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



 
                            INNOVATION ACT

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

                                HEARING

                               BEFORE THE

                       COMMITTEE ON THE JUDICIARY
                        HOUSE OF REPRESENTATIVES

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                                   ON

                               H.R. 3309

                               ----------                              

                            OCTOBER 29, 2013

                               ----------                              

                           Serial No. 113-58

                               ----------                              

         Printed for the use of the Committee on the Judiciary


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


                               SPINE deg.

                             INNOVATION ACT




                             INNOVATION ACT

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

                                HEARING

                               BEFORE THE

                       COMMITTEE ON THE JUDICIARY
                        HOUSE OF REPRESENTATIVES

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                                   ON

                               H.R. 3309

                               __________

                            OCTOBER 29, 2013

                               __________

                           Serial No. 113-58

                               __________

         Printed for the use of the Committee on the Judiciary


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

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                       COMMITTEE ON THE JUDICIARY

                   BOB GOODLATTE, Virginia, Chairman
F. JAMES SENSENBRENNER, Jr.,         JOHN CONYERS, Jr., Michigan
    Wisconsin                        JERROLD NADLER, New York
HOWARD COBLE, North Carolina         ROBERT C. ``BOBBY'' SCOTT, 
LAMAR SMITH, Texas                       Virginia
STEVE CHABOT, Ohio                   MELVIN L. WATT, North Carolina
SPENCER BACHUS, Alabama              ZOE LOFGREN, California
DARRELL E. ISSA, California          SHEILA JACKSON LEE, Texas
J. RANDY FORBES, Virginia            STEVE COHEN, Tennessee
STEVE KING, Iowa                     HENRY C. ``HANK'' JOHNSON, Jr.,
TRENT FRANKS, Arizona                  Georgia
LOUIE GOHMERT, Texas                 PEDRO R. PIERLUISI, Puerto Rico
JIM JORDAN, Ohio                     JUDY CHU, California
TED POE, Texas                       TED DEUTCH, Florida
JASON CHAFFETZ, Utah                 LUIS V. GUTIERREZ, Illinois
TOM MARINO, Pennsylvania             KAREN BASS, California
TREY GOWDY, South Carolina           CEDRIC RICHMOND, Louisiana
MARK AMODEI, Nevada                  SUZAN DelBENE, Washington
RAUL LABRADOR, Idaho                 JOE GARCIA, Florida
BLAKE FARENTHOLD, Texas              HAKEEM JEFFRIES, New York
GEORGE HOLDING, North Carolina
DOUG COLLINS, Georgia
RON DeSANTIS, Florida
JASON T. SMITH, Missouri

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


                            C O N T E N T S

                              ----------                              

                            OCTOBER 29, 2013

                                                                   Page

                           OPENING STATEMENTS

The Honorable Bob Goodlatte, a Representative in Congress from 
  the State of Virginia, and Chairman, Committee on the Judiciary     2
The Honorable John Conyers, Jr., a Representative in Congress 
  from the State of Michigan, and Ranking Member, Committee on 
  the Judiciary..................................................     3
The Honorable Howard Coble, a Representative in Congress from the 
  State of North Carolina, and Member, Committee on the Judiciary     5
The Honorable Melvin L. Watt, a Representative in Congress from 
  the State of North Carolina, and Member, Committee on the 
  Judiciary......................................................     5

                               WITNESSES

Krish Gupta, Senior Vice President and Deputy General Counsel, 
  EMC Corporation
  Oral Testimony.................................................     9
  Prepared Statement.............................................    12
Kevin T. Kramer, Vice President and Deputy General Counsel 
  Intellectual Property, Yahoo! Incorporated
  Oral Testimony.................................................    23
  Prepared Statement.............................................    25
David J. Kappos, Partner, Cravath, Swaine & Moore LLP
  Oral Testimony.................................................    37
  Prepared Statement.............................................    39
Robert A. Armitage, IP Strategy and Policy Consultant
  Oral Testimony.................................................    47
  Prepared Statement.............................................    49

          LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING

Prepared Statement of the Honorable Melvin L. Watt, a 
  Representative in Congress from the State of North Carolina, 
  and Member, Committee on the Judiciary.........................     7
Material submitted by the Honorable Tom Marino, a Representative 
  in Congress from the State of Pennsylvania, and Member, 
  Committee on the Judiciary.....................................   121
Material submitted by the Honorable Judy Chu, a Representative in 
  Congress from the State of California, and Member, Committee on 
  the Judiciary..................................................   137
Material submitted by the Honorable Hakeem Jeffries, a 
  Representative in Congress from the State of New York, and 
  Member, Committee on the Judiciary.............................   155
Material submitted by the Honorable Darrell E. Issa, a 
  Representative in Congress from the State of California, and 
  Member, Committee on the Judiciary.............................   159

                                APPENDIX
               Material Submitted for the Hearing Record

Prepared Statement of Robert A. Armitage, Eli Lilly and Company..   170
Material submitted by The Coaliton for 21st Century Patent Reform   203
Letter from Teresa Stanek Rea, Acting Under Secretary and Acting 
  Director, United States Patent and Trademark Office............   231
Prepared Statement of the National Retail Federation.............   245
Letter from Dr. David Martin, Chairman, M  CAM Inc.......   248
Letter from various companies....................................   253
Prepared Statement of Judge Paul R. Michel (Ret.)................   260
Prepared Statement of the Independent Community Bankers of 
  America' (ICBA).....................................   264
Letter from Brad Thaler, Vice President of Legislative Affairs, 
  the National Association of Federal Credit Unions (NAFCU)......   266
Letter from the Financial Services Patent Coalition..............   268
Prepared Statement of Barry Melancon, President and CEO, American 
  Institute of Certified Public Accountants (AICPA)..............   271
The bill, H.R. 3309, the ``Innovation Act''......................   275


                             INNOVATION ACT

                              ----------                              


                       TUESDAY, OCTOBER 29, 2013

                        House of Representatives

                       Committee on the Judiciary

                            Washington, DC.

    The Committee met, pursuant to call, at 10:10 a.m., in room 
2141, Rayburn Office Building, the Honorable Bob Goodlatte 
(Chairman of the Committee) presiding.
    Present: Representatives Goodlatte, Sensenbrenner, Coble, 
Smith, Bachus, Issa, Forbes, King, Franks, Jordan, Poe, 
Chaffetz, Marino, Gowdy, Labrador, Farenthold, Holding, 
Collins, DeSantis, Smith, Conyers, Watt, Lofgren, Cohen, 
Johnson, Chu, Deutch, DelBene, Garcia, and Jeffries.
    Staff present: (Majority) Shelley Husband, Chief of Staff & 
General Counsel; Branden Ritchie, Deputy Chief of Staff & Chief 
Counsel; Allison Halataei, Parliamentarian & General Counsel; 
Vishal Amin, Counsel; Kelsey Deterding, Clerk; (Minority) Perry 
Apelbaum, Minority Staff Director & Chief Counsel; Danielle 
Brown, Parliamentarian; Stephanie Moore, Counsel; and Jason 
Everett, Counsel.
    Mr. Goodlatte. Good morning. The Judiciary Committee will 
come to order.
    And, without objection, the Chair is authorized to declare 
recesses of the Committee at any time.
    Before we begin, I want to take a moment and acknowledge a 
recent milestone for the former Chairman of the Judiciary 
Committee, the gentleman from Michigan, Mr. Conyers.
    During the month of September, when we were focused on 
other things that were perhaps not as important as this, we 
overlooked the fact that Mr. Conyers surpassed Sam Rayburn as 
the fifth longest serving Member of the U.S. House of 
Representatives in our Nation's entire history. So we commend 
the gentleman from Michigan for this achievement. And thank him 
for the pleasure of working with him for so many years.
    Mr. Conyers. Thank you, sir. Thank you very much. 
[Applause.]
    Mr. Goodlatte. Do you want to say something?
    Mr. Conyers. Chairman Goodlatte that----
    Mr. Goodlatte. Without objection, the gentleman is 
recognized to explain that.
    Mr. Conyers. Yes. [Laughter.]
    Chairman Goodlatte, this is a surprise and a privilege of 
working here in the House.
    I came here when Manny Celler was the Chairman, and it was 
the Committee that I wanted to serve on. And, I must admit, it 
was--the civil rights issues were very prominent at that time. 
And I've enjoyed it ever since and that includes during your 
chairmanship as well. And I thank you very much for your 
generosity.
    Thank you.
    Mr. Goodlatte. The Chair thanks the gentleman and thanks 
him for making that wise decision.
    Today we are here to discuss H.R. 3309, the ``Innovation 
Act.'' The enactment of this bill is something I consider 
central to U.S. competitiveness, job creation and our Nation's 
future economic security. This bill takes meaningful steps to 
address the abusive practices that have damaged our patent 
system and resulted in significant economic harm to our Nation.
    During the last Congress, we passed the America Invents 
Act. Many view the AIA as the most comprehensive overhaul to 
our patent system, since the 1836 Patent Act. However, the AIA 
was, in many respects, a prospective bill.
    The problems that the Innovation Act will solve are more 
immediate and go to the heart of current, abusive patent 
litigation practices. This bill builds on our efforts over the 
past decade. It can be said that this bill is the product of 
years of work. We have worked with Members of both parties in 
both the Senate and the House, with stakeholders from all areas 
of our economy and with the Administration and the courts.
    To ensure an open, deliberative and thoughtful process, we 
held hearings and issued two public discussion drafts, in May 
and September of this year, which led to the formal 
introduction of the Innovation Act last week.
    Abusive patent litigation is a drag on our economy. 
Everyone from independent inventors to startups to mid- and 
large-size businesses face this constant threat. The tens of 
billions of dollars spent on settlements and litigation 
expenses associated with abusive patent suits represent truly 
wasted capital. Wasted capital that could have been used to 
create new jobs, fund research and development, and create new 
innovations and technologies that promote the progress of 
science and youthful arts.
    Within the past couple years, we have seen an exponential 
increase in the use of weak or poorly-granted patents to send 
out purposely evasive blanket demand letters or file numerous 
patent-infringement lawsuits against American businesses with 
the hopes of securing a quick payday. Many of these abusive 
practices are focused not just on larger companies, but against 
small- and medium-sized businesses as well. These suits target 
a settlement just under what it would cost for litigation, 
knowing that these businesses will want to avoid costly 
litigation and probably pay up.
    Such abusive patent suits claim ownership over basic ideas 
such as sending a photocopy to email, aggregating news 
articles, offering free Wi-Fi in your shop, or using a shopping 
cart on your website. Something is terribly wrong here. The 
patent system was never intended to be a playground for 
litigation extortion or frivolous claims.
    One egregious example is of a company that has been suing 
small app developers and end users over a vaguely worded patent 
that claims that any app that allows for in-app purchases 
violates their patent. This early-90's patent apparently 
discusses a method for providing remote customer feedback using 
a fax machine.
    Though their patent may not be novel or nonobvious, they 
made their first obvious error just last month, when they sent 
Martha Stewart a demand letter asking for $5,000 for each of 
her company's four apps. Instead of paying up, Ms. Stewart 
filed a declaratory judgment action in Federal court in 
Wisconsin. Fortunately, Ms. Stewart chose to fight. 
Unfortunately, many small businesses simply do not have the 
resources to do so and must capitulate to this type of patent 
extortion.
    The Innovation Act contains needed reforms to address the 
issues that businesses of all sizes and industries face from 
patent-troll-type behavior, while keeping in mind several key 
principles including targeting abusive behavior rather than 
specific entities, preserving valid patent enforcement tools, 
preserving patent property rights, promoting invention by 
independents and small businesses, and strengthening the 
overall patent system. Congress, the Federal courts and the PTO 
must take the necessary steps to ensure that the patent system 
lives up to its constitutional underpinnings.
    And let me be clear about Congress' constitutional 
authority in this area. The Constitution grants Congress the 
power to create the Federal courts, and the Supreme Court has 
long recognized that the prescription of court procedures falls 
within the legislative function. To that end, the Innovation 
Act includes heightened pleading standards and transparency 
provisions requiring parties to do a bit of due diligence 
upfront before filing an infringement suit is just plain common 
sense.
    It not only reduces litigation expenses, but saves the 
courts time and resources. Greater transparency and information 
makes our patent system stronger.
    The Innovation Act also provides for more clarity 
surrounding initial discovery, case management, joinder, and 
the common law doctrine of customer stays. The bill's 
provisions are designed to work hand-in-hand with the 
procedures and practices of the Judicial Conference including 
the Rules Enabling Act and the courts, providing them with 
clear policy guidance while ensuring that we are not 
predetermining outcomes. And that the final rules in the 
legislations' implementation in the courts will be both 
deliberative and effective.
    We can take steps toward eliminating the abuses of our 
patent system, discouraging frivolous patent litigation and 
keeping U.S. patent laws up-to-date. Doing so will help fuel 
the engine of American innovation and creativity, creating new 
jobs and growing our economy.
    I look forward to hearing from all of our witnesses on the 
Innovation Act and the issue of abusive patent litigation.
    And it's now my pleasure to recognize the Ranking Member, 
the gentleman from Michigan, Mr. Conyers, for his opening 
statement.
    Mr. Conyers. Thank you, Chairman Goodlatte.
    Members of the Committee, there are few economic issues our 
Committee will face that are more important than whether and 
how to reform our patent laws.
    Intellectual property, principally patents, are responsible 
for nearly one-third of all the jobs in U.S. economy. Our 
patent system, while not perfect, is the envy of the world and 
perhaps the most significant driver of growth in our economy.
    I believe that issues of non-practicing entities, or the 
so-called patent trolls, present unique problems that are 
worthy of congressional attention. There is a disconnect when 
shell corporations with little or no assets can threaten 
thousands of small end users with ill-conceived patent 
litigation over ordinary business practices. If we don't know 
who these shell companies are, if the shell companies have no 
operating businesses or assets and if they are given free 
license to engage in endless and costly discovery we have a 
problem that requires our attention and legislation.
    But, at the same time, we need to be careful in addressing 
these problems. Our first rule should be to make sure we do no 
harm to our patent system or take any actions which 
unintentionally discourage innovation or increase litigation. 
As the former director of Patent and Trademark Office, David 
Kappos, reminds us: we are not just tinkering with any system 
here. We're reworking the greatest innovation engine the world 
has ever known almost instantly after it has been significantly 
overhauled.
    If there were ever a case where caution is called for, this 
is it. And, in this regard, I don't see any reason why we 
should be considering amending the fee-shifting statute, when 
the Supreme Court has just agreed to take up the very issue. 
Similarly, I see no rush to expand the use of business-method 
patents when the PTO and the courts are just now beginning to 
review cases brought under the law we just passed. Any changes 
we make must be carefully balanced and consistent with our 
principles and constitutional imperatives.
    For 80 years we've asked our Federal judges, the experts on 
litigation, to develop rules for their own court rooms. That 
system has worked well and I see no reason to abrogate the 
principle of separation of powers now. And, if we're going to 
consider crafting new rules on discovery, stays and joinder, we 
should insist that the rules work the same for all parties, 
plaintiffs and defendants.
    Nor should we be crafting a series of special carve-outs 
from the legislation for the pharmaceutical industry. The last 
thing we need to do is to create two systems of patent laws, 
one for the pharmaceuticals and one for everybody else.
    We cannot lose sight of the single most important problem, 
to me, that's facing our patent system today: the continuing 
diversion of patent fees. The most effective step we can take 
in responding to abusive patent litigation is making sure poor-
quality patents are not issued to begin with. To do that, we 
need to give our examiners the resources they need to review 
and analyze the hundreds of thousands of complex and 
interrelated patent applications they receive every year.
    And that's why yesterday, along with my colleagues, 
Representatives Watt and Issa and Collins, we've introduced 
bipartisan legislation, the Innovation Protection Act, which 
does exactly that on a permanent and statutory basis. This will 
apply regardless of the sequester or any future shutdowns. And 
I stand ready, able and willing to work with Members on both 
sides of the aisle in tackling these problems. But I would urge 
my friend the Chairman to move cautiously, carefully and 
deliberately.
    And I thank you for the opportunity to deliver my 
statement.
    Mr. Goodlatte. Well, thank you, Mr. Conyers.
    And we'll now turn to the Chairman of the Subcommittee on 
Courts, Intellectual Property, and the Internet, Mr. Coble of 
North Carolina, for his opening statement.
    Mr. Coble. I thank the Chairman. Good morning.
    Good morning to our panelist and those in the audience.
    Mr. Chairman, today we are here to build on our work to 
ensure that the U.S. patent system operates fairly for all 
parties in the context of litigation and in our courts.
    Abusive patent litigation is a scourge. It is the product 
of those taking advantage of loopholes in the current system to 
engage in what amounts to litigation extortion. H.R. 3309: the 
Innovation Act, builds on the work of the Leahy-Smith America 
Invents Act, the AIA, from 2011 and previous Congresses.
    The AIA was the most substantial reform to U.S. patent law 
since the 1836 Patent Act. While the AIA rewrote the underlying 
patent law and procedure at the PTO, the dramatic rise in 
abusive patent litigation over the last several years 
necessitates our work to address patent-litigation reform 
measures.
    I call all of my fellow Members and stakeholders, Mr. 
Chairman, to continue working with us in a thoughtful and 
deliberative manner as we address abusive patent litigation. 
The rules that we put into place address some of the most 
abusive patent practices, but will apply to all patents. And 
so, it is important that we work collaboratively with the 
Administration and the Senate to ensure that, similarly to the 
AIA, we are enacting meaningful reforms that set patent 
litigation on the right track for decades to come.
    American innovation cannot be held hostage to frivolous 
litigation from weak or overbroad patents. Companies are 
shutting down and folks are losing jobs. To ensure that the 
American economy does not suffer, due to legal gamesmanship 
that is currently taking place, enacting the Innovation Act, in 
my opinion, will be vital.
    I hope to hear more today from our witnesses on the steps 
that need to be taken to promote America's innovation economy 
and create jobs.
    Again, Mr. Chairman, thank you for calling the hearing and 
I yield back.
    Mr. Goodlatte. The Chair thanks the gentleman.
    And is now pleased to recognize the Ranking Member of the 
Subcommittee, the gentleman from North Carolina, Mr. Watt for 
his opening statement.
    Mr. Watt. Thank you, Chairman Goodlatte.
    And let me join with you in congratulating our colleague 
Mr. Conyers on his historic accomplishment today.
    I appreciate the opportunity to thank and welcome all the 
witnesses and especially to welcome back the former 
Undersecretary of Commerce and director of the United States 
Patent and Trademark Office, David Kappos. He's been a 
tremendously valuable resource to me, my staff and other 
Members of the Intellectual Property Subcommittee and this full 
Committee. And I want to thank him for his continued generosity 
of time and expertise.
    I supported the America Invents Act and actively 
participated in its development through bipartisan Member 
meetings as well as joint meetings with stakeholders and 
Administration officials. The reforms enacted in the America 
Invents Act were designed to equip the PTO to deliver better 
quality and more efficient services to the innovative Americans 
who rely upon the office to evaluate and process their patent 
claims fairly.
    The USPTO is ground zero in our efforts to maintain a 
world-class patent system. But, in order to protect our 
innovators from false reliance on bad patents, costly 
litigation in the Federal courts, services that are not 
commensurate with the fees they pay, and a full range of other 
negative things, we must find the political courage to fully 
fund the PTO. That is why I was happy to join with Mr. Conyers 
and my republican colleagues, Mr. Collins and Mr. Issa, in 
introducing the Innovation Protection Act. Guaranteeing that 
our inventors--whether large or small, whether individuals, 
businesses, or universities--get the services they pay for is 
not a complicated proposition.
    Congress has studied and acknowledged the adverse effects 
of depriving the PTO of needed resources, for years. It's good 
policy with virtually universal support. And the time to 
deliver is overdue. And I hope that all Members of this 
Committee will join as cosponsors of our bill and that this 
Committee will act on our legislation promptly.
    The problem we confront with the so-called patent trolls, 
while real, is not, in my opinion, not nearly as enormous as it 
has been portrayed, nor as urgent. The GAO dutifully fulfilled 
its mandate to assess the consequences of patent litigation by 
non-practicing entities.
    The takeaway from that study was that operating companies 
fight more among themselves and brought the bulk of the patent 
lawsuits examined over a period of years. And that the non-
practicing entities brought only a fraction of cases, but 
engage in litigation tactics that pose some unique challenges. 
These unique challenges will undoubtedly require equally unique 
solutions, not solutions that could have an adverse impact on 
all litigants.
    While the Chairman's bill proposes a number of creative 
solutions, we need to carefully examine how they will effect 
not only the bad actors, but how they will effect all 
participants in the patent system. And, while the Chairman 
released two discussion drafts, prior to introducing his bill, 
to date the process of developing and testing these legislative 
proposals has been, quite frankly, both insular and 
disappointing.
    While I support some of the concepts in H.R. 3309, I worry 
about the interaction and execution of some of its particular 
provisions and question the wisdom of others. In the meantime, 
we risk jeopardizing comity with the Federal Judiciary with 
overly prescriptive mandates, losing the trust and confidence 
of the small and independent innovators with unbalanced 
remedies that leave them out of the equation, and even worse we 
run the risk of enacting measures that could not only be 
ineffective, but could exacerbate the current problem or invite 
new unintended problems.
    One need only look to the joinder provisions incorporated 
at the eleventh hour in the America Invents Act. These joinder 
provisions were intended to disrupt the practice of joining 
unrelated defendants in a single case. In that respect, the 
joinder rules were successful. But the unintended, yet, upon 
reflection, not entirely unpredictable consequence has been an 
explosion of litigation against single defendants.
    There are multiple credible and thoughtful stake holders 
who have expressed grave reservations about one provision or 
another in the Chairman's bill. These concerns should not be 
dismissed as opposition or obstructionism. Reflection is much 
needed here. And I hope that moving forward here, there will be 
in-depth, constructive and open reflection and engagement.
    We have spent a considerable amount of time in various 
hearings discussing, even arguing about, the problem. I urge 
the Chairman to devote at least a comparable amount of time to 
evaluating these very discreet and unrelated proposed 
solutions.
    I look forward to hearing from the witnesses and yield 
back.
    Mr. Goodlatte. The Chair thanks the gentleman.
    And without objection, all other Members' opening 
statements will be made a part of the record.
    [The prepared statement of Mr. Watt follows:]

