying more and more 
often paying that.
    Now, the change--I would estimate the change in why that is 
happening is generally because of this recognition of patents 
sets a strong form of intellectual property right; whereas, 20 
years ago, most companies did not think about patents on a CEO 
level and now they are, small and large companies.
    Mr. Schweikert. So, and we are not going to have time 
because I was heading towards this whole discussion of patents 
almost become commoditized out there as, you know, you can 
borrow on them, trade them, you know, and how you turn them 
into cash flow. But Mr. Chairman, thank you. Yield back.
    Chairman Graves. Mr. Bentivolio, do you have another one?
    Mr. Bentivolio. Thank you, Mr. Chairman.
    Just want to follow up on Mr. Thomas. Just so I understand 
this correctly. If person A, for instance, has evidence they 
invented a product in January and they file in June, and person 
B, for instance, in another State, in another garage, invents 
something in March and files it in April and they happen to be 
the same invention, who gets the patent?
    Mr. Thomas. As someone who has just been busy writing final 
exams, this is in a good spirit for me.
    Mr. Bentivolio. You are a student, so I think--right.
    Mr. Thomas. Under the AIA, the new law, Inventor B gets the 
patent because he is the first to file.
    Mr. Bentivolio. Okay. So, the original inventor who 
actually invented the product or whatever, in January, even 
though because--you know, maybe because of money or they wanted 
to perfect their patent or improve upon it, filed later, the 
actual inventor doesn't get the patent, correct?
    Mr. Thomas. Having been deposed many times, so I have to 
disagree with the question to some degree, it depends on what 
you mean by ``first inventor.'' Under your hypothetical, B has 
self-invented the technology and then----
    Mr. Bentivolio. Mr. Thomas, I am just going by the 
Constitution. That is all I am doing. I am using the 
Constitution as my guide. I am not a patent attorney. I am an 
inventor, okay. So, January I invent, or you invent or Fred 
invents something and--but he--because of money or time and 
circumstance, he can't get to the Patent Office. Maybe he is a 
better inventor than he is in calling patent attorneys and he 
files after somebody else. He loses.
    Mr. Thomas. That is correct. And let me also point out that 
prior to the AIA, under your hypothetical, if can change the 
facts of it, if inventor A had invented first but then sold the 
product more than a year before he sold--he filed.
    Mr. Bentivolio. I understand.
    Mr. Thomas. He would be divested of the patent.
    Mr. Bentivolio. I understand.
    Mr. Thomas. So even under the predecessor regime--in other 
words, that has been the Patent Act of 1952, which governed 
prior to the AIA under your reasoning, it would also be 
unconstitutional, because I think it is unlikely that the 
entire history of the U.S. patent system has been--has not 
comported with the Constitution. I will have to come to a 
different conclusion than you about its constitutionality.
    Mr. Bentivolio. Well, I am just going by the definition on 
the OED, what an inventor is, and it is the authority for 
definition of words, and in 1789, what the word ``inventor'' 
meant.
    Mr. Thomas. One way to discern the meaning of legal 
documents is to look at the dictionary. Another is to consider 
intellectual property policy. If we had patent terms that run 
20 years from the date of filing, we want to get the patent in, 
filed, and as long as it is the person himself is an original 
inventor under the AIA, that person can obtain the patent. I 
think that is a salutary policy goal for this country.
    Mr. Bentivolio. Thank you. I yield back.
    Chairman Graves. With that, I want to thank all of you for 
participating today. Your testimony, obviously, underscores the 
importance of maintaining a strong patent system, one which 
allows entrepreneurs to thrive by commercializing innovative 
products and services. We will continue to monitor the 
implementation of the AIA and its impact on small firms as well 
as continuing to examine some ways to strengthen the patent 
system and mitigate the effects of patent controls on small 
businesses.
    So with that, I would ask unanimous consent, that Members 
have 5 legislative days to submit statements in support of 
materials for the record, and without objection, that is so 
ordered, and with that, the hearing is adjourned, and we 
appreciate you being here.
    [Whereupon, at 2:15 p.m., the Committee was adjourned.]




                            A P P E N D I X






[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]




                Written Testimony of Jeffry J. Grainger

                   Managing Partner, The Foundry LLC

                              May 15, 2013

                     U.S. House of Representatives

               Meeting of the Committee on Small Business

Hearing on How Procedural Changes under the America
        Invents Act Affect Small Businesses and the Impact of Patent 
        Assertion Entities on Small Firms
                               TESTIMONY


    My name is Jeff Grainger. I want to thank Chairman Graves 
and the other Committee members for the opportunity to testify 
today. I am a patent attorney with an engineering degree, and 
have worked continuously in start-up companies over the past 20 
years, almost entirely in the medical device field. I am also 
an entrepreneur, having founded my own start-up company and 
participated in starting a number of others. Currently I am a 
partner at The Foundry, which is a small company, often called 
an incubator, based in Menlo Park, California that develops new 
medical technologies and starts new companies to pursue those 
technologies with venture capital funding. The Foundry has 
started about 15 companies since it was started in 1999. Our 
companies have not only built value for their investors and 
created hundreds of jobs, but the medical technologies we have 
developed have advanced the state of the art in medical 
treatment and improved the lives of thousands of patients. 
These technologies now allow heart valves to be repaired using 
catheters inserted through blood vessels rather than through 
open heart surgery, high blood pressure to be treated through a 
single catheter treatment rather than a lifetime of drugs, and 
blood clots to be removed rapidly from cerebral blood vessels 
to reduce the damage caused by strokes.

    While the dialogue concerning patent reform has been at 
times dominated by forces arguing to weaken the patent system, 
I am thankful to be able to speak today to ensure you hear a 
different view, the view of the innovators and entrepreneurial 
companies that bring new medical treatments to Americans: We 
depend upon a strong patent system that provides a fast and 
efficient examination process, discourages frivolous patent 
challenges, and imposes serious sanctions on infringers. I have 
genuine concern for those who are harassed by patent trolls, or 
``patent assertion entities;'' however, in addressing that 
problem, I urge the Committee to maintain a strong patent 
system that ensures the American medical device industry will 
remain on the forefront of innovation and that the most 
advanced medical technologies will be available to American 
patients. It is from this perspective that I approach the topic 
of today's hearing.

    The development of new medical technologies in this country 
is highly dependent upon the continued ability of small 
entrepreneurial companies to start and grow. Venture-backed 
companies founded by biomedical engineers or physicians are 
more than ever the primary source of groundbreaking new 
therapeutic and diagnostic devices. The established 
multinational medical device companies rely more and more upon 
the acquisition of these companies rather than internal R&D 
programs for product innovation and expansion into new markets. 
The availability of venture capital is thus critical to allow 
new medical innovations to reach patients.

    Investing in medical devices is not for the faint of heart. 
Medical device companies must raise substantial capital in 
order to develop their products, perform clinical studies, and 
obtain regulatory approval, all before a single device is sold. 
Investments of more than $50 million and timelines of ten years 
or more from invention to commercialization are not uncommon.

    Investors in medical device start-ups are thus intensely 
concerned with the ability to obtain strong patent protection. 
They need to know that after a company has blazed a trail over 
many years to bring a new product to market there will be some 
period of exclusivity before the product can be knocked-off by 
competitors. When we approach venture capitalists for financing 
a new company, patent protection is a threshold concern that 
must be satisfactorily addressed before we have any chance of 
receiving an investment. Any changes to the patent system that 
impede our ability to obtain patents or that weaken the 
protection conferred by them would be a serious detriment to 
our ability to raise the funds necessary to start medical 
device companies.

    The America Invents Act (AIA) implemented significant 
changes to the US patent system. These include First Inventor 
to File, Post Grant Review and Inter Partes Review, special 
procedures for certain business method patents, third party 
prior art submissions, supplemental examination, Track One 
prioritized examination, and USPTO fee setting authority, among 
others. While it is too early to tell whether the AIA has been 
successful as a whole, several aspects of the Act clearly 
improve the patent system for innovators, including medical 
device entrepreneurs and start-up companies.

    The change that has garnered perhaps most attention is the 
change from a first-to-invent system to a ``first inventor to 
file'' system. However, for many patent filers including The 
Foundry, this has resulted in little change in the way business 
is conducted. Under the first-to-invent system, if a party was 
second to file a patent application, the statistical chances of 
proving earlier invention were extremely low, and counting on 
it was risky. Our standard practice has therefore always been 
to file as rapidly as possible. Taking one's time in filing on 
the assumption one could prove earlier invention was not a 
rational approach.

