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



 
 THE IMPACT OF PATENT ASSERTION ENTITIES ON INNOVATION AND THE ECONOMY

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


                                HEARING

                               BEFORE THE

              SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS

                                 OF THE

                    COMMITTEE ON ENERGY AND COMMERCE

                        HOUSE OF REPRESENTATIVES

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                               __________

                           NOVEMBER 14, 2013

                               __________

                           Serial No. 113-96


      Printed for the use of the Committee on Energy and Commerce

                        energycommerce.house.gov




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                    COMMITTEE ON ENERGY AND COMMERCE

                          FRED UPTON, Michigan
                                 Chairman
RALPH M. HALL, Texas                 HENRY A. WAXMAN, California
JOE BARTON, Texas                      Ranking Member
  Chairman Emeritus                  JOHN D. DINGELL, Michigan
ED WHITFIELD, Kentucky                 Chairman Emeritus
JOHN SHIMKUS, Illinois               FRANK PALLONE, Jr., New Jersey
JOSEPH R. PITTS, Pennsylvania        BOBBY L. RUSH, Illinois
GREG WALDEN, Oregon                  ANNA G. ESHOO, California
LEE TERRY, Nebraska                  ELIOT L. ENGEL, New York
MIKE ROGERS, Michigan                GENE GREEN, Texas
TIM MURPHY, Pennsylvania             DIANA DeGETTE, Colorado
MICHAEL C. BURGESS, Texas            LOIS CAPPS, California
MARSHA BLACKBURN, Tennessee          MICHAEL F. DOYLE, Pennsylvania
  Vice Chairman                      JANICE D. SCHAKOWSKY, Illinois
PHIL GINGREY, Georgia                JIM MATHESON, Utah
STEVE SCALISE, Louisiana             G.K. BUTTERFIELD, North Carolina
ROBERT E. LATTA, Ohio                JOHN BARROW, Georgia
CATHY McMORRIS RODGERS, Washington   DORIS O. MATSUI, California
GREGG HARPER, Mississippi            DONNA M. CHRISTENSEN, Virgin 
LEONARD LANCE, New Jersey                Islands
BILL CASSIDY, Louisiana              KATHY CASTOR, Florida
BRETT GUTHRIE, Kentucky              JOHN P. SARBANES, Maryland
PETE OLSON, Texas                    JERRY McNERNEY, California
DAVID B. McKINLEY, West Virginia     BRUCE L. BRALEY, Iowa
CORY GARDNER, Colorado               PETER WELCH, Vermont
MIKE POMPEO, Kansas                  BEN RAY LUJAN, New Mexico
ADAM KINZINGER, Illinois             PAUL TONKO, New York
H. MORGAN GRIFFITH, Virginia         JOHN A. YARMUTH, Kentucky
GUS M. BILIRAKIS, Florida
BILL JOHNSON, Missouri
BILLY LONG, Missouri
RENEE L. ELLMERS, North Carolina
              Subcommittee on Oversight and Investigations

                        TIM MURPHY, Pennsylvania
                                 Chairman
MICHAEL C. BURGESS, Texas            DIANA DeGETTE, Colorado
  Vice Chairman                        Ranking Member
MARSHA BLACKBURN, Tennessee          BRUCE L. BRALEY, Iowa
PHIL GINGREY, Georgia                BEN RAY LUJAN, New Mexico
STEVE SCALISE, Louisiana             JANICE D. SCHAKOWSKY, Illinois
GREGG HARPER, Mississippi            G.K. BUTTERFIELD, North Carolina
PETE OLSON, Texas                    KATHY CASTOR, Florida
CORY GARDNER, Colorado               PETER WELCH, Vermont
H. MORGAN GRIFFITH, Virginia         PAUL TONKO, New York
BILL JOHNSON, Ohio                   JOHN A. YARMUTH, Kentucky
BILLY LONG, Missouri                 GENE GREEN, Texas
RENEE L. ELLMERS, North Carolina     JOHN D. DINGELL, Michigan
JOE BARTON, Texas                    HENRY A. WAXMAN, California (ex 
FRED UPTON, Michigan (ex officio)        officio)


                             C O N T E N T S

                              ----------                              
                                                                   Page
Hon. Tim Murphy, a Representative in Congress from the 
  Commonwealth of Pennsylvania, opening statement................     1
    Prepared statement...........................................     3
Hon. Diana DeGette, a Representative in Congress from the state 
  of Colorado, opening statement.................................     4
Hon. Peter Welch, a Representative in Congress from the State of 
  Vermont, opening statement.....................................     5
Hon. Fred Upton, a Representative in Congress from the State of 
  Michigan, prepared statement...................................    84
Hon. G.K. Butterfield, a Representative in Congress from the 
  State of North Carolina, prepared statement....................    85

                               Witnesses

Robin Feldman, Director, Institute for Innovation Law, University 
  of California Hastings College of the Law......................     7
    Prepared statement...........................................     9
    Answers to submitted questions...............................    89
Charles Duan, Director, Patent Reform Project, Public Knowledge; 
  Lee Cheng, Chief Legal Officer, Newegg, Inc....................    13
    Prepared statement...........................................    15
    Answers to submitted questions...............................    91
Lee Cheng, Chief Legal Officer, Newegg, Inc.;....................    29
    Prepared statement...........................................    31
    Answers to submitted questions...............................    10
Daniel Seigle, Director, Business Operations, Findthebest.com....    35
    Prepared statement...........................................    37
    Answers to submitted questions...............................   102
Justin Bragiel, General Counsel, Texas Hotel & Lodging 
  Association....................................................    56
    Prepared statement...........................................    58
Jamie Richardson, Vice President, Government and Shareholder 
  Relations, White Castle System, Inc............................    60
    Prepared statement...........................................    62

                           Submitted Material

Majority memorandum..............................................    86


 THE IMPACT OF PATENT ASSERTION ENTITIES ON INNOVATION AND THE ECONOMY

                              ----------                              


                      THURSDAY, NOVEMBER 14, 2013

                  House of Representatives,
      Subcommittee on Oversight and Investigations,
                          Committee on Energy and Commerce,
                                                    Washington, DC.
    The subcommittee met, pursuant to call, at 2:00 p.m., in 
room 2123 of the Rayburn House Office Building, Hon. Tim Murphy 
(chairman of the subcommittee) presiding.
    Members present: Representatives Murphy, Burgess, 
Blackburn, Scalise, Harper, Griffith, Johnson, DeGette, Lujan, 
Welch, and Tonko.
    Staff present: Carl Anderson, Counsel, Oversight; Charlotte 
Baker, Press Secretary; Sean Bonyun, Communications Director; 
Matt Bravo, Professional Staff Member; Karen Christian, Chief 
Counsel, Oversight; Brad Grantz, Policy Coordinator, Oversight 
and Investigations; Brittany Havens, Legislative Clerk; Gib 
Mullan, Chief Counsel, Commerce, Manufacturing, and Trade; John 
Stone, Counsel, Oversight; Tom Wilbur, Digital Media Advisor; 
Brian Cohen, Democratic Staff Director, Oversight and 
Investigations; and Kiren Gopal, Democratic Counsel.

   OPENING STATEMENT OF HON. TIM MURPHY, A REPRESENTATIVE IN 
         CONGRESS FROM THE COMMONWEALTH OF PENNSYLVANIA

    Mr. Murphy. Well, good afternoon. We convene this hearing 
of the subcommittee on Oversight and Investigations to gain a 
better understanding of the impact that abusive patent 
assertion practices are having on businesses, jobs, and the 
economy.
    Back in August of 1787 when James Madison was drafting the 
Constitution, he and Charles Pinckney offered amendments 
dealing with copyrights and premiums for the advancement of 
useful knowledge and discoveries. In September of 1787, the 
wording included in the Constitution in Article I, Section A, 
Clause A, discussed the powers to secure for unlimited times to 
inventors the exclusive rights to their discoveries. This is 
the basis of U.S. patent law, and patents and trademarks are 
covered in the Commerce Clause which makes this issue a defined 
jurisdiction of the Energy and Commerce Committee.
    Now, let me state at the outset that a strong and fair 
patent system is essential to an innovative marketplace. 
Inventors and companies should be encouraged to research and 
develop ideas, technologies, and products and be rewarded for 
their risk and investment. In addition, I fully recognize that 
patent rights are only as valuable as the holder's ability to 
enforce them.
    The intent of today's hearing is not to assess the current 
state of our Nation's patent system or to opine on the various 
legislative proposals that have recently been introduced or 
discussed in this area, nor is this hearing intended to be a 
comprehensive look at all the patent assertion activity that 
occurs in advance of litigation. This is about gathering facts 
about the nature and scope of this problem. Our purpose in 
holding this hearing is to learn more about a number of 
questionable practices that have recently proliferated and the 
significant direct and indirect costs they have imposed on 
businesses, large and small.
    Specifically, most of the witnesses testifying today are 
representatives of companies from different industries who have 
received letters from various entities demanding licensing fees 
or threatening litigation over the purported use of patented 
technologies or products. Frequently, they are little more than 
form letters blasted off to hundreds or even thousands of 
recipients with the hope that some of them will quickly cave in 
order to avoid the prospect of expensive litigation. It has 
been estimated that the average patent trial can last over a 
year and cost upwards of $6 million. This is simply not a 
viable course of action for a small business, and 
unfortunately, this makes them attractive targets.
    We will hear today about some of the more egregious types 
of demand letters and whether they even contain sufficient 
information to allow for an informed response. Most 
importantly, we will hear about how responding to such 
demanding letters impacts a business's ability to attract new 
capital, utilize new technologies, hire new workers and 
ultimately grow their company and our overall economy. One 
recent study from researchers at Boston University calculated 
that patent assertion activity directly cost defendants and 
licensees $29 billion in 2011. This figure represents a 400 
percent increase since 2005 and does not even include the 
indirect costs to businesses such as diversion of resources, 
delays in new products, and loss of market share.
    A number of other studies on patent assertion, entitled 
PAEs, have recently been conducted. We will hear from a number 
of individuals with significant experience in this area about 
how such practices have evolved, whether more egregious tactics 
are currently being employed and, if so, what can be done to 
stop them without weakening legitimate intellectual property 
rights, enforcement activities, and pre-litigation 
communications.
    Further, the Federal Trade Commission announced in 
September that it will be conducting a formal inquiry examining 
the business practices of patent assertion entities in order to 
expand the empirical picture on the costs and benefits of PAE 
activity. We look forward to reviewing the results of this 
inquiry and in the meantime will continue to further our 
understanding of such practices. As always, we will follow the 
facts so that our oversight can inform any solutions that may 
be proposed to address the underlying problems relating to 
abusive demand letters and related practices. Today is a first 
step in that process. I look forward to hearing the examples 
and perspectives provided by our witnesses, and I look forward 
to hearing from those who may disagree with them in the near 
future. I fully anticipate that we can work together on a 
bipartisan basis on these issues going forward.
    [The prepared statement of Mr. Murphy follows:]

