[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
H.R. ___, A BILL TO ENHANCE FEDERAL AND STATE ENFORCEMENT OF FRAUDULENT
PATENT DEMAND LETTERS
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON COMMERCE, MANUFACTURING, AND TRADE
OF THE
COMMITTEE ON ENERGY AND COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
SECOND SESSION
__________
MAY 22, 2014
__________
Serial No. 113-149
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Printed for the use of the Committee on Energy and Commerce
energycommerce.house.gov
______
U.S. GOVERNMENT PUBLISHING OFFICE
95-698 PDF WASHINGTON : 2015
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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 Commerce, Manufacturing, and Trade
LEE TERRY, Nebraska
Chairman
JANICE D. SCHAKOWSKY, Illinois
LEONARD LANCE, New Jersey Ranking Member
Vice Chairman JOHN P. SARBANES, Maryland
MARSHA BLACKBURN, Tennessee JERRY McNERNEY, California
GREGG HARPER, Mississippi PETER WELCH, Vermont
BRETT GUTHRIE, Kentucky JOHN A. YARMUTH, Kentucky
PETE OLSON, Texas JOHN D. DINGELL, Michigan
DAVE B. McKINLEY, West Virginia BOBBY L. RUSH, Illinois
MIKE POMPEO, Kansas JIM MATHESON, Utah
ADAM KINZINGER, Illinois JOHN BARROW, Georgia
GUS M. BILIRAKIS, Florida DONNA M. CHRISTENSEN, Virgin
BILL JOHNSON, Missouri Islands
BILLY LONG, Missouri HENRY A. WAXMAN, California, ex
JOE BARTON, Texas officio
FRED UPTON, Michigan, ex officio
C O N T E N T S
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Page
Hon. Lee Terry, a Representative in Congress from the State of
Nebraska, opening statement.................................... 1
Prepared statement........................................... 2
Hon. Fred Upton, a Representative in Congress from the State of
Michigan, prepared statement................................... 87
Witnesses
Hon. Jared Polis, a Representative in Congress from the State of
Colorado....................................................... 3
Prepared statement........................................... 6
Tom Marino, a Representative in Congress from the State of
Pennsylvania................................................... 9
Prepared statement........................................... 11
Lois Greisman, Associate Director, Bureau of Consumer Protection,
on Behalf of Federal Trade Commission.......................... 14
Prepared statement........................................... 17
Answers to submitted questions............................... 95
Wendy Morgan, Chief of the Public Protection Division, Office of
the Attorney General of Vermont................................ 25
Prepared statement........................................... 27
Answers to submitted questions............................... 100
Adam Mossoff, Professor of Law, George Mason University.......... 39
Prepared statement........................................... 41
Robert Davis, Counsel, Venable LLP, on Behalf of Stop Patent
Abuse Now Coalition............................................ 48
Prepared statement........................................... 50
Jon Potter, President and Co-Founder, Application Developers
Alliance....................................................... 53
Prepared statement........................................... 55
Answers to submitted questions............................... 104
Alex Rogers, Senior Vice President and Legal Counsel, Qualcomm... 62
Prepared statement........................................... 64
Answers to submitted questions............................... 107
Submitted material
Statement of the National Association of Federal Credit Unions,
submitted by Mr. Terry......................................... 88
Statement of the National Association of Realtors, submitted by
Mr. Terry...................................................... 89
Statement of the State of Nebraska Attorney General, submitted by
Mr. Terry...................................................... 90
Statement of Main Street Patent Coalition, submitted by Mr. Terry 93
H.R. --------, A BILL TO ENHANCE FEDERAL AND STATE ENFORCEMENT OF
FRAUDULENT PATENT DEMAND LETTERS
----------
THURSDAY, MAY 22, 2014
House of Representatives,
Subcommittee on Commerce, Manufacturing, and Trade,
Committee on Energy and Commerce,
Washington, DC.
The subcommittee met, pursuant to call, at 9:15 a.m., in
room 2123, Rayburn House Office Building, Hon. Lee Terry
(chairman of the subcommittee) presiding.
Present: Representatives Terry, Lance, Blackburn, Harper,
Olson, McKinley, Kinzinger, Bilirakis, Johnson, Long, Sarbanes,
McNerney, Welch, and Barrow.
Staff Present: Charlotte Baker, Deputy Communications
Director; Kirby Howard, Legislative Clerk; Brian McCullough,
Senior Professional Staff Member, Subcommittee on Commerce,
Manufacturing and Trade; Paul Nagle, Chief Counsel,
Subcommittee on Commerce, Manufacturing and Trade; Shannon
Weinberg Taylor, Counsel, Subcommittee on Commerce,
Manufacturing and Trade; Graham Dufault, Subcommittee on
Commerce, Manufacturing and Trade Policy Coordinator; Michelle
Ash, Minority Chief Counsel; and Will Wallace, Minority
Professional Staff Member.
OPENING STATEMENT OF HON. LEE TERRY, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF NEBRASKA
Mr. Terry. For our panel and for our witnesses, we do
expect to vote somewhere between 10:00 and 10:15. So I am just
going to say good morning to everyone, and this is a really
important hearing because of the numerous complaints that we
have received, particularly from end users regarding the
perceived fraudulent demands on patent infringements.
The committee has taken an approach to be--what would be
the right term--intellectual about this, realizing that there
are First Amendment implications, as well as we do not want to
make it more difficult for valid patent holders to pursue their
remedies when there is a violation, and so therefore, this is
really the art and science of wording.
And that is why we have this hearing today is to get the
experts to help us make sure that we have the needle thread
appropriately so that we don't injure or make it more difficult
for valid patent holders of any size, but that we are able to
curtail the abuses that we see occurring.
[The prepared statement of Mr. Terry follows:]
Prepared statement of Hon. Lee Terry
Good morning and welcome to this morning's legislative
hearing. Today, we examine a discussion draft of legislation to
address the growing problem of unfair and deceptive patent
demand letters.
The policy goals we consider here today are not a matter of
partisan politics. We can all agree that certain actors are
operating a successful business model of defrauding others
under the guise of seeking compensation for alleged patent
infringement--and that this practice should be addressed.
Thanks to these fraudsters, small businesses all over the
United States are learning quickly that their everyday
activities may or may not be infringing a patent that a
mysterious company may or may not own. These small businesses
are also learning not very much about how they might be
infringing, but that they can escape a lawsuit if a license fee
is paid.
In one example, home builders recently became the favored
victim of a patent assertion entity with the rights to a wood
de-humidifying process. According to this assertion entity's
letters, several home builders in the Pacific Northwest likely
infringed on its patent because . . . well, because the
recipients of the letters build homes.
The patent at issue consists of a process of controlling
moisture inside a building as it is being built. You would have
no idea what exactly that process is from reading the letter.
You would also have no idea what the recipient of the letter
was doing that might implicate the patent. The letter is clear,
however, that there is an option to pay the license fee, or--
somewhat ominously--be deemed to ``refuse to enter into a
license for the patented moisture removal process.''
As an initial matter, I note that some believe the problem
is not systemic, and therefore federal legislation is not
sufficiently justified. I happen to disagree; we have heard
from too many businesses that are desperate for relief, and I
believe there is a narrow path forward. It's time we discussed
the nuts and bolts of how we accomplish the task before us, and
I thank the witnesses for being here today to do just that.
There is no doubt--given the competing considerations
outlined by stakeholders thus far--that we will have to thread
the proverbial needle with this legislation.
For example, some argue that the Federal Trade Commission
should have to prove that false statements are made with some
level of knowledge that they are false in order to bring an
enforcement action.
Moreover, prohibiting speech that isn't false and
compelling certain disclosures may implicate the First
Amendment, and I intend for this legislation to withstand a
constitutional challenge.
The scope of the legislation is also a point of contention.
Our purpose on this issue should be to protect those who are
unable to defend themselves and who would benefit most from
truthful statements and more detail.
On the other hand, we must be careful not to implicate
letters sent between two sophisticated patent owners,
especially those with prior business relationships and
accustomed to dealing with these issues. If these letters are
part of our legislation, we invite gamesmanship on the part of
the would-be licensee and risk devaluing patents generally.
Lastly, our draft legislation includes a rebuttable
presumption that protects those who send demand letters from
enforcement actions for technical violations of the disclosure
requirements.
This falls short of a safe harbor as to all aspects of the
bill, but provides limited shelter for letters that attempt to
make the right disclosures, where an enforcer may believe those
disclosures are inadequate. I expect that there will beis
diverse opinions disagreement on this provision as well.
Once again, I thank the witnesses for their participation
and I look forward to lively debate on these and other issues
surrounding the bill.
Mr. Terry. At this point, I will yield back my time and
recognize Jerry for an opening statement, unless you waive.
Mr. McNerney. No, I will just say a few words. Thank you,
Mr. Chairman.
Mr. Terry. OK. So you are recognized for your 5 minutes.
Mr. McNerney. Thank you, witnesses, for coming this
morning. I am a patent holder. I have a couple patents. I do
have concerns of patent violations, but I also understand the
challenge of making sure that we don't have a patent system
where companies, entities are able to gain the system because
that hurts everyone except the gamers. And threading that
needle is going to be a challenge. I appreciate the chairman's
viewpoint on this to protect the patent holders as well as
providing the right words in the law that make this a viable
law.
So I am going to be brief and yield back, Mr. Chairman, and
I thank you for holding this hearing.
Mr. Terry. I appreciate that. And now I will recognize, we
have the esteemed first panel, who are Members of Congress that
are also active on patent and patent abuse issues. Mr. Polis
from Colorado, and Mr. Marino.
And Mr. Polis, you will be first. You are recognized for
your 5 minutes, although you said you needed 40. If we can
compromise at 5. You are recognized.
STATEMENT OF THE HON. JARED POLIS, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF COLORADO
Mr. Polis. Thank you, Mr. Chairman, in the proud tradition
of compromise. Thank you, Chairman Terry, Acting Ranking Member
McNerney for allowing me the opportunity to testify on this
important topic of patent demand letter reform. I deeply
appreciate, on behalf of my constituents, the attention your
committee is devoting to the issue of abuse of demand letters.
As an entrepreneur and former venture capital investor,
like my colleague, Mr. McNerney, an inventor of several
patented inventions, I got to experience from several
perspectives the challenges of starting and running a small
business. Today these challenges are exacerbated by patent
trolls who prey on our core job creators including many
startups in my home district in Colorado by sending misleading
and scary demand letters without basis.