    While not having a significant effect on how we file for 
patents, the change to ``first inventor to file'' is good 
because it creates greater certainty and reliability in the 
patent system. Because it revolved around secret information 
about when and how an invention was made, the first-to-invent 
system was fraught with uncertainty. The prospect, however 
unlikely, that someone who filed after us could prove earlier 
invention created a cloud over who owned the intellectual 
property. Even if we had filed before another party, there 
remained a lingering risk that they might have invented first, 
a risk that could not be clarified except through expensive 
interference proceedings or litigation. In financings and 
strategic negotiations, this uncertainty lengthened the due 
diligence process, increased legal fees, and threatened the 
ability to reach a deal. Under ``first inventor to file,'' the 
determination of who is entitled to patent an invention is 
clearer, simpler, and based on data available to all parties. 
Moreover, in the vast majority of cases, the results will be 
the same as they would be under a first-to-invent system.

    Another significant change under the AIA pertains to post-
grant proceedings for challenging issued patents. Post-Grant 
Review allows a patent to be challenged by third parties on 
almost any grounds during the first nine months after grant, 
while Inter-Parties Review allows a patent to be challenged 
beginning nine months after grant on ground related to novelty 
or obviousness. Both procedures serve an important purpose in 
providing a process for overturning patents that should not 
have been allowed in the first place, without having to engage 
in costly litigation.

    Importantly, the Act establishes a Patent Trial and Appeals 
Board (PTAB) composed of specialized administrative law judges 
who will decide Post Grant and Inter Partes Reviews. This is an 
important change from the former reexamination procedures, 
which were decided by patent examiners. Many practitioners felt 
they could not rely on patent examiners to overturn patents in 
reexamination, even when new information was presented clearly 
calling into question the validity of the patent. The chances 
were good that the reexamination would result in an affirmation 
of the patent, which could then be perceived as stronger since 
the Patent Office had approved it twice. By establishing the 
PTAB with specialized judges, it is hoped that the new AIA 
procedures will result in better and more predictable 
decisions.

    Another important aspect of both types of post-grant 
proceedings is the estoppel provision that prevents a 
challenger from later challenging a patent in another 
proceeding or in litigation on grounds that were raised our 
could have been raised during the first post-grant proceeding. 
This is a critical aspect of the procedures, for not only does 
it prohibit re-litigation of the same issues, but it creates 
meaningful consequences for those who decide to challenge a 
patent. The estoppel provisions appropriately cause a 
challenger to think twice before launching a Post Grant or 
Inter Partes review. They help to ensure that innovators will 
not be forced to defend groundless or serial post grant 
challenges by those with greater resources.

    Of all the AIA changes, perhaps the most impactful for 
medical device start-ups is ``Track One'' prioritized 
examination. Under this provision, for a higher filing fee, our 
patent applications are examined and either finally rejected or 
allowed within one year. In some cases we are getting our 
patent applications allowed within 6 months. This ability to 
get a decision from the Patent Office rapidly can have a 
dramatic impact on our ability to get our projects funded. For 
a new startup, we are able to approach venture capital firms 
for funding with a patent already in hand, or with an official 
indication of what is patentable. We are also able to build our 
patent portfolios much more rapidly, so that when we seek later 
rounds of funding, we have multiple patents issued protecting 
various aspects of our technologies. This can eliminate much of 
the concern investors have about the availability and scope of 
patent protection. As a result we are more likely to get 
projects funded and can get through funding negotiations 
faster, with lower legal costs, and with potentially higher 
valuations than we have in the past.

    The last aspect of the AIA on which I wish to comment 
relates to the PTO budget. If there is one issue in which all 
stakeholders in the patent system should be aligned, it is the 
provision of sufficient funds to the Patent Office so that 
patent pendency is reduced, patent examination is more 
competently performed, and patent quality is increased. These 
goals benefit everyone, including those who would like to 
obtain patents faster, those who seek a more efficient and 
intelligent examination process, as well as those who want to 
reduce the issuance of poor quality patents.

    To accomplish these goals, the PTO must receive sufficient 
funding to hire and train more and better-qualified examiners, 
update its computer systems, and implement other important 
programs. Yet, even though the PTO generates a revenue surplus 
from user fees each year, its revenues are subject to diversion 
by Congress for other purposes. The Office is thus unable to 
rely on receiving the level of funding needed to expand and 
improve its services.

    Establishing reliable funding for the PTO was recognized to 
be an important issue to address in patent reform legislation. 
To this end, the AIA gave fee setting authority to the office, 
allowing it to set user fees at an appropriate level to 
generate the revenue it needs. But the AIA fell short in 
failing to prohibit the diversion of PTO revenues by Congress. 
So long as revenue diversion is a possibility, the PTO's budget 
will remain uncertain, and the office will be unable to do the 
planning and hiring that it needs to do to achieve its larger 
objectives.

    A fully equipped Patent Office can focus on improving the 
quality and rigor of patent examination, so that the patents 
that are granted have undergone rigorous scrutiny and are 
appropriately limited in scope. This, more than any proposal to 
weaken the rights of patent owners, will ensure that patent 
rights are not unfairly wielded to the detriment of innovation. 
Therefore I would urge the Committee to make the prohibition on 
fee diversion a priority for any future legislation aiming to 
improve the patent system.

    In sum, the American medical device industry continues to 
lead the world in innovation. Much of this innovation arises 
from entrepreneurs and small companies who depend on strong 
patent protection in order to raise the substantial funding 
needed to bring a medical device through clinical trials to 
commercialization. Streamlining and accelerating the 
examination process, improving the quality of patents, 
discouraging frivolous patent challenges, and imposing serious 
consequences on infringers are essential components of a patent 
system that protects and encourages such innovation. In order 
to attain these goals, we must fully fund the Patent Office and 
end diversion of PTO fees so it can build an organization 
equipped to handle the changing and expanding landscape of 
inventions. Further, in order to solve the problem of patent 
assertion entities, we must avoid diluting the important rights 
conferred by a patent upon which innovators rely, but rather 
focus on improving the quality and rigor of the patent process.

    It has been an honor to speak to you today, and I thank you 
again for inviting me to testify.
Prepared Statement of John R. Thomas

Professor of Law, Georgetown University

                               Before the

                      Committee on Small Business

                 United States House of Representatives

                                   On

      ``Patent Reform Implementation and New Challenges for Small 
                              Businesses''

                              May 15, 2013

    Mr. Chairman and distinguished Members of the Committee: 
Thank you for the opportunity to testify on the subject of 
patent reform implementation and new challenges for small 
business. I testify today in my personal capacity.

    The Small Business Administration recently found that small 
businesses that patent regularly obtain 16 times more patents 
per employee than larger firms. Because patents matter to small 
businesses, this Committee deserves congratulations for 
participating in the enactment of the America Invents Act and 
subsequent technical corrections legislation. As someone whose 
principal occupational task is to teach patent law, I am 
grateful that I no longer need to describe internationally 
adopted rules reflecting best patent practices--and then have 
to explain how the U.S. patent system operates differently. The 
Committee should also take pride both in maintaining the small 
entity discount at the USPTO, and in engineering even steeper 
discounts on filing fees for micro entities. For example, the 
fee assessed against a mirco entity for filing a patent 
application is a modest $70. These measures will surely inure 
to the benefit of small businesses.

    Consideration of patent reform implementation in large 
measure involves an assessment of the efforts of the USPTO. As 
a legal academic who has observed that agency for many years--
and on occasion been critical of it--I wish to report my highly 
favorable impression of its implementation efforts. In my 
personal opinion, the USPTO has persistently met its 
obligations under the AIA in a timely and professional manner. 
Particular accomplishments for the agency include:

           Leading a transparent rule-making process 
        with due regard to public commentary.

           Staffing the Patent Trial and Appeal Board 
        with experienced lawyers of exceptional quality.

           Educating its staff of 8000 patent examiners 
        about the new provisions of the AIA.

           Making great strides towards full operation 
        of four satellite offices across the United States.

    I further observe that the USPTO has reduced its First 
Office Action pendency to 18.7 months and decreased its 
inventory of unexamined applications to 600,000 cases--two 
notable achievements in view of the agency's contemporaneous 
implementation of the AIA.

    The efforts of the USPTO to contribute towards small 
business and independent inventors should also be acknowledged. 
Agency programs that are of particular benefit to these 
constituents include:

           An Office of Innovation of Development that 
        oversees the agency's efforts to assist independent 
        inventors and small businesses. These efforts include 
        outreach programs for independent inventors, women, 
        small business concerns, minorities, and other 
        underserved constituencies.

           An Inventors Assistance Center (IAC) that 
        provides patent information and services to the public. 
        The IAC is staffed in part by retired, experienced 
        examiners who answer general questions concerning 
        patent examining policy and procedure.

           An Ombudsman who assists in getting stalled 
        patent applications back on track.

           Independent Inventors Conferences, conducted 
        around the country, which deal not just with the patent 
        application process, but also entrepreneurship and 
        marketing.

           A Global Intellectual Property Academy that 
        conducts a number of programs for U.S. small 
        businesses; one recent program was titled ``What Every 
        Small Business Must Know About Intellectual Property.''