Prepared Statement of the Honorable Melvin L. Watt, a Representative in 
Congress from the State of North Carolina, and Member, Committee on the 
                               Judiciary

    Thank you, Chairman Goodlatte. I appreciate the opportunity to 
thank and welcome all the witnesses and especially welcome back the 
former Under Secretary for Commerce and Director of the United States 
Patent and Trademark Office (USPTO), Dave Kappos. He has been a 
tremendously valuable resource to me, my staff and other members of the 
Intellectual Property Subcommittee and this Committee and I want to 
thank him for his continued generosity of time and expertise.
    I supported the America Invents Act (AIA) and actively participated 
in its development through bipartisan Member meetings, as well as joint 
meetings with stakeholders, congressional leadership and Administration 
officials. The reforms enacted in the AIA were designed to equip the 
PTO to deliver better quality and more efficient services to the 
innovative Americans who rely upon the Office to evaluate and process 
their patent claims fairly. The USPTO is ground zero in our efforts to 
maintain a world-class patent system. But in order to protect our 
innovators from false reliance on bad patents, costly litigation in the 
federal courts, services that are not commensurate with the fees and a 
full range of other negative outcomes, we must find the political 
courage to fully fund the PTO.
    That is why I was happy to join with Mr. Conyers and my Republican 
colleagues, Mr. Collins and Mr. Issa, in introducing the ``Innovation 
Protection Act.'' Guaranteeing that our inventors, whether large or 
small, whether individuals, businesses or universities, get the 
services they pay for is not a complicated proposition. Congress has 
exhaustively studied and acknowledges the adverse effects of depriving 
the PTO of needed resources for years. Its good policy with virtually 
universal support and the time to deliver is overdue. I hope that all 
members of this Committee will join as cosponsors of our bill and that 
this Committee will act on our legislation promptly.
    The problem we confront with the so-called ``patent trolls,'' while 
real, is not, in my opinion, nearly as enormous as it has been 
portrayed, nor is it as urgent. The GAO dutifully fulfilled its mandate 
to assess the consequences of patent litigation by Non-Practicing-
Entities (NPEs). The take away from that study was that operating 
companies fight more among themselves and brought the bulk of the 
patent lawsuits examined over a period of years and that NPEs brought 
only a fraction of cases but engage in litigation tactics that pose 
some unique challenges. These unique challenges will undoubtedly 
require equally unique solutions, not solutions that could erect unfair 
barriers that impact all litigants.
    While the Chairman's bill proposes a number of creative solutions, 
we need to carefully examine how they will affect not only the bad 
actors, but how they will affect all participants in the patent system. 
And while the Chairman released two discussion drafts prior to 
introducing his bill, to date the process of developing and testing 
these legislative proposals has been, quite frankly, both insular and 
disappointing.
    While I support some of the concepts in HR 3309, I worry about the 
interaction and executive of some of its provisions and question the 
wisdom and workability of others. In the meantime, if we move forward 
precipitously with this bill, we risk jeopardizing comity with the 
federal judiciary with overly prescriptive mandates, losing the trust 
and confidence of the small and independent inventors with unbalanced 
remedies that leave them out of the equation and, even worse, we run 
the risk of enacting measures that could not only be ineffective but 
could exacerbate the current problem or invite new, unintended 
problems.
    One need only look to the joinder provisions incorporated at the 
eleventh hour into the AIA. These provisions were intended to disrupt 
the practice of joining unrelated defendants in a single case. In that 
respect the joinder rules were successful. But the unintended (yet, 
upon reflection, not entirely unpredictable) consequence has been an 
explosion of litigation against single defendants.
    There are multiple, credible and thoughtful stakeholders who have 
expressed grave reservations about one provision or another in the 
Chairman's bill. These concerns should not be dismissed as opposition 
or obstructionism. Reflection is much needed here. And, I hope that 
moving forward there will be in-depth, constructive reflection and open 
engagement. We have spent a considerable amount of time in various 
hearings, discussing, (even arguing about) the problem. I urge the 
Chairman to devote at least a comparable amount of time to evaluating 
these very discrete and unrelated proposed solutions.
    I look forward to hearing from the witnesses and yield back.
                               __________

    Mr. Goodlatte. We welcome our panel today.
    And, if you would all rise, I will begin by swearing in the 
witnesses.
    [Witnesses sworn.]
    Mr. Goodlatte. Thank you.
    Let the record reflect that all the witnesses responded in 
the affirmative. And I'll begin by introducing them.
    Our first witness is Mr. Krish Gupta, Senior Vice President 
and Deputy General Counsel of EMC Corporation. In his position, 
Mr. Gupta manages a worldwide portfolio of IP and technology 
licensing, including patent and trademark prosecution and IP 
litigation.
    Prior to his position at EMC, he served 10 years as senior 
counsel at Digital Equipment Corporation. He is a registered 
patent attorney and currently serves on the board of directors 
at the Intellectual Property Owners Association and at the 
Association of Corporate Counsel, Northeast Chapter.
    Mr. Gupta received his J.D. from Suffolk University Law 
School; MBA from the University of South Carolina, Columbia; 
M.S. in electrical engineering from Clemson University; and his 
Bachelor's Degree from the Birla Institute of Technology and 
Science.
    Our second witness is Mr. Kevin Kramer. Mr. Kramer is vice 
president and deputy general counsel for intellectual property 
at Yahoo! where he is responsible for all intellectual property 
matters including the defense of the company in patent 
infringement cases.
    Prior to joining Yahoo!, Kevin was a partner at the law 
firm Pillsbury Winthrop Shaw Pitman representing both 
plaintiffs and defendants in a wide range of patent litigation.
    Kevin has also extensive government and international 
experience. He worked for several years as an associate 
solicitor for the U.S. Patent and Trademark Office. In that 
capacity he represented the USPTO in more than 20 direct 
appeals before the U.S. Court of Appeals for the Federal 
circuit and in numerous civil actions before the U.S. District 
Court for the District of Columbia.
    Kevin also worked for several years as a legal officer in 
the Patent Cooperation Treaty Legal Division of the World 
Intellectual Property Organization in Geneva, Switzerland.
    Our third witness is the Honorable David Kappos. We welcome 
Mr. Kappos' return in front of this Committee. He served as the 
Undersecretary of Commerce for Intellectual Property and 
Director of the United States Patent and Trademark Office from 
August 2009 to January 2013. He is currently a partner in the 
law firm of Cravath, Swaine & Moore.
    Before joining the PTO, Mr. Kappos led the intellectual 
property law department at IBM, serving as vice president and 
assistant general counsel for IP. During his more than 25 years 
at IBM, he served in a variety of roles including litigation 
counsel and Asia-Pacific IP counsel, based in Tokyo, Japan, 
where he led all aspects of IP protection activity for the 
Asia-Pacific region.
    Mr. Kappos received his Bachelor of Science degree in 
electrical and computer engineering from the University of 
California at Davis in 1983; and his law degree from the 
University of California, Berkley, in 1990.
    Our fourth witness is Mr. Robert Armitage. Over the past 
several decades, Mr. Armitage has been an active participant in 
formulating patent policy in the U.S. and abroad. And we are 
very happy to be bringing him back out of retirement for the 
day to testify in front of the Committee.
    Mr. Armitage previously served as senior vice president and 
general counsel of Eli Lilly and Company. Prior to this, he 
served as chief intellectual property counsel for the Upjohn 
Company and was a partner in the Washington D.C. office of 
Vinson & Elkins LLP.
    Mr. Armitage has served in as a past president of the 
American Intellectual Property Law Association and the 
Association of Corporate Patent Counsel.
    Mr. Armitage received his Bachelor's Degree in physics and 
mathematics from Albion College, and his Master's Degree and 
Law from the University of Michigan.
    Welcome to all of you.
    And we'll begin with Mr. Gupta.
    And let me say that each of your written statements will be 
entered into the record in its entirety and we ask that you 
limit your testimony to a summary in 5 minutes or less. To help 
you stay within that time, there's a timing light on your 
table. When the light switches from green to yellow, you will 
have 1 minute to conclude your testimony. When the light turns 
red, it signals that the witness' 5 minutes have expired.
    Now, Mr. Gupta, welcome.

  TESTIMONY OF KRISH GUPTA, SENIOR VICE PRESIDENT AND DEPUTY 
                GENERAL COUNSEL, EMC CORPORATION

    Mr. Gupta. Chairman Goodlatte, Ranking Member Conyers and 
Members of the Committee.
    My name is Krish Gupta and I am senior vice president and 
deputy general counsel for EMC Corporation. I would like to 
thank you for the opportunity to testify today regarding patent 
litigation reform and express EMC's strong support for the 
Innovation Act.
    Headquartered in Hopkinton, Massachusetts, EMC is a global 
leader in cloud computing as well as data storage, backup and 
recovery systems.
    EMC has a keen interest in seeing that our patent system is 
rational, fair and evenly balance. We create many innovations 
and look to the U.S. patent system to protect those innovations 
and the jobs that result from them. We have more than 3,600 
U.S. patents.
    At EMC, I have worldwide responsibility for IP law and 
licensing matters including patent litigation. In my 20 years 
in this field, I have witnessed firsthand how our patent system 
has undergone transformation, not always for the better. 
Abusive patent litigation has swept our country, diverting 
billions of dollars from economic growth and innovation to 
battling frivolous suits filed by patent assertion entities or 
PAEs.
    Since 2005, EMC has been sued by PAEs over 30 times and has 
never found to have infringed. As a matter of principle we 
don't settle frivolous suits, but defending those suits has 
cost us millions and has caused great disruption of our 
business, requiring our employees to shift their attention from 
designing new products and growing the business to sitting in 
depositions or going to court.
    EMC is not alone in this regard. For us a typical PAE suit 
involves a shell company with secret backers created solely to 
file suits. The PAE often sues EMC and dozens of companies in 
separate suits that get consolidated for pretrial purposes. The 
complaint is often vague, provides little information about the 
specific infringement allegations. When cases are consolidated, 
we lose some of our due process rights. We are forced to 
compromise on defense strategies and incur additional legal 
fees in coordinating with others.
    Furthermore, PAEs try to pressure us into settlement by 
demanding thousands of documents and emails during discovery, 
most of which are irrelevant to the suit and costly to produce. 
If we want a decision on the merits, we have to typically wait 
2 years, spend millions and endure massive business disruption. 
Meanwhile, the PAE has nothing to lose, with lawyers on 
contingency, and a steady income stream from defendants who 
have settled along the way. Faced with these choices, most 
defendants cave and are forced to settle. But we don't.
    EMC supports the reform set forth in the Innovation Act. 
Five key elements of this bill are of particular importance to 
us.
    First, this bill ensures that PAEs have something to lose 
when they file meritless suits. We believe the fee-shifting 
provision will strongly discourage the filing of frivolous 
suits.
    Second, this bill levels the playing field by requiring 
disclosure of the real-party in interest and permitting joinder 
of that party. Entities that have a financial interest in a 
lawsuit should not be able to operate in secrecy. They should 
be part of the suit, subject to counter claims and liable for 
attorney's fees for frivolous suits.
    Third, the bill recognizes the need to strengthen the 
specificity in pleadings for patent infringement cases. It 
ensures that a plaintiff has in fact conducted pre-suit 
diligence and has a real basis for filing suit.
    Fourth, the legislation promotes certainty and discovery in 
patent cases. Discovery has become a significant weapon in the 
arsenal of PAEs to try to extort cost of litigation settlements 
in meritless cases.
    Fifth, the bill protects end-user customers by providing 
explicitly that a manufacturer can intervene on behalf of and 
stay a case against a customer. PAEs sue customers in order to 
pressure the manufacturers to settle. This provision is a 
common sense approach that will curb this particularly 
egregious tactic.
    In conclusion, EMC believes the Innovation Act must be 
enacted to restore accountability and balance back into the 
system to alleviate the unfair burdens that PAEs are able to 
put on hardworking companies that are the lifeblood of our 
economy. We believe that this legislation is essential to 
protecting America's position as the most innovative nation in 
the world. We urge you to swiftly pass the Innovation Act and 
we stand prepared to help you in any way we can to bring a bill 
to the President's desk in short order.
    Thank you and I look forward to your questions.
    [The prepared statement of Mr. Gupta follows:]

    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    


                               __________
    Mr. Goodlatte. Thank you, Mr. Gupta.
    Mr. Kramer, welcome.

TESTIMONY OF KEVIN T. KRAMER, VICE PRESIDENT AND DEPUTY GENERAL 
       COUNSEL INTELLECTUAL PROPERTY, YAHOO! INCORPORATED