Patent trolls increase the cost of doing business and cause
small businesses to shell out millions in legal fees or
settlement fees to address illegitimate and unfounded claims.
While many of these patents should never have been granted in
the first place, but since they have, one of the ways to crack
down on patent trolls is by requiring demand letter
transparency and allowing enforcement against bad actors.
Last November, I was pleased to introduce, along with my
colleague, Representative Marino, as well as Representative
Deutch, a bipartisan comprehensive bill that accomplished these
goals, the Demand Letter Transparency Act. Our bill would
require certain patent holders to disclose information relating
to the patent in their demand letters and file their letters in
a searchable and accessible public registry maintained by the
PTO. Our bill truly would help prevent trolls from hiding
behind anonymity, empower defendants to take action together
and share information as well as alert regulatory authorities
and the PTO about frivolous enforcement of patents.
Let me be clear, addressing abuse of patent demand letters
is only a part of a much larger issue. Our patent system, in
many ways, was designed to protect physical innovation,
machines and contraptions and now attempts are being made to
apply it to apps and the Cloud and digital innovation.
Much more needs to be done to ensure that the innovations
of tomorrow have the same protections as the innovations as
yesterday without casting a power on the ongoing innovations of
our economy. I was sad to hear Senator Leahy's recent
announcement with regard to the patent bill in the Senate, but
I want to remind this committee of the urgency that we have to
find common ground and bring our patent system into the 21st
century.
While I wish the discussion draft took a more comprehensive
approach to combating abusive demand letters, I certainly
understand the limited jurisdiction of this committee, and I am
encouraged that this committee is moving forward on the issues
under its jurisdiction. However, I also want to point out, with
regard to the committee's proposal, some language that may
inadvertently actually take us backwards in addressing the
troll problem at the pre-litigation stage.
First, I am concerned that the bill may inadvertently limit
the FTC's Section 5 authority to target harmful behaviors. The
FTC already has enforcement authority to go after certain
entities who are engaging in unfair and deceptive practices by
sending abusive demand letters. I commend the committee for its
inclusion of a savings clause in its discussion draft, which is
a great improvement over the original draft, but I believe that
the language may not be sufficient to preserve the FTC's
existing Section 5 authority.
By delineating a list of unfair and deceptive acts or
practices in the bill, the legislation may actually limit the
ability of the FTC to target other unnamed harmful behaviors
and unforeseen abusive behaviors. So to ensure this legislation
does not foreclose the FTC's existing enforcement authority, I
urge the committee to include a catch-all provision that would
allow the FTC to bring actions to address other harmful
behaviors than aren't expressly listed in the legislation.
Second, I am concerned with the draft's broad preemption
clause, which may inhibit state attorney generals from seeking
civil penalties against bad actors. The United States have
passed strong laws that are pro-innovation, prohibiting abusive
demand letters. 42 State AGs have explicitly stated their
desire for Federal demand letter reform along with concurrent
State authority.
Until we can act decisively at the Federal level, I hope
that this body can support the actions that States are taking
to protect their small businesses and entrepreneurs. I am thus
concerned that this discussion draft may strip State AGs of an
important tool that we need to combat bad actors.
Third, I have concerns that the rebuttable presumption
language may create a loophole. The inclusion of this language
may place a large burden on demand letter recipients and the
FTC to prove their case.
Finally, I am concerned that the bill's scope is only
limited to systems integrators, consumers and end users. I am
hopeful we can expand the bill's definition to protect all
recipients of demands by bad actors. In the real world, these
examples include restaurants, app developers, retail software
or services.
Thank you, again, for allowing me to testify today. I truly
believe that the FTC, under the jurisdiction of this committee,
does have a critical role to play with regard to improving the
climate for entrepreneurship across our country. I greatly
appreciate your attention to patent demand letter reform, and I
look forward to working with you on this legislation.
Mr. Terry. Thank you.
[The prepared statement of Mr. Polis follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Terry. Gentleman from Pennsylvania is now recognized
for 5 minutes.
STATEMENT OF THE HON. TOM MARINO, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF PENNSYLVANIA
Mr. Marino. Thank you, chairman, and thank you acting
ranking member and the additional members of the committee for
allowing me to testify here today.
Nonpracticing entities or patent trolls have created a new
business model that takes advantage of our patent laws in our
court system. They have crafted a system of borderline
extortion that is a major threat to our economy and jobs. While
I am disappointed to hear that the Senate has fumbled the ball
in the patent troll litigation reform for this year, I can tell
you with full assurance, many of us and my colleague and I in
the House will continue to fight this battle until we have won.
While there are many issues in patent troll litigation,
each case begins the same, with a recipient of a vaguely
worded, highly-threatening demand letter. Unlike other areas of
litigation, when it comes to demand letters, things are very
out of balance.
One party to the equation asserts a patent infringement
with little to no specificity and often is unclear who owns the
patent being asserted or how the patent was even allegedly
infringed. However, the other party to the equation is
typically an honest entrepreneur or business person and must
make a decision to either pay the threatening entity to go away
or face them in court for extended litigation with an
exorbitant price tag attached.
It is time for the entity sending out demand letters, like
their community mass mailers, do their due diligence just as we
expect in just about every other area of the law. In addition
to the amendments I offer on demand letter transparency to the
Innovation Act, I have been pleased to work with my colleague
across the aisle, Congressman Jared Polis, who is very well
addressed in this issue, to address issues throughout the
demand letter, the Transparency Act.
This bill would put a lot of specific information about
these patent assertion entities and their claims at the
fingertips of small companies and retailers who lack the time,
money and the resources to respond to the demand letters. We
need to require individuals sending an excessive number of
demand letters to file information for the U.S. Patent and
Trademark Office or the Federal Trade Commission as the
chairman's bill would legislate.
We must shine a flashlight on these deceptive fraudulent
actors who are operating behind closed doors in the dark. By
requiring more transport litigation practices, we will deter
many of the bad actors from being in the litigation abuse
business completely, and if that should happen, I would say,
good riddance.
Mr. Chairman, while demand letters constitute just one
piece of the patent troll litigation problem, it is an
important part of any patent troll litigation reform effort.
While we discuss the various proposals, we must be careful to
strike the right balance to ensure that right shareholders are
still able to protect their property, while also going far
enough to provide real relief for the victims of this
litigation abuse. It is time we start standing up for job
creators and innovative businesses and allow them to get back
to doing what they do best, growing companies and invigorating
our economy.
To close, I would like to share with you a few sample
demand letters that might illustrate the abuse practices we are
viewing here today. I will just give a couple of examples. We
have one letter here that shows that an individual who has
their personal computer but happens to send an email, go to
local files, get on the Internet, get on a server, get on a
printer, get on a digital copier and any other peripheral
matters is infringing upon an patent. It is ridiculous.
Another one simply says that in addition to an alleged
patent on this person who sent this letter, they are saying
that the person being accused of the patent violation may
induce others to infringe on the patent--may induce others to
infringe on the patent.
And then finally, we have a situation where they are saying
that to prevent, we want to prevent irreparable harm in the
future in absence of injunctive relief. It is just another way
of saying, if you don't pay the money now, we are going to tie
you up in court so long that we will put you out of business.
Chairman, I have some letters that I want to enter into the
record, a letter dated from Ni Wang on January 24, 2014; Farney
Daniels of August 1, 2012; Innovative Wireless Solutions, April
10 of 2013; and IsaMai from June 16 to 2013. I thank the
committee for allowing us to do this, and I yield back.
[The prepared statement of Mr. Marino follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Terry. Thank you. And without objection, those letters
will be inserted into the record with your oral statement. So
appreciate the two of you being active on this important and
delicate issue, and taking the time out of your day to
participate in our hearing today. Thank you very much.
Mr. Marino. You are welcome.
Mr. Terry. Now, at this time, while our friends, Mr. Polis
and Mr. Marino are exiting, I am going to start introducing our
next panel.
We have Lois Greisman, Associate Director, Bureau of
Consumer Protection at the Federal Trade Commission. We are
blessed to have Wendy Morgan, Chief of the Public Protection
Division, Office of the Attorney General of Vermont; Adam
Mossoff, Professor of Law, George Mason University; Rob Davis,
Counsel for Venable on behalf of the Stop Patent Abuse Now
Coalition; we have John Potter, President and co-founder of
Application Developers Alliance; and Alex Rogers, Senior Vice
President, Legal Counsel for Qualcomm.
Some of you have been before us in the past and know how
these things work. Each of you will have 5 minutes. There is a
little box there with green, yellow, and red. I would
appreciate it that when it hits the yellow mark that you jump
to your conclusions so we can stay on time. And then at the
conclusion of the statements, we will go into questions, if we
are not on the floor voting at that time.
So at this time, would recognize the gentlelady from the
FTC, Lois Greisman. You have your 5 minutes. Will you turn your
microphone on. I forgot to mention that part. And we have to
have them a little closer, as well.
STATEMENTS OF LOIS GREISMAN, ASSOCIATE DIRECTOR, BUREAU OF
CONSUMER PROTECTION, ON BEHALF OF FEDERAL TRADE COMMISSION;
WENDY MORGAN, CHIEF OF THE PUBLIC PROTECTION DIVISION, OFFICE
OF THE ATTORNEY GENERAL OF VERMONT; ADAM MOSSOFF, PROFESSOR OF
LAW, GEORGE MASON UNIVERSITY; ROBERT DAVIS, COUNSEL, VENABLE
LLP, ON BEHALF OF STOP PATENT ABUSE NOW COALITION; JON POTTER,
PRESIDENT AND CO-FOUNDER, APPLICATION DEVELOPERS ALLIANCE; AND
ALEX ROGERS, SENIOR VICE PRESIDENT AND LEGAL COUNSEL, QUALCOMM
STATEMENT OF LOIS GREISMAN
Ms. Greisman. Congressman, can you hear me?
Mr. Terry. We can hear you now.
Ms. Greisman. Good. Good morning, again, Chairman Terry,
Ranking Member Sarbanes. I am delighted to be here this morning
on the behalf of the Federal Trade Commission. I very much
appreciate the opportunity to present the Commission's
testimony. As you know, my oral remarks are my own, as are any
responses to questions you may have, not those of the
Commission or any individual commissioner.
I appreciate the subcommittee's sustained interest in the
activities of PAEs and the related issues of patent demand
letters. Clearly, this is an area of keen interest across the
business community as well as among Federal and State law
enforcement agencies. Further, the Commission shares the
subcommittee's goal of stopping deceptive demand letters
without intruding on the right of patent holders to assert
legitimate claims.