    Although the efforts of the USPTO have been exemplary, 
issues remain for small businesses. First and foremost is the 
potential impact of sequestration. One of the primary points of 
concern during the pendency of the AIA was USPTO fee diversion. 
To that end Section 22 of the AIA established a Patent and 
Trademark Fee Reserve Fund that was intended to allow the 
agency to retain the fees it received for services provided. 
While I am no expert on sequestration, to my understanding the 
Office of Management and Budget has reportedly reasoned that 
fee payments to the USPTO are not ``voluntary'' within the 
meaning of the Budget Control Act--with the result that USPTO 
fees are not exempt from sequestration. Understandably, loss of 
substantial revenues from the USPTO budget could have a 
significant deleterious impact upon the agency's ability to 
protect the nation's environment for innovation.

    The cost of certain USPTO post-grant procedures is also a 
potential issue for small firms and independent inventors. The 
new inter partes review proceeding costs at least $9,000, while 
the minimum fee for post-grant review is $12,000. These 
relatively high rates are based upon the congressional decision 
in the AIA to allow the USPTO to assess fees designed to 
recover the aggregate estimated costs of the proceeding to the 
agency. Given that the AIA requires post-grant proceedings to 
be conducted by at least three administrative patent judges of 
the Patent Trial and Appeal Board, one would expect the fees to 
be substantial--and indeed I believe that the agency faithfully 
complied with the statute in setting its rates. Nonetheless the 
fees are very costly and may contribute to a pricing out of 
small entities from robust administrative challenges to patent 
validity.

    Patent trolling remains a significant concern for U.S. 
enterprises of all sizes. In my opinion, trolling results from 
systematic problems within the U.S. patent system and is not 
amenable to a quick fix. In the 113th Congress, two bills are 
directed towards patent trolling issues. The SHIELD Act 
mandates an attorney's fees award in favor of any party that 
prevails on either validity or noninfringement, with exceptions 
for initial assignees of a patent, universities, and companies 
that spend substantial resources on the production or sale of 
the patented invention. Further, unexempted litigants must post 
a bond for these fees before they could even commence 
litigation. Fee shifting certainly holds the potential to deter 
non-practicing entities from asserting weak patents. Yet it 
might also discourage small businesses from bringing 
meritorious cases in an often unpredictable litigation 
environment. In particular, the SHIELD Act would cause certain 
types of patent proprietors to pay fees if they lose 
infringement cases, no matter how close the issues in the case 
may have been.

    Another bill, the Patent Quality Improvement Act of 2013, 
would make two changes to the Transitional Program for Covered 
Business Method Patents. First, the sunset provision associated 
with that post-grant proceeding would be eliminated. Second, 
the post-grant proceeding would be expanded in order to cover 
virtually any sort of business method patent. Augmentation of 
the transitional program would potentially enlist the expertise 
of the USPTO to weed out improvidently granted patents in a 
timely manner. Nonetheless, patents that survive a second round 
of review may actually become more robust and troublesome--
after all, advocates may assert that they withstood USPTO 
scrutiny twice and ought to be readily enforced by the courts.

    In closing, I appreciate the invitation to provide my views 
to the Committee on these and other patent reform proposals, 
and looks forward to working with Members of the Committee as 
it continues to consider these issues.
INdigital Telecom Testimony of Mark Grady, Founder and President

Before the Committee on Small Business U.S. House of Representatives 
        May 15, 2013

                         Prepared Testimony and

                      Statement for the Record of

                   Mark Grady, Founder and President

                              On Behalf of

                           INdigital telecom

                                 Before

                    The Committee on Small Business

                     U.S. House of Representatives

                               Hearing on

  Patent Reform Implementation and New Challenges for Small Businesses

                  Wednesday, May 15, 2013 - 1:00 p.m.

                   2360 Rayburn House Office Building
    Good afternoon. Chairman Graves, Ranking Member Velazquez 
and Members of the Committee. I am Mark Grady, Founder and 
president of INdigital telecom (INdigital), a leading provider 
of advanced 9-1-1 public safety communications services. 
INdigital began in 1998 as a cooperative effort of several 
independent telephone companies in the rural areas of Michigan, 
Ohio, and Indiana, including New Paris Telephone, in northern 
Indiana, which I also manage.

    Thank you for allowing me the privilege of sharing with you 
our small business's perspectives on the opportunities and 
challenges surrounding patent reform, and its impacts on our 
business, communities, innovation, and jobs.

    By way of background, INdigital telecom is a specialized 
type of telephone company, a 9-1-1 system service provider. 
Wireless, Voice over IP, and legacy telephone companies deliver 
``9-1-1'' calls their customers make to our network, and based 
on the location of the caller, we manage the vital process to 
make sure these calls are connected to the appropriate local 
police, fire, or medical authority so that emergency help can 
be on the way as soon as possible. Through our systems in Ohio, 
Indiana, and Michigan, we provide a vital service that protects 
the lives and property of the citizens in these communities--
many whom are no doubt represented by members of this 
Committee. Along the way, our company has created 38 high 
paying technical jobs, and has provided training to many more 
interns and technical staff.

    We are working hard every day to provide an important 
public service, and we are proud of the jobs that we do and the 
communities we serve.

    As to the connection between our business and intellectual 
property matters, I need to explain that even today many 9-1-1 
networks continue to use technology that dates from the 1970's. 
We envisioned that this technology had to, and was going to 
change. In 2005, over four years before industry standards were 
adopted, we pioneered methods of using new digital internet 
protocols to provide advanced 9-1-1 public safety 
communications. What we created helped launch the revolution 
that is occurring now in public safety. Many of you may 
recognize the term ``Next Generation'' or ``NG9-1-1''. That's 
what I am referring to. It's a complete re-invention of the old 
9-1-1 network using new digital systems and methods to deliver 
advanced emergency services.

    Small company innovators like INdigital face a number of 
IP-related challenges. In the public safety industry, there are 
giants like AT&T and Verizon, who use many different suppliers 
to create full service public safety networks. There are also 
other large companies that perform backroom 9-1-1 location 
analysis and call processing. The work of these companies 
primarily serves the large telephone companies in the big 
population centers, and other large industrial businesses. 
INdigital is a small company serving more rural areas. For 
example, our largest market is Fort Wayne, the 74th largest 
city.

    As a small business, we cannot afford the in-house 
resources of a large company. We must rely on outside counsel 
for our IP needs such as patents, copyrights, and other 
intellectual property matters. Even so, we are active and 
directly license the IP of others, cross-license our IP, and 
provide critical protected technologies to other business 
partners, and our customers.

    As noted before, 9-1-1 emergency services are going through 
a technological evolution. As other providers in the telecom 
industry realized the need to update their 9-1-1 networks, 
INdigital has been successful in capturing market share with 
its 9-1-1 innovations. Therefore, we recognize the need, value, 
and importance of a well-defined and efficient patent system to 
protect and monetize those innovations. We appreciate and 
support Congress's efforts in these regards. INdigital believes 
in and supports a robust intellectual property system that 
works for small business, not against it.

    Having said this, please note that INdigital is not `patent 
centric.' Our patent law firm understands our business and our 
culture, and recognizes that our IP works in conjunction with 
the actual products and services we provide, not in the 
abstract. Our business succeeds by understanding our customers' 
problems, then putting a working solution into our customers' 
hands for refinement, not by just cranking out low quality 
patents whenever technically feasible. Often, our patent 
applications only start after the products are deployed and 
proven. In short, like many small businesses, patents are a by-
product of and support our innovation, not the reason we exist.

    Even so, we believe that, on balance, the new provisions of 
the American Invents Act (``Act'' or ``AIA'') has been and will 
continue to be of some benefit for INdigital. Certainly, patent 
fee reform is helpful to our small business, as is the ``first 
to file'' and ``provisional patent'' concepts that makes the 
decision to file a patent clearer and easier. It's beyond my 
expertise, but it's my understanding that the AIA attempts to 
make it easier to challenge poor quality patents. Also, I have 
read about special rules for challenging new ``business 
method'' patent applications. While these sound sensible as 
ways to increase patent quality, these seem to be too expensive 
for a small business like ours. Again, we're not patent 
experts, and are only now starting to see how net patent 
applications will be processed and enforced under the Act. We 
remain optimistic that the Act, with some refinements, will 
yield faster results for higher quality patents without harming 
small businesses.

    As the public safety landscape transitions to NG9-1-1 and 
to a more competitive environment, we are seeing an increased 
use of patents in our industry sector. We are increasingly 
aware that companies are hiring armies of patent attorneys, and 
are buying stagnant companies solely for their patent 
portfolios. This brings me to the biggest IP challenge that we 
and other small businesses face today--the inappropriate 
assertion of poor quality over-broad patents. This is 
especially troublesome for us when they apply to 9-1-1 public 
safety, an area that clearly deserves as much special 
protection from frivolous lawsuits as ``business methods.''