    Mr. Kramer. Chairman Goodlatte, Ranking Member Conyers, 
Members of the Committee, thank you for inviting me to testify 
today.
    Yahoo! shares your interest in reducing patent litigation 
abuse and promoting American innovation. And we applaud your 
leadership and we support the Innovation Act.
    I am honored to have the opportunity to offer my 
perspective as Yahoo!'s lead IP attorney and based on my 
previous experience as a trial attorney in private practice and 
the USPTO.
    Yahoo! is an Internet pioneer and serves over 800 million 
users worldwide today. Our success is due, in no small part, to 
our continual innovation. We hold over 1600 U.S. patents. And 
we have enforced those patents when we felt the need to do so.
    Clearly, we believe in the patent system and we believe 
patents have a positive role to play in society. But here is 
the bottom line: abusive patent litigation practices by patent 
trolls are harming our business and harming our industry.
    This has a cost. For Yahoo! the money effort and time that 
we spend could be more productively spent elsewhere developing 
new products, investing in equipment and creating jobs. We 
believe that common sense reform, like measures proposed in the 
Innovation Act, would make significant strides to restore the 
desired balance between protecting intellectual property and 
discouraging patent litigation abuse.
    Yahoo!'s experience highlights how the system is now out of 
balance. Between 1995 and 2006, Yahoo! faced between two and 
four patent cases on its docket at any given time. Since 2007, 
we've seen a tenfold increase in the number of cases on our 
docket at any given time. And the merits of those cases has 
declined. In about 96 percent of all cases filed against Yahoo! 
in the last 6 years, the plaintiffs fail to identify a patent 
claimant issue and they fail to identify the features of our 
products at issue. So, instead we have to guess what the cases 
are about when they're filed.
    Requiring more genuine notice pleading would make cases 
more efficient for everybody. In most cases we're required to 
produce hundreds of thousands of document before the court 
construes the patent claims at issue. Most of the cost of 
production could be avoided by simply staging discovery after 
claim construction, since that is the most pivotal point in 
most cases. In our experience, less than 1 percent of all 
documents are actually used in the cases. Placing presumptive 
limits on discovery would help to avoid that needless cost.
    In many cases we face shell corporations as plaintiffs. 
Those entities exist only to litigate. Yet, when it comes time 
to discuss settlement, we are routinely told that the investors 
and partners, who are not named plaintiffs, need to approve. 
Joining those with a financial interest in the patent or the 
litigation will help curb that abuse.
    When we do prevail at trial, it's next to impossible to 
recover our attorney's fees. For example, we were sued by a 
patent troll called Bright Response, their patent was based on 
a provisional application which conceded that the claimed 
invention had already been in public use more than 1 year prior 
to the filing date of the application. That is, by its own 
admission the patent was invalid, yet Bright Response pursued 
trial and charged ahead. And the jury found both the patent 
invalid and not infringed. However, despite the exceptional 
nature of that case, the District Court refused to award our 
attorney's fees. And we believe that clarifying the standard 
for attorney's fees, in Section 285, would discourage abusive 
cases like that. The thoughtful, balanced provisions in the 
Innovation Act would address all these problems.
    Our options for less expensive alternatives to litigation 
are limited or come with drastic consequences. For example, 
both the inter partes review and patent post grant review apply 
estoppel to all issues that could have been raised before the 
PTO, potentially erasing our ability to defend ourselves in 
court. And the current covered business method program is 
limited in scope to only those patents used in the practice, 
administration or management of financial product or service. 
We look forward to working with this Committee on these issues.
    I should note that, while Yahoo! has the wherewithal to 
defend itself, patent trolls know we're not going to try every 
case. Particularly where nuisance-level settlements are 
available. But, we're not alone. Settlement rates in our 
industry are at about 75 percent. That high settlement rate 
only feeds the troll model and leads to more troll litigation.
    We do our part, we try cases when we have to, we act as a 
friend of the court in others, and we act responsibly when 
selling our patents. Our policy has been to sell patents only 
to operating companies, rather than to non-practicing entities. 
We do not want our patents to be obtained by a troll and 
irresponsibly asserted against others in our industry.
    We believe that comprehensive common sense reforms are 
needed, only Congress can make those reforms. We think the 
Innovation Act is on the right track. It would streamline cases 
from the start, prioritize important decisions, reduce costs, 
force real parties in interest into the litigation, and clarify 
when winning defendants are able to recover their fees.
    Again, I thank you for the opportunity to be heard. We look 
forward to working with you. And I welcome your questions.
    [The prepared statement of Mr. Kramer follows:]

    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    


                               __________
    Mr. Goodlatte. Thank you, Mr. Kramer.
    Mr. Kappos, welcome.

            TESTIMONY OF DAVID J. KAPPOS, PARTNER, 
                  CRAVATH, SWAINE & MOORE LLP

    Mr. Kappos. Chairman Goodlatte, Ranking Member Conyers, 
Members of the Committee thank you for this opportunity to 
provide my views on H.R. 3309.
    I'm testifying today solely on my own behalf.
    Let me start by congratulating you, Mr. Chairman, on 
introducing H.R. 3309, a bill designed to improve our strong 
patent system by removing litigation loopholes that debase 
strong patent rights. Various provisions of this legislation 
can achieve that objective, given refinement. Other provisions, 
as I'll explain, will require a bit more substantial 
deliberation or would be best deferred.
    Before turning to H.R. 3309, the most important point I'll 
make today is that Congress simply must ensure full funding for 
the USPTO. Less than 2 years after passage of the AIA, we found 
ourselves again, this year, looking at an agency having its 
lifeblood drained away. I cannot overstate the destruction this 
is causing as the work remains without the funding to handle 
it, creating an innovation deficit that will require future 
generations of innovators to pay into the agency again and 
again. Nor will it be possible for USPTO to accomplish the 
mandates of the AIA, much less the added responsibilities 
contemplated by H.R. 3309, without access to its user fees.
    In this regard, I thank Ranking Member Conyers, Ranking 
Member Watt and Representatives Issa and Collins for their 
introduction, just yesterday, of the Innovation Protection Act, 
designed to ensure full funding of the USPTO.
    Mr. Chairman, given the importance of U.S. innovation-based 
industries rooted in an innovation ecosystem that's the envy of 
the world, substantial alterations to this ecosystem must be 
undertaken with caution. Caution in turn calls for a 
deliberative process that reaches out to all stakeholders. Many 
innovators, today's Edisons, have not had the time to make 
their views heard yet.
    Now, Mr. Chairman, I do believe that a number of the 
provisions of H.R. 3309 can reduce litigation costs and 
increase the value of legitimate patent rights for American 
innovators. But, I also believe that significant further work 
is necessary to avoid major negative consequences of over 
correction. Consequences more harmful potentially than the 
problems the legislation is intended to address.
    Now, turning to key provisions of H.R. 3309: fee shifting, 
real-party and interest disclosure, litigation procedure, and 
joinder are good policy. As most of these provisions directly 
impact the work of judges, it bears emphasizing that further 
effort is needed to ensure that judges are not deprived of 
their ability to exercise judgment. Consideration should be 
given to reducing prescription to a minimum and tasking the 
judiciary with turning legislative guidance into court 
precedent.
    For covered business methods: the right course, in my view 
is to let Section 18 settle in further. The courts are in the 
best position to review USPTO interpretation of covered 
business method and technological. The provision is certainly 
not being interpreted too narrowly thus far.
    Intention and extension of Section 18 to software-related 
inventions should be avoided. Such an overextension devalues 
innovation implemented in software, one of America's most 
important and innovative sectors, discriminating against a 
critical field of technological innovation. The U.S. is home to 
a software industry that dazzles the world and we should not 
declare software innovation any less important than other kinds 
of innovation.
    H.R. 3309's stay provision, offering protection to innocent 
end users and retailers is also good policy. But also there a 
number of improvements are needed.
    Finally, a covered customer will almost never be in 
precisely the same situation as its covered manufacturer, when 
you're talking about the stay provision. That is because a 
covered customer cannot be expected to be bound in all respects 
by a judgment against its covered manufacturer. There are many 
different circumstances effecting the two parties. As a result, 
parties will find themselves embroiled in more, not less, 
litigation caused by this provision, unless clarity is added to 
it to avoid this result.
    In conclusion, Ranking Member Conyers, Representative Watt, 
thank you for recommending me to testify today.
    Mr. Chairman, thank you again for this opportunity to share 
my thoughts. I commend you for introducing H.R. 3309.
    [The prepared statement of Mr. Kappos follows:]

    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    


                               __________
    Mr. Goodlatte. Thank you, Mr. Kappos.
    Mr. Armitage, welcome.

               TESTIMONY OF ROBERT A. ARMITAGE, 
               IP STRATEGY AND POLICY CONSULTANT

    Mr. Armitage. Thank you, Chairman Goodlatte, Ranking Member 
Conyers and Members of the Committee. I do appreciate the 
opportunity to appear before the Committee this morning.
    Before getting to the nitty-gritty of the specific patent 
litigation reform topics, I would like to underscore the point 
that has already been made several times today on the 
importance of full funding to a well-functioning patent system.
    With this in mind, I want to offer a special thanks to 
Ranking Member Conyers, Members Watt and Collins for their work 
on this issue, particularly 3349, a bill that was introduced 
yesterday. While I've not had the opportunity to study the bill 
into detail, my hope is that this will be the decisive step 
forward to permanent action on fixing PTO funding issues.
    I'd like now to move on, if I could, to discuss a few of 
the important provisions of Section 9 of H.R. 3309. First, 
Section 9 would specify that the new post grant review system, 
created under the America Invents Act, must use the same 
standard for construing what a patent covers in assessing the 
validity of the patent that the courts use when the courts are 
determining patent validity in a patent infringement action.
    The USPTO, under its current rules today, is placing 
inventors in an untenable situation. The same patented 
invention that may be found invalid by an administrative patent 
judge in the Patent Office would, at the same time, be found 
potentially valid by a District Court judge determining that 
same issue of patent validity. These opposite outcomes can 
arise solely because the administrative patent judge is 
permitted, under PTO regulations, to use an artificial standard 
of claim interpretation, one that stretches the meaning of the 
claim beyond any subject matter that the patent owner could 
ever hope to assert would infringe the claim in the patent 
infringement litigation.
    Fixing this claim construction disparity, opens the door to 
securing broader support for another provision in Section 9, a 
provision that would correct the AIA's broad estopple against 
later challenges to the same patent in a post grant review 
procedure. The Section 9 estopple fix corrects an inadvertent 
legislative drafting error in the AIA. Indeed, without this 
correction the AIA's new post grant review procedure is almost 
certain to be underutilized and the important benefits that 
this procedure can bring to the patent system, by removing 
questionable patents, would be lost or at least significantly 
impaired.
    Another important reform in Section 9 relates to the so-
called double patenting doctrine. The bill offers a 
codification of this judge-made law for the new first inventor 
to file patents that will soon begin to issue under the AIA. In 
a nutshell, this provision will assure that when two patents 
are issued with highly similar claims they cannot be 
independently enforced against an accused infringer.
    In my written submission I've suggested that there are 
other issues that relate to the AIA that merit inclusion in 
H.R. 3309. In the interest of time, let me briefly mention only 
two of them.
    First, the Committee should consider including a statutory 
research-use exemption to patent infringement that would 
replace an antiquated judge-made doctrine. The common-law 
standard today is overly sparse and sometimes inconsistent in 
its application. Second, the AIA has opened the way for the 
Committee to remove the last vestige of secrecy in the 
patenting process by mandating publication of all patent 
applications 18 months after they're initially sought.
    This brings me to a few final points on the provisions of 
H.R. 3309 that relate most directly to patent litigation. Like 
Mr. Gupta and Mr. Kramer, I would like the Committee to move 
with a sense of urgency to get a comprehensive patent reform 
bill through the House and on to the Senate. Like, 
Undersecretary Kappos, I'd like to see the Committee act with 
deliberation with a 360-degree vetting of each of these 
provision to assure that the details of statutory information 
don't destroy the promise of the underlying reform.
    As with many issues of life and patent reform, some of the 
most promising initiatives at a conceptual level may prove 
problematic to make work as intended. I'd like to mention, 
perhaps, just one of these. The stay of discovery provision in 
the bill would indeed--as convincingly, I think, set out in the 
testimony today--provide an effective and efficient vehicle for 
rapidly eliminating non-meritorious infringement allegations. 
Critics of that provision wonder whether perhaps it has the 
potential to deny justice by delaying it or even increasing the 
aggregate cost of securing it. I'd ask the Committee to be 
careful in provisions where one size appears to fit all patent 
lawsuits. Indeed this same concern relates to Section 6 of the 
bill that would mandate the judicial conference to implement 
very specific rules and procedures.
    In conclusion, I believe the case is made today, in the 
testimony that I've heard and I've read, that patent reform 
should proceed in this Congress. The bill now before the 
Committee has jumpstarted the process. I believe it's 
positioned the Committee to make decisive progress in crafting 
a refined legislative package in the days and weeks ahead.
    Thank you for the opportunity to be here this morning.
    [The prepared statement of Mr. Armitage follows:]

    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
                                APPENDIX














































