As you know, the Commission continues to examine PAEs and
demand letters from the policy perspective. The Commission's
testimony and my remarks, however, focus on patent demand
letters from the angle of consumer protection law enforcement.
Briefly, the Commission's Section 5 authority to prevent unfair
and deceptive acts and practices can and should be brought to
bear with respect to demand letters when appropriate.
While our analysis always will be fact specific, Section 5
may be violated, for example, if a PAE asserts a patent claim
where it has no ownership interest or a standing to assert the
claim; where the patent or the relevant statute of limitations
has expired; where the patent would be covered by an existing
license; or where the patent, on its face, relates to a topic
obviously unrelated to the claim of infringement.
Further, the PAE also may violate Section 5 where it makes
false or deceptive claims that are unrelated to the merit of
its patent such as false threats of litigation. On this last
point, a ready analogy exists in past cases the Commission has
brought dealing with potentially deceptive representations made
in connection with attempts to collect a debt. The debt
collection actions, some of which preceded passage in 1977 of
the Fair Debt Collections Practices Act included a number of
cases involving false threats of legal action.
Briefly, these cases hold that a false threat that legal
action will be taken, or that legal action will be taken
imminently may violate Section 5. Indeed, the FDCPA itself
prohibits false threats of legal action in connection with the
collection of a debt. Thus, in addition to decisions under the
FTC Act, there exists a robust body of FDCPA law, Federal case
law that addresses false threats of litigation and false
threats of imminent litigation.
It is important to reemphasize that the assertion of a
patent claim in and of itself, of course, is not deceptive, and
it serves the important purpose of protecting patent rights.
Still, the distress experienced by businesses that receive
demand letters is real as are the challenges to that business
in evaluating how to proceed after the receipt of a demand
letter.
It is equally important to keep sight of the fact that
concerns about demand letters do not get at the deeper and
highly complex issues that underline many businesses'
grievances with respect to the patent demands. These critical
issues are related to the broad scope of many patents, the ease
with which patent infringement claims can be asserted and the
cost of defending against such claims, of which some businesses
report are simply prohibitive.
Thus, while the current bill provides the Commission with
civil penalty authority that it does not currently have, and we
believe that civil penalties authority in this area is of
potential benefit and may well deter some bad actors. Such new
authority does not reach these broader, more fundamental
issues.
Additionally, and as outlined in the Commission's
testimony, we do have some concerns about the draft's inclusion
of a bad faith scienter requirement and its possible
application outside the civil penalty context. At the same
time, we do appreciate the bill's inclusion of a savings clause
that preserves the Commission's existing authority.
In sum, the Commission's goal is to stop deceptive patent
demand letters while respecting the rights of patent holders to
assert legitimate claims. We are happy to work with the
subcommittee to strike the right balance on this very important
consumer protection issue. Thank you.
Mr. Terry. Thank you, and you have, and we thank you for
your effort and help on this matter.
[The prepared statement of Ms. Greisman follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Terry. Ms. Morgan, you are now recognized for 5
minutes.
STATEMENT OF WENDY MORGAN
Ms. Morgan. Thank you, Chairman Terry, Ranking Member
Sarbanes, and subcommittee members. Thank you for this
opportunity to appear before you to give you the perspective of
the Vermont Attorney General's Office into your discussion
draft. I am glad that the witnesses that have gone before me
have laid out the general problems relating to this area
because, thinking that I was the last witness, my focus is
really much more in the weeds as with regards to your draft.
You asked if there were ways that the draft might be
improved to further balance the need to prevent the bad actors
from abusing the patent demand letter process while preserving
the legitimate purpose of communicating intellectual property
rights. That balance is critically important here. I would
suggest that there are three ways in which your draft might be
improved, all of which would increase the likelihood that the
States will take action under any statute that you enact.
There are additional points in my written testimony, which
I hope you will consider as well, but I would like to just
focus on three this morning. Those will be with regards to the
preemptions section; the definition of bad faith, which was
already briefly discussed by Ms. Greisman; and also the
provision for State action and the jurisdiction for State
action.
So as you know from the written testimony, we would prefer
that there is no preemption at all within this statute. But if
there is, at a minimum, the State laws that exist now should be
maintained. But if they are not to be maintained, we would ask
that you include a review of your Section 4(a)1. In that
section, your general preemption section, you say that the Act
preempts any law, rule or regulation, and you also say
requirements standard or other provision having the force and
effect of law which expressly relates to the transmission or
contents of communications relating to the assertion of patent
rights.
The difficulty we have with this section is that if we go
to court under our Consumer Protection Act, or under our UDAP
in other States, the Unfair and Deceptive Acts and Practices
Act, then the court will be articulating a standard relating to
the transmission or contents of communications, and therefore,
at least arguably, we would be preempted under 4(a)1.
So we would suggest that you both eliminate the requirement
standard language that is contained in (a)1 to avoid that
possibility, and also in the savings clause in (a)2, that you
add language that would be comparable to this; that these
States may proceed including actions relating to transmissions
or contents of communications relating to assertions of patent
rights.
In other words, it may be that the preemption statute, as
you have it here, would not preempt the State from proceeding
under the Consumer Protection Act. But it would be far safer
for the States if you were completely clear about that, and the
statute as it is here is not clear about that.
With regards to bad faith, our concern is that the current
draft requires actual knowledge or knowledge fairly implied
that the information in the demand letter is false. States
under their Consumer Protection Acts and UDAP laws do not have
to prove knowledge, and that is a very important distinction.
If we have to prove knowledge, we are not going to be able to
in many instances, and therefore, will be much less likely to
proceed under your statute.
Similarly, if even with the language of knowledge fairly
implied, again, that requires that it be a false statement and
it will not always be a false statement. The people that you
are trying to address, the bad actors here are going to change
their behavior to meet your statute, and so they will not
include false statements. They will include misleading or
deceptive statements. So we would recommend that you change the
definition of bad faith to be false, misleading or deceptive.
Finally, my third recommendation with regards to the
jurisdiction under which the States would bring an action, we
would ask that you make it very clear that these are not under
patent law, but rather under the Section 5 of the FTC Act,
because otherwise, we will end up in a situation where we have
the risk of having any decision in district court appealed to
the Federal circuit rather than the regional circuit, and the
Federal circuit is not used to engaging in UDAP analysis. Thank
you.
Mr. Terry. Thank you.
[The prepared statement of Ms. Morgan follows:]
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Mr. Terry. And Professor, you are now recognized for 5
minutes.
STATEMENT OF ADAM MOSSOFF
Mr. Mossoff. Thank you. Chairman Terry, Ranking Member
Sarbanes, and members of the subcommittee, thank you for this
opportunity to speak with you today about the draft bill
prohibiting false statements and mandating disclosures in
demand letters. My name is Adam Mossoff, and I would like to
note that I am speaking in my personal capacity as a law
professor at George Mason University and not on behalf of my
employer or any organizations with which I am affiliated.
The draft bill is directed at bad actors who engage in bad
faith communications in asserting patents against alleged
infringers. Since the draft bill defines bad faith in terms of
deceptive or fraudulent statements in demand letters, it is a
laudable effort at addressing bad behavior by some patent
owners who act illegitimately.
But the draft bill goes beyond this prohibition. It also
mandates specific disclosures in all demand letters sent by all
patent owners including those sent by legitimate patent owners
who are properly licensing their patented innovation in the
marketplace or are properly asserting their patents against
real infringers. Unfortunately, as a result, the draft bill
raises concerns under the First Amendment, and my testimony
will focus on two First Amendment concerns with these mandated
disclosures.
First, the mandatory disclosure provisions likely violate
the First Amendment's guarantee of the right to free speech in
communicating freely and truthfully in the marketplace. The
Supreme Court has held that the First Amendment necessarily
protects the decision of both what to say and what not to say.
As a result, the Supreme Court has consistently invalidated as
unconstitutional laws and regulations that compel speech in
both commercial and noncommercial activities.
A demand letter serves the function of informing its
recipient that it is infringing a property right. Without the
threat of a potential lawsuit, infringers would hold out and
continue infringing, and thus, patent owners would no longer
have a right to their patented innovation as secured to them
under Federal law. For this reason, demand letters do not fit
the Supreme Court's definition of pure commercial speech, which
historically has received less protection under the First
Amendment.
Instead, a demand letter identifies a violation of a
property right and proposes either a legal process in Federal
court or a settlement of this legal claim; thus, a law
mandating disclosures and demand letters would be strictly
scrutinized under the First Amendment's guarantee of the right
to free speech. The court will follow the many cases involving
similarly compelled speech, even speech by commercial actors in
a commercial context and find these mandates likely to be
unconstitutional under the First Amendment.
Second, by burdening the legal process of taking the
necessary first steps in enforcing legitimate property rights,
the draft bill's mandated disclosures likely violate the right
to petition also secured under the First Amendment. Now, the
Noerr-Pennington doctrine prohibits the use of antitrust law to
prevent the exercise of the First Amendment right to seek
redress for one's legal rights in court.
The draft bill states that violating this provision
constitutes a violation of the antitrust laws and it authorizes
the Federal Trade Commission to enforce its mandates. As such,
the draft bill directly implicates the Noerr-Pennington
doctrine.
Now, courts have generally recognized in a wide variety of
cases that the Noerr-Pennington doctrine extends to all
activities that are necessarily connected to filing a lawsuit
in a courthouse. One such activity includes pre-lawsuit
communications to settle a legal claim asserted against a
defendant. Courts have thus applied the Noerr-Pennington
doctrine to patent demand letters.
In one case in 2006, involving an antitrust challenge to an
patent owner who sent over 100,000 demand letters to consumers,
the court held that applying the antitrust laws in that case
violated the Noerr-Pennington doctrine. Several other Federal
Courts have reached similar conclusions in recent years. Thus,
the draft bill likely imposes an unconstitutional burden on the
right to petition secured to all persons under the First
Amendment.
In conclusion, excising the bad actors in the patent system
is important and laudable because they undermine the efficient
operation of our innovation economy. But we must not forget
that it is legitimate patent owners engaging in legitimate
licensing and assertion activities who make possible America's
innovation economy in the first place, which is the engine of
economic growth, new jobs and high standards of living. And
this is what is being secured by the First Amendment's
protections that are implicated by the mandatory disclosure
provisions in the draft bill.
Thank you.