    One of our `frenemies', a company that INdigital works with 
often on many types of projects, has fallen behind in 
developing new NG9-1-1 technology. Rather than innovate in-
house, they acquired another entity that was issued a very 
broad telecom-related patent many years ago.

    Under pre-AIA patent law, there was insufficient legally 
relevant prior art, and, unfortunately, the patent was 
approved. The concepts in the patent are very common in 
telecommunications, and not specific to public safety. However, 
this company has unleashed a patent assertion firm to seek 
enforcement against us of this old patent based, in large part, 
on the simple notion that INdigital provides ``9-1-1 service.''

    In case you are curious, nothing would please me more than 
to explain to this Committee exactly how INdigital has 
infringed this patent, but . . . I cannot. We have analyzed the 
patent, and we have had it analyzed by other experts. We are 
unable to determine how the NG9-1-1 industry standards we 
follow in our products and services are infringing, yet the 
litigation moves forward with swift precision. In one form it 
is a letter to our existing and potential customers that claims 
that INdigital is, or soon will be, infringing upon this 
patent. It doesn't take much to imagine what our customers or 
potential customers think when they receive such a notice, or 
the fear, uncertainty, and doubt it generates throughout the 9-
1-1 public safety community. Our public safety customers are 
often units of local government. They don't need or want the 
distraction or expense of a `potential for infringement' letter 
from a patent assertion firm.

    A more pressing problem is that many new technologies 
commonly used by the public today such as text messaging and 
sending pictures are not part of the current 9-1-1 public 
safety system. Just image how many lives or how much property 
could be saved if they were. The recent terrorist bombing in 
Boston is a horrific and unfortunate example of how public 
safety and first responder access to video and related 
information directly from the public could (and did) greatly 
enhance emergency response and homeland security. 9-1-1 Centers 
desperately need new technologies and new equipment as the 
country transitions to NG9-1-1 services. A local 9-1-1 Center 
isn't resourced or funded to sort out the complex legal demands 
of patent claims, especially ones that say even offering ``9-1-
1'' could be infringement.

    In one recent case, after receiving the letter, a potential 
customer had to put its project on hold to completely reissue 
its request for proposal. As a small business person, an 
innovator, an employer, and a citizen, I believe this cannot be 
Congress' intent for our patent system. The patent system 
should not be used to put Americans' lives and property in 
jeopardy by delaying their access to new and innovative 9-1-1 
public safety and homeland security services. IP rules should 
first serve inventors--not investors--to bring innovation to 
the marketplace, not fruitless litigation which destroys jobs 
and companies, and wastes a small company's limited resources. 
But, that is exactly what is happening.

    So that our message to this Committee is clear, please note 
that INdigital supports, in general, the process and other 
improvements in the America Invents Act. As the trade press 
detailed, we recognize the difficult negotiations and 
compromises required to pass the AIA. Unfortunately, however, 
for all the progress that was made, the Act has not remedied 
these current IP issues as they relate to essential 9-1-1 
public safety services.

    As we continue to work to develop and deploy important new 
life-saving NG9-1-1 services, we are forced to divert our 
limited resources to plan for the business and financial 
impacts of unknown patent assertion claims. This has directly 
affected our innovation efforts, ability to hire new employees, 
and our work to help protect our communities. From the 
perspective of our small business, the AIA is incomplete until 
our nation's 9-1-1 public safety and homeland security system 
is secure.

    As we begin to benefit from the other aspects of the AIA, 
our Company is asking this Committee to take half a step back 
and help level the playing field as it relates to public safety 
intellectual property disputes. Two ideas we've heard discussed 
in the trade press, in our view, have particular merit and we 
support their introduction into law. First, the law should 
recognize 9-1-1 and NG9-1-1 for what they are; essential 
government services, and patent litigation claiming 9-1-1 
infringement should be managed under an existing patent 
statute--28 United States Code Section 1498. This will help 
control the costs of the court process, yet still guarantee a 
legitimate patent will be enforced and the patent holder 
compensated. Second, every infringement complaint should 
contain a detailed explanation of the claim--something more 
than just the assertion of a ``hypothetical'' infringement we 
receive today. It is unfair to burden small businesses with 
patent allegations no more substantive than a TV commercial.

    No doubt there are other useful concepts that can be 
considered. Whatever the conclusions from this hearing, our 
request is that this Committee take prompt action to discourage 
frivolous 9-1-1 public safety related lawsuits while protecting 
valid patent holders.

    In conclusion, thank you for your time and the opportunity 
to help you understand the IP problems faced by INdigital and 
other small business entrepreneurs today. I look forward to 
your questions.
    Committee on Small Business

    Hearing: ``Patent Reform Implementation and New Challenges 
for Small Businesses''

    May 15, 2013

    Questions for the Record Submitted by Rep. Bentivolio

    Questions for Mr. Grainger:

    1. Can you please elaborate how it is that Congress is 
looting the USPTO's surpluses?

    Answer: While I am not expert on the precise amount of the 
PTO's revenues that has been appropriated for other purposes, 
it has been reported that over $1 billion has been diverted in 
the past 20 years. Having been on the management team of 
multiple companies I know the importance of certainty with 
regard to the level of funding that will be available to allow 
for strategic planning and organizational and infrastructure 
improvements. Even if the USPTO has good ideas about how to 
solve its major challenges, if its level of funding cannot be 
relied upon, the office cannot put its plan into effect. The 
office now has the authority to set its own fees, and it has 
the ability to forecast fairly accurately the level of filing 
and prosecution activity to expect. But it has no assurance as 
to how much of its revenue it will be allowed to keep. If the 
PTO had control of its revenues, it could reliably predict its 
funding levels for years to come, and it could implement 
meaningful changes and infrastructure improvements. Until that 
happens, or Congress passes specific budget allocation that the 
office needs to make those improvements, we are likely to see 
little change. It is important to remember as well that such 
improvements are not just needed to reduce the patent backlog 
and shorten pendency, but to improve the quality of the 
examination process so that fewer ``bad'' patents are issued. 
For this the office needs to hire more and better-qualified 
examiners, conduct more examiner training, allow examiners more 
time to examine each application, and upgrade its computer 
infrastructure to allow more comprehensive and efficient 
searching and data access. These are major undertakings that 
cannot be implemented without budget certainty.

    2. From your testimony I infer that you create companies 
based off of patents. Can you please elaborate, perhaps by 
naming some claimed inventions, on the novel ideas developed, 
how it is that they, in your mind, attain the standard of 
``inventive genius'' above and beyond simply being ``new 
gadgets''?

    Answer: I would ask the question, has anyone among your 
friends and family suffered from high blood pressure, stroke, 
or heart valve disease? These diseases are not treated with 
gadgets. High blood pressure is treated with drugs, but for 
many patients drugs do not work or cause unacceptable side 
effects. The Foundry invented the first device-based therapy 
available for high blood pressure that has the potential to 
provide a lifetime of benefit from a single thirty-minute 
catheter procedure. In a clinical trial of the device, patients 
receiving the catheter treatment experienced a drop in blood 
pressure substantially higher than they did from drugs and, 
three years later, continue to maintain that reduction. The 
device has been approved in Europe and is in clinical trials 
for approval in the U.S. Medtronic recognized the value of this 
technology and acquired the company for more than $800 million. 
See http://www.medtronicrdn.com/intl/healthcare-professionals/
index.htm. Similar stories can be told about the devices we 
invented for removal of clots from cerebral blood vessels to 
reduce the damage caused by stroke (Concentgric Medical, 
acquired by Stryker), and for repairing diseased mitral valves 
using a catheter rather than open-heart surgery (eValve, 
acquired by Abbott). Both devices were pioneering advances 
without any comparable devices available for treating those 
diseases. Currently we are working a catheter to enable 
replacement of the mitral heart valve without open heart 
surgery, and a device to relieve osteoarthritis of the knee for 
patients not ready or not able to undergo knee replacement. 
While companies have been working on these problems for years, 
none have succeeded in developing a successful device-based 
treatment.

    It is not entirely accurate to say that The Foundry creates 
companies based off of patents. We start by identifying major 
clinical needs, then we develop the technologies needed to 
solve those needs. If a technology shows the promise of working 
clinically, we start a company to pursue it. We file patents on 
everything we invent because we know it is a requirement to 
obtain funding for these companies. Often we find that others 
have invented technology that will complement or that is better 
than what we have invented, and we will attempt to acquire 
rights to that technology. In most of the companies we have 
created (now working on the fifteenth), the patents protecting 
their core technology include some invented internally and some 
we have acquired from others.

    3. The America Invents Act cited in its Constitutional 
Authority Statement Article I, Section 8, Clause 8. Explicitly, 
this clause secures to authors and inventors their writings and 
discoveries. As I observed, the AIA removes this security from 
an inventor, transferring it to a first-to-file entity who was 
not the first to invent. Is that not explicitly forbidden by 
I:8:8? If not, please explain how the definition of inventor is 
lawfully changed from ``one who invents'' to ``one who files.''