                 Prepared statement of Hon. Tim Murphy

    We convene this hearing of the Subcommittee on Oversight 
and Investigations to gain a better understanding of the impact 
abusive patent assertion practices are having on businesses, 
jobs, and the economy.
    Let me state at the outset that a strong and fair patent 
system is essential to an innovative marketplace. Inventors and 
companies should be encouraged to research and develop ideas, 
technologies, and products and be rewarded for their risk and 
investment. In addition, I fully recognize that patent rights 
are only as valuable as their holder's ability to enforce them.
    The intent of today's hearing is not to assess the current 
state of our nation's patent system or to opine on the various 
legislative proposals that have recently been introduced or 
discussed in this area. Nor is this hearing intended to be a 
comprehensive look at all patent assertion activity that occurs 
in advance of litigation. This is about gathering facts about 
the nature and scope of this problem. Our purpose in holding 
this hearing is to learn more about a number of questionable 
practices that have recently proliferated and the significant 
direct and indirect costs they have imposed on businesses, 
large and small.
    Specifically, most of the witnesses testifying today are 
representatives of companies from different industries who have 
received letters from various entities demanding licensing fees 
or threatening litigation over the purported use of patented 
technologies or products. Frequently, they are little more than 
form letters blasted off to hundreds or even thousands of 
recipients with the hope that some of them will quickly cave in 
order to avoid the prospect of expensive litigation. It has 
been estimated that the average patent trial can last over a 
year and cost upwards of six million dollars. This is simply 
not a viable course of action for a small business. 
Unfortunately, this makes them attractive targets.
    We will hear today about some of the more egregious types 
of demand letters and whether they even contain sufficient 
information to allow for an informed response. Most 
importantly, we will hear about how responding to such demand 
letters impacts a business's ability to attract new capital, 
utilize new technologies, hire new workers, and ultimately grow 
their company and our overall economy. One recent study from 
researchers at Boston University calculated that patent 
assertion activity directly cost defendants and licensees $29 
billion in 2011. This figure represents a 400% increase since 
2005 and does not even include the indirect costs to businesses 
such as diversion of resources, delays in new products, and 
loss of market share.
    A number of other studies on patent assertion entities have 
recently been conducted. We will hear from a number of 
individuals with significant experience in this area about how 
such practices have evolved, whether more egregious tactics are 
currently being employed and, if so, what can be done to stop 
them without weakening legitimate intellectual property rights, 
enforcement activities, or pre-litigation communications.
    Further, the Federal Trade Commission announced in 
September that it will be conducting a formal inquiry examining 
the business practices of patent assertion entities in order to 
``expand the empirical picture on the costs and benefits of PAE 
activity.'' We look forward to reviewing the results of this 
inquiry and in the meantime will continue to further our 
understanding of such practices. As always, we will follow the 
facts so that our oversight can inform any solutions that may 
be proposed to address the underlying problems relating to 
abusive demand letters and related practices. Today is a first 
step in that process. I look forward to hearing the examples 
and perspectives provided by our witnesses and I look forward 
to hearing from those who may disagree with them in the near 
future. I fully anticipate that we can work together on a 
bipartisan basis on these issues going forward.

                                #  #  #

    Mr. Murphy. With that I recognize the Ranking Member of the 
Subcommittee, Diana DeGette, for an opening statement, and I 
know she has a high level of interest in this issue.

 OPENING STATEMENT OF HON. DIANA DEGETTE, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF COLORADO

    Ms. DeGette. Thank you very much, Mr. Chairman, and I do 
believe we can work together in a bipartisan basis on this 
because it is a real concern, and it is a concern that has been 
increasing a lot. Several people have bills that they are 
planning to introduce, and I think this would give us some good 
facts as we look toward writing legislation.
    In the past few years, a number of companies have emerged 
and their sole business model is to assert overly broad patent 
rights and use the threat of litigation to extort settlements. 
This is an abuse of the patent process which, as the Chairman 
accurately said, is a very important process, but recently we 
have seen the abuses getting worse and worse as these actors 
are targeting not just large corporations but also small 
businesses who are just using everyday technology like office 
scanners or wireless routers. The small businesses, nonprofits, 
and startups using these technologies lack the expertise and 
resources to litigate the questionable infringement claims, and 
frankly they are being singled out because they cannot afford 
to defend themselves. And so what they end up doing is paying 
money so they can return to focusing on their business.
    Now, clearly, this is not acceptable. It is extortion, 
plain and simple, and it results in significant harm to 
inventors, small businesses, and start-ups. It costs the 
economy over $80 billion a year. And you know, I agree, the 
U.S. patent system is an incredible tool for innovation and 
economic growth. In theory, legitimate patent assertion 
entities could protect small inventors by enforcing their 
rights if in fact those rights are legitimate against more 
powerful companies. But in practice some of these firms 
transfer only a small amount of settlements or funds back to 
technology, inventers and producers. They have purchased these 
patents or acquired them in some way, and then they are 
asserting their rights over people who cannot afford to defend 
themselves. And that is why we have the name patent troll 
because of these predatory tactics.
    One notorious patent troll, Inevado, sent over 13,000 
demand letters to users of Wi-fi routers. Small businesses have 
received intimidating and harassing letters demanding costly 
settlements or licensing fees. Too many of these Mom-and-Pop 
establishments pay hefty settlement fees just to avoid 
protracted, multi-million dollar patent litigation.
    Last week Nebraska's Attorney General testified in the 
Senate about an elderly gentleman, Mr. Eldon Steinbrink, who 
received a demand letter from MPHJ Technologies alleging 
infringing use of a scan-to-email patent through his work for 
Phelps County Emergency Management. Well, in fact, Mr. 
Steinbrink never worked for the county. He once served on the 
county board many years ago, and now he lives in a nursing 
home. Patent tolls like MPHJ fail to do even basic due 
diligence about their targets, and I think that is because 
frankly they just do not care. They hope somebody will pay the 
money.
    So I think it is important that we find the right balance 
with patents, but I think we can all agree that these end users 
should not be targeted at all by patent tolls and the abusive 
and harassing practices have got to stop.
    And so, I think there is a lot we can do. The demand letter 
should be transparent. They should contain meaningful 
information. My colleague, Jared Polis, is looking at 
legislation that has more registration of people who are 
sending these letters out. There is a lot going on, and I think 
because of this Committee's history of protecting consumers and 
small businesses, this is the perfect place.
    So I want to thank our witnesses. This is going to be a 
good hearing.
    Ms. DeGette. And I want to yield my last minute to Mr. 
Welch if he would like to have it. Oh, do you want 5 minutes?
    Mr. Welch. Yes, that is good.
    Ms. DeGette. Then I will yield back and he will just take 
our other 5 minutes.
    Mr. Welch. Thank you.
    Mr. Murphy. I do not think we have anybody else on our side 
with an opening statement and you are recognized. We are going 
to have votes soon if you want to----
    Ms. DeGette. Go ahead.
    Mr. Murphy [continuing]. Take the next one.
    Mr. Welch. Well, just to----
    Mr. Murphy. Recognized.

  OPENING STATEMENT OF HON. PETER WELCH, A REPRESENTATIVE IN 
               CONGRESS FROM THE STATE OF VERMONT

    Mr. Welch. I do appreciate it, just a minute, Mr. Chairman. 
I appreciate the hearing. This is an unbelievable rip-off, 
obviously, and it is incredibly detrimental to large businesses 
and to small non-profits. And my concern is because in Vermont, 
we have just been getting hammered. MyWebGrocer, which is a 
start-up company doing really well, has 180 employers, they 
have had six patent troll attacks, and it has resulted in that 
company not being able to hire eight to ten people.
    Then at the other end we have got a small non-profit where 
they provide help for disabled kids, and it is a hand-to-mouth 
operation. They are raising money from folks in the local 
community doing work that is incredibly important to those kids 
and to the parents. They got attacked by patent trolls. They 
are in no position to do it. They opened up the mail, and it is 
a demand letter, all formal, all threatening, all you are going 
to--this is the end of the world. And it creates enormous 
emotional anxiety as well as financial peril. And it is such a 
small community in Vermont where it is not just the big 
business and the small business. There is a real ripple effect 
in the community that the Attorney General in the State has 
taken the lead in bringing the first-in-the-Nation lawsuit 
against the patent troll, MPHJ Technologies based on our 
consumer protection laws. And the State itself, under Governor 
Shumlin, has passed a bill that makes it a civil offense if 
there are bad-faith assertions of patent infringement and 
allows victims to see actual and punitive damages.
    So we are trying to act as a state, but this clearly is 
something that requires national attention. So I am so grateful 
to each of you to be here today to help the Congress get 
focused, and you have got a bipartisan buy-in here in the halls 
of Congress. So we have got a chance to break the mold and 
actually get something that needs to be done, done. And with 
your help, we will succeed. Thank you. I yield back.
    Mr. Murphy. The gentleman yields back. Just for the members 
here, we know we are going to have votes probably about 20 of 
or a quarter of the hour. So we believe during that time 
between now and then we can get through all of your testimony 
and then try and start some questions. Immediately after votes 
we will reconvene and be able to continue on with other 
questions.
    So I would now like to introduce the witnesses for today's 
hearing, quite a distinguished panel. Our first witness is 
Robin Feldman, the Director of the Institute for Innovation Law 
at the University of California Hastings College of Law. She 
has written extensively on patent assertion practices and how 
they have changed over time.
    Our second witness is Charles Duan. He is the Director of 
the Patent Reform Project of Public Knowledge. Public Knowledge 
is dedicated to promoting technological innovation, protecting 
the rights of all users in technology and ensuring technology 
law serves the public interest.
    Our third witness is Lee Cheng. He is the Chief Legal 
Officer at Newegg, Inc. Newegg is a global internet retailer 
that is the largest privately held e-commerce company in North 
America.
    Our fourth witness is Daniel Seigle. He is the cofounder 
and Director of Business Operations at FindTheBest.com. 
FindTheBest is an online research engine that equips people 
with information and tools to make informed consumer decisions. 
I felt like I just did a commercial there.
    Ms. DeGette. You did.
    Mr. Murphy. And act now and you get one more free. Next we 
have Justin Bragiel. He is a General Counsel for the Texas 
Hotel & Lodging Association. He manages and oversees the legal 
program servicing over 2,500 Association members. He serves as 
the primary legal counsel to over ten local lodging 
associations across Texas.
    Our last witness is Jamie Richardson. He is the Vice 
President of Government and Shareholder Relations for White 
Castle Restaurants.
    I will now swear in the witnesses. Now, you are all aware 
that the Committee is holding an investigative hearing, and 
when doing so has a practice of taking testimony under oath. Do 
you have any objections to testifying under oath? None of the 
witnesses have objected to that. So the Chair then advises you 
that under the Rules of the House and the Rules of the 
Committee, you are entitled to be advised by counsel. Do any of 
you desire to be advised by counsel during your testimony 
today? None of the witnesses have said they wanted to be 
advised by counsel. In that case, if you all please rise and 
raise your right hand, I will swear you in.
    [Witnesses sworn.]
    Mr. Murphy. All right. Thank you. All answered in the 
affirmative. You are now under oath and subject to the 
penalties set forth in Title 18 Section 1001 of the United 
States Code. You will now begin a 5-minute summary of your 
written statement beginning with Ms. Feldman. Welcome. You have 
5 minutes.