                               __________
    Mr. Goodlatte. Thank you, Mr. Armitage.
    And the Committee--I guess your advice would be to proceed 
with all due concentrated deliberation and get it right.
    Mr. Armitage. I'll give you a few weeks to get it done 
right, sir.
    Mr. Goodlatte. There you go.
    The Chair will begin the questioning process under the 5-
minute rule. And I'll recognize myself.
    Mr. Gupta and Mr. Kramer, could you walk us through how you 
see the abusive patent litigation environment changing, if this 
bill is enacted? Specifically, how the provisions on fee 
shifting, heightened pleading standards, discovery and 
transparency would reduce litigation, extortion and abusive 
practices?
    Mr. Gupta. Certainly. Thank you for the opportunity, 
Chairman.
    Mr. Goodlatte. And you're also going to have to be 
expeditious about that----
    Mr. Gupta. Sure.
    Mr. Goodlatte [continuing]. Because I have a few other 
questions I want to----
    Mr. Gupta. I can answer that with one example of a recent 
case for us.
    We were sued by a patent assertion entity on a patent that 
the claims were very vague, in terms of the pleadings, there 
was so specificity as to how we were alleged to infringe. And 
the product that was identified was a product that we'd long 
discontinued. When we notified the plaintiff about that we got 
no response from them for months. About a month before 
discovery was supposed to close, they served us with a request 
and they identified 14 additional products from our company 
asking that we produce information and documents related to 
those 14 products.
    With about a month left in discovery, we approached the 
court and said that that was not proper or fair. The court 
allowed the plaintiff to proceed. We were then asked to produce 
a significant number of documents to this particular plaintiff. 
In the meantime, we were seeking some discovery from them which 
they vigorously defended and fought. Ultimately, when we got 
those documents, it turned out that they had licensed a 
software manufacturer, whose software was imbedded in our 
products, and we were all licensed. At that point they walked 
away from the suit, after having settled in the meantime with 
tons of companies and having collected settlement fees from 
them.
    Now, at the end of the day, we sought to recover our costs 
and fees from having had to have defended against this 
frivolous and abusive practice. And our fees were denied. So, 
the provisions in this bill address many of these procedural 
abuses and would make our lives and the lives of defendants who 
are faced with these abusive practices a whole lot easier.
    Mr. Goodlatte. So, you would say that that company hid the 
defects in their litigation while they attempted to drive up 
your litigation costs and procure a settlement. And, when that 
tactic failed, because you finally did discover what you needed 
to discover, you were not awarded any compensation for the 
added--one would argue--willful contribution to pursuing an 
abusive and, I would say, frivolous lawsuit, if indeed the 
products had been properly licensed in the first place. If 
people had been able to find that out in the first place, you 
wouldn't have had the problem.
    Mr. Gupta. I agree, yes.
    Mr. Goodlatte. Mr. Kramer?
    Mr. Kramer. Thank you, Mr. Chairman.
    The Innovation Act is a bundle of common sense reforms that 
will help level the playing field, create transparency and 
allow defendants to defend themselves in cases. The provision 
on clarification of Section 285 will provide disincentives for 
patent trolls to abuse the court system and bring bad cases. 
The staging--the standards, with respect to genuine notice 
pleading in patent cases, will encourage the focus of the 
litigation from the start so we all know what we're talking 
about. That will decrease costs for everybody. Staging of 
discovery until after claim construction will also make 
litigation more efficient for everyone, both plaintiffs and 
defendants. Focusing discovery and making presumptive limits on 
what should be produced will also help everybody by making the 
process more efficient.
    So, all these things are tremendous steps forward and 
create a more level playing field for everyone in the 
litigation.
    Mr. Goodlatte. Thank you.
    Mr. Kappos, when it comes to the patent system, especially 
patent ownership, do you believe that it is appropriate for 
entities to assert a patent far beyond the value of its 
contribution to the art? Should there be greater requirements 
to asserting patents in litigation, such as fee shifting, 
heightened pleading standards and transparency? And, can you 
describe a clearly abusive patent litigation case that you 
faced in the private sector?
    Mr. Kappos. Yeah, well the--thanks for the question, Mr. 
Chairman.
    I do like, in general, the provisions that shift fees that 
stay some discovery that focus discovery. I think that's all 
good for the system, whether you are a plaintiff or defendant, 
frankly.
    I think where further consideration is going to be needed 
is in balancing some of those provisions, for instance cases 
where a plaintiff may engage or where a prevailing party may 
engage in action that's found to be vexatious. So there's 
fairness on both sides that need to be achieved there.
    In terms of overbroad claiming, which I think is a great 
question and central to the issue, I've seen that in any number 
of situations, you know, both in the government and in my 
private practice experience. And it is indeed--tends to be 
claims that cover all solutions to a problem, which frequently 
are business method claims, which brings up the value of the 
covered business provision as it is currently being worked 
through the USPTO. And it is those claims that enable, at 
times, patentees to assert far beyond any contribution they 
made to the field. And it is those claims, I believe, that this 
litigation should be directed to, in terms of its discovery, 
fee shifting and other provisions.
    Mr. Goodlatte. Thank you very much.
    Chair recognizes the gentleman from Michigan, Mr. Conyers 
for his questions.
    Mr. Conyers. Thank you very much, Chairman Goodlatte.
    I'd like to just follow up with Mr. Kappos on this notion 
that--what we can do to ensure full funding of the USPTO. And I 
note, in your testimony, that the GAO found their recent report 
that patent assertion entities are not driving patent 
litigation. And I want to find out if you believe the broad new 
legislation to constrain patent assertion entities is needed in 
that--in this general range of considerations. What's your 
view, sir?
    Mr. Kappos. Well, thank you, Ranking Member Conyers.
    And indeed the GAO report, which was obviously very 
nonpartisan, found that non-practicing entity behavior is not 
primarily what's driving litigation. Moreover there have been 
scholarly papers that have come out, some within the last few 
years and even more recently, that are getting the facts and 
are showing that when the effects of the AIA are factored out, 
the total number of lawsuits really is not changing.
    That being said, I would agree with the assertions of my 
colleagues here that there clearly is a problem. I don't see 
the problem as one about identifying bad guys like patent 
assertion entities or trolls. I see the problem as one of 
behaviors. Behaviors that anybody can engage in, whether you're 
a large well-funded company or a small litigant whatever sector 
you're in. And so, I applaud the parts of the legislation and 
the sentiment, that I heard earlier, to direct our attention 
toward those actions and behaviors that need to be restrained 
and redirected rather than trying to label parties.
    Mr. Conyers. Thank you very much.
    Mr. Goodlatte. The Chair recognizes the gentleman from 
North Carolina, Mr. Coble, Chairman of the Subcommittee.
    Mr. Coble. Thank you, Mr. Chairman.
    Gentlemen, thank you for your testimony. Some of this may 
become repetitious, but it's nonetheless important.
    Mr. Gupta, let me ask you this: we've all heard about 
patent trolls, but what about patent privateering, that is the 
situation where a company outsources its patent lawsuits to a 
shell company to harass competitors? Should such behavior be 
subject to FTC or DOJ antitrust scrutiny for anticompetitive 
behavior?
    Mr. Gupta. Thank you for the question.
    I think there is an opportunity for the DOJ and the FTC to 
investigate and look at those practices. And I understand that 
they are in the process of doing so. This bill has several 
provisions that are directed toward the abusive litigation 
practices that we see today from these PAEs. And, while the FTC 
and the DOJ are looking at those privateering practices, if 
these provisions are enacted, we should see a significant 
decrease in abusive practices.
    And I particularly think that the opportunity to hold PAEs 
financially accountable for having brought frivolous and 
abusive litigation would go a long way in changing the basic 
paradigm, which is that companies, if given an opportunity--or 
defendants, if given an opportunity to defend these actions and 
not feel extorted to settle in light of the significant 
expenses associated with getting to judgment, would choose to 
actually take cases to trial more often than not. And that 
simply would then break the model of abusive PAEs who thrive on 
early settlements.
    Mr. Coble. Thank you, sir.
    Mr. Kramer, how do the Innovation Act's provisions work 
together to level the playing field in patent litigation? And 
with that new level playing field, do you expect that we'd see 
demand letters and suits against small businesses and startups 
to increase or decrease? And, if you would Mr. Kramer, define 
``demand letter.''
    Mr. Kramer. Thank you, Congressman, for your question.
    I'm sorry, I did not catch the last part of that question.
    Mr. Coble. I said, with the proposed new level playing 
field that we would expect--would the demand letters and suits 
against small businesses and small startups increase or 
decrease?
    Mr. Kramer. Thank you, Congressman.
    So, I think that the provisions in this bill are 
commonsense reforms that will decrease those types of demand 
letters because, once you clarify the standards for fee 
shifting under Section 285, then all of a sudden there is a 
disincentive to send out blanket demand letters just willy-
nilly and haphazardly because, like the Martha Stewart case 
that was discussed earlier, that could provoke a declaratory 
judgment action. And all of a sudden, fees could be in play.
    So, I think that the behavior that we're talking about 
here, abusive patent troll litigation behavior, would actually 
be dis-incentivized. And that's for all players in the system, 
both large and small. So, the first part of your question, with 
respect to how it would level the playing field, I think the 
legislation would provide incentives for defendants to actually 
defend themselves in cases instead of settling more cases and 
just feeding the behavior.
    The vicious cycle of troll litigation is such that, the 
more cases there are the more you settle, the more you pay the 
trolls go out and buy more patents to assert against you. And 
all of a sudden you get more litigation. If you stage 
discovery, if you have presumptive limits on discovery, if you 
create a disincentive for bringing bad cases in the form of 
clarifying Section 285 then you will level the playing field. 
And, as a result, you will see fewer bad cases.
    Mr. Coble. And Mr. Kramer, if you would, define a demand 
letter. What is a demand letter and what would a demand letter 
consist of?
    Mr. Kramer. Demand letters typically consist of an 
assertion that your business practices somehow infringe a 
patent and they request that you stop doing what you're doing, 
whatever activity they accuse you infringed with.
    Mr. Coble. I thank you, Mr. Chairman.
    I see my red light is about to illuminate, so I will yield 
back.
    Mr. Goodlatte. The Chair thanks the gentleman and 
recognizes the gentleman from North Carolina, Mr. Watt, the 
Ranking Member of the Subcommittee for 5 minutes.
    Mr. Watt. Thank you, Mr. Chairman.
    And, let me start by trying to find common ground here. 
There are some provisions in this bill, I think, that a number 
of us agree with. There are other provisions where we have some 
real concerns.
    Mr. Kappos, there are some provisions that you said you are 
comfortable with. Can you kind of identify what those are so 
that we can kind of start from common ground? That would be--
and maybe you want to just take some time to do that and give 
that to me following the hearing.
    The other concern I have is with a case pending on the 
payment of fees before the Supreme Court now. Mr. Gupta and Mr. 
Kramer, what would you think the justification would be for 
this Committee acting on that subject before the case is heard 
and decided by the Supreme Court?
    Let's--let me go on the reverse order. That's probably an 
easier more direct answer to the later question.
    Mr. Gupta and Mr. Kramer?
    Mr. Gupta. Thank you, Congressman.
    I think that, as the Supreme Court explains or does a 
better job of qualifying what an exceptional case is, that 
there is an opportunity here and a much needed change in the 
law that, in the event, that we have a plaintiff that brings an 
abusive action and defendants are forced to spend millions to 
defend themselves, that there'd be an opportunity to hold those 
plaintiffs financially accountable so that there is a shifting 
of that burden that was entirely----
    Mr. Watt. And would you think it would be appropriate to 
apply that same standard to a defender to counter claim or 
would you put him in a different category?
    Mr. Gupta. I would completely support a bilateral proposal 
along those lines where it would be--if it's good for the 
plaintiff it's----
    Mr. Watt. And is it your sense that the Supreme Court or 
the courts don't have that discretion now?
    Mr. Gupta. Right now the default is that there is no 
shifting of fees. One has to make a showing of exceptional 
case. This bill, we think, very effectively and will, 
efficiently address this problem of abusive litigation by 
making the default be that, in the event a defendant is able to 
show that a plaintiff's claims were objectively baseless the 
default would be that there would be a shifting of fees so that 
there is some financial accountability felt by the non-
practicing entity or the PAE who currently----
    Mr. Watt. This is not restricted to non-practicing 
entities, is it?
    Mr. Gupta. It could be.
    Mr. Watt. I mean, is this--this is everybody in the 
litigation chain gets a--this provision gets applied to, does 
it not?
    Mr. Gupta. It does. And I think, from our experience, when 
practicing entities are in litigation, they tend to be a lot 
more cautious and judicious and thoughtful about claims they 
bring in litigation because they know that when they assert a 
claim that they're likely to get a counter claim. As we've 
seen, with our experience with having this patent assertion 
entities, they are not fearful for any of those checks and 
balances.
    Mr. Watt. Mr. Kramer?
    Mr. Kramer. Thank you, Congressman.
    In short, Congress is in the best position to remedy the 
situation and address the problem with respect to everyone 
involved, right, not just Octane Fitness, which is the case 
pending before the Supreme Court. And, like Mr. Gupta has 
alluded to, the current bill, Innovation Act, goes a little bit 
farther than what the Supreme Court could possibly do in that 
case and therefore would provide broader remedy----
    Mr. Watt. You think 535 Members of the House and the Senate 
are in a better position to address question than some 
thoughtful response from the court. That's what you're saying?
    Mr. Kramer. Congressman, thank you for that--yeah. I----
    Mr. Watt. Okay, I'm just a--I got you----
    Mr. Kramer. The answer is yes.
    Mr. Watt. Okay. Alright. You got a lot more confidence in 
us that I think the public has in us. [Laughter.]
    Mr. Kappos, I gave you a little opportunity. Can you tick 
off just the provisions that you think are noncontroversial in 
this bill, I guess, that's kind of the bottom line of the----
    Mr. Kappos. Well, yes. Thank you, Ranking Member Watt.
    I would start by saying, for instance, the fee shifting 
provision, which others have lauded here, while not without its 
issues--including that the Supreme Court is looking at two 
cases right now that involve that--is good policy. But, 
apropos, your question should be bonding in both directions 
that inappropriate behavior on the part of either prevailing 
party should be kept in mind in applying fee shifting.
    I think real party in interest is in the category of being 
fairly noncontroversial, although I've heard calls that maybe 
real party in interest identification should go be a little 
more aggressive than it is and that more should be required 
than is currently in the bill.
    Litigation procedure--we've talked about that. I think that 
is positive. Stage discovery will cut a lot of unnecessary 
litigation expense.
    But, once again, there needs to be some reciprocity or 
bilateralism brought into that. So, in the case of a counter 
claim party, so an original defendant that makes a counter 
claim of invalidity or non-infringement or declaratory judgment 
plaintiff, should have the same requirements as the original 
patentee, relative to stage discovery and paying for the other 
party's discovery beyond a basic limit. But, I think the idea 
is a good one. Again, also subject to letting the Federal 
courts do their job and Congress not being overly prescriptive 
with permitting judges to use judgment.
    The joinder provision, we've talked about, that clearly 
positive also in holding to account those parties, like Mr. 
Kramer pointed out, who are behind the scenes, who are not 
disclosing their identities. So, there's goodness there. But, 
again, some confusion and some lack of clarity in my reading of 
that provision and can stand more discussion so that it doesn't 
wind up being interpreted in a way that a licensee of a patent 
portfolio becomes subject to joinder. Which is, as I read that 
provision, a risk right now.
    And then lastly, I would mention, stays. We haven't talked 
very much about that. But, that's, I think, a positive 
provision also. It can protect the innocents, the retailers and 
the end users who are brought in sometimes as hostages in 
patent infringement suits. And I think the provision is good 
from that respect, but the danger in it--several dangers. One 
that's prominent is that, the way it's written, it can apply to 
any party in the distribution channel.
    So, from the top of the food chain, if you will, the party 
that makes the subcomponent then sells it to an aggregator that 
puts that subcomponent with other subcomponents, creates a card 
or a board, if I can refer to computers for a moment, then 
sells that accumulation to another party that assembles the 
product. I don't think you want all of those intermediary parts 
of the value chain to be able to benefit from stays. You want 
that end user or that retailer to benefit. And so, I think some 
tuning, some refinement of the statute will solve those 
problems.
    Mr. Watt. Thank you, Mr. Chairman. I thank you for your 
indulgence of allowing the response to go over time.
    Mr. Goodlatte. Not at all. It was a learned response.
    The Chair will now recognize the gentleman from Texas, Mr. 
Smith, for 5 minutes.
    Mr. Smith. Okay. I thank you, Mr. Chairman.
    And also, I want to thank you again, Mr. Chairman, for 
making this subject a priority of the Judiciary Committee. I 
think it will be one of the most important bills that we 
consider this year.
    I also want to welcome back Director Kappos to the witness 
table, I believe, for the first time since he left PTO and 
entered the private sector. And it's always nice to hear your 
expert testimony as well.
    The Innovation Act codifies the first post grant review 
decision on covered business method patents. And I have two 
questions I would like to direct to Mr. Armitage, Mr. Kappos 
and Mr. Kramer.
    And the first one is this: what should the Committee 
consider or contemplate as it thinks about the amendments to 
the program for covered business method patents? And my second 
question is this: are there any negative consequences to 
expanding the covered business method program?
    And Mr. Armitage, could we start with you?
    Mr. Armitage. In the course of enacting the America Invents 
Act, probably the most contentious part of that work was 
figuring out what role the PTO should play with patents that 
have already issued. I think there was wide support for post 
grant review procedures. Post grant review takes place 
immediately after the patent issues. It allows every issue that 
you could raise in a District Court to be raised in the Patent 
and Trademark Office and indeed protects the public, if it's 
used and used effectively, against patents that might be sued 5 
years, 10 years down the road.
    It becomes much more difficult to justify these procedures 
once the patent is in the marketplace for several years, 
investments have been made in reliance on the patent because 
you simply can't protect the rights of the patent owner in 
these procedures to the same degree the rights of the patent 
owner would be protected in District Court.
    With CBM this was the last exception to the rule that the 
PTO should get out of the way, after the post grant review 
period was over, and not consider these issues of 
patentability.
    So, I would urge the Committee to respect that compromise. 
And, if there's a provision in the bill that I would hope might 
come out, it would be everything related to Chapter 18. I 
didn't hear any witness testify today that Chapter 18 was 
needed to get the much needed litigation reforms done.
    Mr. Smith. Okay, thank you, Mr. Armitage.
    Mr. Kappos--Director Kappos?
    Mr. Kappos. Yes, thank you, Chairman Smith.
    So, relative to covered business method issues, I'm first 
and foremost concerned that covered business method be expanded 
in a way that it encompasses all software patents. I think that 
that sends a--just a really terrible message about the 
importance of software innovation and puts into scope a huge 
number of patents that don't belong in Section 18. As Mr. 
Armitage alluded, there's plenty of other provisions of the AIA 
procedures that those patents are appropriately subject to.
    I would also say that the extension of the CBM provision to 
become permanent or to be extended for a number of additional 
years--it's just too early to say whether that makes sense. 
There was a great compromise and wonderful work done by 
Congress, this Committee, that set that procedure up as a 
bridge provision with a set number of years. I just don't see 
any reason to go and return to that, at this point.
    And then lastly, I'd say, while it's too early to measure, 
with only 15 months with--sorry, only about 13 months under our 
belt so far in a procedure that's designed to take at least 15 
months to produce decisions, if you look at what we know so 
far, there's been over 70 of these things that have been 
instituted, CBM procedures. That's significantly more than we 
anticipated at the USPTO. So, that could be viewed as a good 
thing. Participants are investing in the process and that's 
good.
    There's been exactly one decision so far, in the Versata 
case. In that case, the USPTO took out an entire patent, 
despite that it had been found to be valid previously by a 
District Court, getting rid of a multi-hundred-million dollar 
judgment. So, if you extrapolate that single event out and just 
guess that there might be two-thirds of patents that go through 
the CBM procedure in the next year, have their claims either 
significantly or completely invalidated, you could be looking 
at a far different world than the one that we were living in a 
year ago with huge relief for the companies sitting to my right 
here at this table, with many, many business-method patents 
having been taken out. And it's in that context that I say, it 
feels like we should let the USPTO and its reviewing courts 
work a little further, because they're actually making progress 
with this provision.
    Mr. Smith. Thank you, Mr. Kappos.
    Mr. Kramer, my time is expired, but do you have anything 
you'd like to add briefly?
    Mr. Kramer. Yes, Congressman, thank you for the 
opportunity.
    The one concern that I would say that the Committee should 
keep in mind is providing low-cost alternatives to District 
Court litigation for bad patents--bad quality patents. The PTO 
has enacted very good rules that backstop the covered business 
method program including identifying that patents that have a 
technical solution to a technical problem should be excluded 
from that program. So, the program, by its own implementation--
by its own rules, is very narrow.
    Mr. Smith. Okay, thank you, Mr. Kramer.
    Thank you, Mr. Chairman.
    Mr. Goodlatte. Chair recognizes the gentleman from 
Tennessee, Mr. Cohen, for 5 minutes.
    Mr. Cohen. Thank you, Mr. Chair.
    Mr. Gupta--Gupta--is it ``Gupta?"
    Mr. Gupta. Gupta, sir. Gupta is fine.
    Mr. Cohen. Okay. You were discussing this case where, after 
discovery, you found out that there was a license. Did you file 
a Rule 11 there?
    Mr. Gupta. If I recall correctly, we sought to recover our 
costs and fees after the plaintiff approached us and wanted to 
drop the suit. And we were unable to because we could not make 
a showing that it was an exceptional case. And that's where, I 
think, the standards are really high right now. And the 
plaintiff was able to walk away knowing full well----
    Mr. Cohen. I'm missing something. Tell me about this 
license. The--you discovered that it was----
    Mr. Gupta. So, we sell--in this particular case, the 
products that were accused of infringement were generally 
hardware products that needed some operating system software. 
And, in this particular case, the operating software came from 
two or three different sources. Each one of those companies had 
previously obtained the license to the patent from the patent 
assertion entity. And the license covered downstream users of 
that operating system software.
    So, understanding that that operating system software 