    Answer: With the disclaimer that I am not a constitutional 
law scholar, I believe Article I can be interpreted to require 
that a system be established that allows all inventors to 
obtain patent protection for their inventions. However, I do 
not believe it prohibits the establishment of a system that 
makes sense in terms of efficiency and creation of economic 
value, so long as all inventors have reasonable opportunity to 
participate in that system. In my view the first inventor to 
file system eliminates huge waste in time and resources spent 
in resolving first to invent disputes, when it was well-
established that a party who was second to file rarely won 
these contests. Under the first-to-invent system, inventors who 
took their time in filing a patent were hurting their own 
chances of obtaining enforceable patent rights, as well as 
creating uncertainty and perceived risk for other parties who 
were more prompt in filing. Further, the new system increases 
the efficiency of commercializing valuable inventions by 
allowing inventors and funders to know, based on public 
information, whether a particular party is entitled to a patent 
or not. On the other hand, the cost to an inventor of 
participating in the first-inventor-to-file system is minimal--
a few hundred dollars to file a provisional application--which 
I believe is not an unreasonable obstacle even to an individual 
inventor, and well worth the benefits it confers to the system 
as a whole.
    The Supreme Court has ruled repeatedly that ``inventive 
genius'' is the standard by which an invention overcomes the 
``obviousness'' hurdle to patentability. Has the USPTO ever 
endeavored to define standards of inventive genius, and if so, 
what was the outcome?

    Answer: I am not familiar with any judicial opinions or 
USPTO rules that attempt to define ``inventive genius.'' There 
are numerous factors which are considered in determining non-
obviousness. One case frequently cited on this topic is Graham 
v. John Deere, 383 U.S. 1 (1966).

    5. One issue today is that end-users of a device, using it 
for its normal intended purpose, infringe on patents that the 
manufacturers of the devices do not infringe upon. (See Ars 
Technica, ``Meet the nice-guy lawyers who want $1,000 per 
worker for using scanners,'' April 7, 2013.) The situation is 
plainly absurd. Is there a judicial remedy for the victims of 
the patent trolls? What legislative remedy would you envision? 
More specifically, how is it that an end-user, using a device 
in an advertised manner, it taken to be an ``inventor'' when 
the maker of the device is not?

    Answer: Because a patent confers on the he patent owner the 
exclusive right to make, use, and sell the invention, it allows 
the patentee to prohibit others from using the invention. The 
doctrine of patent exhaustion, however, prohibits the patentee 
from enforcing the patent against downstream users of a 
patented item after a sale of that item which was authorized by 
the patentee. In the cited example if the patent holder never 
authorized the sale of the device to each user, patent 
exhaustion would not be a defense. Moreover, if the patent in 
the example covers only the end users' use of the device and 
not the manufacture, sale or use by the manufacturer or seller, 
then patent exhaustion is inapplicable. I am not aware of any 
legal theory that would provide a defense to the victims in the 
example, other than the usual defenses of invalidity or non-
infringement. I understand that in some cases the validity of 
the asserted patents is questionable, but defending a lawsuit 
is too expensive for such victims. Thus a legislative approach 
might allow end users to form alliances to collaborate in the 
defense and funding of such suits. In additions, legislation 
could penalize plaintiffs who bring lawsuits that are clearly 
meritless, such as by loser-pays schemes or imposing other 
sanctions. Vermont, for example, just amended its consumer 
fraud statute to allow damages to be awarded for bad faith 
assertions of patent infringement. Further, legislation could 
prohibit the enforcement of patents against end-users where an 
infringement action could be brought against the manufacturer 
or seller under a theory of direct or contributory infringement 
or a theory of inducement to infringe.

    6. Do you believe the lifetime of a patent, the same across 
all types of utility patents, is reasonable in its duration for 
all types of inventions?

    Answer: I think it is worth considering whether a shorter 
patent term would make sense in fields where product lifecycles 
are shorter, development costs are lower, and/or the time 
required to bring a product to market is less. The challenge 
lies in determining which fields should get the shorter term, 
which inventions fall into those fields, and how to handle 
inventions in those fields that are exceptions to the general 
rule on lifecycle, development cost, or time to market. For 
example, one could reasonably question whether a method of 
buying a product by clicking a mouse only once should be given 
twenty years of patent protection. Yet, even defining a 
``business method'' can be a challenge, when many drugs, 
medical devices, and other articles are protected by patents on 
methods of use or administration which some might call methods 
of doing business.

    7. If two companies independently invent the same thing 
within a reasonable period, doesn't that suggest the invention 
is really neither's to exclude from the other? Does innovation 
and invention mean the same thing?

    Answer: After 20 years in medical device start-ups, I can 
confirm that one can almost be certain that while one party is 
working on an innovative new idea, another party somewhere in 
the world is or soon will be working completely independently 
on the same idea. I believe the patent system is in large part 
responsible for this phenomenon by incentivizing and requiring 
patent holders to disclose their technological advances so that 
others can build upon them. If patents were not available 
whenever m multiple parties invented the same or similar 
inventions within weeks or months of each other, few patents 
would be issued. The system enables multiple parties to begin 
at the same starting line with the same information available 
to all, so by its very nature creates a tight race to the next 
advance. However, were the patent incentive no longer there, 
publication of inventions would cease, and the ability to 
advance the art would decline.

    On the second question, I believe innovation is a general 
term for creating something new in a particular field, while 
invention, at least in the context of the patent system, has a 
specific legal meaning. Invention is arguably narrower than 
innovation, and requires that an innovation meet a particular 
set of requirements defined by the law before it becomes an 
invention.

    How would you devise some standards for the patent office 
to reject issuing patents for gadgetry?

    Answer: I don't believe the government should get into the 
business of defining what is a ``gadget'' and what is a 
valuable invention. What may seem like a gadget today may well 
prove to bring great economic value. The answer lies in where 
the threshold for non-obviousness is drawn. If a qualified and 
well-trained patent examiner truly (1) has done a comprehensive 
and effective search; (2) cannot find any disclosure of the 
invention anywhere in the prior art; and (3) cannot find any 
combination of references that reasonably can be combined and 
together disclose all the elements of the invention, then the 
invention is non-obvious and a patent should be allowed. To 
ensure this is done competently on a more consistent basis, the 
patent office needs to hire better-qualified examiners, 
increase examiner training, and improve searching techniques 
and systems.

    9. How do we return the patent office to its constitutional 
role of protecting real ingenuity, by stopping the issue of 
frivolous patents?

    Answer: See comments above regarding hiring more and 
better-qualified examiners, increasing examiner training, 
allowing examiners more time to examine patents, improving PTO 
computer infrastructure, and developing better searching 
techniques and systems.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


                      Committee on Small Business


                 United States House of Representatives


            Prepared Responses to Questions for the Records


                     from Representative Bentivolio


                       Dennis Crouch *


                            On the Topic of


  Patent Reform Implementation and New Challenges for Small Businesses


                            February 4, 2014


    --------------------------------
    *Associate Professor of Law, University of 
Missouri School of Law; J.D., University of Chicago School of 
Law; B.S.E., Princeton University (Department of Mechanical and 
Aerospace Engineering and Engineering Management Systems).

    My academic research interests focus on patent law, 
intellectual property law and internet law. In addition to 
traditional academic publications, I am the founder of 
Patently-O, with a daily circulation of over 35,000 and that is 
a regularly read by must US patent law professionals. Prior to 
joining the University of Missouri faculty, I was a visiting 
professor at Boston University School of Law and worked as a 
patent attorney at a major intellectual property law firm in 
Chicago where I represented inventors pursuing patent 
protection as well as clients litigating claims of patent 
infringement. Prior to entering law school, I served as a 
United States Peace Corps Volunteer in rural Ghana, West 
Africa; worked as a manufacturing engineer in upstate New York; 
and conducted research on microgravity combustion with NASA.

    I am not a registered lobbyist, I do not represent any 
clients, and I do not own stock in any particular company with 
a vested interest in patent rights (beyond broad-based mutual 
funds).
    Bentivolio Question: 1. You recommend ensuring the 
availability of private insurance to guard against claims of 
innocent patent infringement. Does that really solve the 
problem, or would it simply transfer the risk to the insurer 
and average out the costs across the market?

    Crouch Response: The US legal and business environment 
creates many major risks for small and medium sized businesses. 
Although rare, these risks are often outsized and too large to 
be self-insured against. A strong US insurance market helps to 
mitigate these risks so that those business operators can go 
about their business with the assurance that they are protected 
against these rare-but-major potential liabilities.