TESTIMONY OF ROBIN FELDMAN, DIRECTOR, INSTITUTE FOR INNOVATION 
  LAW, UNIVERSITY OF CALIFORNIA HASTINGS COLLEGE OF THE LAW; 
     CHARLES DUAN, DIRECTOR, PATENT REFORM PROJECT, PUBLIC 
KNOWLEDGE; LEE CHENG, CHIEF LEGAL OFFICER, NEWEGG, INC.; DANIEL 
SEIGLE, DIRECTOR, BUSINESS OPERATIONS, FINDTHEBEST.COM; JUSTIN 
 BRAGIEL, GENERAL COUNSEL, TEXAS HOTEL & LODGING ASSOCIATION; 
     AND JAMIE RICHARDSON, VICE PRESIDENT, GOVERNMENT AND 
        SHAREHOLDER RELATIONS, WHITE CASTLE SYSTEM, INC.

                   TESTIMONY OF ROBIN FELDMAN

    Ms. Feldman. Mr. Chairman and esteemed members of the 
committee, I am honored to be here today. As an academic, I 
have studied patent assertion behavior both in the litigation 
context, and in the pre-litigation context.
    And in recent years, a new business model of patent demands 
has exploded on the scene. It preys on people's fears of the 
costs and risks of litigation, and it takes place largely 
outside the courthouse with no judge, jury or regulator in 
sight. Much of the time, it is shrouded in nondisclosure 
agreements, so no one is allowed to talk afterwards.
    The behavior is based on the following. There are millions 
of patents outstanding, and it is very difficult to know what 
any patent covers. It will cost about $1 million to $6 million 
dollars in litigation expenses to find out. And if you take the 
litigation route, there is a risk. If you lose, you could be 
subject to massive penalties for damages and you could also 
have your product shut down.
    So with that leverage, here is a sample of some of the 
modern techniques that have appeared. The first is what one 
could call the peddler's bag. Suppose you are a computer 
manufacturer, and I claim that your manufacturing process 
infringes my gumball patent. Now, you may think that is pretty 
far-fetched. But suppose that I threaten to throw 50 more 
patents at you as well. You may be tempted to fight off the 
first, you may not have the stomach or the litigation budget to 
fight off all 50 of them. The cost of investigating 50 patents 
is substantial, also the risks of litigation. Maybe not the 
gumball patent but maybe something in there will stick. So 
perhaps it is better just to pay a license fee.
    Another behavior is what I call the assault rifle 
technique. With this approach, patent assertion entities target 
a vast number of people, hoping to obtain moderate settlement 
amounts from as many of them as possible. For example, patent 
assertion entities have targeted small businesses for using 
scanner equipment they have purchased and coffee shops for 
using Wi-fi equipment. Those who receive the letters know 
nothing about the patents that are involved and have no idea 
how to respond to these demands.
    Still another behavior is known as privateering. If I am a 
product company and I launch my products against a competitor, 
ordinarily that competitor will launch its products back at me 
and put my products at risk. So I might not bother. But in this 
new world of entities that don't make any products, I have many 
options. I can transfer some of my patents to an assertion 
entity that could target my competitors. I could even structure 
the transfer so that I share in the returns. In that way, I 
damage my rivals, get a return on some of my patents, and my 
hands are clean.
    These three are samples of the techniques that are being 
utilized, and as with many pressure sales techniques, the 
demand letters may say things like the settlement cost will go 
up if you consult a lawyer, if you ask for more information, if 
you wait until a lawsuit is filed or if you wait until others 
accept the offer. Some demand letters require that the company 
sign a broad nondisclosure agreement even to get basic 
information.
    This leads me to one of the many troubling aspects of this 
behavior which is that much of it is shrouded in nondisclosure 
agreements and hidden behind layers of shell companies. This 
makes it very difficult for regulators to see bad behavior when 
it is occurring. It is also difficult to hold anyone 
accountable because the shells may have no meaningful assets at 
the end of the day.
    Now, the impact of these patent demands on companies large 
and small is troubling. A recent study of mine showed that one 
in three startup companies has received patent demands and that 
most of these demands are coming from assertion entities that 
don't make any products. Other scholars have estimated that 
very little of the vast amount of money changing hands ever 
gets back to the inventors who actually filed for the patents. 
And really, it does not take fancy economics to know that time 
spent analyzing patent demands is time away from innovating, 
and money spent on patent demands is money not spent hiring 
workers.
    In closing, I do want to stress one important issue. 
Patents are essential for innovation in this country, and 
patent rights are useless if they cannot be enforced. I am not 
talking about the legitimate protection of an invention. I am 
talking about shadow games that prey on people's fears and that 
exploit the system.
    I have submitted several pieces of my research as my full 
testimony for the record, and I look forward to answering any 
questions. Thank you. \*\
---------------------------------------------------------------------------
    \*\ The full testimony has been retained in committee files and is 
also available at http://docs.house.gov/meetings/if/if02/20131114/
101483/hhrg-113-if02-wstate-feldmanr-20131114.pdf.
---------------------------------------------------------------------------
    [The prepared statement of Ms. Feldman follows:]

    [GRAPHIC] [TIFF OMITTED] 

    Mr. Murphy. Thank you for staying both under the time 
limit. I am impressed you have memorized most of your document. 
Thank you so much.
    Mr. Duan, you are recognized for 5 minutes.

                   TESTIMONY OF CHARLES DUAN

    Mr. Duan. Thank you, Chairman. Mr. Chairman Murphy--sorry, 
is this on? Yes. Mr. Chairman Murphy, Ranking Member DeGette, 
and members of the subcommittee, thank you for inviting me to 
testify today on this important issue. My name is Charles Duan, 
and I am the Director of the Patent Reform Project at Public 
Knowledge.
    As a bit of background, Public Knowledge is a nonprofit 
organization dedicated to ensuring that technology law serves 
the public interest. Prior to working at Public Knowledge, I 
served as a patent attorney where I both obtained patents and 
defended against demand letters. I also worked as a Silicon 
Valley software developer, and these experiences along with my 
conversations with various stakeholders inform my views on the 
patent system.
    We are here today to discuss the role of patents in our 
innovation economy, and it is worth beginning from the 
beginning, I think. The principle behind the patent system is 
an exchange. Patents are granted to encourage inventors to 
contribute their inventions to the public. Our patent system 
ultimately must serve the public interest, and in many areas of 
our patent system, it does indeed work this way. But far too 
often scheming speculators and clever lawyers find ways to 
abuse patents and profit off of the system while detracting 
from the social good.
    The most egregious among these abusers include patent 
assertion entities and so-called patent trolls. Instead of 
innovating and creating jobs for Americans, patent trolls 
manipulate the small businesses and individuals who actually 
innovate and create these jobs extorting unjustified fees 
through nuisance threats of litigation.
    One of the ways they succeed in doing so is through the 
sending of demand letters. These letters assert that the 
recipient infringes a patent and then demand a settlement or a 
license fee. Abusive demand letters exploit at least two 
problematic techniques. First, many demand letters are vague, 
misleading and deceptive. They are threateningly intimidating 
and yet wholly uninformative, failing to explain what products 
infringed the patents, how they infringe or even why. Some of 
the letters that I have seen fail to demonstrate even basic 
knowledge of the businesses of the recipients. MPHJ, for 
example, which we have talked about, merely alleges that ``a 
substantial majority--OK. Worse yet, some demand letters 
contain plain falsehoods and deceptions. I once represented 
this client who received a demand letter, and when we actually 
investigated the patent, we found that the patent had been 
invalidated in court. The sender simply bet that the targets 
would settle before those targets discovered that the patents 
were actually worthless.
    The sender could win that bet because of the second 
exploited technique, sending letters to small, unprepared 
businesses. Small businesses lack the resources, funding, and 
expertise to fight an expensive and complex patent lawsuit and 
are often forced to succumb to the letter's demands. This is 
especially true of non-technology businesses, like the hotels, 
restaurants and retailers represented by my colleagues. Just to 
give a sense of the price comparison, at the start-up that I 
worked at, we ran our entire operation off of a couple hundred 
thousand dollars of angel investments. Now, $100,000 will buy 
you perhaps a single detailed analysis of a certain patent by a 
lawyer like myself. The full lawsuit will cost in the millions. 
This is an unfair situation that must be addressed.
    These abuses take advantage of two-way symmetries of 
information. First, demand letter recipients lack information 
to react on an informed basis. Second, researchers and 
regulators lack information about the shrouded world of demand 
letters and the abuses therein. I'll present solutions for 
both.
    The first solution I call demand letter transparency. 
Senders of demand letters in appropriate situations should be 
required to disclose relevant details of their campaigns. Those 
disclosed details should be aggregated into a searchable 
database accessible to individuals, businesses, researchers and 
regulators. All of these parties stand to benefit from demand 
letter transparency. The only parties who stand to lose are 
abusers of the patent system.
    The second solution I call truth-of-demand letters. 
Congress has repeatedly dealt with misleading advertisements, 
loan offers and other solicitations by requiring solicitors to 
prominently disclose truthful, relevant information in the text 
of the message. A patent demand letter is no different. It is 
an uninvited solicitation to purchase an intangible product, 
namely a patent license. And it should be regulated as such. 
Senders ought to be required to disclose truthful, relevant 
information in their demands.
    These are straight-forward reforms that would minimally 
burden legitimate patent owners, provide fairness to small 
business, aid regulators in crafting good policy and prevent 
abusive practices that ultimately detriments the public 
interest in promoting innovation. I urge Congress to consider 
them closely.
    I thank the Committee for taking on this important and 
timely topic. Thank you for inviting me to testify, and I look 
forward to your questions.
    [The prepared statement of Mr. Duan follows:]

    [GRAPHIC] [TIFF OMITTED] 

    Mr. Murphy. Thank you, and I also appreciate you staying 
within the time as well.
    Mr. Cheng, you are recognized for 5 minutes.