needed to work with pieces of hardware, the operating system 
provider had obtained a license that was broad enough.
    When that patent was asserted against us, we did not know 
and we had been trying to figure out what sort of licenses were 
already in place with--you know, with that patent. That 
information was not provided to us readily. Now, it is our 
belief that the patent-holder knew all along--the patent 
assertion entity knew all along that these folks had indeed 
been licensed. And they had kept that information away from us 
as long as they could.
    Mr. Cohen. I may not understand this, but it seems like if 
they--if there was a license that it was--that that's when 
the--was a slam dunk.
    Mr. Gupta. Yes.
    Mr. Cohen. Well then, how could you not have succeeded? 
Now, was this the judgment of the court under Rule 11? I 
don't--it just doesn't seem like the facts as you describe them 
could even--could a judge find other than to award fees.
    Mr. Gupta. That is part of, I believe, the reason why this 
bill is actually--targets or has directed remedies for some of 
the challenges that we face today.
    In this particular case, we had to go through months of 
discovery to ultimately get that document or get those set of 
facts. And even after we were able to establish that there was 
indeed a license, the patentee is--or, the plaintiff is simply 
about to walk away and without any financial accountability for 
having put the defendants through this very expensive process.
    Mr. Cohen. And Rule 11 wouldn't have covered that?
    Mr. Gupta. We did not, you know, it's not that----
    Mr. Cohen. You did assert Rule 11?
    Mr. Gupta. There--we--there are Rule 11 sanctions that are 
available, but we sought to recover fees under Section 285 for 
frivolous--you know, for having initiated this action. And our 
case was deemed not to have satisfied the exceptional case 
standards.
    Mr. Cohen. This is somewhat, as I understand it, patterned 
this remedy or change under the Equal Access to Justice Act. 
Are you familiar with that?
    Mr. Gupta. Somewhat familiar with it.
    Mr. Cohen. Are there not some countervailing standards 
whereby if there--one side has protracted the litigation and 
caused additional expenses that the ward can be reduced by the 
judge.
    Mr. Gupta. In patent cases it's very rare that a prevailing 
defendant is able to recover their fees and costs. And 
generally, you know----
    Mr. Cohen. Right. And this would change that.
    Mr. Gupta. This would put some financial accountability 
back on the abusive plaintiffs.
    Mr. Cohen. And shouldn't--just like the Equal Access to 
Justice, shouldn't it be balance though that if there's certain 
harm or fault on the defendant maybe then the expense of 
litigation that that should be something the judge takes into 
consideration?
    Mr. Gupta. And I think this bill talks about, you know, if 
the non-prevailing party has--takes positions in litigation 
that are objectively baseless then there is an opportunity for 
the prevailing party's fees and costs to----
    Mr. Cohen. So you think that should occur, if whether does 
or doesn't----
    Mr. Gupta. Yeah.
    Mr. Cohen. Mr. Kappos, let me ask you this--Mr. Watt asked 
you, ``What are the things that you find are okay in this 
bill?'' And in response to Mr. Smith you said a few things that 
maybe weren't. What are the things that you think are most 
egregious in this bill?
    Mr. Kappos. I wouldn't identify anything as ``egregious.'' 
I think the----
    Mr. Cohen. All right. The things that are your least 
favorites.
    Mr. Kappos. Yeah.
    Mr. Cohen. The thinks we should--the things we--shouldn't 
be in this bill, how about that?
    Mr. Kappos. Well, the one thing that comes to mind, I think 
it's a very productive discussion, but on balance, as I've 
mentioned, I would tend to leave the covered business method 
situation the way it is given how much in flux and how early in 
implementation that is.
    Mr. Cohen. Is that the only Section that causes you any 
concern? Otherwise you're for this bill?
    Mr. Kappos. Well, with all the points that I've raised, you 
know, relative to the judiciary and letting the judiciary play 
its role, et cetera. I can't think of a provision that, as I 
sit here though, that I would say is completely unacceptable or 
bad policy, per se.
    Mr. Cohen. It's hard for me to even to comprehend that 
there should be a bill because Mr. Smith was such a great 
Chairman and passed such a good bill that I supported, that I 
wouldn't think we need to be here this year. But apparently 
there was something he--even he missed.
    I yield back. We have a new Chairman. [Laughter.]
    Mr. Bachus [presiding]. Yeah well, he's not new, but he's--
--
    Mr. Cohen. He's not new. He's 20 years----
    Mr. Bachus. That's right.
    Mr. Cohen [continuing]. Great service----
    Mr. Bachus. Thank you.
    Mr. Cohen [continuing]. To the country. I yield back the 
balance of my time.
    Mr. Bachus. Thank you.
    First of all, I'd like to also say, Mr. Conyers you're a 
man of--a very wonderful person as an individual.
    Mr. Conyers. Thank you.
    Mr. Bachus. And I have really enjoyed by 21 years 
association with you and your connection with Alabama.
    Mr. Conyers. Yes.
    Mr. Bachus. And we appreciate that.
    Mr. Conyers. Yes. Rosa Parks.
    Mr. Bachus. With Rosa Parks--came to work for Mr. Conyers 
when she moved to Detroit.
    Mr. Conyers. Yeah.
    Mr. Bachus. Thank you.
    Mr. Conyers. Until she retired.
    Mr. Bachus. Now, I'm just reviewing this. The enhanced 
pleading standards appears to be somewhat noncontroversial. The 
fee shifting to discourage frivolous lawsuits seems to be a lot 
of support for that. The transparency--the discovery 
limitation, at least initially, seems to be the--we're not 
getting a lot of feed---pushback on that. The covered business 
method patent program is--seems to be controversial.
    I noticed, in fact in my case, Microsoft/IBM business 
software alliance strongly opposed expanding the program. We 
got Google, National Retail Federation, Food Marketing 
Institute, Internet Association there for it. I would think 
Yahoo! would be for or against it, I'm not sure.
    Mr. Kramer?
    Mr. Kramer. The covered business method program?
    Mr. Bachus. Yeah, the expansion of it----
    Mr. Kramer. Yeah.
    Mr. Bachus [continuing]. To include its first issue patent.
    Mr. Kramer. Yeah. Thank you for the question, Mr. Chairman.
    Certainly we are in favor of trying to find low-cost 
alternatives to litigation, particularly in situations where we 
feel like the patent quality is very low, right. We feel like, 
in that situation, we should have the ability to go back to the 
Patent Office on any ground and address that question with the 
Patent Office, rather than spending millions of dollars in the 
litigation.
    Mr. Bachus. Right.
    Mr. Kramer. Now, I understanding that there's debate on 
both sides of the issue, with respect to the scope and the 
length of this program. And we're certainly happy to work with 
the Committee on that point.
    Mr. Bachus. And I know Mr. Kappos, as he's testified to 
sort of an alternative approach to what is in the legislation.
    Mr. Kappos. Well I--yeah, on balance relative to covered 
business methods, I would--the alternative, if I can call it 
this, is to return to full funding for the USPTO because it's 
doing a lot to bring to life those procedures.
    Mr. Bachus. Right.
    Mr. Kappos. And, if the agency is funded it'll do more.
    Mr. Bachus. In fact, there are other requirements in this 
bill which would--you would have to spend additional money on 
developing software, so----
    Mr. Kappos. Yeah. Exactly right.
    Mr. Bachus. Mr. Gupta, what is your position on expanding 
the covered business method? Yeah, on financial services, I 
think it's critically important that we do it in that field in 
some way. But, do you have any comment on covered business 
method program--on how we should approach that?
    Mr. Gupta. Mr. Chairman, we have--at EMC we have generally 
focused on the procedures and the processes that have been set 
forth to deal with abusive litigation practices.
    Mr. Bachus. Which are the transparency, the enhanced 
pleading standards----
    Mr. Gupta. You know, fee shifting----
    Mr. Bachus [continuing]. Discovery----
    Mr. Gupta [continuing]. Specificity in pleadings and the 
like. And that's where we think the bill can really do a lot 
to----
    Mr. Bachus. So, it's not a----
    Mr. Gupta [continuing]. Address those issues.
    Mr. Bachus. It's not----
    Mr. Gupta. It's not a particularly relevant topic for us--
--
    Mr. Bachus. All right.
    Mr. Gupta [continuing]. At this time.
    Mr. Bachus. How about the stay for customer suits? That 
also--we're hearing two different sides of that. Is that--would 
those be the covered business method patent programs--the 
expansion of that and the stay for customer suits? Are those 
the two main points of conflict?
    Mr. Kappos. Mr. Chairman, I would just say that I--in my 
view, the stay for customer suits is not, at its highest level, 
particularly controversial. It's clearly good policy to let 
innocent retailers and so-called mom-and-pops and end users 
stay litigation. The issue is crafting the provision so they're 
not over broad.
    Mr. Bachus. Right. Okay.
    And whether or not the--whether it's mandatory or 
discretionary on part of the manufacturer?
    Mr. Kappos. Well, there clearly has to be thought given to 
an appropriate amount of discretion for--including for a court 
so that, for instance, manufacturers who can avoid judgments or 
are not reachable under U.S. jurisdiction can be accounted for.
    Mr. Bachus. Would--could you give us recommendations on 
the--any of you on the panel, just give us some written 
recommendations on how to fashion that stay for customer suits 
or look at the legislation? Would that be possible?
    Mr. Kramer. Certainly happy to work with the Committee on 
that. My personal view is that the language in the statute 
that--the bill, sorry--that requires agreement between the--
both the customer and the plaintiff that's a great start.
    Mr. Bachus. All right. Yeah, and then it is--in that 
regard, it is somewhat discretionary.
    Mr. Kramer. Correct.
    Mr. Bachus. Okay.
    Mr. Kramer. Correct.
    Mr. Bachus. Mr. Armitage? And I'm exceeding by 1 second my 
time----
    Mr. Armitage. I just had two brief comments. While I think 
everything in the litigation part of this bill is actually--
needs to be done. The real question is how.
    There are two issues that I'd point out. One is time to 
commencement of discovery to the Markman process, the claim 
construction process. Does that work in all cases? And, if not, 
does--is more flexibility needed? And then, the rules and 
procedures judicial conference will be mandated to put in 
effect. Are those, in fact, rules and procedures to specific in 
the sense that they don't cover situations beyond practicing--
beyond some of the concerns that the witnesses have given here?
    Mr. Bachus. Okay, thank you.
    I do. Thank you very much. I appreciate you all's 
testimony.
    And at this time, Mr. Johnson is--the gentleman from 
Georgia is recognized for 5 minutes.
    Mr. Johnson. Thank you, Mr. Chairman.
    Through executive actions, President Obama has already 
worked with the Patent Office to improve the quality of patents 
by tightening functional claiming. Patent quality is at the 
heart of this issue. And, if we make strides today to eliminate 
low-quality patents, we'll make great leaps and bounds in 
improving patent litigation for all parties over time. The 
President has already made real party in interest the new 
default for patent applications and has worked to educate and 
protect consumers and other downstream users who are targeted 
by the patent trolling phenomenon.
    Now, there's no doubt that there is abusive behavior 
occurring in patent litigation and it's causing harm to large 
and small businesses alike. And so, I think you are all happy 
with the fact that the U.S. Supreme Court has accepted cert on 
the Octane Fitness case and will be deciding the issue of 285--
Section 285.
    When is it or what is the definition of what--how do 
construe this exceptional standard that is put forth under 285? 
And so, now that case will be decided by the court, which is 
going to be looking at the legislative history, which includes 
input from the APA, both sides, plaintiffs and defense. It'll 
be looking at various cases that have developed over the time 
of patent litigation. And certainly has to be well suited to be 
able to construe this issue of exceptional cases.
    Is there anyone who disagrees with that?
    Yes, sir.
    Mr. Armitage. If the issue is should this Committee wait 
until the Supreme Court renders this decision, I would urge the 
Committee not to do that. I think that what the Supreme Court 
is doing is try to define precisely where the goalpost is 
placed today. And what the provisions in the bill do would 
actually move that goalpost for good policy reasons. So, I 
think, to some degree, the Supreme Court, I hate to say, is 
wasting its time. But, certainly would be if Congress were to 
effectively move the goalpost.
    Mr. Johnson. Anyone disagree with that?
    Mr. Kramer. Congressman, thank you for the questions.
    So, again, I think that--I'm not going to pretend to guess 
where the Supreme Court is going to come out on the--that case. 
But that cases is limited to its facts for that party. And I 
think the clarification that is in the Innovation Act goes 
farther and is a better provision for everyone in the patent 
litigation system.
    Mr. Johnson. So you're both saying that you think the 
legislature is in a better position to deal with when a case is 
so exceptional that it requires or that it merits an award of 
fees and costs.
    My problem is the small investor and--or, excuse me, the 
small inventor without access to the cash to commercialize the 
product that he--this invention would fit within or that it 
would constitute. And, if there's an infringement on a patent 
that is owned by an individual without the cash or the 
resources to assert that patent, then it drives down 
innovation.
    And so, I'm afraid that the legislative approach to 
tightening--further tightening of the ability of plaintiffs, be 
they patent--be they non-practicing entities or patent 
assertion entities, for them to be able to, on behalf of that 
small inventor, protect what that inventor has invented. So, I 
don't want us to go too far, in terms of closing the courthouse 
doors to those types of good-faith----
    Mr. Bachus. Thank you.
    Mr. Johnson. Good-faith litigants. And we can't just throw 
a broad brush on all patent litigation and say that it--the 
majority of it is abusive, when in fact the GAO has found that 
is not the case.
    Mr. Bachus. Thank you.
    Mr. Johnson. Thank you.
    Mr. Bachus. Of course what it does, it just establishes the 
standard that's used in the Equal Access to Justice Act. So 
there is--we have case law going back to 1980, which is well 
established and it has not really eliminated the legitimate 
lawsuits in that regard. So, I think we've got a long history 
of--this is not a new standard, it's just a--you're changing 
the standard to fit something that works very well.
    At this time, Mr. Marino is recognized for 5 minutes.
    Mr. Marino. Thank you, Chairman.
    First of all, I would like to enter five demand letters. I 
ask for unanimous consent that these documents be entered into 
the record?
    Mr. Bachus. Without objection.
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    Mr. Marino. And I will say what they are. The first letter 
is from Isa Mai--I do not know if I'm pronouncing this right, 
so I'll spell it: I-s-a M-a-I--dated June 16, 2013 from--doing 
business out of Delaware. The next one is Farney--F-a-r-n-e-y--
Daniels LLP, dated August 1, 2012 out of Texas. The third 
demand letter is Lerner, David, Littenberg, Krumholz & Mentlik, 
dated July 1, 2013, and I believe they're out of New Jersey. 
The next letter is Desmarais--D-e-s-m-a-r-a-i-s--LLP, it's 
dated June 2, 2011 and they're from New York. And the last is 
Innovation Wireless Solutions LLC from Texas, dated April 10, 
2013.
    These letters are typical letters, they fail to state a 
claim by the plaintiff. The features of the alleged abuse by 
defendants are absent and we don't know who is suing.
    Mr. Bachus. Thank you and those are made a part of the 
record.
    Mr. Marino. Even one of the letters has a little diagram. 
And the diagram says, ``if your main computer is dealing with a 
fax machine, sending information to a fax, to another computer, 
or to a printer, there's a violation.'' Well, apparently I have 
some problems in my house because my children's computers and 
mine and my wife's are all linked together. We go to the fax 
machine, we go to the printer, we go to the Internet, and we 
send each other air-mails--emails.
    So, this is how ridiculous these letters are, particularly 
to small businesses in my district who are just scared to death 
when get something like this, because they do not know what's 
going on. So, this legislation is clearly, clearly needed.
    Mr. Kappos, could you please--I may have misunderstood, and 
I know a couple of my colleagues have stated that there's not 
an abuse, the--was it the GAO or one of the offices said cases 
haven't increased, it doesn't appear to be an abuse of 
litigation. But you're certainly saying that that is the 
standard because there's no increase or because there doesn't 
appear to be a great deal of abuse in the legal system, that we 
should not look at penalizing, somehow, the plaintiffs in these 
cases for sending demand letters among other things just like 
this. So----
    Mr. Kappos. Well, there clearly is a problem with abusive 
litigation. Your examples----
    Mr. Marino. But, we're not basing it on the number of 
cases--you're not basing it on the number of cases or the 
increased litigation in the courts, are you?
    Mr. Kappos. I'm basing that view on--not on the number of 
cases----
    Mr. Marino. Okay.
    Mr. Kappos [continuing]. But on the exemplars of abuse, 
like the ones that you're talking about.
    Mr. Marino. Sure, and thank you.
    I do agree with you. I think the--we need to fund the 
USPTO. It's in drastic need of funding. And I think three areas 
will really make a difference in this: Funding PTO, because 
enough people to look at the patents coming in can tell whether 
they're, you know, they're legitimate and they're following the 
rules that are prescribed. Number two is making sure the courts 
get serious about fees and sanctions. And, as a prosecutor for 
18 years, I give a great deal of--I was a U.S. attorney in the 
middle district, the judges were excellent there. But, I hope 
that courts are really going to take a serious look at this, as 
far as awarding fees and applying sanctions.
    And I would like to ask anyone who wants to respond to 
this: this is a--based on what Mr. Gupta stated, if that 
plaintiff knew about that license, is there anyone on the panel 
that says that this is not a fraud against the court by 
omitting that information? And why should criminal charges not 
be filed against somebody for doing this?
    No response, so I'm guessing you agree with me on this.
    Mr. Kramer, I see you want to make a statement here?
    Mr. Kramer. Thank you, Congressman.
    Certainly that is egregious behavior. Courts typically have 
already the ability to sanction that type of behavior. And I 
agree, in that situation, they should use that power.
    Mr. Marino. And I find the courts, both from when I worked 
in the State court and the Federal court, the courts are very 
reluctant to reward fees and to enforce penalties and 
sanctions. I'm hoping that we get the courts' attention. I 
really don't want to get into a position where Congress, to a 
great deal, is telling the court what to do in discretionary 
matters. But, if your plaintiff knew and that could be shown, I 
think it is fraud on the court and I think, not only should 
there be severe fees and sanctions, but I think there should be 
criminal charges filed as well.
    Mr. Gupta?
    Mr. Gupta. And, if I might add to that. I agree with you, 
Congressman. And if, as Chief Judge Rader wrote in the Op-Ed 
piece he authored in the New York Times, he acknowledged that 
there is a problem where District Courts are not awarding fees, 
you know, and shifting costs in this regard. And I think 
there's also an acknowledgement that the Federal circuit feels 
that the judges don't act uniformly or the courts don't in 
doing so.
    Mr. Marino. If I were a U.S. attorney, I'd be all over this 
like white on snow.
    Mr. Armitage. One of the difficulties with most patent 
litigation is the subject matter is complicated, the patent law 
is complicated. There's a certain fog of patent litigation that 
engulfs the courts and it's to the advantage of someone to have 
vague pleadings and broad discovery requests et cetera that, 
even if they're meritless, it's, in the fog, it's hard to see 
the lack of merit sometimes on the part of the court. And that 
to me is why these maybe special remedies are needed for this 
special kind of litigation.
    Mr. Marino. And I'm going to yield back with this closing. 
It's not my idea by my colleagues. So, I notice that the three 
tech guys are reading from paper and the pharmaceutical guy is 
reading from the pad. [Laughter.]
    Mr. Bachus. Thank you, Mr. Marino.
    And actually he did not exceed his time because he had a 
unanimous consent request, which doesn't count on his time.
    The gentlelady from California, Ms. Chu, is recognized for 
5 minutes.
    Ms. Chu. Thank you, Mr. Chairman.
    I'd like to ask Mr. Gupta a question about end users. I'm 
very concerned about the effect of frivolous suits that are 
filed against the end users of products. These customers of 
everyday technologies are oftentimes the victims of demand 
letters and patent infringement lawsuits.
    And I know, from example in my local area in southern 
California, about this because the local credit unions were the 
subject of a lawsuit from the patent assertion entities just 
because they had features on their websites that had to do with 
online banking features. And, you know, some of them are very, 
very small credit unions, but they were sued as a group. And 
ultimately they had to make a decision between reducing staff 
or proceeding with a lawsuit. Finally, they just gave up and 
they settled with the patent trolls.
    I just think this is outrageous. And I think that we need 
to find some way of relieving our end users. So, that's why I'm 
so pleased to see that Chairman Goodlatte included a provision 
that would allow customer suits to be stayed, while a 
manufacturer intervenes on their behalf. Because a manufacturer 
has the ability to defend a patent infringement lawsuit given 
that it has prior art and knowledge of how the technology truly 
works.
    So, Mr. Gupta, I know your company has a great deal of 
experience in dealing with these cases. Can you tell us more 
about the nature of these lawsuits and walk us how your legal 
team makes the decision to intervene in an end user suit? What 
factors do you consider? And do you ask that the end user 
consent to being bound by the outcome of the case?
    Mr. Gupta. Thanks for that question, Congresswoman.
    We find ourselves as being the covered manufacturer at 
times. And we also find ourselves as being the covered customer 
at times. So, there are instances where we buy a chip or a 
component that then get--you know, is used to develop a 
computer system. And the infringement accusations are really 
directed to the chip, but we're the ones that are sued.
    In those instances we look to the chip manufacturer to 
intervene and defend the litigation. And we believe that that's 
a more productive way to go about it. And there are times that, 
when we are suppliers of technology in times our customers get 
notices, in addition to the fact that we have been sued and we 
have to, at that point in time, intervene and attempt to 
resolve the case.
    The--what's incentivizing this sort of behavior is that 
PAEs have figured out that, if you go further and further 
downstream, you are potentially able to target a customer or a 
party that is least able to defend the action and probably has 
a larger revenue base, relative--you know, relative to the 
component or the product that's accused.
    I give the example often of a patentee that might have a 
patent on a wiper blade. Why would you sue the wiper blade 
manufacturer for a ten-dollar part, when you can sue an 
automaker for shipping a car that sells for $30,000 with the 
wiper? And why stop there? Why not go after an auto rental 
agency and attempt to collect a certain portion of their rental 
fees because they rent out cars that have wipers?
    Now, in those circumstances, it makes utmost sense--and 
this bill provides a mechanism for it, where the auto rental 
company or the auto manufacturer would agree to a stay with the 
manufacturer of the wiper blade and let the wiper blade 
manufacturer take it up with the patentee.
    There might be instances where, if indeed it is the auto 
rental company that says, I need a custom part designed for my 
wipers and they customize the wiper or they take it to put a 
special coating on it, they trim it in a different way that's 
unique to their use and the patent goes to that unique aspect, 
then the suit may be rightfully brought against that party that 
made those modifications that brought it to--within the claims 
of the patent. But, by and large, the abusive behavior tends to 
be where there are discrete parts where the end users is really 
not in any way, shape or form modifying the part that's accused 
of infringement. But they're the ones that are sued.
    Ms. Chu. Thank you for that.
    And, I'd like to enter into the record now a letter that 
was sent to the Committee on Monday, in support of expanding 
the covered business method program. It was signed not only by 
high-tech groups, but other industries that are badly in need 
of relief, such as grocers, chain restaurants and retailers. 
The money was taken--that was taken from them impacts thousands 
of constituents. So, I ask to enter this letter into the 
record, Mr. Chair.
    Mr. Bachus. Without objection.
    [The information referred to follows:]