Mr. Terry. Thank you. You may be the first professor to
testify in 5 minutes. Thank you.
[The prepared statement of Mr. Mossoff follows:]
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Mr. Terry. Mr. Davis, you are now recognized for your 5
minutes.
STATEMENT OF ROBERT DAVIS
Mr. Davis. Thank you Chairman Terry, Ranking Member
Sarbanes and members of the subcommittee. The SPAN Coalition
thanks you for your leadership in addressing patent troll
demand letters. SPAN's members include the American Association
of Advertising Agencies, the Direct Marketing Association, the
Association of National Advertisers, the National Retail
Federation and the Mobile Marketing Association.
Whether you are a coffee shop, or retailer or a hotel, an
ad agency or any other business or nonprofit, the smash-and-
grab tactics embodied in deceptive patent troll demand letters
are a scourge affecting main streets across the country. This
sad fact was clearly established in the committee's earlier
hearings.
Congress can help, and we are extremely pleased that the
subcommittee has circulated the discussion draft. We want to
commend you and your staff for your excellent work. I was asked
to provide SPAN's comments in the discussion draft, and there
are seven points. At the outset, I want to flag the definitions
of ``systems integrator'' and ``end user.''
Given the bill's limitation to only those engaged in the
pattern or practice of sending letters, SPAN is concerned that
further limiting the scope of the bill to letters sent to end
users and systems integrators is not only unnecessary, but also
may exclude from the bill's protection certain main street
victims of patent troll demand letters. We appreciate the
efforts of the staff to get this right. This is a threshold
issue for SPAN and we look forward to working with you to
resolve it.
Next, SPAN strongly supports the bill's primary objective,
which is to clarify the FTC's existing Section 5 authority to
bring enforcement actions against those who send unfair or
deceptive patent settlement demand letters. The bill targets
unfair deceptive practices masquerading as legitimate patent
demand letters. As such, addressing this problem is not about
patent policy, and it is not about the First Amendment.
Third, we believe the bill fairly well captures the
universe of unfair deceptive practices embodied in many of the
patent troll demand letters that we have seen. However, SPAN is
concerned about other unfair deceptive practices that patent
trolls may develop in the future not explicitly included in the
discussion draft.
Therefore, we strongly recommend the inclusion of language
to clarify that the legislation is not intended to foreclose
the FTC's Section 5 enforcement authority to pursue any unfair
deceptive acts or practices with respect to patent demand
letters not expressly listed in the legislation. SPAN would
have grave concerns about legislation that either did not
expressly enable such enforcement by the FTC, or would have the
effect of foreclosing such future enforcement by the FTC.
Fourth, we believe the bill fairly well captures the basic
elements of transparency that should be included in a demand
letter. However, we recommend the inclusion of additional
elements addressing the settlement demand amount and the basis
for it, as well as further information about real party and
interest, all of which we believe would further improve
transparency. In addition, we are concerned that certain
elements only need to be included to the extent reasonable
under the circumstances which would be a loophole that trolls
will exploit.
Fifth, the bill seeks to address the concerns of patent
holders to send legitimate correspondence by limiting its scope
to those who engage in a pattern or practice of sending patent
demand letters. SPAN does not oppose such a limitation and
concept, provided that it does not get defined in a way that it
becomes a loophole easily evaded by trolls.
Similarly, we understand the committee's intent behind
including bad faith as an additional condition for certain of
the unfair or deceptive practices listed in the discussion
draft. SPAN does not necessarily oppose this concept either
provided the definition of bad faith is not inconsistent with
the FTC's existing standards for unfairness and deception under
Section 5, and does not render the law unlikely to be enforced.
Sixth, we are concerned that the bill's inclusion of
rebuttable presumption may render the law less likely to be
enforced, therefore we recommend that the provision be
converted to an affirmative defense.
And seventh, the bill enables State attorneys general to
enforce it along with the FTC. However, we believe the State
attorneys general ought to be able to seek civil penalties.
At the end of the day, nothing in the bill limits anyone's
right to enforce patent, nor does it limit anyone's right to
send a demand letter provided the letters are not unfair or
deceptive.
On behalf of SPAN, thank you, again, for your leadership in
addressing this important issue affecting main street
businesses across the country. We fully support your effort,
and we look forward to working with the committee as it moves
this legislation forward. We hope that the committee can act to
complement the work being done on other important forums to
address the patent troll problem.
Mr. Terry. Thank you, Mr. Davis.
[The prepared statement of Mr. Davis follows:]
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Mr. Terry. And now, Mr. Potter, you are now recognized for
5 minutes.
STATEMENT OF JON POTTER
Mr. Potter. Chairman Terry, Ranking Member Sarbanes, and
members of the subcommittee, thank you for shining a light on
the deceptive and fraudulent practices of an unseemly new
industry. Smash-and-grab patent trolls use shell companies,
print-at-home letterhead, and $0.49 stamps to send baseless
patent demand letters that scare small companies, investors and
customers, that cause them to pay lawyers instead of hiring new
employees and that bully companies into paying extortion
settlements simply because they are cheaper than litigation.
I am Jon Potter, and as head of the 2-year-old App
Developers Alliance, I have personal spoken with many
entrepreneurs and startups that have been shaken down,
dispirited and even run out of business by patent trolls. On
behalf of our 30,000 members and our 175 corporate members, I
am pleased to say that the committee's discussion draft bill is
a very good start to a simple antifraud bill.
Despite the background chatter from academics and confused
opponents, the committee should rest well, assured that, number
one, fraudulent commercial speech is simply not protected by
the Constitution; number two, focused legislation to prohibit
troll's extortion need not inhibit the honest and fair
licensing practices of Qualcomm, Dupont, Gore-Tex, or any
legitimate inventor; number three, Congress has previously and
successfully required the exchange of basic information in
commercial communications where there has been a documented
pattern of fraud.
The Fair Debt Collection Practices Act effectively cleaned
up an industry that previously was ripe with bullying
fraudsters, sort of like patent trolls. Instead of opposing
patent reform, legitimate patent owners should welcome
congressional action that similarly helps cleanse their
industry.
To strengthen the discussion draft, we urge the following
important amendments: First, require demand letters to identify
specific claims infringed. A single patent often has more than
a dozen claims within it. They legally define the borders of
the intellectual property. Only the owner who is asserting
infringement knows which of those borders have been crossed or
infringed upon. It is reasonable, therefore, to require that
demand letters include those details, including how each claim
was infringed.
Second, require trolls to detail how an infringement is
occurring or that they simply don't know but they undertook a
substantial investigation to try to find out. The discussion
draft requires that demand letters describe infringing activity
to the extent reasonable under the circumstances. In the hands
of patent trolls, this exception will be abused and the
requirements will be ineffectual, unless you also make the
troll document that they made a good-faith investigation and
that it was fruitless.
Third, protect every business from abusive demand letter
fraud. The discussion draft proposes to limit antifraud
protection to only some businesses. I know firsthand that often
small, creative agencies that build or manage custom Web sites,
apps, or software networks need protection from trolls.
Frankly, all Americans deserve protection from fraud.
Please appreciate a very important distinction. Great
American innovators, like Qualcomm, communicate with potential
infringers after very careful research. They provide potential
licensees with technical and legal background information and
documentation. And in good-faith negotiations, they seek
legitimate licensing relationships.
In contrast, patent trolls buy cheap patents and use them
to extract shake-down royalties from small business. Trolls
send ominous and threatening letters but do not include
information about how the target's product or technology
infringes or which claims are infringed.
Moreover, when targets receive these vague and threatening
demand letters and call the troll for more information, they
meet stone-faced lawyers who respond with ultimatums: Pay us a
settlement or pay lawyers hundreds of thousands of dollars to
fight us in court. That is not a choice; that is fraud and
extortion.
Some argue that recent increases in patent litigation and
demand letters are simply a nuisance byproduct of our
innovation economy, a blip on the economic landscape that
courts will eventually address so legislation is unnecessary.
Others argue that deadweight loss and failed companies caused
by trolls cannot be helped without stepping on the First
Amendment or empowering the FTC to be intrusive speech police.
None of this is true. Fraud is squarely within the purview
of this committee, and this antifraud bill simply sharpens the
FTC's scalpel and aims enforcement resources in the right
direction, a direction urged by more than 40 attorneys general
and already traveled by 10 state legislators that have enacted
demand letter abuse laws.
Yesterday, patent trolls celebrated when the Senate
Judiciary Committee announced that small business, tech
startups, and main street businesses will endure at least one
more year of patent troll abuse. This is disappointing, because
comprehensive and effective patent troll abuse legislation is
needed. Demand letter reform is an important part of broad
reform, but it is also independently important.
On behalf of thousands of innovative App Developers
Alliance members, and in support of tens of thousands, if not
millions of coffee shops, restaurants, hotels, printers retail
stores, banks, credit unions, advertising and marketing
agencies, grocery stores, home builders, realtors, and their
main street patent coalition, I urge you to quickly legislate
standards for a new and growing strain of garden-variety fraud,
abusive patent demand letters.
Thank you for your leadership on this important issue. We
look forward to working with you to improve and enact this
bill.
Mr. Terry. Thank you, Mr. Potter.
[The prepared statement of Mr. Potter follows:]
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Mr. Terry. Mr. Rogers, you are recognized for 5 minutes.
STATEMENT OF ALEX ROGERS
Mr. Rogers. Chairman Terry, Congressman McNerney, and
members of the subcommittee, thank you for the opportunity to
appear today to discuss patent demand letters. My name is Alex
Rogers, and I am senior vice president legal counsel for
Qualcomm. Qualcomm is a member of the Innovation Alliance, a
coalition of research and development-focused companies that
believe in the critical importance of maintaining a strong
patent system.
Qualcomm is a major innovator in the wireless
communications industry and the world's leading supplier of
chipsets than enable 3G and 4G devices. Qualcomm's founders are
the quintessential example of American inventors in the garage
who built one of the world's foremost technology companies.
Through ongoing investments in research and development and
broad licensing of our patented technologies, Qualcomm has
created thousands of well-paying jobs for U.S. workers and
helped foster a thriving mobile industry.
It is worth noting that Qualcomm is not a plaintiff in any
pending patent litigation, but we are a defendant in numerous
patent infringement lawsuits, some of which were brought by so-
called patent assertion entities. However, I am not here to
criticize or defendant PAEs, but instead to address what we
believe should be the proper focus of any patent demand letter
legislation; namely, targeting abusive demand letter activities
without unintentionally damaging important patent rights.