                     TESTIMONY OF LEE CHENG

    Mr. Cheng. Thank you, Mr. Chairman and members of the 
subcommittee.
    Patent trolling is a growing and uniquely American problem 
caused by loopholes in patent law that were estimated to cost 
the American economy over $80 billion in 2011 and probably a 
lot more today.
    American businesses and consumers, who ultimately pay 
higher costs for everything because of patent trolling, need 
relief from Congress, and soon.
    I am the Chief Legal Officer of Newegg.com, an internet 
retailer. We are members of the Consumer Electronics 
Association which represents the interests of over 2,000 
members of the innovation industry. We deeply appreciate 
patents and innovation.
    Newegg is a uniquely American success story, founded by 
four immigrants in 2000 on a shoestring budget to sell 
electronic products online. We are now the second largest 
online-only retailer, after Amazon. We employ almost 1,000 
Americans. We have always been profitable in a notoriously low-
margin business and achieve profitability largely by keeping 
our costs down. I work in a cube in a warehouse, we serve 
Folgers in our office, and everywhere I go I fly coach.
    Upon joining Newegg in 2005, I was very surprised to get a 
number of demand letters asserting that we infringed someone's 
patents because we don't really make anything. We are a 
retailer, buying products from innovative companies and selling 
them to end user customers. The demand letters were generally 
vague, and the patents asserted against us covered common and 
obvious functionalities used in every single e-commerce web 
site, like the shopping cart or search boxes.
    In one instance, a patent troll sent us a demand letter 
claiming we infringed six of their patents. After being told 
that our patent counsel said we didn't infringe on any valid 
patent claims, the troll told us that they had thousands of 
patents, that we likely infringed something and to just pay up. 
Many, if not most demand letters declare that the troll is the 
owner either of patents or patent portfolios without much if 
any analysis as to why the alleged infringer actually 
infringes. They allude to the high cost of litigation and 
suggest that it makes sense to resolve the issue early by 
having the infringer pay money to take a license. These letters 
may reference other companies who have taken such forced 
licenses to add credibility to a demand. And for a small 
company that gets such a letter, the only practical path is to 
pay up, and serially. Patent trolls and their contingency fee 
lawyers view small companies as sheep to be sheered every 
couple of months. And these demand letters can be crippling to 
a start-up company.
    In Newegg's case, the trolls who hit us offered to settle 
for, initially, high six figures to low seven figures, and all 
of our co-defendants in the early cases settled, sometimes for 
millions of dollars. Not being a seasoned patent litigator or 
patent attorney, I wasn't smart enough to not ask some basic 
questions like why do we have to pay millions of dollars for 
utter crap, and soon realized that patent trolling was a 
complete scam like securities class action litigation. Settling 
with trolls to avoid the cost and inconvenience of litigation 
might save a little bit of money up front but would encourage 
more and more lawsuits. Settling would simply feed the beast.
    Since Newegg's profit margins are low, we simply could not 
afford to serially cut settlement checks. We also couldn't 
spend what our competitors spent on legal defense. We needed 
another path. I spent a lot of time and effort on ways lower 
defense costs without compromising quality.
    I was very nervous when the jury for our shopping cart case 
in Texas came out of deliberations, and they could have awarded 
the troll $34 million. They didn't, and on appeal, we 
invalidated all of their patents. Despite being sued or 
threatened over 30 times in 8 years, Newegg has never lost a 
patent suit after appeal, and not surprisingly, smart trolls 
don't sue us anymore.
    Unfortunately, we are the exception to the rule. Small 
companies and startups don't have the resources to fight. Large 
companies settle because it is cheaper to do so. The 
overwhelming majority of patent troll suits settle, even when 
the asserted patents are terrible quality or when a defendant 
likely does not infringe because of the high cost of defense.
    Although our strategy of resisting frivolous lawsuits 
appears to be working, we remain committed to helping reform 
patent law. We stay in the fight because not long ago we were a 
small company and could not possibly have launched if our 
programmers had to look over their shoulders and pay millions 
of dollars every single time they wrote a line of code. 
Moreover, it is just the right thing to do.
    Patents are legal monopolies, granted under a visionary 
piece of legislation to spur innovation to benefit society. The 
Patent Act was not passed to reward extortionists who are 
taking advantage of loopholes in patent laws to force honest, 
hardworking businesspeople and entrepreneurs to pay premiums to 
avoid the cost of litigation. It was passed to benefit society. 
Those who abuse patents do not deserve windfall profits.
    Congress must step in. Common sense steps can be taken to 
increase the cost of abusively asserting patents and to allow 
small companies and startups to innovate and operate without 
fear. Provisions included in H.R. 3309, the Innovation Act, and 
also heightened requirements for demand letters would be a 
great start.
    Thank you again for the opportunity to testify.
    [The prepared statement of Mr. Cheng follows:]

    [GRAPHIC] [TIFF OMITTED] 

Mr. Murphy. Thank you. Just made it. We are going to try 
and get through a couple more before we have to run to the 
floor and vote.
    Mr. Seigle?

                   TESTIMONY OF DANIEL SEIGLE

    Mr. Seigle. Chairman Murphy, Ranking Member DeGette, and 
members of the subcommittee, thank you very much for this 
opportunity to testify in front of you on this pivotal issue of 
the abuse of the patent system and demand letter reform.
    I am Danny Seigle, Director of Operations at FindTheBest, a 
research platform that helps 20 million consumers and 
businesses each month get the information they need to make an 
informed decision on a variety of topics.
    In the last 6 months, we have unfortunately received two 
demand letters. The first was from the shell company Lumen 
View. It is a 5-page document as you can see here. You would 
think in these 5 pages they could provide some details into how 
we actually infringe on their said patent. But aside from 
naming the patent and naming the feature that infringes, there 
are no specifics. The rest of the 5 pages are simply spent 
using threats to scare us into settlement. These threats 
include full-motion litigation that they are prepared if we 
defend ourselves, protracted discovery process and settlement 
escalations if we defend ourselves. In other words, if you try 
to defend yourselves, they will make it an expensive and time-
consuming process for us.
    The correct business decision for us would have been to 
accept their 1-day, special offer of $50,000 and have this 
issue go away. However, that is just blatant extortion. We were 
even told by the Plaintiff that this was the correct business 
decision and our investors and board members would have 
preferred we did this as well. However, our CEO, Kevin 
O'Connor, took a different stance. He decided to do what was 
right and personally finance litigation to prove that we were 
innocent and to call out the scam that was going on.
    Yesterday morning the judge on the case denied the 
protective motion for the gag order that they filed against us. 
They wanted to silence us so we could not share this story with 
you today.
    The second demand letter we received was a four-sentence 
demand letter as you can see here, all of four sentences. It 
simply states we infringe on their auto scrolling technology, 
names three possible patents and then gives a link to our 
homepage as evidence of infringement. These three patents have 
78 claims. That is a lot of claims for a small company like 
ourselves to go through and figure out if we actually infringe 
or not. Without inside counsel and scarce resources, it takes a 
lot of time and effort for us to go and decide what the best 
course of action is. Additionally, they sent this letter 
certified mail so we could be in violation of willful 
infringement if we do not actually do our proper research. We 
had to hire an outside counsel to spend several thousand 
dollars investigating this to write a letter of reply. In our 
letter of reply, we asked for specifics because we can't figure 
out how we actually infringe. These vague tactics are all too 
common in these demand letters.
    I wish I could say that our story was unique, but it is 
not. The only unique thing about our story is our public 
stance. We have heard from hundreds of people in similar 
situations like us that wish they had a voice, that wish they 
could talk out about this. They have been coerced into signing 
NDAs in order to settle, and their voice has been silenced. I 
am here today to represent them as well.
    Comprehensive patent litigation reform is necessary, and 
demand letter reform is essential. Proper disclosure guidelines 
would greatly help companies like FindTheBest understand how we 
actually infringe, which claims we actually infringe on and 
provide details so we could actually research this in a matter 
to resolve the issue.
    The FTC should also look into investigating several of 
these unfair, corrupt practices. It is very blatant there is no 
good-faith examples of how we actually infringe and how we 
infringe.
    We did what was right. We fought this patent. We did not 
have to. In fact, taking the $50,000 settlement would have been 
the easy and less costly option, and I ask that you guys do 
what is right and stop this abuse of the patent system. Thank 
you.
    [The prepared statement of Mr. Seigle follows:]

    [GRAPHIC] [TIFF OMITTED] 
    
    Mr. Murphy. Thank you. Mr. Bragiel, you may take 5 minutes.

                  TESTIMONY OF JUSTIN BRAGIEL

    Mr. Bragiel. Thank you, Mr. Chairman and members of the 
committee. My name is Justin Bragiel. I am General Counsel at 
Texas Hotel and Lodging Association. Thank you for inviting me 
to testify today.
    We represent approximately 2,000 hotels across the great 
State of Texas, about 500 additional members on top of that. We 
have been in existence since 1903, and our mission is to 
advocate for and serve the Texas lodging industry.
    Our members work and live all across Texas, but one region 
in particular of the State has been plagued recently by a great 
deal of patent litigation activity, and this is, for historical 
reasons the Eastern District of Texas, known often as the 
rocket docket, sees and hears more cases related to patents per 
capita than any other jurisdiction in the United States.
    Our members sell a product we are all familiar with, hotel 
rooms, right? I represent the hotel industry. It is really 
simple. And so oftentimes I have been asked over the last 
couple of days, why are you going to Washington to testify on a 
patent issue? What in the world does a hotel do that is related 
to patents? Our members, our operators, don't understand 
patents. We don't file for patents when we build our lodging 
properties, nor when we operate them. But our members have been 
given and served with not only demand letters but actually 
lawsuits as well for failing to answer demand letters, simply 
for providing Wi-fi in the hotels to guests. We all understand 
that concept as well. Our guests expect and demand wireless 
technology. It is a part of this day and age in staying at a 
hotel. It is a very simple product that we offer. And yet, we 
have been sued, our members have been sued. Almost 100 hotels 
across the State of Texas were sued in the last 6 months or 9 
months for allegedly infringing upon the Wi-fi patent held by 
one particular patent troll.
    The letters start as a shakedown. Pay us $5,000. This is a 
significantly smaller sum, but a sum that would be attractive 
for an independent lodging operator to seize upon to settle. 
Pay us $5,000 as a licensing fee, and we won't file suit 
against you. If our member, our hotelier ignores that letter, 
they receive a lawsuit in the mail months later that alleges 
the hotel is continuing to infringe upon the patent holder's 
patent by providing Wi-fi to hotel guests, and a suit like 
this, as we have heard, can cost upwards of a million dollars 
to defend, $100,000 just to start the process with an IP 
attorney. And again, all our hotelier does is operate a hotel, 
right? We don't deal with patents. We have no way to know when 
we buy a wireless access point or a wireless router whether or 
not the manufacturer has provided all pertinent licensing on 
fees and patents to the patent holders. We don't know that. We 
are not in that business. We have no way of knowing which 
brands of equipment will be singled out. We have no way of 
identifying which one of our members will be targeted for a 
demand letter or a lawsuit. It is really incredible.
    So I get calls every day from hoteliers across the State of 
Texas with legal questions. They ask the most basic legal 
questions you can imagine oftentimes, and usually all of our 
questions are related to how can I avoid potential litigation, 
how can I avoid potential liability. I have no answer for any 
my members on this issue, none at all. There is not a brand of 
Wi-fi router or piece of equipment that I can tell them and 
assure them that they will not be sued for purchasing and 
operating. It is a real problem for us.
    So we are here to ask for smart patent reform to look at 
this process. We need some protection for the end users here. 
We are not experts in the patent field, we are not. And, you 
know, to be targeted like this, it really is just a shakedown.
    I am here for questions. Thank you so much for inviting me 
to testify.
    [The prepared statement of Mr. Bragiel follows:]

    [GRAPHIC] [TIFF OMITTED] 

    Mr. Murphy. Thank you. I think we can--do you have a full 5 
minutes you need because we will have to come back then and----
    Ms. DeGette. OK. I am going to go vote.
    Mr. Richardson. I have time to do this.
    Mr. Murphy. All right. I will do it. Real quick then, thank 
you. Go ahead.