    Patent infringement litigation is an area where entrenched 
leaders hold competitive advantages because of the costs and 
complexity of the system. In this arena of repeat players, 
small businesses are at a comparative disadvantage and an 
insurance market for unintentional patent infringement would 
help level this playing field. Because of their broader 
industry knowledge, Insurance providers may be especially good 
at identifying and eliminating bogus claims for relief (as they 
do in other areas of liability insurance). At the same time, an 
insurance market for unintentional patent infringement would 
not eliminate or detract from a patentee's ability to enforce 
its valid patent rights.

    Bentivolio Question: 2. You recommend better 
standardization and publicizing contractual indemnification for 
downstream users and retailers. Can you please explain how what 
sounds like a big-government solution solves a fundamental 
issue of frivolous lawsuits threats and/or frivolous patents 
creating real threats?

    Crouch Response: A US patent provides its holder with the 
exclusive right to make, use, sell, import, and export the 
covered invention. That right extends to stopping an end-user 
from unlicensed use of the invention so long as the patent 
right has not been exhausted. As part of a business-to-business 
transaction, large business typically negotiate the contractual 
indemnification associated with potential patent infringement 
of the product being sold, such as when a computer manufacturer 
purchases elements from microchip manufacturers. Except for 
their core business products, small businesses are much more 
likely to purchase goods and services from a retail outlet just 
like an ordinary consumer and without negotiating over these 
particular terms. This leaves small businesses at potential 
risk.

    The Uniform Commercial Code (UCC) that has been enacted in 
every state creates the background rules for business 
transactions. The Code was largely designed as a way to define 
clear understandable baseline rules in order to facilitate 
transactions. Those baseline rules of understanding can 
ordinarily be contracted-around, but offer clear, standardized, 
and well understood default rules. That same process can be 
done with patent infringement indemnification so that all 
parties understand their relative risks and obligations early 
in the process.

    My suggestion does not arrive on a blank slate. Rather, 
U.C.C. 2-312 already includes an implied warranty of non-
infringement. However, there are a number of important 
uncertainties associated with what that warranty and those 
uncertainties have been compounded by two recent Supreme Court 
cases.\1\ See, Bowman v. Monsanto Co., 133 S.Ct. 1761 (2013) 
(holding farmer liable for patent infringement for replanting 
seeds purchased on the commodity market) and Quanta Computer, 
Inc. v. LG Electronics, Inc., 553 U.S. 617 (2008) (interpreting 
the scope of the patent exhaustion doctrine).
---------------------------------------------------------------------------
    \1\ Uncertain issues include, for instance, when is infringement of 
a process patent indemnified; is the merchant who induces infringement 
required to indemnify; and does the indemnification pass-through to any 
subsequent purchasers?

    Setting of these default rules for market transactions is a 
core a critical role of Government as the ultimate arbiter of 
---------------------------------------------------------------------------
contract and property disputes.

    Bentivolio Question: 3. The America Invents Act cited in 
its Constitutional Authority Statement Article I, Section 8, 
Clause 8. Explicitly, this clause secures to authors and 
inventors their writings and discoveries. As I observed, the 
AIA removes this security from an inventor, transferring it to 
a first-to-file entity who was not the first to invent. Is that 
not explicitly forbidden by 1:8:8? If not, please explain how 
the definition of inventor is lawfully changed from ``one who 
invents'' to ``one who files.''

    Crouch Response: The US Constitution does not authorize the 
grant of patents to non-inventors. Thus, a patent regime would 
overreach its authority by granting patent rights to a non-
inventor (other than a non-inventor who possesses a legal 
interest in the patent right based upon a chain-of-title from 
the inventor).

    The question then is whether the AIA provides the USPTO 
with authority to grant patents to non-inventors. The answer to 
this question largely depends upon the meaning of the 
constitutional term ``inventor.''

    Three possible definitions include:

          1. An inventor is the first to conceive of an 
        invention.

          2. An inventor is the first one to conceive of an 
        invention and reduce that invention to practice (either 
        actually or constructively by filing a patent 
        application) without abandoning, suppressing, or 
        concealing the invention.

          3. An inventor is someone who conceives of an 
        invention and reduces that invention to practice 
        (either actually or constructively by filing a patent 
        application).

    Although the first definition offers simplicity in 
statement and strong moral appeal, it has never been the rule. 
Rather, for more than a hundred and fifty years, the US patent 
system has regularly granted patent rights to someone who was 
the second-to-conceive of an invention because the first-to-
conceive failed to properly pursue his or her rights, either by 
failing to diligently pursue reduction-to-practice or else in 
unduly abandoning, suppressing, or concealing the invention. In 
those cases, the first-conceiver's activities were essentially 
ignored and the next-best inventor was granted the patent. The 
second definition above highlights the traditional nuance 
associated with being an inventor under the pre-AIA first-to-
invent rules. As you'll note, the definition has allowed for 
many second-conceivers to get a patent so long as the first-to-
conceive failed to properly and fully protect her rights.

    The third definition appears to roughly fit to the working 
definition of invention under the first-to-file rules of the 
AIA. The definition of inventorship is no longer tied to being 
the first-one to conceive or reduce the invention to practice. 
Rather, anyone who completes those steps qualifies as an 
inventor. Under the first-to-file rules then, the one inventor 
who receives a patent will be determined by speed at filing a 
patent application. I should note there, that my use of the 
term ``conceive'' implies that the invention was not fully 
derived from elsewhere, but instead was created and realized in 
the mind of the inventor.

    For proponents of the AIA, this third definition is merely 
a mild modification of the definition already used in the 
first-to-invent regime. The first inventor is still given first 
potential rights, but only if she is able to quickly file a 
patent application before someone else independently invents 
and files their own application. There is no precedent that I 
know of that rejects this definition as defying the 
Constitutional requirement.

    The one potentially major caveat is the potential that the 
AIA could be interpreted to grant patent rights to individuals 
who do not fit any definition of the world inventor. In 
particular, the statutory change removed the explicit 
requirement that the patentee be the inventor. That change was 
designed to make it easier for corporate patent owners to file 
applications on behalf of potentially non-cooperative employee 
inventors, but could have dire Constitutional implications. The 
USPTO has recognized this potential problem and has provided 
its interpretation that inventorship is still a requirement of 
patentability required by the statute. The USPTO points to the 
introductory patent provision: 35 U.S.C. Sec. 101 that 
indicates a patent is to be granted to an individual who 
``invents or discovers any new and useful process, machine, 
manufacture, or composition of matter.''

    Bentivolio Question: 4. The Supreme Court has ruled 
repeatedly that ``inventive genius'' is the standard by which 
an invention overcomes the ``obviousness'' hurdle to 
patentability. Has the USPTO ever endeavored to define 
standards of inventive genius, and if so, what was the outcome?

    Crouch Response: The test for patentability is not 
``inventive genius'' but rather whether the invention would 
have been obvious to a skilled artisan.

    A patentable invention must be novel and must also take a 
substantial step beyond what was done in the prior art. In US 
law, we use the term ``nonobviousness'' as the key term for 
defining this substantial step. In a 1941 decision, the US 
Supreme Court did write that a patentable invention ``must 
reveal the flash of creative genius, not merely the skill of 
the calling.'' Cuno Engineering v. Automatic Devices., 314 U.S. 
84 (1941). However, that decision was rejected by Congress in 
the 1952 Patent Act that established the modern test of 
obviousness and rejected the ``flash-of-genius'' requirement. 
Today, the statute reads as follows:

          A patent for a claimed invention may not be obtained 
        ... if the differences between the claimed invention 
        and the prior art are such that the claimed invention 
        as a whole would have been obvious before the effective 
        filing date of the claimed invention to a person having 
        ordinary skill in the art to which the claimed 
        invention pertains.

          Patentability shall not be negated by the manner in 
        which the invention was made.

    35 U.S.C. Sec. 103.

    Although section 103 was amended slightly in the AIA, those 
amendments have been seen as technical and not substantively 
altering the test of obviousness. Thus, the leading cases on 
obviousness continue to be KSR Int'l Co. v. Teleflex, Inc., 550 
U.S. 398 (2007) and Graham v. John Deere Co., 383 U.S. 1 
(1966). These two cases (along with the statutory language) 
largely define the process of determining obviousness that has 
been implemented by the USPTO and that is used by courts.

    If it so chose, Congress could further raise the standard 
of patentability to only allow patents for ideas of exhibiting 
``inventive genius.'' However, such a change would represent a 
major disruptive shift in patent law and would likely violate 
many of the international agreements that the US has pushed 
through over the past several decades.

    Bentivolio Question: 5. One issue today is that end-users 
of a device, using it for its normal intended purpose, infringe 
on patents that the manufacturers of the devices do not 
infringe upon. (See Ars Technica, ``Meet the nice-guy lawyers 
who want $1,000 per worker for using scanners,'' April 7 2013.) 
The situation is plainly absurd. Is there a judicial remedy for 
the victims of the patent trolls? What legislative remedy would 
you envision? More specifically, how is it that an end-user, 
using a device in an advertised manner, is taken to be an 
``inventor'' when the maker of the device is not?