    
    
    
    
    
    
    
    


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    Ms. Chu. Mr. Kramer, if I may ask about these covered 
business methods. You've fought back against these suits for 
many years now. Can you tell us about any past cases in which 
an expanded CBM program would have been helpful?
    Mr. Kramer. Thank you for that question, Congresswoman.
    Unfortunately, off the top of my head, I don't have a great 
fact situation to share with you. But, I can say that there--we 
have been participants in a pending CBM, at this point in time. 
So, you know, we think it's a useful proceeding. It is helpful 
to have low-cost alternatives to litigation. And, because of 
that, you know, we certainly support that program.
    Ms. Chu. Thank you.
    I yield back.
    Mr. Bachus. Thank you.
    Just to clarify, you know, the business methods already are 
reviewed, we're including patents. Is that your - all of your 
understanding? You know, in the covered business method, it 
includes patents. We already include the business methods, in 
the original bill that mister--that we passed, shouldn't it?
    Mr. Kappos. I'm not sure I understand the question. Could 
you restate it?
    Mr. Bachus. We keep talking about a--there's a difference 
in business methods and patents. And we already have statutory 
language that's already covering business methods. So, what 
we're talking about here is patents, is that correct?
    Mr. Armitage. In the America Invents Act, there was a 
special Section----
    Mr. Bachus. For financial services.
    Mr. Armitage. Right. That covered----
    Mr. Bachus. Yeah.
    Mr. Armitage [continuing]. Business method patents. It's 
the Patent Office, in fact, has given that term quite a broad 
interpretation. As, I think, as broad as the statute would 
allow. And it goes on for a period of 8 years. So, if this 
Committee did nothing on that issue, that procedure would 
continue in place for years to come.
    Mr. Bachus. Sure. Okay.
    Mr. Farenthold?
    Mr. Farenthold. Thank you very much. And I'm really glad 
we're having this hearing today, as patent reform is an 
important issues. I'm a tech guy, so I enjoy it.
    But you know there's a problem when you've got--you know, I 
can't get Wi-Fi at my local Whataburger and the prices in my 
grocery store are coming up because they're getting tagged by 
frivolous lawsuits.
    So, I kind of wanted to touch on some of the stuff that the 
gentlelady from California talked about because I'm 
specifically interested in end users as well. And, Mr. Gupta, 
you said that you don't settle unmeritorious suits because it 
would be tantamount to giving in to extortion. And I 
understand, as a player in the intellectual property game, 
that--I applaud that. But, you know, Whataburger for instance, 
which, you know, Texas-based burger company--better than In-N-
Out Burgers. [Laughter.]
    But, they make hamburgers. They don't play in the 
intellectual property game. And they don't have the expertise 
in it. They get a demand letter--or, you know, you take it down 
even lower to a mom-and-pop business and you get these demand 
letters listing all the demands, all the claims, all the 
potential damage. And then hitting you three or four paragraphs 
on how you can't--how to avoid a spoliation claim. And you've 
got to--you know, you got to replace all the hard drives to all 
you computers to preserve evidence. I mean, does this go far 
enough to protect end users in what we're doing, do you think?
    Mr. Gupta. I think there are several provisions in the 
bill. And, what you touched on is really a collection of 
abusive practices that lead to that sort of messy outcome for 
those defendants. And I think there are several provisions in 
the bill that would address very specific aspects of abusive 
procedural uses that would ultimately curtail those sort of 
behavior.
    But, you know, in the example of the burger manufacturer, 
if indeed it was something they felt they needed to take a 
stand on, like Martha Stewart did, if they knew that 
ultimately, if they did take it to trial and they prevailed, 
that there would be some accountability on the part of the 
plaintiff for having harassed these folks in the first place. 
That there would be some sort of remedy at the end of the day 
to shift the burden.
    Mr. Farenthold. So, Mr. Kappos, you--I mean, you talked 
about not wanting to reach down to the mom-and-pops. I think 
that was in answer to one of your questions. It seems like this 
stuff naturally rolls downhill. Once the patent trolls have 
finished shaking down the big businesses, then they move down 
to the--they've already moved down to the Whataburgers. I'd 
call them a medium-sized business. You know, when do they move 
down to the, you know, the person who has the one retail store 
or the boutique? Or when do they move into my house and say, 
``Oh my. You got a Wi-Fi router in your house and you got a 
cell phone. That'll be 50 bucks licensing fee or were going to 
sue you for 10,000?"
    Mr. Kappos. Yeah, so I think there are--first of all, that 
is happening already. And that's why you've seen, in some 
States, some State action being taken. But there are a number 
of issues with this provision that I think, for the 
Whataburgers of the world in Texas, are going to make the 
provision probably not helpful in its current manifestation.
    The top one on my list is that there's a requirement for 
the covered end user or retailer, in this case, to agree to be 
bound by the judgment. But the problem with that is that 
parties are never in exactly the same position. They're in 
different positions. They were put on notice at different 
times.
    Mr. Farenthold. So what would you propose to fix that?
    Mr. Kappos. There needs to be work done on the statute in 
order to ensure that parties----
    Mr. Farenthold. But you could--would you say a provision to 
stay, then an option to be bound by it, and then, you know, a 
tolling of the statute of limitations during that time--would 
that be a workable solution? Or--I mean, I'm trying to figure 
out how to fix this so it solves those problems.
    Mr. Kappos. Yeah, I'm not sure if I understand that. But, 
certainly, I think the issue is resolvable for--so that the 
statute benefits the retailers without being overextended.
    Mr. Farenthold. All right.
    And does anybody else on the panel want to comment on ways 
we could improve that? And I'm specifically concerned about end 
user protection. Does anybody else want to anything? I don't 
want to leave the opportunity.
    Go ahead.
    Mr. Kappos. I would say one other thing. There's an issue 
also there with the commonality of interests that's needed in 
order to trigger the provision. The way it's worded right now, 
I think we're going to see a lot of reordering of commercial 
relationships with parties, you know, like the EMCs of the 
world, when their customers are in asking for--to change 
indemnity provisions, that's going to create one set of 
situations. Because customers are going to want to get 
indemnities to get under this new provision----
    Mr. Farenthold. Right.
    Mr. Kappos [continuing]. And be able the stay litigation. 
And an EMC, when it's in the position of being a customer, is 
going to want to change indemnity language. Now, I'm not sure 
Congress meant to reorder commercial relationships, so that 
needs to be taken into account too.
    Mr. Farenthold. All right. I see I'm out of time. And I 
think Mr. Kramer wants to answer, if the Chair will indulge me 
and let him answer.
    Mr. Bachus. Yes, you may answer.
    Mr. Kramer. Thank you, Mr. Chairman.
    Thank you for the question, Mr. Farenthold--Congressman.
    You know, I steadfastly believe that those who manufacture 
should stand behind their technology, right? I know we do. We 
expect our partners to do that. And so, I think the provisions 
in the act regarding end user stays are a great start. And 
certainly happy to have my staff get in touch with your staff 
and work on appropriate language to make sure everybody is 
satisfied.
    Mr. Farenthold. Thank you very much.
    Mr. Bachus. Mr. Deutch, are you next or Mr. Jeffries?
    Mr. Deutch?
    Mr. Deutch. I'm next.
    Mr. Bachus. Okay.
    Mr. Deutch. Thank you, Mr. Chairman.
    Mr. Chairman, as an early advocate for legislative fixes to 
the troll problem, I'm glad we're having the opportunity to 
discuss this in detail today. And I--while I don't agree with 
all of the provisions of the bill, I applaud Chairman 
Goodlatte's attention to the issue and his willingness to dive 
into this with solutions to a genuine and growing problem. And 
I appreciate, in particular, Chairman Goodlatte's willingness 
to work through disagreements. I'm hopeful that we can get to a 
place where we can all be supportive of a final piece of 
legislation.
    For a problem this complex there can't ever be one solution 
alone. Any work that we do to combat the predatory environment 
that has allowed patent trolls to prey on both large and small 
companies has to focus, I think, on stopping bad behavior and 
establishing incentives for responsible action rather than 
going after specific business models. Those business models 
will change if we don't address the underlying behavior.
    And we also have to take a comprehensive enough approach so 
that we don't find ourselves back in the same situation a year 
down the line, with little actually solved in spite of bills 
that we may have passed. I think this necessitates a kitchen 
sink approach. Chairman's bill certainly does this, bringing 
together several approaches aimed at making the patent troll 
business less profitable. It gives us a lot to talk about 
today.
    And I'd just like to focus the remainder of my time on a 
component of the Chairman's bill I strongly support, which is 
bringing greater transparency to the patent system.
    Mr. Kappos, you spoke--you mentioned real party in interest 
as one of the items that would be a constructive addition to 
current law. You also acknowledged earlier in the hearing that 
the real party in interest language that some have advocated 
for stronger language still. I count myself as among those who 
do.
    And, first though, I've been monitoring the PTO's current 
examination of what can be done to enhance real party in 
interest disclosure within their exiting authority. I'd welcome 
your comments on the work that they've done thus far and 
particularly where that might go, as former PTO director.
    Mr. Kappos. Well, thank you, Congressman.
    And, indeed, where I was going with my comment before was 
that the provisions of this bill mainly effect the real party 
in interest disclosure and litigation. What about in all those 
other contexts, in front of the expert agency, where people 
really need to know who they're dealing with. So, I applaud 
your focus on the USPTO's efforts. I do not think the USPTO has 
enough statutory authority now. I would love to see them get 
more to be able to require the necessary disclosures at all the 
touch points in the patent system, where parties are coming in 
and asking the agency to do work for them.
    Mr. Deutch. I appreciate that. I think it's not just the 
touch points in the patent system. As you know, the Goodlatte 
bill adds new requirements at the initial complaint stage. And 
I certainly agree it'd be helpful over the current system. And 
I agree with you that identifying those specific points within 
the system are appropriate.
    But, I worry that it leaves out earlier places in this 
chain where it would also be critically helpful. People who 
receive demand letters without a key piece of information that 
they need in order to decide whether to settle or whether to 
litigate or, frankly, sometimes whether to just shut their 
doors. What additional transparency requirements might be 
helpful for the system, as a whole, as we try to approach it 
that way?
    Mr. Kappos. That's a good point. So, you're talking demand 
letters, you're talking the portion of the system that lies 
between the USPTO's authority and the courts authority.
    Mr. Deutch. Right.
    Mr. Kappos. And a great example of why I think more 
discussion is needed, as we consider this bill, on this 
particular point.
    Mr. Deutch. Mr. Kramer, you--you're testimony also 
highlighted the value to practicing companies for enhanced 
transparency. When I started on this Committee a few years back 
I assumed that patent ownership was fairly straightforward, it 
was easy to identify. I've learned, obviously, otherwise. The 
opposite is true. It can be difficult to know who the true 
party behind a demand letter is, when a--or even when a 
defendant goes into court. And even properly identifying real 
parties in interest for a particular patent can be complicated 
based on exclusive licensing agreements that are also in place, 
other private contracts that might exist.
    So, I'd ask if you could just expand upon your experience 
managing the IP portfolio in dealing with plaintiffs who 
intentionally hide the identities of owners or key investors. 
And then, finally, just stepping outside of the bill for a 
moment, as the person responsible for a large patent portfolio, 
if you could address whether it would be overly burdensome for 
you to have to record ownership of your patents whenever you 
sell or acquire them.
    Mr. Kramer. Thank you, Congressman.
    Let me take your second question first. I--the--patents are 
a government grant, right? And I think that the government, you 
know, as well as the public should understand who has a 
financial interest in them. As a holder of patents, I'm more 
than happy to record my transactions with the Patent Office, 
right, but--so, people know who owns those patents. So, that's 
your second question.
    In terms of complicating the procedures, certainly, you 
know, my experience has been in the real problem is in the 
settlement of litigations, right, when all of a sudden the 
party across the table says, ``Well, you know, I got to talk 
with my investors to see whether I can accept that,'' right, 
and that's a problem, right. I, personally, want to know who 
I'm dealing with, in the context of a litigation. I, you know, 
I don't want to keep feeding this vicious cycle of troll 
litigation. So, if I know that the same person is on the other 
side of the case from me, I might fight it harder, I might not 
settle because otherwise whatever money Yahoo! ends up paying 
them, right, they're just going to go buy another patent and 
sue me again, right? And I don't want that to happen. So I 
think it's very important that we know the parties who have an 
interest in the patent and an interest in the litigation.
    Mr. Deutch. Thank you.
    Thank you, Mr. Chairman.
    Mr. Bachus. Thank you.
    Mr. Collins from Georgia is recognized for 5 minutes.
    Mr. Collins. Thank you, Mr. Chairman. I appreciate the 
opportunity.
    Also, I appreciate this process and this is something that 
I have, before I was even sworn in, began the process of 
looking into this because we knew it was going to be coming 
back up. There was too much conversation going on.
    I appreciate Mr. Armitage, what you said about the fog 
around patent litigation. I come to think of it not more as a 
fog, but when my staff comes in and we have these sort of dream 
sequences, I believe. When am I going to wake up and I'm in the 
shower or something.
    But, it's like, what is this--where are we headed here? And 
I think that's the concern I have, in looking at--over this. 
And the question, Mr. Kappos, I want to ask this to you and 
it's long and I'll sort of lay it out. The question I'll--that 
I have is on whether or not Section 18 should have been, one, 
originally included in AIA and whether its expansion in this 
bill is necessary or even really appropriate? Now, is that--one 
that I have been giving a lot of thought to and honestly it 
causes me some trouble.
    There's a question that there--there is no question that 
the right to patent, the right to exclude is given inventors by 
the Constitution. Patent rights are property rights, but they 
are unique in they only--in that the only way for an inventor 
to protect his property and to protect his patent is to assert 
it in court. If a subject matter is patentable, then I believe 
that it has the same value as another patentable subject 
matter. No monetary--not monetary, of course, but it should 
enjoy the same protection, the same ability to license, the 
same ability to assert as other patentable subject matter.
    Many other minds have discussed at great length, during the 
AIA floor debates of Section 18 placed expediency of process 
above protection of patent rights. And I'm not seeking to 
rehash or relive those debates, however I am struggling with a 
provision that would make permanent a temporary program that 
does not expire for 6 years. What I have found in my short time 
here is Congress legislates then they collect data and suppose 
to conduct oversight. I am in mind of that in finding that 
that's what we're sort of doing again here. We're running to do 
something, then we're going to look at how it works or maybe 
look at it later.
    So, is there anything that you can tell me that would 
basically assure my fears? Or is there some compelling argument 
for why we must make permanent today a provision that doesn't 
expire for 6 years? Wouldn't it be more prudent to let this 
provision act as it was intended? Operate for 8 years, conduct 
oversight, assess the program and its achievements, and then 
decide if so to, whether to extend it or make it permanent.
    Mr. Kappos. Well, thank you, Representative Collins. I 
would, if anything, amplify your fears so that bubble sequence 
could get rather darker.
    The challenge with this provision is that it has just been 
implemented. It is just getting on its feet. And, in fact, 
Congress has called for a study of the post grant procedures, 
including Section 18, about this time 2 years from now, 
September of 2015. So, I completely ascribe to and agree with 
the process that you've articulated. Congress already called 
for that process as part of the AIA. We need to let it run 
forward. And----
    Mr. Collins. Yeah.
    Mr. Kappos [continuing]. Learn more.
    Mr. Collins. Well I appreciate that. I want everyone in 
this room, because there's holders in all these seats here, 
looking at this. This is a--this is not a good workable system, 
what we have now. There are problems all up and down the line. 
And I think there's some things that we've got to do to address 
this.
    What really concerned me though is--Mr. Kramer, is just a 
comment that you made that sort of took my whole question when 
you were asked directly, ``Can you cite an example where an 
expanded process would have helped you?'' And you said you 
really couldn't name one. That concerned me.
    But I have a--do have a question for you as well. That your 
statement just brought my--crystalized my whole question line, 
and you as mister well--Mr. Gupta as well. I understand that 
both of you have some concerns with the provision in the bill 
on the standard for the PTO to apply when examining a patent in 
the post grant procedures. Can you explain the--you know, as 
briefly as possible, the nature of your concern and the 
reasoning for your concerns on this standard for post grant 
procedures?
    Mr. Kramer. Certainly.
    Let me first address the example question. I understood 
that Chu--Congresswoman was asking me for a prior case, I 
couldn't think of a prior case. I can think of a current case 
where we've used the system and that's the Metasearch case. So 
there is one that----
    Mr. Collins. Well, he question was where is one that would 
expansion would have helped you. And----
    Mr. Kramer. Correct.
    Mr. Collins.--I think that's sort of where we're headed 
here. So, you really--and I appreciate that because----
    Mr. Kramer. Correct.
    Mr. Collins [continuing]. It crystalized my question. So--
--
    Mr. Kramer. Great. In terms of an example, I'm sorry.
    Mr. Collins. The post grant review.
    Mr. Kramer. The post grant review. That's a--I understand 
there are concerns on both sides of the aisle with respect to 
the standard of claim construction being proposed. You know, 
certainly, you know, that's an issue where on the one hand 
you've got a hundred years of PTO history using one standard 
and to change things, I think, might be dramatic for them. 
Certainly, willing--happy to work with you on finding a 
resolution to that problem.
    Mr. Collins. Well, I think, in some way, wouldn't you agree 
that this bill itself is in--and Mr. Armitage, I think, sort of 
alluded to this--this bill is changing procedural provisions in 
a specialize way for patents. That, you know, really if this 
goes through as is, books will be written because you're going 
to have to explain how you're going to go through the process 
now.
    Mr. Kramer. It is a process that is currently a standard 
that we all have to face already.
    Mr. Collins. Well, when new discovery requirements, stays, 
those kind of issues like that--I mean, that's an issue that--
you know, there's many things in this bill that are--that I 
believe can be workable and are workable and I support. You 
know, I think the PTO office--actually--and that's one of the 
reasons I signed on to make sure that we put the right 
resources where the resources need to go.
    Mr. Kramer. Right.
    Mr. Collins. And I--that was a concern.
    Anything to add to post grant?
    Mr. Gupta. You know, we happened to--our patents are, from 
time to time, subject to post grant review process--procedures 
and we put patents through post grant review procedures as 
well. And, from our perspective, whatever--you know, wherever 
we end up on this in a thoughtful sort of outcome, we're 
wanting to live by the same set of rules when they're applied 
to our patents and when we apply them to others' patents.
    But where we really have a lot hope and our focus has been 
on is sort of--you know, anytime a system goes out of whack you 
get feedback. And then, with the feedback, you could take some 
corrective action. There's clear feedback on the litigation 
abuses that we see. And this bill has so much good in the area 
of procedural abuse, you know, sort of feedback mechanisms, you 
know, our focus has always been on supporting those aspects and 