                 TESTIMONY OF JAMIE RICHARDSON

    Mr. Richardson. Chairman and Ranking Member DeGette and 
esteemed members of the committee, thank you so much for the 
chance to testify on behalf of White Castle and the National 
Restaurant Association.
    For us, White Castle is a family-owned business. It started 
in 1921 in Wichita, Kansas. Today we are based in Columbus, 
Ohio. But throughout our entire history, it has been a history 
of famous firsts. So we are big believers in intellectual 
property rights and understand the importance of this debate 
when it comes to patents.
    But for White Castle specifically, what we have been faced 
to deal with in the past year are four specific patent troll 
cases that we have had to face. And a lot of it has to do with 
how we connect with our customers. So we have lots of new 
technologies that we are trying to employ. For instance, the CR 
codes, the QR codes, that will go on a package that make it 
easy to scan and to find out for a customer how to link to 
information, we got a letter about that, asking that we refrain 
from using that further. We had a second one show up because we 
inserted a link into a customer email, to once again make it 
easier for customers to get the information they crave and 
received a letter on that. Most recently we received a letter 
about having our White Castle logo appear on a White Castle map 
on our mobile app that we have created for our phone with a 
firm claiming that they own the patent to place a logo on a 
map. And most discouraging of all is we are trying to be 
compliant with things like menu labeling that require that we 
soon post nutritional information on our menu boards. We have 
started to look at digital menu boards. Along the path towards 
implying digital menu boards, we didn't even get the benefit of 
a demand letter, we got a suit filed by one of the patent 
trolls. And that is what we are going to call them at White 
Castle because that is what they are to us. And in that suit it 
claimed that we can't transfer information electronically to 
our digital menu boards, that that is an infringement.
    Unfortunately for us, we are small. We are a medium-sized 
fast-foot chain. We are a family-owned business. We don't have 
the dollars to litigate. We have got two very gifted attorneys 
internally. They are awesome, but we have to rely on outside 
counsel when these patent cases come up to try to get the right 
guidance to understand where we can go with it.
    So what it has caused us to do, it has stopped us in our 
tracks when it comes to moving forward in talking to our 
customers. So the patent trolls are living under the bridge to 
tomorrow, and as we are trying to progress and move forward, 
they are slapping duct tape over our face and not allowing us 
to share with our customers what's really going on in providing 
the information that they want.
    So it is a real issue for us. We have chose not to pursue 
these technologies. We have had to set them on the shelf. We 
can't afford to get involved in some type of settlement. Who 
knows how high that is going to go, nor can we risk litigation 
because we are not going to bet the White Castle system and the 
10,000 people who rely on us for their livelihoods and the 
communities that rely on us because some folks have decided 
that it is OK to not obey the law and just go outside of that 
on their own.
    So thank you for the chance to share.
    [The prepared statement of Mr. Richardson follows:]

    [GRAPHIC] [TIFF OMITTED] 