    Crouch Response: First, only an very small number of 
individuals have been sued for patent infringement over the 
past 100 years apart from wealthy corporate owners sued under a 
corporate veil piercing theory. However, an increasing number 
of patent holders are considering end-user campaigns against 
relatively small companies who are merely using off-the-shelf 
technology in a manner that it was intended by the 
manufacturer. Compounding this issue, a number of these patents 
(including the ones mentioned in the Ars Technica article) are 
of questionable validity.

    If we focus here on the hardship caused to small and medium 
sized businesses, I should first note that the two solutions 
noted above (insurance and standardized indemnification) could 
go a long way toward protecting these interests.

    I also would support an expanded fair-use doctrine of 
patent infringement that would permit small-scale and non-
commercial use of another's patented invention without fear of 
being charged as an infringer. Such a doctrine would have very 
little negative impact on patent valuation, but could go a long 
way in relieving fears associated with being accused of patent 
infringement.

    Bentivolio Question: 6. Do you believe the lifetime of a 
patent, the same across all types of utility patents, is 
reasonable in its duration for all types of inventions?

    Crouch Response: The primary policy goal behind patent 
rights is to encourage innovation. The offer of potential 
exclusive rights provides an incentive to research and develop 
new technologies and new solutions to contemporary problems. 
Rather than granting rights in perpetuity, the drafters of the 
US Constitution determined that those rights should be of 
limited terms. To the extent a patent carries monopoly power, 
that power will only be temporary, and, following a patent's 
expiration, the ideas behind the invention will be fully 
available for free public use. In general, a longer patent term 
is thought to be more valuable to a patentee and thus provide a 
stronger incentive for research while a shorter patent term 
reduces the negative monopoly impact and give the public 
earlier access to the invention.

    The ``optimal'' patent term has been the subject of 
substantial economic research and the most agree-upon 
conclusion is that the patent term should be just long enough 
to provide the necessary incentive to innovate. In a world of 
perfect information and bureaucratic efficiency, the term could 
be adjusted on an invention-by-invention basis where we 
determine the term necessary for the patentee to recoup its 
investments in research and development along with an 
appropriate rate of return. That approach is a fools-dream.

    A more practical approach could be to divide patent term 
according to the market area or area of technology. Areas that 
require more incentive (typically larger investment over a 
larger period of time) could be given longer patent terms while 
areas that require less incentive would be given less patent 
term. Other levers could be used, such as increasing/decreasing 
the patent damages award for particular areas of technology or 
increasing/decreasing the requirement of proving obviousness 
for those areas of technology.

    I have developed a tentative stance against dividing the 
patent system by areas of technology. My position is largely 
based upon issues of political economy, tradition, and 
reflection on the Copyright Act. In particular, the current 
system where all patent rights (regardless of technology) are 
given the same level of respect requires a substantial amount 
of cross-industry agreement before any change will be made. 
Lobbying by one industry (such as the branded pharmaceutical 
industry) is countered by lobbying by another industry (such as 
the high-tech and software industry). If the definition of 
rights were defined by-industry I fear that we would see a 
great increase in lobbying power by those industries in ways 
that protect industry incumbents but that tend to exclude new 
entrants.

    Although something of an aside, the structure patent 
examination and patent term help to direct research toward 
particular types of inventions. In particular, the patent 
examination process typically takes about three years and the 
patent is not enforceable until it issues. Subsequently, the 
patent will be in force four about seventeen years. Thus, 
valuable inventions are those that will see market value during 
that seventeen year period beginning three years from the 
patent application date. New patents are thus something 
corporations consider as part of their five and ten year 
strategic plans rather than offering profits for the immediate 
year. In my view, that delayed value is useful because it 
rewards longer term planning and strategy that, in turn, 
hopefully leads to increased stability and more lasting 
economic security.

    Bentivolio Question: 7. If two companies independently 
invent the same thing within a reasonable period, doesn't that 
suggest the invention is really neither's to exclude from the 
other? Does innovation and invention mean the same thing?

    Crouch Response: Yes, I agree that near-simultaneous 
invention is one indication that an invention was obvious. 
However, such an occurrence is not conclusive proof because 
innovation races occur regularly where multiple companies (or 
countries) are each racing to be the first to reach the same 
hard target.

    Invention and innovation are related but not the same. I 
use invention as a term of art in patent law and innovation 
more loosely as an advance that may or may not be patentable.

    Bentivolio Question: 8. How would you devise some standards 
for the patent office to reject issuing patents for gadgetry?

    Crouch Response: The three primary standards for issuing 
patents on gadgetry are (1) that the invention represents a 
substantial advance in technology (nonobviousness); (2) that 
the invention is fully described in the patent application so 
that others can read and understand the invention (enablement); 
and (3) that the patent claims are written in a way that 
informs the public of the patent's scope (definite claims). 
These standards are all in place and the USPTO has policies in 
place so that these standards are considered by the patent 
examiner for each and every patent prior to issuance. I have 
studied the patenting process extensively and have found that 
the USPTO initially rejects the vast majority of patent 
applications (80% +) based upon one of these three standards. 
Following that initial rejection, most patent applicants are 
able to amend their patent to better fit within the statutory 
guidelines. Some applicants are successful in this argument, 
but more than 100,000 patent applications are abandoned each 
year based upon their failure (in the eyes of the USPTO) to 
meet the requisite standards.

    Bentivolio ?Question: 9. How do we return the patent office 
to its constitutional role of protecting real ingenuity, by 
stopping the issue of frivolous patents?

    Crouch Response: To be clear, the USPTO makes many mistakes 
and issues thousands of patents each year that do not meet the 
appropriate standards discussed above. The agency needs to do a 
better job. Although there are some litigation abuses in the 
system, I continue to see the greatest problems with the patent 
system as derived from poorly issued patents. In truth, the 
Patent Office has struggled with this issue for its entire 
history--ever since Thomas Jefferson took on the role as the 
original patent examiner. We should not expect to find a single 
all-powerful solution that stops the issuance of frivolous 
patents but instead we should expect a daily struggle to 
maintain the highest standards and rigor. The following is a 
concise and abridged list of several ways that Congress can 
move this forward:

          1. Over the past decade, Congress has been quite lax 
        at exerting detailed oversight over the USPTO and its 
        patent examination process. Former USPTO Director David 
        Kappos had a strong working relationship with Congress. 
        However, it has been more than one year since Director 
        Kappos left the position in January 2013. As we stand 
        now, the USPTO has been without a Senate approved 
        Director for more than one year, and has been without 
        even an Acting Director for the past three months. At 
        this point, direct Congressional oversight may be the 
        best way to push the Administration toward getting the 
        agency quickly back on track.

          2. One of the most effective ways to improve the 
        patent examination quality may be to Ensure that the 
        USPTO receives funding necessary to hire, train, 
        retain, and retrain excellent patent examiners who are 
        both skilled in the appropriate areas of technology and 
        also committed to the valuable filtering role of the 
        Agency.

          3. In addition to personnel, proper examination also 
        requires quality infrastructure so that examiners can 
        quickly and accurately identify the best potential 
        prior art and link that prior art to the patentee's 
        claim language. As with personnel, that infrastructure 
        requires necessary funding.

    Thank you.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    
    Chairman Graves, Ranking Member Velazquez and members of 
the House Small Business Committee, on behalf of the National 
Retail Federation (NRF) and its division Shop.org, I appreciate 
the opportunity to submit this written statement to the 
Committee in connection with its hearing entitled ``Patent 
Reform Implementation and New Challenges for Small Businesses'' 
held on May 15, 2013.

    As the world's largest retail trade association and the 
voice of retail worldwide, NRF represents retailers of all 
types and sizes, including chain restaurants and industry 
partners, from the United States and more than 45 countries 
abroad. Retailers operate more than 3.6 million U.S. 
establishments that support one in four U.S. jobs--42 million 
working Americans. Founded in 1996, Shop.org's 600 members 
include the 10 largest outline retailers in the U.S. and more 
than 60 percent of the Internet Retailer Top 100 E-Retailers. 
Contributing $2.5 trillion to annual GDP, retail is a daily 
barometer for the nation's economy. Retailers create 
opportunities for life-long careers, strengthen communities at 
home and abroad, and play a leading role in driving innovation. 
Learn more at www.nrf.com.

    Comments

    Members of the National Retail Federation appreciate the 
attention the Committee is paying to the issue of patent reform 
and the changing landscape of patent law and its effect on 
small businesses.

    In recent years, over 200 retailers, including independent 
retailers and small businesses, have contacted NRF about patent 
trolls' demands and litigation because they have been, or are 
currently, the target of patent trolls' abusive practices. The 
threat typically comes from firms whose business model is 
buying obscure patents which are about to expire and then 
either licensing the patents to retailers through the threat of 
litigation or filing lawsuits in an effort to force a 
settlement. Often retailers will choose to pay the licensing 
fee because patent litigation is prohibitively expensive.