Notice letters play an important role in the patent system,
both for patent holders and accused infringers. Patent law
encourages and sometimes requires patent holders to take
reasonable steps to notify others of possible infringement.
Meaningful patent protection, including the ability to provide
notice, is a key factor for companies like Qualcomm in deciding
whether to invest in new products and technologies.
Qualcomm appreciates the committee's interest in curtailing
abusive demand letter activities; at the same time, we urge the
committee to be cautious so as not to inadvertently hinder
legitimate patent enforcement practices. A demand letter law
that makes patent notification or enforcement too burdensome,
too costly or too risky may deter appropriate notice activity
and undermine incentives to innovate.
As the committee proceeds with this bill, we believe the
following guiding principles will help strike the appropriate
balance: First, the bill should clarify rather than expand the
FTC's existing authority under Section 5 to address abusive
demand letters; second, the bill should be limited to
situations in which the sender has engaged in a pattern or
practice of mailing bad-faith demand letters to consumers or
end users.
The pattern or practice requirement appropriately targets
the mass mailing of deceptive demand letters and is consistent
with the FTC's Section 5 authority. And explicit bad-faith
requirement is necessary to protect patent holders' First
Amendment rights. It also avoids punishing patent holders for
good-faith conduct. Limiting the bill to communications sent to
consumers and end users protects those most vulnerable to
abusive demand letters while reducing the risk that the FTC
will be drawn into business-to-business disputes.
Third, the bill should clearly describe the conduct that
would be considered unfair and deceptive and not impose overly-
burdensome disclosure requirements.
Fourth, the bill should preempt State demand letter laws.
Although State enforcement may be appropriate in certain
circumstances, it would be extremely burdensome to subject
patent owners to disparate and overbroad State demand letter
requirements.
Keeping these principles in mind, the draft bill has a
number of strengths. For example, the bill focuses on those
engaged in the pattern or practice of sending unfair and
deceptive demand letters to consumers and end users. The bill
sets forth reasonable disclosure requirements and specifically
describes the conduct that would be considered unfair and
deceptive, and the bill preempts State demand letter laws. We
urge the committee to retain these requirements and limitations
in the bill.
On the other hand, there are provisions of the discussion
draft that require further refinement. For example, the
definition of systems integrators is overbroad. Additionally,
the discussion draft would cover not only statements made in
demand letters but things implied by them. This language could
create too much uncertainty with respect to compliance and
enforcement.
Qualcomm looks forward to working with the committee in its
efforts to achieve a balanced and appropriately tailored bill.
Thank you for allowing me to testify today, and I look forward
to answering your questions.
Mr. Terry. Thank you.
[The prepared statement of Mr. Rogers follows:]
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Mr. Terry. And that concludes the testimony, and we will
enter the questions from this panel up here.
And I want to start with you, Mr. Rogers. I guess, last to
speak, first to answer questions. You testified that the
concept of bad faith is, ``necessary to capture the
requirements of current case law.'' Can you please elaborate a
bit on that comment?
Mr. Rogers. Well, again, it is appropriate in light of what
we are trying to target here, and that is bad-faith, abusive
behavior, and we want to, as Mr. Chairman said, thread the
needle. We want to avoid deterring good-faith patent assertion.
The bad-faith requirement also, we believe, is necessary for
this bill to survive the challenges that Professor Mossoff has
identified. We think it is important and necessary in order to
make the bill appropriate and viable under the First Amendment
and under the Noerr-Pennington doctrine that Professor Mossoff
identified.
Mr. Terry. Thank you.
Ms. Morgan, in that same respect, you indicated during your
testimony that bad faith is problematic and should be taken
out. Would that make this law of strict liability such that
even if a person innocently misstates something in a letter or
a series of letters that they could, in theory, be civilly--
that they could be liable for civil penalties?
Ms. Morgan. I am not saying that you need to eliminate bad
faith entirely. I think you need to have some sort of attribute
with regards to Sections 2(a)1, 2 and 3 because--I am sorry.
Mr. Terry. That is all right.
Ms. Morgan. I am not used to testifying here, needless to
say.
Mr. Terry. We are just talking here, don't worry. There is
no audience.
Ms. Morgan. Right. So I do think that you need something
comparable to your bad-faith requirement or definition, but I
think the problem is with the definition that you have here,
and that is that it requires knowledge or that people
effectively know and you can attribute them to having
knowledge.
And both knowledge and falsity, because it is entirely
possible that these letters will be particularly going forward,
not exactly false, but they may be misleading and deceptive.
And so you want to be careful that you don't eliminate
enforcement when you don't have a false statement or when you
cannot prove that the sender had knowledge.
That also relates to, I think, the benefit of having a
catch-all clause. I think that if you just list, enumerate
things that will violate the Act then you are going to
eliminate the possibility of using the Act going forward,
because the patent, what people have been calling the patent
trolls, those who are sending fraudulent letters at this point
in time will change their behavior. And so you need the courts
and the FTC and the States to be able to enforce even when they
do change their behavior if it is essentially the same kind of
deceptive behavior.
Mr. Terry. OK. Appreciate that.
So Ms. Greisman, I appreciate, again, all of your effort
and we will continue to work together on this. You mentioned
under Section 5 that you can currently hold someone liable and
obtain an injunction against conduct that wasn't intentional,
but is deemed unfair and deceptive. And so if we don't include
the scienter requirement in this bill, does that mean that you
could hold someone liable and obtain civil penalties for
conduct that wasn't intentional?
Ms. Greisman. No, it does not. Under the Federal Trade
Commission Act, in order for the Commission to obtain civil
penalties, there exists, by statute, a knowledge requirement
which is comparable, largely comparable to the knowledge
requirement in the bill which speaks of actual knowledge or
knowledge fairly implied. So the Commission already, under
current bylaw, has to show some level of knowledge in order to
obtain civil penalties. Separate from that, as you note, in
order to obtain an injunction or other equitable relief, the
Commission does not have to show any knowledge.
Mr. Terry. OK. I appreciate that.
I am going to yield back my time and recognize the
gentleman from Maryland who is the acting ranking.
Mr. Sarbanes. Acting ranking. Thank you, Mr. Chairman. I
appreciate the opportunity to ask them some questions, and we
don't have a lot of time here so let me get right to some of
the provisions in the bill because we want to get some of your
answers on the record.
Ms. Morgan, your testimony is particularly important
because you are, you know, at the State level trying to apply
these enforcement opportunities and seek the appropriate
remedies, so we want to make sure that in the drafting the bill
we don't, in some way, constrain your ability to do that.
You expressed some concern that Section 4(b)1 requires
State attorneys general to show actual consumer harm before
they bring a case under the bill. And I was curious if that is
a requirement that is consistent with typical consumer
protection causes of action?
Ms. Morgan. No, it is not. And there are two parts of that
section that are unlike, at least the Vermont statute, and I
believe in many other statutes. First of all, we don't have to
act as parens patriae. We come in as the State. We are not
standing in the shoes of the consumers.
And similarly, your bill here requires that we prove that a
consumer or an end user has been adversely affected. And what
that is going to do is to prevent us from coming in and
stopping patent trolling when we first hear of it, if the
person who received the letter has not been adversely affected.
If they come to us immediately and say look at this letter, can
you do something about it, can you stop it from going to other
Vermont companies or nonprofits, we wouldn't be able to under
this provision. So we would want to come in under our Consumer
Protection Act in that case.
Mr. Sarbanes. It takes away your ability to be sort of
preemptive in the way you are doing some of the enforcement, it
sounds like.
The draft also limits remedies available to State attorneys
general to injunction and compensatory damages on behalf of
recipients who suffered actual harm. And I am wondering, would
that limitation of remedies affect your office's likelihood of
bringing claims under this statute?
Ms. Morgan. I think that it would. Under our Consumer
Protection Act and UDAP laws in other states, we have the
ability to get penalties and the ability to get attorneys' fees
and costs, and that is a very important deterrent to the
companies that are issuing these letters.
Mr. Sarbanes. Thank you. Also, I would like to note that a
recipient under this bill is considered not to have a, quote,
established business relationship with the sender, end quote.
Are there problems with the way that this language could be
interpreted; and if so, how would it affect your office or
agency's ability to enforce the law?
Ms. Morgan. There are problems, and thank you for asking
that. Because the definition of sender does not include the
fraudulent patent demand--people who are sending fraudulent
demand letters. So the definition of sender is really
undermining your statute here. There is a violation only if
there is a recipient, and recipient has to have a relationship
with a sender, at least arguably that is the case. And so,
again, we would get into a dispute in court about whether or
not this is an actual sender or not under your statute. And
frankly, the more you can solve the problems before we get to
court, the better off we will all be and the more likely we
will bring an----
Mr. Sarbanes. So that is definitely another potential
constraint.
Mr. Davis, you stated that SPAN would have, I think you
said, grave concerns about legislation in this area that did
not expressly enable the FTC to reach other unfair or deceptive
practices that patent trolls may develop in the future, not
explicitly included in the Section 2 of the draft. Can you
explain that a little bit more?
Mr. Davis. Yes.
Mr. Sarbanes. Thank you.
Mr. Davis. This relates to the application to the Noerr-
Pennington doctrine. There is some, I think, misconceptions
about what Noerr-Pennington is. It is a court-created doctrine
of statutory interpretation that applies when you have a broad,
a statute of broad application like the antitrust laws as
Professor Mossoff mentioned, or potentially Section 5 of the
FTC Act.
What happens in that case when someone goes after what
might be considered petitioning behavior, under these broad
statutes, the court will look and ask whether Congress intended
that statute to deal with that type of petitioning behavior. If
that petitioning behavior isn't specifically mentioned, then
the court will read that out of the statute. So even if the
broad language of the statute covers that particular conduct,
if it is petitioning behavior, it won't be read as covering it.
Mr. Sarbanes. OK.
Mr. Davis. The courts have actually been split on whether
demand letters are petitioning behavior, but seems like there
is a movement towards finding that demand letters are
petitioning behavior. So there is a concern that if Congress
doesn't write this law and include a broad language, a catch-
all provision, that the courts will read the statute as
limiting the FTC's authority to what is specifically mentioned
in the bill under Noerr-Pennington.
Mr. Sarbanes. Thank you very much. Yield back.
Mr. Terry. Thank you. Gentleman from Mississippi is
recognized for 5 minutes.
Mr. Harper. Thank you, Mr. Chairman.