    Mr. Murphy. Thank you. I appreciate your winding that up. 
We have zero time left, so we have to run to the floor and vote 
real quick. I will be back here within half-an-hour, so don't 
go too far away, and we will be right back. Thank you.
    [Recess.]
    Mr. Murphy. Thank you. We are reconvening this hearing of 
the Oversight and Investigation hearing on patent assertion 
practices, and thank you for your patience, panelists, as we 
move forward with this.
    A number of my colleagues are on the floor in speeches, et 
cetera. We will go through and perhaps I might ask if it is a 
matter that we will go through our questions back and forth, 
but if I have a couple extra questions on behalf of other 
members, I don't think we will be going much more than probably 
a half-an-hour behind.
    Ms. DeGette. That is fine, and you know, this Committee has 
a history of allowing questions in writing. And Mr. Chairman, 
if you would agree to that, unfortunately, most of the rest of 
the Democrats probably won't be back because we have a 
Democratic Caucus meeting right now, and I don't know what the 
Republicans have going.
    But I know that Members on this Subcommittee are very 
concerned about this issue. So if we could allow members to 
submit written questions, that would be wonderful.
    Mr. Murphy. I absolutely will. And so what I will do is I 
will take 5 minutes, yourself and then if----
    Ms. DeGette. Sure.
    Mr. Murphy [continuing]. Go to a colleague there and I may 
ask couple other questions with unanimous consent. We will 
proceed from there. See how nice we get along? This is an 
important issue to all of us.
    Well, obviously from the panelists here, and I will start 
with myself for 5 minutes, you have similar perspectives on the 
impact of these demand letters that had on your companies or on 
businesses in general. They are rather remarkable, the 
vagueness of them and the content and the impact they have.
    For those of you who have actually received demand letters, 
is this a recent phenomenon? Who can speak to that? Who 
received this? Mr. Cheng, did you receive one of those letters? 
Is this a recent issue?
    Mr. Cheng. Well, we have been getting them for about 8 
years. So it depends on what you define as recent, right? So it 
somewhat coincided with my arrival at Newegg, but I had nothing 
to do with it.
    So we crossed the billion dollar revenue mark right around 
that time. Historically trolls, they just had such a wide 
field, easy pickings, that they would literally go down lists 
of the largest or the largest companies or the most accessible 
companies. Getting your name as the fastest-growing company in 
the Los Angeles Business Journal was going to make you--that is 
what they based their demand letters on. And in recent years, 
as the trolling industry has demonstrated how lucrative 
trolling can be, more and more companies are getting demand 
letters.
    In some areas, the volume of demand letters is actually 
declining with larger trolls. They just go straight to 
litigation because under the Medtronic, there is case law that 
states that a demand letter that is very detailed will give a 
prospective defendant the right to file declaratory judgment 
action in a venue not of the troll's choosing.
    So with larger defendants, sometimes the trolls will 
actually just go straight to litigation now. But for the 
smaller companies and start-ups, in all likelihood, their 
demand letter volume is increasing.
    Mr. Murphy. Ms. Feldman, why have these trends gone the way 
they have, with more of these taking place and with the kind of 
problems that have been described here today?
    Ms. Feldman. I think some very clever and very 
sophisticated people figured out how to game the system. Once 
that had happened, it was so lucrative that everyone became 
interested in jumping on the bandwagon.
    In the start-up study that I mentioned, most of those who 
financed start-up companies say that these demands have 
increased dramatically in the last 5 years against the 
portfolio companies.
    Mr. Murphy. Ms. Feldman, you are an attorney, correct?
    Ms. Feldman. I am a professor.
    Mr. Murphy. Anybody here who is an attorney in this? Mr. 
Duan, you are an attorney. Why hasn't the Bar Association 
brought up ethics concerns against those who just do this 
without information and just move forward?
    Mr. Duan. Well, I think there are a number of concerns, you 
know. Number one, as I think a number of the witnesses have 
alluded to, we often don't know who is behind a lot of these 
sorts of things. They hide behind shell companies, we don't 
know all who is really behind a lot of the demand letters. So 
it would be hard for the bar to go after them.
    Now, in terms of what the lawyers are sending out, they are 
sending out letters that are threatening, they are sending out 
letters that are uninformative. But they are not sending out 
letters that are illegal. Everything that they are saying is 
just communication, and there is nothing wrong with 
communication. The problem is that the underlying demands, 
which are being made not by the law firms themselves but by the 
companies that are being represented by the law firms, those 
are the aspects that are problematic.
    Mr. Murphy. But what separates a good-faith request or 
good-faith letter from one that is a trolling one?
    Mr. Duan. Well, I think it starts from the investigation 
that goes behind the letter. In my practice, if we thought that 
there was infringement of a legitimate patent, we would look at 
the products, we would identify what features the product 
infringed, why they infringed, we looked carefully at the 
patents to make sure that everything was set and then we would 
have a conversation.
    What I think we are seeing with a lot of these demand 
letters, they are taking the shotgun approach that Professor 
Feldman talked about. We are not seeing the sort of 
investigation. I think I mentioned that MPHJ has sent out 
letters that don't even talk about what the business itself 
does to infringe. The simply say that businesses like yours 
infringe. So therefore you should pay us a licensing fee. You 
know, I think there are plenty of examples. If you take a look 
at some of the demand letters on EFF's Trolling Effects Web 
site, you'll see plenty of examples of letters that really 
evince no knowledge of what the company does, why they think 
the products infringe, what they think is wrong and what they 
want the companies to do. And that is where the abuse comes in.
    Mr. Murphy. Real quickly, Ms. Feldman, I have just a few 
seconds left, you testified that in recent years a new business 
model of patent demands have developed. Can you expand on what 
this old business model entailed, why it has changed, what 
impact this change has had on businesses and consumers?
    Ms. Feldman. Yes, traditionally most patents didn't garner 
a return. It is very difficult to translate a patent into an 
actual product. It normally takes lots of patents and lots of 
knowhow to do that. The Patent Office has about 18 hours over a 
period of 2 years to look at patents, and these patents may 
have dozens of claims in them.
    So no one really worried that lots and lots of patents were 
being granted because the ones we cared about ended up in 
court. With a new business model, all of these patents, each 
individual ones, can be separated out and launched against 
companies. It is that particular business model that is 
wreaking havoc for companies across the country.
    Mr. Murphy. Thank you. I see my time--I appreciate it. I 
now recognize Ms. DeGette for 5 minutes.
    Ms. DeGette. Well, following up on that, Ms. Feldman, and 
then what happens? So there are all these patents that were 
granted. The review, the patent examiner was minimal in many 
cases. So there are a lot of patents, and a lot of them are 
duplicative, right?
    Ms. Feldman. Yes, and also a legitimate patent doesn't mean 
that you are launching it at an appropriate target.
    Ms. DeGette. Right.
    Ms. Feldman. You may have a valid patent. You are just 
sending it indiscriminately to lots of people.
    Ms. DeGette. And it doesn't mean that the people who you 
are targeting have in any way infringed against that patent, 
right?
    Ms. Feldman. That is right.
    Ms. DeGette. And most of these patents that we are talking 
about here are patents that have been obtained by these third 
parties. So it is not like it is the inventor who filed the 
patent application and had it granted. It is some third party, 
right?
    Ms. Feldman. It is true, although there is a new approach 
that appear to be happening which is let's file patents and see 
if we can go after companies with these.
    The key question is, are there products being made or are 
you just knocking on the door of existing companies asking for 
a handout?
    Ms. DeGette. Right. When Mr. Duan and Ms. Feldman, when you 
were answering that question, I was reading one of the letters 
that Mr. Cheng was referring to where it says FindtheBest is 
using automatic scrolling technology on their Web site, 
technology which we believe to be covered, and it doesn't even 
say specifically what that is, right?
    Mr. Cheng. It is actually----
    Ms. DeGette. Oh, it is Mr. Seigle?
    Mr. Cheng [continuing]. Seigle's letter----
    Ms. DeGette. Sorry.
    Mr. Cheng [continuing]. But we have gotten letters like 
that, too.
    Ms. DeGette. Yes. Sorry, Mr. Seigle.
    Mr. Seigle. Yes. When you get this letter, and you are not 
a legal expert like me, you have to start investigating this, 
and there are 78 claims in those three patents and you have 
noticed they don't mention which claims we can be infringing 
on.
    Ms. DeGette. Right.
    Mr. Seigle. So there is no due diligence on their part. 
There is no reason to believe they have a good-faith reason to 
believe we infringe. They just take this template, insert 
company name, insert link to home page and send it out.
    Ms. DeGette. Yes. I can see that. Mr. Chairman, I don't 
know if these are in the record, but I would like to put these 
two letters that Mr. Seigle had referred to in the record 
because it is frightening.
    And you know, even if you are a legal expert, if you look 
at these--I am sure you sent them along to your lawyer, and 
then the lawyer is having to--because I myself am a lawyer, and 
I used to represent companies before I came to Congress, and I 
had clients who got letters like this. And we had to comb 
through the patents, and it is even confusing to the lawyers.
    This goes back, Mr. Chairman, to what you were asking 
about, why doesn't the Bar Association enforce this. Oftentimes 
if the patent trolls are the legal owners of these patents, 
then it is really legally a matter for the court to decide 
whether or not they are infringing. And it is really a problem.
    I wanted to ask both you, Mr. Duan, and you, Professor 
Feldman, what separates a so-called patent troll from a 
legitimate company asserting its patent? Can we really come up 
with a bright line here?
    Ms. Feldman. I think the question to focus on is whether 
there are new products coming out of this. There has been a lot 
of attention on patent trolling, and no one wants to be the bad 
guy and everyone wants to draw a definition that says I am not 
a bad guy, that is over there. And you can parse these in many 
different ways, but it all comes back to, it seems to me, grant 
patents in order to get new products out for society and 
strengthen the economy. And the question is, where are the new 
products of this activity? Is any of that coming out of here or 
is this just a tax on current production? You have to pay it in 
order to go about your business.
    Ms. DeGette. What do you think, Mr. Duan?
    Mr. Duan. So I agree. I think there is a very simple 
definition for what a patent troll is. A patent troll is 
somebody who uses patents to abuse the system to reduce social 
value for their own personal profit.
    Ms. DeGette. OK, but that is not a legal standard.
    Mr. Duan. I understand that it is not a legal standard. I 
think that when we look at what we want to do in terms of 
regulation, right, we shouldn't be focusing on how are you 
making your money. We should really be focusing on, what is the 
behavior that you are taking advantage of, right?
    In this case, the behavior that they are taking advantage 
of in order to threaten people in detriment to society is they 
are sending out letters that really don't provide information, 
that basically just tax companies that are actually producing 
and on the flipside, they don't produce anything themselves.
    Ms. DeGette. Well, there are a lot of suggestions different 
people have, both in front of the Judiciary Committee and this 
committee and in the Senate, so I would ask both of you and 
also the rest of the panel, if you have ideas for things we can 
do in statute to help prevent this kind of behavior, to set 
that bright line, that would be really helpful to us. And I 
yield back. Thank you, Mr. Chairman.
    Mr. Murphy. Thank you, yield back. Now we will go to the 
gentleman from Virginia, Mr. Griffith, for 5 minutes.
    Mr. Griffith. Thank you, Mr. Chairman. Following up on 
that, Mr. Seigle, I was intrigued with some of your comments in 
regard to what Ms. DeGette was just talking about, some ideas. 
And I believe, if I remember your testimony correctly, what you 
indicated was that if you were going to send a letter of this 
nature, because you might have a legitimate claim, then make it 
a requirement that that claim be stated up front. Did I 
understand that correctly and would you expand on that, please?
    Mr. Seigle. That is correct. If they actually had proof 
that they did proper due diligence to have a reasonable belief 
that we infringed, we would happily discuss the infringement 
contentions with them and try to come to a resolution if they 
were in good faith. It is very clear from the letters we have 
been getting that they do not have that good-faith intention. 
It is spray and play, although the demand letters are all the 
same, just with a different company name.
    Mr. Griffith. And so all they say we have reason to believe 
that you may have violated----
    Mr. Seigle. Yes.
    Mr. Griffith [continuing]. The terms of our patent and 
therefore pay up?
    Mr. Seigle. And then when we called them at Lumen View, it 
was very clear they hadn't even been to our Web site, didn't 
really understand the functionality, didn't even understand 
their patent that well, too. So it is very hard to deal with 
the situation when they are actually more concerned on the cost 
of defense as their main reason for exercising these demand 
letters as opposed to the merits of the infringement.
    Mr. Griffith. Right. Of course, it is not always easy to 
figure that out, and somebody may have a legitimate claim. Even 
though their motives may not be great, they may actually have a 
legitimate claim. But it does seem to me that we ought to be 
able to work out some language probably in the Judiciary 
Committee, but perhaps we can in this Committee as well figure 
out some language that ought to be included in that letter that 
would be a requirement that you notify the company prior to 
filing a lawsuit. I don't think you can say necessarily the 
first letter, but you could say that prior to filing a lawsuit 
on such a claim, you have to provide the defendant company or 
defendant individual, whichever it may be, with the following 
information and then go A, B, C, D, E to basically, to state a 
reasonably articulate theory of why you think you have been 
damaged.
    Mr. Seigle. Yes, and at a very minimum, the claims and the 
patent that they are actually inserting, there are usually lots 
of claims on a given patent. In our case, they don't mention 
which claims. And so that has an undue amount of work and time 
and effort on our part to then have to research every claim. So 
at a minimum, they should disclose which claims, provide some 
evidence of due diligence, screen shots from your Web site, 
what evidence they have to believe that you infringe, and with 
that, we are OK with those. That shows they have a good intent 
to potentially resolve this issue. It is this type of behavior 
that we think needs to stop, and I think a lot of it is just 
because it is so easy to send a demand letter. There should be 
some minimum standards of what that should entail.
    Mr. Griffith. Well, I appreciate that very much. Mr. 
Richardson, you indicated that you all had gotten a letter for 
just linking a site? Was it the site that they were upset about 
or the fact that you used linking technology because I am 
surprised----
    Mr. Richardson. Yes----
    Mr. Griffith [continuing]. Every Member of--if it is 
linking technology, I am surprised every Member of Congress 
hadn't gotten a letter. I link stuff through my Web site every 
day.
    Mr. Richardson. You never know. Today's mail might not be 
here yet.
    Mr. Griffith. Well, that is a good point.
    Mr. Richardson. That is exactly what the claim was, and it 
was insertion of a hyperlink, a URL into Tweets, into a 
customer e-mail, just to make it easier to direct our customers 
who had opted in, who wanted this information, an easier path 
to get to it.
    Mr. Griffith. Wow. And then of course there is the safety 
factor because not only are there more requirements in regard 
to service of food as your industry does with White Castle and 
lots of other fast-food chains out there, people want to know 
what all those ingredients are. And it is not only the calorie 
intake, it is, you know, what are you actually putting in there 
because food allergies are on the rise. And you are saying that 
you got a letter on trying to do something like that, too, that 
you had to put on the shelf because you just couldn't afford to 
the price of litigation?
    Mr. Richardson. Very similar to that because as we are 
looking at new menu board technologies to make it easier to 
share that nutritional information or to change a price or 
change an offer, the claim there was that that was a violation 
actually because of how we were using the internet to send the 
information digitally. We would be OK if we wanted to put it on 
a jump drive and drive from Columbus to Louisville. But not to 
be able to use the internet to do that just didn't seem to make 
much sense to us. But that is one where they didn't even send 
us a letter. It went straight to litigation as others have 
referenced.
    Mr. Griffith. Wow. That is incredible. I will tell you that 
that is of great concern because particularly for the smaller 
chains or the Mom and Pops, you know, they just don't have the 
ability to get that information out there if they can't put it 
on the internet. And that is a real problem that will affect 
their businesses.
    Mr. Chairman, I appreciate you doing this hearing. I 
appreciate all our witnesses being here. This is a subject 
area--I, too, am a lawyer, but this was--but I never 
represented corporations. Unless they were small Mom and Pops, 
I didn't do this kind of work. But I really appreciate this has 
been an eye-opening hearing, and thank you so much for doing 
it. I yield back.
    Mr. Murphy. The gentleman yields back. I now recognize Mr. 
Lujan for 5 minutes.
    Mr. Lujan. Mr. Chairman, thank you very much. Mr. Chairman, 
I appreciated it very much a point that you made in your 
written testimony about focusing on the abuse of activity 
itself rather than the form of the party involved. The point 
that I would like to make is your promotion of the term abusive 
patent asserter as opposed to the more commonly used terms of 
non-practicing entity and patent assertion entity because 
national labs-universities fall into that category. And so I am 
hopeful that as we talk about developing our legislation that 
we are very careful to go after the bad actors and make a clear 
differentiation between universities and the national labs 
coming from a State that has two national labs and a district 
that has what I would describe as the strongest and best 
national lab in the country.
    But with that being said, Mr. Cheng, to you and to all of 
the witnesses, I would like your thoughts on that as we target 
this area, what can we do in that specific arena, or are you 
seeing activity coming from any entities such as those that I 
have described?
    Mr. Cheng. Big picture, Congressman Lujan, I think that 
reform efforts at some point have to take the economic 
incentive to engage in abusive patent litigation away or they 
have to give the victims this type of litigation some recourse. 
Presently the system is very, very asymmetrically stacked, both 
substantively and procedurally against parties that get demand 
letters and parties that get sued. It is very easy not just to 
crank out demand letters but also to crank out lawsuits. Filing 
a lawsuit is actually not much more expensive, a form lawsuit 
not much more expensive than sending out a demand letter. And 
in all sorts of different ways, in the ways for example a shell 
entity can be created to file lawsuits and issue demand letters 
with no recourse for the victims at all, even when they win, 
right? I mean, there are opportunities I think for Congress to 
take a look at what is being done by these abusive patent 
asserters.
    In my written testimony that you cited, my goal is to focus 
not on the form of the sinner but on the sin itself. We love 
the sinners or you know, we could, but it is their actions and 
activities that actually are causing a lot of harm to society. 
It is causing companies and entrepreneurs not be able to start 
their companies, not be able to spend money on creating jobs 
and making products that your constituents use.
    Mr. Lujan. OK. Anyone else? Mr. Seigle?
    Mr. Seigle. I agree that educational institutions are in 
this weird area where they are not practicing entities, but I 
believe their belief in creating this technology is to license 