making sure that those tweaks are indeed put in place.
    Mr. Collins. And I know my time is running short. But I do 
appreciate the fact that you're willing to be--you know, 
everybody need to play by it. That's something that's sort of 
lost in this town. That some people want this treatment and 
other treatment and we want to treat the same here, as we move 
forward.
    Mr. Armitage, I've watched--I've just--as my last moments 
here, is there anything to my questions or stuff that you'd 
like to add to that?
    Mr. Armitage. Just that we do have a hundred year's history 
of the PTO in examination using one standard. But for the last 
220 years, the PTO has never been given the authority by 
Congress to adjudicate the validity of issued patents. And so, 
we're in a situation where the PTO is actually being the court, 
substituting its administrative patent judges for District 
Court judges. And those claim construction standards in those 
two proceedings simply must be the same for the sake of 
fairness to the patent owner.
    Mr. Collins. Well, I think my time is over. There are some 
other issues on studies on transfer of venues, some other 
things. We'll get to those.
    But I appreciate the Chairman's time. And I appreciate this 
coming forward in our discussions today.
    Mr. Bachus. Thank you.
    And, at this time, the gentlelady from Washington, Ms. 
DelBene is recognized.
    Ms. DelBene. Thank you, Mr. Chair.
    And thanks to all of you for being here and for all of your 
time.
    I kind of wanted to follow up actually, Mr. Kappos, 
discussing Section 9's changes to the standard of claim 
construction in interparty and post grant review proceedings. 
You pointed out that this may lead to the PTO endorsing and 
issuing broader claims in these proceedings. And so, I wondered 
if you could speak more about the impact of this provision and 
whether you view the current use of broadest reasonable 
interpretation standard as effective in achieving the goals of 
our proceedings or whether you think there needs to be change.
    Mr. Kappos. Well, I think that Congress, when it put the 
AIA in place, did so knowing that the USPTO has for many, many 
years been using the so-call BRI or broadest reasonable 
interpretation. So, I think that there's fairness on both sides 
of this debate. The reason BRI has always been the standard is 
that in the USPTO, unlike in the courts, applicants or 
patentees have opportunities to amend their claims. And so the 
view is, ``Look the agency's mandate is to protect the best 
interests of the public, ensure that overbroad claims are not 
being granted and therefore take a reasonable but broad 
interpretation.'' Applicants can amend their claims and the 
public's best interest is protected.
    The challenge that we get into with moving the USPTO to the 
skill of ordinary--one of ordinary skill in the art standard, 
that the courts use, is that then, quite clearly, the agency 
will be issuing claims that are going to be broader in some 
cases, less clearly defined in some cases. And, in that sense, 
that provision, while there are plenty of merits to it as Mr. 
Armitage points out, does cut against the core of this 
legislation, which is to try and improve the quality of the 
patent system and reduce vague patents that lead to these 
overbroad assertions that folks to my right are concerned 
about.
    Ms. DelBene. Thank you.
    Mr. Kramer, do you have anything else to add as we were 
talking about post grant review? Or do you----
    Mr. Kramer. No comment.
    Ms. DelBene. Okay, thanks.
    We also know that the impact on small business and venture-
backed businesses, startup companies--the impact that abusive 
litigation is having. Today, Robin Feldman, the professor of 
law at the University of California, Hastings, and the National 
Venture Capital Association released findings from a survey 
that they did of venture capitalists and startup companies. And 
the results are very clear that the number of patent demands 
received by venture-backed companies has increased over the 
last 5 years. Roughly one in three startup companies report 
receiving patent demands.
    When we talk about this legislation and I think, Mr. 
Kappos, you brought up earlier that we may still need feedback 
from small inventors in terms of the impact of this 
legislation. I wondered what your thoughts were with respect to 
the impact of this legislation on small inventors, small 
innovators? And, what changes you might look at, given what you 
might perceive their feedback to be, going forward?
    Mr. Kappos. Right, well thank you for that question.
    And my sense, and I don't pretend to represent the small 
inventor community, but my sense is that when they register 
their views they will have some concerns. They'll have some 
concerns that go along the lines of access to justice by being 
potentially priced out of the system. And we need to be 
sensitive to that.
    They'll have some concerns that when they go to enforce 
their valid patent rights that large companies and medium-sized 
companies and even modest-sized companies that have far more 
resources though than the small entities and the independent 
inventors will be able to potentially engage the same kind of 
actions that we're talking about here that we don't want patent 
trolls engaging in. So that's why I commented before that while 
I like lots about the bill, I think that reciprocal provisions 
are needed to ensure that parties in the role of defendants are 
acting responsibly, just as we're requiring parties in the role 
of plaintiffs to act responsibly.
    Ms. DelBene. And, Mr. Gupta, the--you know, you also talk, 
in your written testimony, about the impact on small business. 
So, I wondered if you had anything to add with respect to how 
this bill might balance the needs of large businesses but also 
small innovators.
    Mr. Gupta. I think the--again, I can't necessarily speak 
for all small businesses. But, I think, if you think about VC-
backed companies or small companies that are truly 
entrepreneurial, they have an idea--a business idea, they get a 
patent on it and they're working toward bringing a product to 
market. I think they are more concerned about the abusive 
litigation tactics that are directed toward them.
    The data that we have suggests that more than half of these 
patent suits are filed against companies that have less than 10 
million and a vast majority against companies whose revenues 
are less than 100 million. And so, you know--and when small 
companies initiate patent action against someone else, they 
generally do not take advantage of procedural tricks to 
increase the cost of litigation of the--on the other side. And 
they are certainly not looking of an early settlement to get 
out of it. They are, at that point, protecting their invention, 
their innovation, their business. They're not looking for a 
settlement where they end up licensing the patents or that this 
alleged infringer could then be competing against them using 
the technology that they want to commercialize.
    And in talks--and in the context of Access to Justice, I 
think you have to look at the fact that the defense costs, in 
today's patent system, is so great and so high for small 
businesses, I think effectively they are being excluded from 
this justice system because the only way they can feel they can 
participate is by having to give in to these extortions and 
settle, rather than actually get to the merits of the dispute 
to prove their non-infringement position or the invalidity 
position.
    Ms. DelBene. Thank you.
    I yield back my time, Mr. Chairman.
    Mr. Bachus. Thank you.
    Mr. Poe is recognized for 5 minutes.
    Mr. Poe. I thank the Chairman.
    One of the strengths of our system is that it treats 
everybody the same. And, in fact, the United States has fought 
to establish a nondiscrimination between types of inventions in 
international trade under the TRIPS Agreement. Do you think 
that other countries, like Brazil, India and China will use 
this as an invitation to harm one of our best industries, like 
software? And this is open to whoever wants to answer it.
    Mr. Kappos. Yeah, I'll certainly take that on. I've been 
mentioning that all morning here.
    Well, I do think there's risk of that. And I think that the 
provision that you're referring to, Section 18, the covered 
business method provision and inserting into it an overt--quite 
blatant discrimination against software-based innovation will 
invite our trading partners sit up and take notice and to 
potentially have that come up in trade negotiations. And I 
think that's one of the many reasons why extension to the 
software field is a not good policy.
    Mr. Poe. So, the answer is what? I'm sorry I didn't hear 
what the answer was.
    Mr. Kappos. The answer was--is enthusiastically to agree 
with your concern.
    Mr. Poe. And so, what do we do about it? Do you have an 
answer on what we should do about it? Any of you?
    Mr. Kappos. Well----
    Mr. Poe. I've never seen four lawyers quiet in my life, 
like this. [Laughter.]
    Mr. Kappos. Yeah, relative to Section 18, I do. Which is 
that we certainly should not be expanding it to cover software.
    Mr. Poe. Right.
    Mr. Kappos. And the better judgment, I think overall--given 
that it's so new, given that it is getting traction, given that 
the USPTO has interpreted it broadly, given that its reviewing 
court hasn't had time to even look at the USPTO's 
interpretation--is that it's best to let that procedure keep 
running forward and not amend it at this point.
    Mr. Poe. All right.
    Mr. Armitage, did you want----
    Mr. Armitage. Yes.
    Mr. Poe [continuing]. To make a comment? Thank you.
    Mr. Armitage. I would just say that, in the course of the 
America Invents Act, Congress made a finding that there were 
particular type of patent, based on developments in the law and 
the work of the Patent Office in examining them that justified 
a transitional procedure to deal with those patents and specify 
the transition period. And, as Mr. Kappos says, the case hasn't 
been made to change any of those findings much less make what 
was a transitional program a permanent part of our patent law.
    Mr. Kramer. Congressman, thank you for the question.
    I think that there should be low-cost alternatives to 
challenge, within the U.S. Patent and Trademark Office, patents 
that do not have a technical solution to a technical problem. 
That is the definition that the USPTO has adopted, therefore I 
think it's a good program.
    Mr. Poe. Okay.
    Mr. Armitage, did you want to weigh in on that again?
    Mr. Armitage. Yeah, just one comment.
    Every issued U.S. patent that meets the CBM definition 
tomorrow could be challenged in the Patent Office. And there'd 
be another 6 year when that can happen. And that could happen 
for every newly issued patent during the next 6 years. Under 
the new patent law, every first inventor to file a patent that 
issues is subject to the identical type of procedure on any 
ground of patentability. It covers all technologies. So, we 
already have in place a comprehensive system of post grant 
review. We don't need yet another procedure or to expand an 
existing procedure to take care of existing patents.
    Mr. Poe. Every time--not every time, but many times when 
Congress gets involved in anything it makes it worse, whatever 
it is. Of course, we don't want to do that. And now the 
proposal is, you know, H.R. 3309 would expand the covered 
business method program, even though it's only been in effect 
about a year. Is it too soon to make changes in the law that 
really hasn't been tested much--two cases I believe? Too soon?
    Mr. Kappos. I would say yes, on balance it is.
    Mr. Armitage. Too soon.
    Mr. Poe. That's two.
    Mr. Kramer. And in my opinion it's not too soon.
    Mr. Poe. Two and one.
    Mr. Gupta. I'd have to concur.
    Mr. Poe. That it's too soon or not too soon?
    Mr. Gupta. I think, as we have only one decision, we'd 
really like to see how the system plays out.
    Mr. Poe. All right. Three and one. All right thank you.
    Small guys. I think the reason--one reason we got patent 
trolls to begin with is because the small guys are looking for 
help. That's one reason. Does--I'm concerned about the small 
guy going against Yahoo! or somebody else. They don't have 
lawyers. They--you know, they call their family lawyer or 
something, if they need help. Patent law, as we know, is a very 
specific, difficult litigation process. It's much more 
complicated than probably anything. So, small guy. How do we 
make sure the small guy isn't excluded from the system? That's 
the end of the question because I'm out of time. How do we keep 
the small guy excluded from taking care of their patent?
    Mr. Kramer. Mr. Chairman, I see the time is expired. Can I 
respond to the question please?
    Mr. Bachus. Yes.
    Mr. Poe. Thank you, Mr. Chair.
    Mr. Kramer. Thank you. Since Yahoo! was identified in the 
question, I feel like I have an--a responsibility----
    Mr. Poe. I'm not picking on Yahoo!, I'm just giving 
examples.
    Mr. Kramer. There is nothing in this bill that prevents 
anyone from filing a meritorious lawsuit, right? Matter of 
fact, there are provision in this bill that will--would help 
the small guy. Staging discovery, giving presumptive limits on 
discovery--those things will definitely help the small 
individual inventor to pursue a meritorious claim against any 
company.
    Mr. Poe. Well, what they're concerned about it the losers 
pays provision.
    Mr. Kramer. I'm sorry, I didn't understand.
    Mr. Poe. What they'd be concerned about, of course, is if 
they lose and then they got to pay. Well, they can't pay.
    Mr. Kramer. So----
    Mr. Poe. Some of them say, ``I can't pay, so I can't 
litigate.''
    Mr. Kramer. Under the provision, as written, it's very 
forgiving, right. Although there is a presumption that if you 
have a--there is a presumption toward fee shifting. But, if you 
have a substantially justified case, i.e. a good case, right, 
you're not going to pay. Or there is also a provision that 
provides the District Court judge with discretion in special 
circumstances, if it--if fee shifting is not warranted than fee 
shifting will not happen. And it's a good thing to give the 
District Court judge that discretion.
    Mr. Poe. As a former judge, I like the word discretion.
    I yield back. Thank you for your patience, Mr. Chairman.
    Mr. Bachus. All right. Thank you.
    Gentleman from New York, Mr. Jeffries, is recognized for 5 
minutes.
    Mr. Jeffries. Thank you, Mr. Chairman.
    And let me thank the witnesses for your testimony today. I 
found it to be both helpful and illuminating.
    I represent a district largely anchored in Brooklyn that 
increasingly has become home to technology and innovation 
companies, particularly a significant number of startups and 
tech entrepreneurs. That's been a very positive addition to the 
local economy and one that we embrace and want to foster and 
develop.
    Unfortunately, many of these same entrepreneurs and 
startups have increasingly found themselves on the wrong side 
of the patent troll issue. And that's why, Mr. Chairman, I 
think this is such an important hearing and an issue that we 
need to address thoroughly, comprehensively, but also 
deliberately here in the Congress.
    Let me start with Mr. Gupta. You testified, I believe, that 
you were sued more than 30 times since 2005 by patent assertion 
entities, is that correct?
    Mr. Gupta. That is correct.
    Mr. Jeffries. And it's fair to say that, in your view, each 
of these actions were lacking in merit and frivolous, is that 
right?
    Mr. Gupta. That is correct. In fact, you know, of all these 
30 cases we have settled only one piece of litigation. We've 
taken cases to trial, cases have also been dismissed on summary 
judgment in our favor.
    Mr. Jeffries. So in the cases that you did not settle, all 
but one, you prevailed in one way or the other in all of those 
other matters, is that right?
    Mr. Gupta. Yes. Or, when the--we were able to convince the 
patent assertion entity that we were the last one standing and 
we were going to fight until the end and have our day in court, 
they had walked away.
    Mr. Jeffries. Now, were you awarded attorney's fees? And 
did you apply pursuant to Section 285 in those cases that you 
ultimately prevailed in, either at the pleading stage or some 
point during the lawsuit or at trial?
    Mr. Gupta. In a couple of instances we were awarded our 
fees--I'm sorry, our costs in connection with having had to 
continue litigating after a certain point. But we have never 
been successful in recovering our attorney's fees and costs.
    Mr. Jeffries. Okay. Now, I think you also testified that 
patent assertion entities bring unmeritorious suits and then 
leverage the high cost of litigation to negotiate, I think what 
you termed, ``Extortionary settlements,'' is that correct?
    Mr. Gupta. That is correct.
    Mr. Jeffries. I think that's a colorful but fair framing of 
the issue that folks confront.
    I think, Mr. Kramer, you characterized the problem as, 
``Defendants being forced to spend millions to litigate against 
abusive actions,'' is that right?
    Mr. Kramer. That is correct. Yes, Congressman.
    Mr. Jeffries. Now, is it also fair to say that this 
litigation cost tends to primarily be anchored in the expensive 
nature of discovery in the patent context?
    Mr. Kramer. That is a large component of the cost, yes.
    Mr. Jeffries. And so, is it also fair to say that the 
ability to negotiate the extortionary settlements, that these 
patent trolls seek either with a demand letter or in the 
commencement of action, is largely anchored in the fact that 
the costs of discovery is so expensive in many instances?
    Mr. Kramer. I think it's anchored in the cost, in the fact 
that litigation as a whole is expensive and time consuming and 
requires a lot of effort and attention from everybody involved.
    Mr. Jeffries. So, is it reasonable to focus, in terms of 
our effort to try and address the patent-troll problem, to try 
and limit the cost of the litigation either at the front end or 
as you pursue discovery in order to eliminate the primary 
weapon being used by, you know, illegitimate patent trolls to 
try and extort or extract settlements?
    Mr. Kramer. I certainly think that the provision in the 
Innovation Act for staging discovery is a great step forward. 
And I certainly think that the proposal to have the judicial 
conference look at creating presumptive limits on the content 
of discovery, that's a great step forward.
    Mr. Jeffries. And is the heightened pleading requirement 
also an important step in terms of limiting actions from moving 
forward unless there's some judicial finding of merit?
    Mr. Kramer. I agree that the requirement for genuine notice 
pleading would be a tremendous step forward to drive efficiency 
in the system, so we all know what we're talking about when the 
complaint is filed.
    Mr. Jeffries. And, Mr. Kappos, I believe there was an 
article written by the Chief Justice of--or the Chief Judge of 
the Federal Circuit Randall Rader entitled, ``Make Patent 
Trolls Pay in Court,'' on June 4, 2013.
    I'd ask unanimous consent that this be entered into the 
record.
    Mr. Bachus. Without objection.
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                               __________
    Mr. Jeffries. And he makes some interesting observations in 
this op-ed written with two other individuals. He indicates 
that in 2011 there were 3,000 patent cases filed but only 20 of 
those cases resulted in a finding of attorney's fees pursuant 
to 35 U.S.C. 285. He then makes the observation that he 
believed that this statute does provide judges with the ability 
to defend against the trolls but it's not being exercised with 
sufficient robustness. That's my characterization of what he 
said in this article.
    I think that the challenge for us is to figure out how do 
you balance, you know, the need to maintain some integrity and 
judicial discretion with a coequal branch of government, with 
the ability for there to be some cost in pursuing frivolous 
actions. And I would just ask you to comment on that.
    Mr. Kappos. Right. Thanks for the question.
    So, yeah. The Federal Circuit jurisprudence interprets 285 
to require both an objectively baseless claim and subjective 
bad faith on the part of the--or bad faith on the part of the 
plaintiff. And that is a very exacting standard. And as Chief 
Judge Rader points out, it has resulted in extremely few 
findings of violation of 285 or, you know, the exceptional case 
standard.
    Now, there are two cases in the Supreme Court pending right 
now that are set to look at that issue. So, query whether the 
Supreme Court will, despite some of the other comments on this 
panel, be able to significantly correct the situation. And 
history teaches us, if we look back at the eBay case and the 
injunction standard or the KSR case and the obviousness 
standard, that the Supreme Court--as well as other examples, 
the Supreme Court has done a good job in just the last 10 years 
or fewer of taking really thorny issues that were vexing to 
congressional action and resolving them.
    So, I appreciate the comments that others have made today 
mentioning that Supreme Court looking at two cases. And, 
Congressman, you mentioned the need to achieve balance and the 
challenge of legislating in this area. And one might consider 
what good the Supreme Court can do to help.
    Mr. Jeffries. Thank you.
    Mr. Bachus. Thank you, Mr. Jeffries.
    At this time, Mr. Issa----
    Mr. Issa. Thank you, Mr. Chairman.
    Mr. Bachus [continuing]. And Mr. Issa has--is on your 
funding bill. He's on the funding bill.
    [Laugher]
    Mr. Kappos. Listen, I mentioned that in my opening remarks, 
Congressman Issa.
    Mr. Issa. This should help as I batter the witnesses with 
questions.
    First of all, Mr. Chairman, I'd like to ask unanimous 
consent that a letter dated July 30, 2013, which went to the 
Chairmen both in the--and Ranking Members in the House and the 
Senate, be there--be submitted into the record because I'm 
going to speak on it.
    Mr. Bachus. Without objection.
    [The information referred to follows:]