Mr. Davis, you expressed concern that while you supported a
threshold, the phrase ``pattern or practice'' could create a
loophole that could easily be evaded by patent trolls. You
know, we don't want that either. Can you give us an example of
how it could be evaded?
Mr. Davis. Thank you. We actually support the use of
pattern and practices as a threshold to the statute. It
prevents the use of the statute--or the bill, I am sorry, from
being used against legitimate patent holders and we agree with
these in that circumstance. It is, however, a threshold. It's
threshold language for all of the substantive provisions in the
Act, and we are concerned if the definition of the term is too
restrictive, that it will limit the application of the bill
unduly.
Mr. Harper. All right. Ms. Greisman, in determining what a
pattern or practice looks like, is there any existing law or
rule that on which you could rely, or would rely?
Ms. Greisman. I am not aware of any statute or rule
enforced by the FTC where that kind of language actually
constrains the ability of the agency to act, though that kind
of language does appear in private causes of action and I think
perhaps some laws enforced by the States.
Where the constraint is is the Commission is authorized by
law only to act in the public interest. What that means is it
does not act where there are purely private disputes or
isolated incidents, so there has to be something that is
affecting the marketplace in a significant enough manner to
rise to the level of warranting Federal action.
Mr. Harper. OK. All right. Well, Mr. Davis, hearing Ms.
Greisman's interpretation of the phrase, do you still have
concerns about the phrase?
Mr. Davis. I don't. I think, I agree with Ms. Greisman's
discussion. I think that there is still the same concern given
the absence of the use of that phrase.
Mr. Harper. OK.
Mr. Davis. But, again, we support use of pattern or
practice, assuming that the definition works.
Mr. Harper. Ms. Greisman, if I could ask you, Mr. Rogers
testified that private disputes and negotiations, presumably
between large, sophisticated companies, do not need to be
regulated. Are there any limiting principles of FTC law rules
or enforcement guidance that would preclude the FTC intervening
in actions between two such companies?
Ms. Greisman. I respectfully go back to my prior comment
that the Commission is required to act only in the public
interest, and it would not be, in my mind, in the public
interest to intervene in what I consider purely private
disputes or isolated incidents that do not have a significant
impact on the market.
Mr. Harper. All right. Let me ask you this: The standard in
the draft for defining an unfair or deceptive act or practice
is to engage in a pattern or practice of sending letters in bad
faith that are false or deceptive. The FTC enforces violations
of other rules such as we have discussed, Fair Credit Reporting
Act, that permits civil penalties for a knowing violation that
constitutes a pattern or practice. Have there been any
difficulties meeting that standard in FTC enforcement cases of
FCRA, and is there any reason why this standard could cause
problems in that context?
Ms. Greisman. I am not aware of any problems in the Fair
Credit Reporting Act context, and I would not anticipate at
this point any in this context.
Mr. Harper. All right. Mr. Davis, if I could come back to
you on the issue of rebuttable presumption.
Mr. Davis. Yes.
Mr. Harper. You expressed concern that the rebuttable
presumption will render this bill less likely to be enforced. A
sender of one of these letters can only avail themselves to the
rebuttable presumption if they don't engage in any of the
prohibitive behavior of subsection A, paragraphs 1 through 3,
and they make good faith to disclose what is required under
subsection A, paragraph 4.
In other words, if they don't engage in any of the bad
behavior, they can't be held liable for a technical violation
because the FTC thinks that they didn't do a good enough job
with the disclosures. Why would that hinder enforcement against
people who made purposely false statements or people who make
purposely false statements in conjunction with omissions?
Mr. Davis. Well, I agree, Congressman, that the rebuttable
presumption only applies to the transparency provisions. But
those transparency provisions are very important. The principal
problem that we have, that our members have with patent trolls
is how expensive it is to deal with those demand letters. That
is the force behind the patent troll demand letters.
And the transparency provisions are very important in
helping us lower the cost of dealing with those demand letters.
The information that you would use to figure out whether there
is a good faith effort to come up with the information needed
to put in the demand letter relating to how the patent is being
infringed by the product or service that the recipient has is
in the possession of the sender of the letter.
Mr. Harper. Got you. OK.
Mr. Davis. And as a result, it seems more appropriate for
this to be a--rather than a rebuttable presumption, to be an
affirmative defense, something that that person sent, no matter
what proof.
Mr. Harper. Thank you, Mr. Davis. And I am past my time. I
yield back, Mr. Chairman.
Mr. Terry. Yes. Thank you. And recognize the gentleman from
California.
Mr. McNerney. Thank you, Mr. Chairman. And I thank the
witnesses this morning. You know, no piece of legislation is
perfect. We are not talking mathematics here. We are taking
English, and eventually we have to vote on these things, so I
would like to know from each one of you, would you support this
if you were a member of Congress and it was up for final vote,
starting with Ms. Greisman, yea or nay.
Ms. Greisman. That is a tough question.
Mr. McNerney. We have to face these tough questions once in
awhile.
Ms. Greisman. I think that what the bill does is it
provides the Commission with an additional tool that it does
not currently have, which is civil penalty authority, and I
think, on balance, that is positive.
Mr. McNerney. OK. That is a yea then. Thank you. Ms.
Morgan.
Ms. Morgan. I appreciate that this is a positive step
forward, but I think there are too many problems with it as it
is and so that it will not be effective in the way that you
would like it to be effective.
Mr. McNerney. So nay. Professor.
Mr. Mossoff. I recognize that it is very important not to
let the perfect be the enemy of the good, which is always a
danger to academics face, and I think the preemption provisions
and the prohibitions on false and misleading statements in
section 2 are excellent and would do much to address the
identified problem with the bad actors, but I would still have
constitutional reservations about the mandatory disclosures,
and so with that, those reservations, I would probably vote no.
Mr. McNerney. Thank you. Two noes, one yes so far.
Mr. Davis. It wasn't the question you asked, but with the
amendments that we proposed, we would be in favor of it. As I
said in the testimony, the systems integrator definition is a
gating--is a gating issue for us.
Mr. McNerney. So yea. Yes, Mr. Potter.
Mr. Potter. As I said to the chairman when I met with him
yesterday, if the door is locked and there are no meal breaks
and no bathroom breaks, we can get this to a place where it is
a really good bill. In fact, it will be a great bill, but at
this point, with the coverage not including substantial numbers
of our members who receive, regularly receive demand letters
and have been sued and put out of business by trolls, we
couldn't support this bill as written, but we look forward to
that door is locked and no meal breaks meeting.
Mr. McNerney. Thank you.
Mr. Rogers. I think there is commonality on the definition
of the recipients. The system integrator language has--is not
broad enough in certain respects, according to my colleagues,
and it is also broad in other respects. It would sweep in very
sophisticated large manufacturing companies like cell phone
manufacturers and computer manufacturers, and even car
companies that are essentially system integrators. Ford would
be a system integrator under this, and I think that is
unintended. But I think that if we can work on the definition
of ``recipients,'' this is a very good, very well-balanced bill
that threads that needle between trying to target abuse by bad
actors and trying to protect good faith rights activities of
patent holders.
Mr. McNerney. So is that a yea or a nay?
Mr. Rogers. That is a yea with work on the definition of
``recipients.''
Mr. McNerney. Very good. Professor, do you think it is
possible to thread this needle?
Mr. Mossoff. With----
Mr. McNerney. To protect patent holders and yet to protect
small businesses?
Mr. Mossoff. Yes, I think it is completely possible to
thread the needle. And in fact, I think the provisions of
section 2 that address what reflects the real concerns, which
is the misleading and false and deceptive statements in letters
that are being sent out to unsophisticated individuals and
small businesses would be properly addressed by that, and in
fact, those prohibitions are important, too, because they bring
themselves--they bring the statute there for within the
exceptions to both the Noerr-Pennington Doctrine under the sham
litigation exception as well as the predicate requirement under
the First Amendment that there is--under First Amendment
analysis that there is no protection for false or misleading or
deceptive statements.
Mr. McNerney. Would it be possible to limit the number of
letters that a patent assertion entity could send out? Would it
be possible to say you can only send out 10 letters or 100
letters or--by the Constitution?
Mr. Mossoff. I don't think there is anything in the
Constitution that would say you could limit or permit the
letters. I do think that as an underlying policy matter,
though, it would be very difficult to identify what would be
the appropriate number or amount because we just don't know on
a going forward basis how new innovative technology would be
deployed in the marketplace and potentially used or exploited
by legitimate users or infringers. And the whole purpose of the
patent system is to, in fact, promote and bring into the hands
of consumers that new innovative technology, and we need to
make sure that there is this appropriate legal protections
provided to the creators of those technologies when they come
up with them.
Mr. McNerney. OK. Thank you.
Mr. Terry. Thank you. The gentlelady from Tennessee is
recognized.
Mrs. Blackburn. Thank you, Mr. Chairman, and I want to
thank each of you for your time and for your patience and
working with us through this. I know you are hearing a lot of
the section 3, section 5 conversations, and our concerns there.
So, Ms. Greisman, let me come to you. Mr. Davis recommended a
language change for you-all, that the bill include language to
clarify this legislation is not intended to foreclose the FTC
section 5 enforcement authority to pursue any unfair deceptive
acts or practices with respect to patent demand letters not
otherwise expressly listed in the legislation.
So, I am asking you, the savings clause in section 3(c) was
meant to accomplish precisely that, so are you concerned--do
you have concerns about the language and whether or not there
is adequate protection for the existing section 5 authority?
Ms. Greisman. Thank you. I appreciate the question. I do
think the savings clause as drafted is consistent with other
savings clause, and it most likely is adequate to the task.
Mrs. Blackburn. You do. OK. Mr. Potter, let me come back to
you, if I can. You stated that it is important this bill not,
and I am quoting you, limit the Federal Trade Commission's
authority to enforce against deceptive and unfair practices in
any way whatsoever. But the bill contains an explicit savings
clause ensuring that the FTC can still pursue action against
trolls under the section 5 authority.
So, are you concerned that the savings clause is not
sufficient to preserve the FTC's enforcement authority.
Mr. Potter. Congresswoman, I made an executive decision in
between my written testimony and my oral testimony not to
include that point because I am deferring to the Federal Trade
Commission on the matter of the savings clause that affects
their authority.
Mrs. Blackburn. So you are going to work on this?
Mr. Potter. I am prepared to work on this.