it out so that it can become a product and help spur innovation 
and help consumers. When I have been lobbied on The Hill the 
last couple of days, I have heard that the University of 
California school system has been against patent reform, and as 
a graduate of the University of California at Berkeley, I am 
not so happy with that. But I think they have a good faith in 
what they are doing with their patents, and I would be OK with 
them having exclusion for being an educational institution.
    Mr. Lujan. I appreciate that, Mr. Seigle.
    Ms. Feldman. Sir, may I comment?
    Mr. Lujan. Professor?
    Ms. Feldman. Yes.
    Mr. Lujan. Dr. Feldman, Ms. Feldman?
    Ms. Feldman. Thank you. The universities have a unique 
position as keepers of the academic flame and also recipients 
of taxpayer money. There is increasing pressure on universities 
to transfer their patents to those who would assert patents in 
licensing and litigation. The Association of University 
Technology Managers has just announced that it is going to 
rethink its policy of not transferring patents to non-
practicing entities, and that can be troubling. So in any 
legislation you draft, you might want to be careful about how 
you craft it because if you leave out universities and joint 
ventures, you may create large loopholes for those who would 
simply purchase from, purchase rights from or join hands and 
hide behind universities for their activities.
    Mr. Lujan. Very important point. I appreciate that, 
Professor Feldman. Mr. Bragiel?
    Mr. Bragiel. We would like to see some protections for end 
users. You know, again, our operators don't manufacture the 
technology. They just purchase it off a shelf and then 
installed at their property and operate it for the public.
    So some sort of protection that provides protection for the 
end user would be fantastic. It is not just the hotelier that 
could be sued for a Wi-fi infringement. It could be you or I 
for purchasing a Wi-fi product and operating it out of our 
household. Allegedly we would be violating that same patent.
    So we would like to see some sort of reform that involves 
protecting the end users, having us last in line for a lawsuit 
for technology we don't understand, we don't manufacture, we 
just merely purchase and use.
    Mr. Lujan. I appreciate that. As my time has run out, Mr. 
Chairman, I want to commend both the majority and minority 
staff for the witnesses that we have today and would invite 
their input and recommendations to the Committee that we could 
get to the FTC with the upcoming study in 2013, and I think it 
would be great if the FTC would actually invite the witnesses 
to sit down and have serious conversations with them to include 
those aspects of the study's law.
    So thanks again, Mr. Chairman, to you and to the staff and 
Ranking Member DeGette.
    Mr. Murphy. Thank you. The gentleman's time has expired, 
and he yields back.
    Speaking of the FTC, so let me follow up on that. I want 
to--just so you know that they are going to be conducting a 
formal inquiry, touch on many of the issues you have discussed 
today. Has any one of you had a chance to review the proposed 
scope of the FTC inquiry?
    Ms. Feldman. I have looked at it.
    Mr. Murphy. Ms. Feldman? Can you talk about that?
    Ms. Feldman. I think it is an important step. We can't 
solve what we can't see, and much of this is shrouded in non-
disclosure agreements. I applaud those who are here and willing 
to speak because people have been afraid to share their 
experiences for fear that they will be targeted by those who 
propagate these lawsuits.
    The FTC action contemplates looking at 25 patent assertion 
entities. That is a start, but it is a small piece of the 
puzzle. My own view is that it will probably take several types 
of steps so there is low-hanging fruit that can be addressed 
now, and then there will probably be some longer-term efforts 
once we understand the problem better once the FTC has finished 
its investigation.
    Mr. Murphy. Have any of you met with the FTC in this issue?
    Ms. Feldman. I have spoken to staff members.
    Mr. Murphy. Have you have done that? Let me ask this of 
other people or two. Are there any specific issues you have 
encountered prior to litigation that you think the FTC should 
prioritize or other areas you think are receiving less 
attention that they should, especially those who have been 
involved with litigation? Mr. Seigle, is there anything that 
you think they should prioritize?
    Mr. Seigle. What I was most surprised about prior to 
litigation was just how deceptive they are. It is very much a 
corrupt behavior. They threatened criminal charges against us 
for calling them patent trolls at one point. So behavior like 
that, where it is very clear just how corrupt and unfair it is, 
I think you will see a lot of it out there. It would be 
interesting for the FTC to investigate that, and I think 
specifically a demand letter registry would be interesting as 
well because I don't think anyone knows the complete scope of 
how many demand letters have been out there because there is no 
way to track it.
    And if you are given a patent, you are basically given a 
golden ticket, the right to have a monopoly, and with that 
responsibility comes the right to act in good faith. And I 
think it would be reasonable to have them register all the 
demand letters they send because we are giving them that 
monopoly.
    Mr. Murphy. Thank you. Mr. Bragiel, do you have some 
comments on this in terms of what the FTC should look at?
    Mr. Bragiel. Yes, and again, I think, some sort of 
protection for end users here is really key, some sort of 
regulation by the FTC would be helpful that prohibited this 
sort of predatory behavior on behalf of patent trolls prior to 
filing a lawsuit, be that a registry, be that some sort of a 
system or mechanism in place that prevents them from filing 
just masses of lawsuits. This is a numbers game for my clients. 
These patent trolls will sue hundreds of individuals and 
corporations all with one form letter just swapping out the 
name of the company. So some sort of regulation that prohibits 
that type of behavior from occurring would be very beneficial 
to us. We would see quite a bit fewer lawsuits filed, I think, 
in the State of Texas.
    Mr. Murphy. Mr. Richardson, can you talk about any comments 
you would want the FTC to pay attention to?
    Mr. Richardson. Yes, we would echo the sentiment that it 
needs to be focused on the end user. A registry is a great 
idea, but we think it is a two-step, that it is real important 
to look at the demand letter as well and to get the clarity and 
understand that. You know, in our instance to echo that 
sentiment, one of the things we have had to deal with is using 
outside counsel, but our legal cost is a percentage of--our 
legal cost has gone from a quarter of 1 percent for patent-
related issues to 20 percent in the most recent year. So it is 
real cost.
    And Congresswoman, you referenced abuse, and the victims of 
the abuse are our customers and our team members and it is not 
just the companies, it is our neighborhoods that are suffering 
as a result of this.
    Mr. Murphy. Curious, what does it add to the cost of your 
products, all this?
    Mr. Richardson. You know, at this point, the real cost is 
opportunity cost because we are avoiding moving forward with 
the technology because that is our only defense. So we haven't 
had the big lawsuit or had any big settlements. But it is 
holding us back. That is the big issue.
    Mr. Murphy. Then let me ask you this. Are there other areas 
outside of technology that have been impacted by these recent 
patent assertions? Anybody?
    Ms. Feldman. So in this start-up demand study, 70 percent 
of those who financed start-ups said that they had seen this in 
technology, but the 30 percent said that they are seeing it in 
life sciences as well. We know anecdotally that we are also 
seeing it everywhere, Mom-and-Pop stores, restaurants, coffee 
shops across the board. It started in technology, but it seems 
to have spread.
    Mr. Murphy. Thank you. Mr. Cheng?
    Mr. Cheng. Yes, Mr. Chairman, we are a retailer, and it is 
all over--they have been targeting retailers for a couple of 
years already. They are hitting logistics companies. It is 
literally anybody with a business they think they can get money 
from.
    But if I could have your indulgence and just to echo and 
expand on what Mr. Bragiel was saying earlier in terms of 
protections for end users I think is some sort of regulation 
that could expand the doctrine of exhaustion to help at least 
end users at least have a defense up front to patent 
infringement assertion as long as they are licensing or 
purchasing technology or products in good faith from another 
party. That would be very, very helpful.
    Mr. Murphy. Thank you very much. I see my time has expired. 
I really wanted to ask Mr. Richardson if square burgers were 
patented but----
    Mr. Richardson. The five holes are.
    Mr. Murphy. Five holes, thank you. OK. Thank you. Ms. 
DeGette?
    Ms. DeGette. Thank you. Mr. Chairman, just a couple of 
questions. Mr. Richardson, you talked about Congress doing 
something about the demand letters, and that is I think a good 
idea. Some people have suggested that the FTC should establish 
a demand letter database. I am wondering what our witnesses 
think about that. Let us start with you, Ms. Feldman.
    Ms. Feldman. I think some type of registry would be very 
important. Patent is supposed to be a notice system, and a lot 
of those in assertion behavior claim that the way they are 
asserting their patents is something that is private to them. 
But what you claim as your territory is something that 
everybody should have notice of.
    Ms. DeGette. Right. Yes.
    Ms. Feldman. And that is important. These non-disclosure 
agreements are very corrosive for getting information about 
what's happening.
    Ms. DeGette. Mr. Duan, what do you think?
    Mr. Duan. So I agree. I think that it is important that we 
have this sort of information about the demand letter economy, 
about what sort of assertion is going on. I think it helps out 
a lot of parties. It helps out the businesses that receive the 
demand letters because they are able to see, you know, a lot of 
the facts that they may not be presented with immediately. It 
helps related businesses in that they can see what sort of 
patents have been asserted, and they know what sort of 
technologies they should look at and what sort of technologies 
they should avoid if they have to avoid infringements. It helps 
researchers obviously because they will be able to do better 
studies, and I think it helps lawmakers like you.
    Ms. DeGette. Well, it would help regulate them, too.
    Mr. Duan. Because----
    Ms. DeGette. There are unfair trade practices going on, 
right?
    Mr. Duan. I think that is the first step. I definitely 
applaud the FTC for taking on their six-piece study of patent 
assertion.
    But you know, I think an important point to realize is that 
for every one of these big patent assertion entities that we 
are talking about, there are dozens or hundreds of much smaller 
ones, the ones we have been talking about today that would just 
fly under the radar. The FTC would never find out about them, 
Congress would never find out about them. The only people that 
would find out about them are the people who receive the 
letters.
    Ms. DeGette. Well, unless you had a demand letter database.
    Mr. Duan. Exactly.
    Ms. DeGette. Yes.
    Mr. Duan. And I think that is the importance of that----
    Ms. DeGette. Mr. Cheng, you are nodding your head yes.
    Mr. Cheng. In complete agreement, and also I think one of 
the other benefits of a demand letter registry is simply to let 
victims know they are not alone.
    Ms. DeGette. Yes.
    Mr. Cheng. A lot of people who get these letters, they 
don't know what to do, they don't know who to turn to. It is 
going to help defendants in some cases organize a legitimate 
defense against sometimes truly, truly craptastic patents.
    Ms. DeGette. Mr. Seigle, let me ask you and others as well, 
if there was a demand letter database and you knew about it, 
then I would assume if you got a demand letter, that would help 
you try to figure out----
    Mr. Seigle. That would be an absolute huge help. When I got 
my first demand letter, I went and searched for the docket to 
see who else they had sued, and I reached out to 20 people on 
LinkedIn. We formed a joint defense group. It took a lot of 
time and effort to email them all individually, see where they 
were, and of course, the litigation. If that was made available 
and easy, it would have saved me a lot of time.
    And ironically, when I reached out to them, their reply was 
that was so smart of you to try to pull us together. I didn't 
think of that, which, I know it sounds funny, but it is 
actually what happens.
    I have heard from the meetings they have had on The Hill 
that the U.S. PTO or FTC doesn't want to have to deal with the 
administration or technology burden of hosting a registry. I 
would like to offer that at FindTheBest, we are a data company. 
We deal with data a lot, and we can easily do that and we would 
be happy to work with the public sector and host that for them.
    Ms. DeGette. Well, you know there is some debate about 
whether the PTO is the office to do it or the FTC, and the FTC 
is more used to taking issues like this. Mr. Bragiel, what do 
you think?
    Mr. Bragiel. Well, like everyone else on the panel I think 
that is a good first step. But from our standpoint it is not 
just the demand letters we are dealing with. There are actual 
lawsuits that have been filed. And so, some of those, most of 
those were preceded by a demand letter, but either way, the 
lawsuit was going to be filed because it is relatively 
inexpensive to file a lawsuit and extract a $5,000 settlement 
from my member at that point.
    In our case, it wasn't difficult to organize. They are all 
members of mine. So I know who these folks are that have been 
sued. They all called my office, you know, immediately upon 
receiving the lawsuit. But the question was once they'd been 
sued, they have to individually defend themselves so we 
couldn't do some sort of joint, mass defense like a reverse 
class action. And so, we were forced to inform clients that 
they should consider settlement.
    So but you know, again, it is always good to know who is 
after you, right, and it is good to know who is behaving in 
this sort of behavior. And there is so much in terms of hiding 
behind shell corporations and whatnot that this would lend some 
transparency to that. So we would support that.
    Ms. DeGette. Mr. Richardson, you are the one that started 
the conversations about the demand letters. So what do you 
think about this?
    Mr. Richardson. As a family-owned business, for us it is 
about mutual gain through voluntary exchange. That is how for 
the past 92 years we have built our business. And patent trolls 
don't use that business model, they use coercion. So anything, 
the registry, other things that can shed more light on it, we 
think turn the tables and start to get us back to an even keel 
and bring more truth to the situation.
    Ms. DeGette. Thank you. Thanks to all of you for coming. 
This is a good hearing.
    Mr. Murphy. Thank you. Mr. Griffith, you are recognized for 
5 minutes for final questions.
    Mr. Griffith. Thank you, Mr. Chairman. I would be 
interested in hearing from any of you in regard to--and I think 
it was the hotel folks that said, they were being sued for 
using Wi-fi. They bought it from Best Buy or other provider, 
from a manufacturer, but they purchased it. The hotel purchases 
the Wi-fi unit, installs it and then they are the ones getting 
sued. And I am wondering if anybody has looked at seeing if one 
of the manufacturers or the big retailers would be willing to 
support some of these defense lawsuits, either by warranty of 
their product or in some other way. Has anybody heard anything 
in that regard?
    Ms. Feldman. Some of the larger manufacturers have tried to 
step into court and defend these lawsuits, and they have been 
rebuffed. They are not allowed to because those who are 
bringing the demands are smart enough not to see the big guys, 
they just see the little guys. And so they can't get in there. 
So rule along those lines would be important.
    Mr. Griffith. So perhaps we as a Congress, it may not be 
our Committee but as we as a Congress look at this, we may want 
to look at some standing issues and create some special 
standing for the manufacturer if they are the folks who put it 
into the Wi-fi in the example that we are using.
    Ms. Feldman. I think the other----
    Mr. Griffith. They would have the right to come in and 
defend themselves or defend their product in such a suit.
    Ms. Feldman. I think that is right, sir, and the key issue 
is to get only interested parties in the courtroom or in 
whatever the bargaining room is. So one of the problems is you 
can't figure out who is behind these letters, so some type of 
disclosure of who has a beneficial interest in these companies, 
then you could figure out that perhaps you actually did buy 
something that comes with a license or regulators could see 
what's happening behind the scenes. There is just no way to 
penetrate through all these shells and figure out where it is 
coming from.
    Mr. Griffith. And also, correct me if I am wrong and I know 
we have got a couple of attorneys on the panel, but if we bring 
all the parties to the table, wouldn't we be able to use 
collateral estoppel res judicata and then future litigations 
and then shut it down nationwide if we got one, good lawsuit on 
the Wi-fi situation? What do our lawyers have to say about 
that? Yes, sir.
    Mr. Duan. I think that is correct, and that is the reason 
that you don't see them going after the big manufacturers. They 
could just go after the company who makes the Wi-fi router, 
right? If they did that, they would get one settlement, that 
would be the end and there would be no further lawsuits.
    Instead, they can go after as many people as they want by 
never touching the manufacturers. And this is really what 
creates the incentive for a lot of these abusive companies to 
go after end users rather than to go after the manufacturers. 
The fact that instead of having just one lawsuit that you fight 
and, maybe you win, maybe you lose, you have an endless stream 
of revenue.
    Mr. Griffith. All right.
    Mr. Bragiel. If it is not Wi-fi today, it is our lock 
system tomorrow we are afraid or that treadmill in our fitness 
center. Where does this end? That is where we are with this, 
and you know, if we settle one case, does that make us a target 
for additional patent trolls that may say we are an easy 
target?
    Mr. Griffith. And once they find that you are not an easy 
target, then they go after the individual consumers who may 
have purchased the same product for their home.
    Mr. Bragiel. That is correct.
    Mr. Griffith. They may not be asking for the $5,000, but 
they might very well be asking for $150 or $200. And I can 
assure you, most households are not prepared to receive a 
letter of that nature.
    I have about a minute-and-a-half left. Does anybody have 
something that we haven't touched on today that they would like 
to bring up? Yes, sir?
    Mr. Cheng. In touching on the subject of getting 
manufacturers--people upstream to stand behind their product, 
one of the unfortunate side-effects of patent trolling is the 
fact that a lot of suppliers have actually stopped honoring 
their indemnification obligations. We have actually had to sue 
one of our technology platform providers because after being 
sued twice, after they honored the first indemnity obligation, 
they just decided it was too expensive to keep stepping up.
    And so even though we are not being--I have submitted this 
in my written testimony--even though we are not really being 
sued anymore, we are still in the game because we are still 
paying. We are still paying, and our customers are still 
paying. And patent trolling is a toll on everybody.
    Ms. Feldman. I would like to stress the important role that 
this committee has to play. According to the figures in the 
White House report this summer, conservative estimates show 
that 90 percent of this activity never proceeds to the 
courthouse. And so the committee has an important role to play 
in establishing what are fair and reasonable business practices 
as opposed to deceptive practices in this particular area of 
commerce.
    Mr. Griffith. Thank you very much. I yield back, Mr. 
Chairman.
    Mr. Murphy. Thank you, and I want to thank everyone for 
being part of this hearing today and also to note that you have 
stepped forward and gave some valuable information. And those 
of you who were willing to come forward in this I think also 
inspired, hopefully inspired, many other businesses not only to 
step forward when they have these concerns, do the kind of 
things you have done to reach out and form some coalitions to 
fight this but also shine some light on this for those who did 
not even know it was coming. And I hope that we will continue 
this.
    I ask unanimous consent that written opening statements 
from the members be introduced in the record, and without 
objection the documents will be entered into the record.
    So in conclusion, once again, I thank all the witnesses and 
all the members who attended today. I remind members they have 
10 business days to submit further questions for the record, 
and I hope you will be willing to respond to those letters. 
Thank you very much, and please respond promptly to them.
    With that, this hearing is adjourned.
    [Whereupon, at 4:00 p.m., the subcommittee was adjourned.]
    [Material submitted for inclusion in the record follows:]