    
    
    
    
    
    
    
    


                               __________
    Mr. Issa. Thank you.
    Mr. Kramer, your company was on this letter, which is no 
surprise, in support of expanding CBM to a certain extent, to a 
certain extent supporting the STOP Act, although not stating 
it. You obviously believe there needs to be a low-cost 
alternative to narrowing the claims or eliminating overly broad 
and poorly executed patents, is that correct?
    Mr. Kramer. That is correct, Congressman, yes.
    Mr. Issa. And by definition, if you've got bad patents--
and, Mr. Armitage, I'll give you a chance to respond--but, if 
you've got bad patents in one category and they're being 
adjudicated, if you will, through a low-cost system and you 
have others that are being ignored but they're being executed 
on in court, isn't that inherently a flaw in existing 
legislation not to pick them up?
    Mr. Kramer. I think it's a flaw in existing legislation not 
to provide low-cost alternatives where, you know, you have 
these bad patents whatever their technology. And you don't 
provide the ability, you know, in a broad way to go back to the 
Patent Office to address those things. And post grant review 
and inter partes review have limitations in scope.
    Mr. Issa. And I certainly agree.
    Mr. Armitage, you said--you talked about a hundred years of 
a standard. You're familiar with, until maybe 20 years ago--I 
think it's less than that--about 20 years ago, means-plus-
function claims allowed somebody a quick and dirty way to 
describe an invention and then make an extremely broad under 
the doctrine of equivalence. Do you remember that?
    Mr. Armitage. Was it only--I'm sorry, I do remember before 
the Federal Circuit clarified how Section 112----
    Mr. Issa. They struck it down. They absolutely killed 
means-plus-function as a way to get broad patents while 
narrowly defining them, didn't they?
    Mr. Armitage. I don't want to get into a debate, but I 
still urged clients when I practiced used means-plus-function 
claims because they----
    Mr. Issa. As long as all they wanted was the means and 
the--that they were showing, correct?
    Mr. Armitage. I'm going to say you're substantially 
correct. And afterward we can discuss the exceptions.
    Mr. Issa. Well, the--Mr. Kappos, I lived under those old 
means-plus-functions as an inventor and as a manufacturer. And, 
you know, I saw people who took a couple of relays and popped 
them together and threw a patent with a line drawing out and 
then said, ``Darn it, your microprocessor or your complex gate 
array with thousands of gates in it or huge amounts of memory, 
it's the equivalent,'' and tried to claim that because the 
output of the device did the same thing that it must have the 
same input. Do--you also remember that era of overly broad 
interpretation that, quite frankly, paled in comparison to 
what's happening today with business method patents, isn't it?
    Mr. Kappos. I certainly do, Representative Issa----
    Mr. Issa. Not that you're that old, but you know I am.
    Mr. Kappos. Over breadth associated with 112-6 would--
definitely was a problem. It has been significantly reigned it.
    Mr. Issa. Well, it has. But there's a new generation. A new 
generation of workarounds, just as the eBay decision is being 
worked around by going to the ITC whenever possible to get an 
exclusion, because the court, when they said--they set a 
standard for injunctive relief they didn't consider that 
there's an entity just down the street that only does 
effectively injunctive relief. It's the only tool and they use 
it constantly because they have to. So, you know, 
legislatively, certainly, we have a similar challenge that the 
court only can consider what's brought to it. Well we can 
consider all the problems that are brought to us.
    Mr. Kappos, you have a tough job. But, under the current 
law, if you do not have a standard to look at prior art as 
broadly as prior art is expressed when it comes before the 
Patent Office, don't you inherently find yourself in a 
situation in which examiners are constantly being told that 
prior art is narrow. Well in fact, if that same prior art were 
coming before a court it would, like the old means-plus-
functions, suddenly be expansive. Isn't there a need for a 
standard change that makes it clear that you must consider 
prior art as broadly as possible from a standpoint of 
exclusion? And that's not currently the case. The examiners are 
often faced with claims that something means very little and 
with relatively little recourse to argue that point.
    Mr. Kappos. Are you asking whether the court should have to 
move to the broadest reasonable interpretation instead?
    Mr. Issa. No. Actually, my point is the broadest reasonable 
interpretation standard should apply to what has already been 
invented. And one of the challenges is it's applied to your 
consideration of what a--an applicant is entitled to rather 
than the exclusion. The whole point is that the--and you 
mentioned earlier, the obviousness standard. We have a problem 
which is, if anyone of ordinary education--not necessary 
ordinary skill in the art--but of ordinary education reads the 
existing patents and then looks at a new patent, most often 
they search endlessly to try to figure out what's new. And they 
find a little nuance. You know, I had a relay and I had a car. 
And now I've got a relay, a car and a mobile radio. And they 
say, ``Ah ha. It's the mobile radio.'' Or is it?
    The fact is, we have a fundamental problem that regularly 
your examiners have a standard--which under the scrutiny of an 
opposition from an outside party bringing in the actual and 
real experiences, the actual products and what they do--are 
successful in narrowing patents dramatically on a regular 
basis, isn't that true?
    Mr. Kappos. I see. So you're asking about the inferences 
that examiners are able to draw. Certainly, in my view as a 
citizen, that has improved. Since KSR and some of the cases 
that have interpreted it, further refinement clearly is needed. 
I would agree with you, Congressman Issa that providing the 
USPTO with greater flexibility to apply inferences and to 
expect applicants to respond to those to--in order to clearly 
specify patent claims is good for the whole system.
    Mr. Issa. When I was learning about patent law as a--both 
an inventor and as a manufacturer, you know, I understood that 
you could be sued for your--making, using or selling a product. 
But, I don't think I ever considered that on--of these 40 
companies that the ones most concerned with people with great 
new technology would be suing--being sued, I didn't think of 
Eddie Bauer, Safeway, J. Crew, Overstock.com, the Kroger 
Company, Macy's. Now, I've been in a lot of Macys'. I've been 
in Kroger. I've been in Safeway.
    Isn't one of the problems that this Committee has to deal 
with is the growth of deep pocket large companies? And Mr. Poe 
talked about little companies and I was a little company. And I 
appreciate the cost of litigation. But, isn't one of our 
problems the idea that incidental use has made companies large 
targets just because they're using a product?
    I've got Wi-Fi in my store and I'm going to be sued as a 
result. Is often--and isn't one of the most important things 
that we have to do, in the legislation we're looking at today, 
to make sure that the manufacturer, the--ultimately the entity, 
the single entity there probably is in the food chain, is the 
entity that deals with the eventual use of their product, 
rather than being sued in jurisdictions all over the country 
simply because I put a hundred Wi-Fi units into my store to 
help my customers. Or, you know, my airplane serves a certain 
type of food that somebody finds a way to have a patent on.
    Mr. Kappos, I'll start with you and then I'd like to go to 
Mr. Kramer.
    Mr. Kappos. Yeah. So, that's the stays for customers. And, 
as we've discussed, I certainly am in the group that would 
agree that retailers, right, the Kroger's of the world----
    Mr. Issa. Particularly when they're not selling the 
infringing product but simply using something that somebody has 
put through.
    Mr. Kappos. If they're using it run their Wi-Fi's or if 
they're selling it, end users--and, you know, this would be 
Kroger in the role of an end user or Kroger in the role of a 
retailer, should be able to stay out of litigation. The trick 
is letting them do that in a way that doesn't also let every 
other party in the manufacturing value chain stay out of 
litigation. Because, if you do that, then you significantly 
devalue patents for companies in--you know, whether it's in 
auto alarms or any other industry where you've got, you know, 
lots of parties adding value to components, making more and 
more aggregated products. You don't want to devalue the whole 
patent system. You do want to protect the end users and the 
retailers.
    Mr. Issa. Well, and I know the Chairman's being 
understanding about my time.
    But, you know, the intermittent wiper case was certainly a 
great case, under Avril Cohen, in which it added value to the 
car. And some understanding of entire market was the case. I'm 
pretty sure that the delivery of groceries at a Kroger's or a 
Safeway is not so dependent on Wi-Fi. And I certainly think 
that there's a fair test of entire market. But, that's not the 
test that currently these trolls are using when they choose to 
go after deep pockets.
    Mr. Kramer, I'm--although the Chairman may allow others to 
answer. I'd like to just have--you know, you've been used as a 
big company. But, ultimately aren't you just a big target? And 
isn't that part of what you see every day?
    Mr. Kramer. Yeah. Thank you for that question. That is 
absolutely true. Since 2007, we have received roughly 70 patent 
infringement complaints. So, that's a huge increase in our 
litigation burden particularly when compared to the first 12 
years of the company where we had, at any given time, two to 
three cases on our docket. Now, I mean--you know, a case--we 
settle cases, we get new cases. On our docket at any given time 
is 20 to 25 cases. So, we are a huge target.
    And then, I think that has to do with the nature of the--
our technology, the fact that, you know, you can see pretty 
easily what we do and the fact that software patents are, quite 
frankly, there are a lot of them out there on a lot of 
different things. And, yeah. It's--I can't emphasize how--
enough how our situation has changed over the years.
    Mr. Issa. Thank you.
    Mr. Chairman, I appreciate your indulgence. And I thank you 
for all the hard work that the Committee is doing to try to 
improve patent qualities and particularly empower the PTO to do 
so.
    Mr. Bachus. Thank you, Mr. Issa.
    I wasn't really concerned, you did spend 12 minutes. But 
you----
    Mr. Issa. You know, I--it's the darnedest thing----
    Mr. Bachus. You almost----
    Mr. Issa. I just don't----
    Mr. Bachus. I've never heard you----
    Mr. Issa [continuing]. Have a clock.
    Mr. Bachus [continuing]. Badger a witness. But you came 
close on Mr. Armitage here.
    Mr. Issa. You know, Mr. Chairman, you know, if you come 
next door, we're accused to doing that to a number of people.
    Mr. Bachus. Oh, no. I've never noticed.
    Mr. Issa. Now, no. You know Eric Holder. Eric Holder said 
it was--he was a pleasure being here the last time.
    But, Mr. Chairman, I do think it--this is so important. I 
appreciate the extra indulgence of time.
    Mr. Bachus. Well, thank you.
    That will conclude our hearing.
    I will make two comments. If you look at Section 9 of the 
legislation, that seems to be where a lot of the concern is for 
the post grant reviews and the business method patent review. 
And if each of you could go down, because you've--I know the 
Internet Association that Yahoo!'s a part of is on one side of 
this and some other companies are on the other. If you could 
take each of those subsections, like whether we--whether 
Section 145 is still necessary, the estopple fix, all those 
different parts and just go through each one and tell us what 
your thoughts on those are--would be.
    One of them is codifying the--taking the board's decision 
in the business--I think it's Sap versus Versata. Should that 
be--should we codify that, for instance, or just leave it 
alone?
    Mr. Kappos. Yeah, I don't think we should.
    Mr. Bachus. Okay.
    Mr. Kappos. I think that the Federal Circuit and the USPTO 
should have some time to further consider and refine that.
    Mr. Bachus. Right. Okay. Thank you.
    That concludes today's hearing. Thanks to all of our 
witnesses for attending.
    Without objection all Members will have 5 legislative days 
to submit additional written questions for the witnesses or 
additional materials for the record.
    Now this hearing is adjourned.
    [Whereupon, at 12:57 p.m., the Committee was adjourned.]


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