Mrs. Blackburn. OK. That sounds great. Ms. Morgan, you are
getting a workout today, aren't you? And you have expressed
some concern on the preemption provision, that it removes your
ability to protect consumers under your laws of general
applicability. The intent was to create a single uniform law
with respect to patent demand letters but not to remove
existing consumer protection angles. Can you describe the
language that causes you concern in section 4(a)(2) or provide
the committee in a short period of time. You can do this--we
are short on time today. You can submit this in writing if you
would like.
Give us what you think would be better alternative
language, and you suggest clarifying that a clause of action
brought under this Act would not arise under, let's see, 28
U.S.C 1338, and I would like for you to explain the effect of
this. And you can do all of this in writing because we are
short on time, and I want to come to Ms. Greisman for one more
footnote 6 of your testimony states that the FTC is prepared to
use its competition authority in this context, if warranted.
So, I would like for you to expand on that, and I would also
like for you to give us what a hypothetical would----
Ms. Greisman. Any competition issue, and we obviously do
have competition authority under section 5 of the FTC Act.
Mrs. Blackburn. Right.
Ms. Greisman. And our competition authority does extend to
transfers of intellectual property----
Mrs. Blackburn. OK.
Ms. Greisman [continuing]. Issues that might relate to
collusive behavior, monopolization or attempts to monopoly, but
the competition inquiry is so highly fact-specific, I really
would be hard pressed to provide----
Mrs. Blackburn. OK.
Ms. Greisman [continuing]. A hypo at this point.
Mrs. Blackburn. All right. I will take that as your answer.
Mr. Chairman, in the interest of time and votes coming up, I
yield back.
Mr. Terry. Thank you. And recognize the gentleman from
Vermont.
Mr. Welch. Thank you very much, Mr. Chairman. You know, is
it within your power to lock this great panel into a room with
no bathroom breaks or window in order to come out with that
bill we want.
Mr. Terry. I don't know. We should write a bill.
Mr. Welch. Well, I want to thank the panel. I especially
want to recognize Wendy Morgan who has been a great member of
the Attorney General's Office in the State of Vermont for
years, and of course, Vermont has been a leader on this. A lot
of our small businesses are just getting hammered, and we have
got to do something, bottom line. We just have to do something.
It is outrageous when you are a MyWebGrocer or another small
company and you are getting these rip-off patent letters.
We had a nonprofit that some parents with disabled kids
started, and they scraped together money, bake sales,
everything, and they get these rip-off patent letters, so it is
a problem. But the fact it is a problem, we don't want to come
up with a solution that creates other problems, we get that,
but the closed room with no windows, that is no a bad idea
because we do have to solve this, and I appreciate your
leadership on this, Mr. Chairman.
But let me ask Mr. Rogers and Mr. Potter. You know, the old
tech companies that are reputable have valuable patents and
they have got to protect them. We get that. And new tech
companies are oftentimes on the receiving end of some of these
patent trolls, so there is legitimate interest on both sides,
and it is legitimate, I understand, for you both to be looking
at this from the perspective of the folks you represent. And it
is a lot of the small guys in Vermont that are advocating this
so vigorously, but we have got IBM, which is the biggest engine
of our economy in the state, very important.
Is there a way to draft this that you both are satisfied?
Mr. Rogers. So, Congressman, I would be happy to answer
that first. Absolutely.
Mr. Welch. Well, I am going ask quite seriously, the
suggestion, you can help us on this because I think this panel
here wants to do something that solves the problem but doesn't
create another one, and you have a collective knowledge and
experience, you know what the reality is, but my request of you
is that you really do spend some time trying to work out what
those differences are. We are not going to do it right here,
but I don't know, Mr. Chairman, I mean, that would be helpful
to us, wouldn't it, because----
Mr. Terry. Yes, it would.
Mr. Welch [continuing]. Our goal is to get a bill that
works.
And let me ask, Professor, you want as little intervention
as possible, and here is my question. If there is little
intervention as possible means the status quo continues and our
nonprofits and our small emerging tech companies are getting
hammered and harassed and bled to death financially, that is
not acceptable, and I wouldn't think it would be for you, so
would you see there to be a need to provide some protection
against the abuse of the process to protect those folks?
Mr. Mossoff. Oh, certainly, and I hope I made it clear that
I believe that the prohibitions on sending false and deceptive
and misleading letters are acceptable and appropriate, and as a
matter of fact, do address, I think, the concerns that had been
raised by some of the bad actors in the patent system. I think
that the important principle, though, that we always have to
remember is that costs are symmetrical, that--and I think you
have been touching on this, that--to create systemic changes
that address bad actors creates burdens and costs for good
actors as well.
Mr. Welch. Yes, but that is--that is a drafting issue. I
mean, to say that, basically, if we say that solving one
problem is going to cause another, to me, there are two
outcomes. One is you don't do anything, so then you keep a bad
situation continuing for innocent people, or if you fix it, you
have really got to thread that needle and do the hard work to
find a way where the good actors are protected and the bad
actors are hammered.
Mr. Mossoff. Right.
Mr. Welch. Now, Ms. Morgan, on preemption. You know,
Vermont, Mr. Chairman, has a very active consumer protection
bureau and it has helped small businesses and it has helped a
lot of our consumers, so it is important for us in Vermont to
maintain that ability for our Attorney General's Office to
protect our citizens and our small businesses, and the
preemption issue is a big one, and I just want to give you a
chance to speak a little bit more about that, Ms. Morgan.
Mr. Terry. In 19 seconds. No pressure.
Ms. Morgan. Preemption, preemption, preemption, don't do
it.
Mr. Terry. Got it.
Ms. Morgan. The States want to protect the small businesses
and the nonprofits that are, as you say, getting hammered, and
we can do that under our Consumer Protection Act if you don't
in some way interfere with that, so my initial testimony was
around being sure that you not interfere with it.
And furthermore, if you want us to use this statute, it has
to be in a form that is useful and doesn't create a lot of risk
of litigation around peripheral issues, so I am all in favor of
locking us in a room. I think that is a good idea, and as you,
Representative Welch know, I spend a fair amount of time locked
in rooms in the Statehouse or in the cafeteria trying to
resolve things in precisely that way, and it is an excellent
way to go.
Mr. Terry. Thank you.
Mr. Welch. I yield back.
Mr. Potter. Mr. Chairman.
Mr. Terry. Mr. Kinzinger from Illinois is recognized for 5
minutes.
Mr. Potter. Mr. Chairman, may I take one moment to answer
the question that was asked of me?
Mr. Terry. Sorry.
Mr. Potter. OK.
Mr. Kinzinger. Thank you, Mr. Chairman, and again, thank
you-all for being here, and I know it is a very important issue
and one that has been rightfully getting a lot more of
attention lately.
Mr. Rogers, I am going to start with you, and actually, I
may basically focus exclusively on you. Today we are trying to
tackle the dangers of abusive demand letters. I have heard from
restaurant owners in my district that have received these
demand letters because they are using credit card machines. So,
there is a problem that needs to be addressed. I think that is
very obvious. With that said, in your business, what are some
legitimate purposes that you think demand letters can serve?
Mr. Rogers. So, to start with, Congressman, demand letters
can avoid litigation. We receive demand letters all the time,
and it puts a party on notice that there is a property rights
issue that exists with respect to their products, and you can
actually deal with a demand letter in a variety of different
ways. If you pay attention to it, you may be able to say you
are wrong, it doesn't affect our product, and let me explain
why. You may also decide to enter into a license, and we have
done both, and sometimes it results in litigation, and
litigation has to move forward.
But the demand letters are a necessary precursor toward
resolving property rights, and in the ongoing litigation, if it
actually does occur, demand letters actually set markers that
matter for purposes of either establishing liability or
establishing a right to certain damages. So, demand letter and
notification is integral to the patent system that we have.
Mr. Kinzinger. And we have heard from a number of
stakeholders that are requesting a general catch-all
prohibition on fraudulent statements. You testified that
clarity is necessary in this bill to prevent misinterpretation
and to put individuals on notice of what conduct is unlawful.
Would tying a catch-all to the concept of fraudulent statements
made in bad faith as defined in this bill provide acceptable
notice?
Mr. Rogers. I think the problem with the catch-all is that,
that it tips the balance between targeting bad faith and bad
actors and trying to avoid harming good faith patent holders.
It tips the balance too far in the wrong direction. If you have
a catch-all, it creates a chilling effect with respect to the
companies that want to assert their patent rights in good
faith, particularly smaller companies. We are going to be very
concerned about what is involved and what that means, and they
may feel that they are going to get trapped, and it creates a
chilling effect towards asserting their patent rights to begin
with, and that, in turn, then creates and tends to undermine
their incentives to innovate and get patents in the first
instance. So I'm very concerned about a catch-all.
Mr. Kinzinger. So, I have another question, but actually,
what I am going to do because I am in a good mood and it is our
Friday, kind of, Mr. Potter, if you wanted to respond to the
question that was asked of you previous, I will give you little
bit of time, because you seem like you were just sitting there
wanting to respond, so go ahead.
Mr. Potter. Thank you very much, Congressman. Let me say in
his absence to Congressman Welch and to the subcommittee, I
think the answer is yes, that we can reach a resolution, but
the resolution must have some basic information required in
demand letters, and I don't think Mr. Rogers is even disputing
that. And so the professorial First Amendment argument, which
has been rejected by courts in the Fair Credit Debt Practices
Act--Collection Practices Act, is specious and just needs to be
pushed aside, but beyond that, on these practical issues of
whether we are protecting billion dollar companies or billion
dollar market companies or five-person companies, we can figure
out a way to address that issue.
Mr. Kinzinger. Thank you. Mr. Chairman, I yield back.
Mr. Terry. Thank you. At this time recognize the vice
chairman, Mr. Lance.
Mr. Lance. Thank you very much. Good morning to the panel.
Let me say it is my view that Congress are the last people on
earth who should suggest that you should be locked in a room to
solve the problems of the United States.
To you, Mr. Rogers, I have no doubt that there are
frivolous demand letters that are sent, and we should do all
that we can to crack down on this abuse, from my perspective,
we also must be careful lest we unintentionally hurt legitimate
investors. There is, of course, no patent police, and patent
rights are enforced by individuals who hold those patents. My
question to you is this, what harm might be done to the economy
if we pass legislation that hampers innovators from enforcing
their valid patent rights?
Mr. Rogers. So, the harm to an economy that has
transitioned from being primarily a manufacturing economy to an
innovation economy----
Mr. Lance. Yes.
Mr. Rogers [continuing]. Is very, very significant.
Mr. Lance. Yes.