                 Prepared statement of Hon. Fred Upton

    Today's hearing will examine certain practices relating to 
``patent assertion,'' or the practice of bringing--or 
threatening to bring--a lawsuit against an organization who is 
allegedly infringing on a patent. Litigation related to patent 
infringement has dramatically spiked in recent years. According 
to the Government Accountability Office, from 2010-2011, the 
number of these lawsuits increased by one-third. A report 
released by the White House in June stated that as many as 
100,000 companies were threatened last year with patent 
infringement lawsuits.
    Members of both the House and Senate have proposed 
legislation to address patent assertion litigation. Our purpose 
today is somewhat different. We are taking a step back to get 
the facts about what happens before these patent suits are 
filed. Each of the companies testifying today has received 
something called a ``demand letter'' from a patent assertion 
entity. Typically, these letters claim that the company is 
infringing on a patent and ask the company to either settle and 
pay a licensing fee--or prepare to be sued.
    For some of these companies, dealing with these demand 
letters and the threat of litigation has drained resources that 
could have been spent on innovation, expanding their companies, 
and hiring additional employees. In many cases, identifying the 
specific patent at issue, and who is behind the demand letter, 
is a challenge, complicating a company's ability to defend 
itself and determine whether to settle or fight the claim. What 
entities are sending these demand letters? What patents are 
being asserted? Do these demand letters specify the particular 
patent at issue and the alleged infringement? What effects and 
costs do these demand letters and litigation threats have on 
your companies? These are a few of the issues we want to 
address today, so we can get a better understanding of the 
facts relating to these letters, and how they affect the 
companies who receive them.
    I think all of us recognize that protecting patents and 
inventions is important. Bringing a lawsuit to protect a 
patent, to protect an invention, is warranted in many cases. 
Those types of cases--where a valid patent is being asserted 
and protected--seem to be a very different thing from the 
recent rash of demand letters that are vague, do not contain 
simple information about the patent at issue or the alleged 
infringement, and contain threats to sue unless a company pays 
up. As job creation and innovation are threatened, we want to 
figure out today what separates legitimate patent disputes from 
the types of demand letters and actions that seem to be brought 
simply to exact a settlement payment.

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              Prepared statement of Hon. G.K. Butterfield

    The importance of patents is highlighted in our 
Constitution and integrated into our country's legal framework. 
Patents are designed to spur innovation and stimulate commerce, 
but more frequently the system is being manipulated to impede 
progress.
    A 2011 piece on National Public Radio titled ``When Patents 
Attack!'' discussed the ongoing problem of patent assertion 
entities using intimidating demand letters to make opaque 
patent claims and collect on settlements from other businesses. 
According to the NPR program, ``our patent system sometimes 
seems to be discouraging rather than encouraging innovation in 
high tech businesses.''
    NPR aired follow up piece in May showing that the problem 
has increased in scope. Much of the testimony submitted for 
today's hearing shows that patent assertion entities are now 
sending demand letters with contrived patent claims to a wide 
variety of businesses from the high tech to lodging.
    We must find ways protect small businesses and consumers 
from deceptive and malicious practices while ensuring 
legitimate patent claims are protected.

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