    Many retailers are using capital resources to settle with 
or fight patent trolls' infringement claims that they would 
otherwise use to invest in their businesses, including jobs, 
innovation and refurbishment of their stores. Retail, at its 
core, is a highly competitive industry, and many retailers are 
using innovative technology creatively to expand and grow their 
businesses. Patent trolls, who are not investing in 
technological innovation, providing jobs or engaging in 
communities, employ tactics that cut at the heart of this 
growth and ingenuity.

    Patent trolls sued more non-tech companies than tech 
companies in 2012.\1\ Patent trolls employ a strategy that 
focuses on end-users such as retailers because end-users are 
more numerous. One manufacturer or vendor may supply a product 
or service to thousands of retail end-users. Thus, there are 
many more entities from which to demand a royalty. The end-user 
retailers are also easy prey because they lack the legal 
resources and in-house expertise to fight complex patent 
infringement claims. Compared to high tech companies, retailers 
typically operate on thin profit margins. Patent trolls, 
knowing that retailers lack technical expertise, retail stores 
operate on thin margins, and patent litigation is exorbitantly 
expensive, will often price a settlement demand (which may 
reach as high as millions of dollars) below the cost of 
litigating, effectively blackmailing a retailer into 
settlement. This is an abuse of the system.
---------------------------------------------------------------------------
    \1\ Colleen Chien, ``Patent Trolls by the Numbers,'' Patently-O, 
March 14, 2013. http://www.patentlyo.com/patent/2013/03/chien-patent-
trolls.html

    Patent trolls assert infringement claims covering the use 
of technology in all areas of e-commerce and mobile retailing 
because in addition to targeting specific software innovation, 
their claims are based on broad concepts and a general way of 
doing something. This approach is especially damaging to 
retailers, who are embracing new technology and groundbreaking 
---------------------------------------------------------------------------
innovation to better serve their customers.

    For example, MacroSolve, Inc. has filed numerous suits 
related to violating U.S. Patent No. 7,822,816, which is a 
method patent covering the process that many businesses have 
used to develop their mobile apps. It has sued technology 
companies, service providers and end-users, including 
retailers. Over half of the defendants have settled, but the 
settlement details have not been publicly released. MacroSolve 
claims their patent covers thousands of apps as well as those 
yet to be developed.\2\ This is of great concern to the retail 
community, which increasingly relies on mobile apps as part of 
their omnichannel presence in the marketplace.
---------------------------------------------------------------------------
    \2\ Robert Evatt, ``MacroSolve adds Wal-mart to list of patent 
lawsuits,'' Tulsa World, February 8, 2012. http://www.tulsaworld.com/
site/
printerfriendlystory.aspx?articleid=20120208--52--
E1--Jsasat255194&PrintComments=1

    Trolls' claims not only affect e-commerce applications but 
also affect the operations of traditional ``brick and mortar'' 
retail stores. Some examples of the latter are claims that 
purport to cover the printing of receipts at cash registers, 
the sale of gift cards, and the connection of any product such 
---------------------------------------------------------------------------
as a computer or printer to an Ethernet network.

    These cases rarely go to trial because the damages claims 
are so exorbitant, and the prospect of relief through 
litigation so time-consuming, that retailers make a business 
decision to settle, rather than litigate. It has been reported 
that trolls lose 92 percent of cases that do go to trial, but, 
as noted, it is infrequent that a defendant has the fortitude 
and resources to litigate. Small businesses in the retail 
sector may find themselves particularly ill-equipped legally or 
financially to defend themselves from abusive claims, and 
dealing with these claims certainly inhibits their ability to 
innovate and grow.

    The excessive costs associated with seeing a court case 
through to final adjudication are startling for retailers, 
especially small businesses. We have heard from our members 
that some spend as much as one million dollars or more annually 
on patent troll-related litigation and other expenses. For 
smaller-sized retailers, these costs could put them out of 
business, and at the very least these expenditures and the 
employee hours diverted to fighting patent trolls are precious 
capital resources that they would rather reinvest in their 
businesses.

    The recent case of Soverain v. Newegg demonstrates that 
many costly steps involved in litigating a patent case and the 
enormous economic impact that just one patent troll can wreak 
on an industry. Beginning in 2004 and continuing up through 
2012, Soverain has filed numerous suits against dozens of 
retailers alleging that the basic check-out technology used by 
nearly all websites infringe its patents \3\. One large 
retailer is reported to have settled the first suit for $40 
million because of the fear of jury verdicts in that era in the 
Eastern District of Texas. Numerous other settlement amounts 
are unreported, but in a subsequent suit, an Eastern District 
of Texas jury awarded damages of almost $18 million against two 
other national brands.
---------------------------------------------------------------------------
    \3\ Joe Mullin, ``How Newegg Crushed the ``Shopping Cart'' Patent 
Troll and Saved Online Retail'' ArtsTechnica.com, January 27, 2013, 
http://arstechnica.com/tech-policy/2013/01/how-newegg-crushed-the-
shopping-cart-patent-and-saved-online-retail/

    In 2007 Soverain sued Newegg, which decided to fight back. 
The case went to trail three years later in April of 2010 and 
resulted in a judgment of $2.5 million against Newegg. But 
Newegg decided to appeal to the Federal Circuit, and on January 
14, 2013, more than five years after the suit against it was 
first instituted, it obtained a judgment in its favor, 
reversing the lower court judgment and declaring the patents 
invalid due to obviousness. Although Newegg has won, it took 
more than five years and millions of dollars in attorneys' and 
legal fees. And the saga is not over yet because Soverain still 
has pending before the Federal Circuit a petition for re-
hearing of the case en banc by the full court, as opposed to 
the panel of three judges that rendered the most recent 
---------------------------------------------------------------------------
decision.

    The Newegg case is just one example of the broad 
infringement claims trolls are asserting against retailers. 
There are over one million software patents in the United 
States. Many software patents contain broad concepts dealing 
with Internet functionality and have extraordinarily vague 
claims.

    NRF is engaged in discussions with Members of Congress to 
address the abusive litigation practices patent trolls utilize. 
Retailers support the Saving High Tech Inventors from Egregious 
Legal Disputes (SHIELD) Act. By requiring the patent troll to 
pay the defendant's attorneys fees and costs, the SHIELD Act 
would help deter frivolous litigation.

    The America Invents Act (AIA), which the President signed 
into law in September 20122, established a Patent and Trademark 
Reserve Fund. The United States Patent and Trademark Office 
(USPTO) is required to deposit all patent and trademark fees 
collected in excess of the annual appropriation amount into the 
fund. The provision also provides for authorization to spend 
all fees deposited in this fund in the USPTO's annual 
appropriations. The AIA also establishes a provision requiring 
patent fees to be used only for patent operations, including a 
share of administrative expenses.\4\
---------------------------------------------------------------------------
    \4\ USPTO.gov

    Senator Schumer recently introduced the Patent Quality 
Improvement Act of 2013, which also aims to produce better 
quality business method patents. Retailers feel his is an 
important step, and coupled with further litigation reform will 
---------------------------------------------------------------------------
be helpful in alleviating this extraordinary problem.

    Retailers are also considering a legislative proposal which 
would limit the scope of discovery requests in patent 
litigation to ``core documents'' to help drive down the 
excessive costs associated with patent trolls' current model of 
abusive and endless discovery requests. These abusive discovery 
requests are another expensive tactic used by trolls to drive 
up the costs of litigation in order to compel retailers into 
early settlements.

    While these proposals are laudable, retailers are 
ultimately seeking a solution that provides immunity from 
patent trolls altogether. As we stated earlier, patent trolls 
target retailers and other end-users because they are numerous 
and are easy prey. But as end-users of the technology being 
disputed broadly and vaguely, they should not be the principal 
targets of these far-reaching lawsuits.

    Conclusion

    By papering retailers with broad and vague demand letters 
and filing an endless series of lawsuits against retail end-
users alleging the same patent infringement claims alleged 
against manufacturers and service providers of a particular 
device or technology, patent trolls are able to cast a very 
wide net that hauls in a lucrative catch. They have proven that 
many of the companies they target will settle given the 
extraordinarily high demands they make and the costs those 
companies know it will take to fight even the most frivolous of 
alleged claims. Addressing this abusive and growing patent 
litigation problem will help release retailers from the 
controlling grip on their industry that patent trolls currently 
enjoy. Because the retail industry contributes $2.5 trillion to 
our nation's annual GDP, removing or even loosening this grip 
on retailers will allow innovation and growth to flourish, and 
undoubtedly benefit the overall U.S. economy.

    NRF thanks the Committee for their examination of the 
impact of patent reform and is happy to work with Members of 
the Committee to find effective solutions against patent 
trolls' egregious behavior.

                                 