Mr. Rogers. And so threading the needle here is critical,
very important, and I think that this step, this bill is very
well-balanced. As I said before, we had some things to work on.
I would urge you not to do things that undermine small
inventors. And just touching on Mr. Potter's last comment, if
we ladle into this bill onerous disclosure requirements
relating to identifying every claim and every detail of every
infringement theory, a prolific small inventor who has a
portfolio of 100 or a couple of 100 patents or even scores of
patents, will find that to be so daunting and so expensive and
so lawyer-intensive, that he is going to wonder why he got his
patents to begin with. We have to be very careful, and I think
this committee has done a very good job so far of being very
careful.
Mr. Lance. Thank you. Thank you very much, Mr. Rogers.
Professor Mossoff, would any of the required disclosure
elements in the draft, standing on their own, pass First
Amendment analysis? Is this a way to cure--are there any ways
to cure the flaw, or are there any disclosure elements that we
could require to test such an analysis from your perspective,
sir?
Mr. Mossoff. Thank you, Congressman, and it is an excellent
question. And because of the structure of intermediate test
scrutiny sometimes given and the multi-factor test that they
developed under the Central Hudson decision, it is difficult to
answer the question in the abstract.
Mr. Lance. Yes.
Mr. Mossoff. So, any one particular disclosure requirement,
probably in isolation, it would probably be upheld as
legitimate. The difficulty and concern, of course, is a
slippery slope.
Mr. Lance. Of course.
Mr. Mossoff. And what you see in the Supreme Court's
precedents going back 30 years in Bolger and Riley and Zauderer
and Central Hudson, going all the way back to the Virginia
Board of Pharmacies where the Supreme Court has repeatedly held
that even seemingly innocuous disclosure requirements
addressing simple facts have been struck--have been struck down
as being unconstitutionally compelled speech.
Mr. Lance. Because of--in part, because of the slippery
slope.
Mr. Mossoff. Yes, in part because of the slippery slope and
that even in the commercial context, yes, speech has economic
motivation, but nonetheless, it embraces noneconomic
communications, yes, were fact-based but nevertheless
themselves are not commercial standing.
Mr. Lance. And it has been a long time since law school,
and Virginia Pharmacy was quite awhile ago, wasn't it?
Mr. Mossoff. That was back in the early 1970s, but coming
all the way up to Sorrell, 2012, which involved--the Supreme
Court struck down the--a Vermont statute or requiring
disclosure of pharmaceutical records by prescribing physicians
as an unconstitutional compelled speech.
Mr. Lance. Thank you very much. I yield back the balance of
my time, Mr. Chairman.
Mr. Terry. Recognize the gentleman from Missouri, Mr. Long
for 5 minutes.
Mr. Long. Thank you, Mr. Chairman. And Mr. Davis, you
qualified your acceptance of the bad faith concept so long as
it is not inconsistent with FTC's existing standards for
unfairness and deception. Does it matter that the definition of
bad faith in this bill was borrowed from the FTC Act and it is
something the FTC must show in order to obtain civil penalties,
which is a remedy for the violation to outline in this bill?
Mr. Davis. Thank you, Congressman. It does matter and it is
important. Our concern is that the language diverges slightly
from the language in section 5 of the FTC Act. There is at the
very end of the provision, so that the FTC Act relates to
actual knowledge or knowledge fairly implied on the basis of
objective circumstances that such act is unfair or deceptive;
whereas, this bill relates to actual knowledge or knowledge
fairly implied on the basis of objective circumstances et
cetera because such representations were false. And we are
concerned that the--that the bad faith definition implying
falsity rather than deceptive would allow patent trolls to slip
in literally true but deceptive representations in their demand
letters that the FTC would not be able to go after under the
current definition.
Mr. Long. OK. OK. Thank you. And Ms. Greisman, the first
thing I want ask you is how many different ways are there to
mispronounce your name?
Ms. Greisman. Infinite number.
Mr. Long. You probably heard them all, haven't you?
Ms. Greisman. I am sorry?
Mr. Long. I say you probably heard them all, haven't you,
all the different ways, but you indicated that the FTC is
familiar with the scienter requirement in the bad faith
definition and that you do not anticipate new obstacles in the
context of civil penalty cases which can arise under this Act.
How do you prove that someone has actual knowledge or knowledge
fairly implied?
Ms. Greisman. That can be proved in a variety of ways, and
I want to just pick----
Mr. Long. Can you pull your mic just a little bit closer?
Ms. Greisman. Sure. Sorry. That can be proved in a variety
of ways, and I just want to pick up on something that Mr. Davis
said. I agree with everything he said, and I did not think,
within the narrow context of civil penalties, our burden is
significantly different than it is otherwise by the requirement
to prove something is false because of the narrow prohibitions
in the statute, in the proposed bill itself. As a general
matter, I agree with him that it could be problematic.
Proving actual knowledge can be done any variety of ways.
It could be done through deposition testimony, through e-mails,
through written correspondence, and the same for knowledge--
knowledge fairly implied. It is a burden of proof that we are
quite familiar with.
Mr. Long. So you don't think it is going to be an issue?
Ms. Greisman. As a general matter, no, sir.
Mr. Long. OK. OK. Being that votes are called and we have
got other people to ask questions, Mr. Chairman, I yield back
the remainder of my time.
Mr. Terry. Thank you. Recognize the gentleman from Florida.
Mr. Bilirakis. Thank you. Thank you, Mr. Chairman, I
appreciate it very much. Question for the panel. American
universities are particularly important to the innovation of
the economy. I am sure you agree with that. Located in the
Tampa Bay area, the University of South Florida is a major
research institution that is a worldwide leader in producing
university patents and a national leader in producing spinoff
companies. Approximately 55 percent of all Federal funded
research is conducted by universities. I believe it is in the
taxpayers' interest for the research to be developed into
products or processes rather than to be underutilized, and I
think you probably agree with that, too. The discoveries made
at our universities can often be eventually commercialized, but
they are patented to protect the investment in development.
There have been concerns that some legislative proposals
may inadvertently define the universities as patent trolls. I
am confident that this legislation before us does not go that
far. With that understanding, will you please discuss how this
particular draft bill distinguishes between those who send out
large numbers of letters merely seeking payoffs and legitimate
large scale patent defenders like our university systems? And
we can start with Ms. Greisman, if she would like.
Ms. Greisman. I think it directly does in one way by
speaking in terms of pattern and practice. Because it is
enforced by the FTC Act, as I mentioned earlier, the FTC Act
can only act in the public interest, so that is another
constraint on what we could do vis--vis enforcing the law, the
proposed bill.
Ms. Morgan. And I would say the enumerated provisions----
Mr. Terry. Is your microphone on?
Ms. Morgan. I am sorry. Thank you. The enumerated
provisions are going to focus attention on the bad actors, not
the people who are legitimately enforcing their patent rights.
And the Vermont law that was enacted a year and a half ago
specifically addresses the university situation. This one does
not, but I think, in any event, the universities are not going
to be sending out the kinds of letters that are described here
in section 2.
And could I say one more thing about a comment that----
Mr. Bilirakis. Sure.
Ms. Morgan [continuing]. Mr. Mossoff made? He said that
there was a Vermont case that struck down compelled speech. It
was not compelled speech. It was, in fact, exactly the
opposite. It was speech--it was a provision that did not allow
certain accurate information, so it is not like what you are
dealing with here with deceptive information. It did not allow
accurate information to go to some people while it did to
others. It did not allow it to go to marketers as well. It
allowed it to go to universities, so I just wanted to clear
that up with regard to the Vermont case. Thank you.
Mr. Mossoff. In fact, thank you, Ms. Morgan, you preempted
my correction. I checked my notes because I was speaking
extemporaneously when I answered the question earlier to the
Congressman, but yes, it was a preemptive speech that it was
struck down. It was a commercial speech case, and so it is a
very significant case that indicates that commercial speech is
still given much greater scrutiny now than the user----
Mr. Terry. I understand.
Mr. Mossoff [continuing]. Used to receive.
Mr. Terry. Thank you.
Mr. Mossoff. I apologize for that misstatement earlier, but
to go back to the question that was presented to the panel. I
believe that the question is very well made, Mr. Congressman,
because universities, because they license and don't
manufacture, are accused of being patent trolls, and for
instance, University of Wisconsin, its tech transfer division,
WARF, is often listed as one of the ``Top 10 Patent Trolls'' in
lists that you see on the Internet for enforcing its legitimate
patent innovation from Wisconsin researchers against
infringers.
So I think this is a real concern and that universities and
individual inventors have been brought within the scope of this
pejorative term ``patent troll.'' And if you don't have
actually specified lists, what type of activity you are
prohibiting, you risk creating the types of damage to the
innovation economy that Mr. Rogers has detailed, I think, quite
well with respect to good inventors and original inventors,
because a lot of our original large, even large companies
today, like Google and Microsoft, Apple, and Hewlett Packard
started in garages and were individual inventors. In fact,
Google, they were university graduate students at Stanford when
they came up with their algorithm. They got a patent on it and
received venture capital funding.
Mr. Bilirakis. Thank you.
Mr. Davis. I agree with you that the bill does a good job
in avoiding putting universities into the same category as
patent trolls. The statute appropriately does a lot to limit
the application of the bill, does a lot to limit its
application to patent troll activities and not the legitimate--
not for legitimate enforcement behavior. There is a belt, there
is suspenders and something else holding up your pants. I mean,
there is pattern and practice limitation, there is the bad
faith limitation, and there is the user agent model that I
think under all those, the universities would probably not be
involved in this.
Mr. Potter. I agree that there are clear distinctions
between good actors and bad actors, but I don't want to leave
it unstated that universities do have the potential to send out
a pattern or practice of deceptive demand letters, and in those
contexts, let's remember that universities are taxpayer-funded,
patents are a gift or it is earned, but taxpayers are the
beneficiary through the government and the PTO of the patent,
and we should make sure that everybody is a good actor.
So, I appreciate that, as a general proposition,
universities are not in the business of patent trolling, but
that doesn't mean we should have clear distinctions if we are
defining what is good behavior and what is bad behavior.
Mr. Terry. The gentleman's time has expired. At this time,
I need to enter into a colloquy with the gentleman from Texas.
The time for the votes has gone to zero zero, but there are
still 288 of us that are not present. If you would like to take
over the chair and ask your questions, I would gladly allow
that.
Mr. Olson. I am happy to, sir. And I just have one
question. I have got five for the record and submit those guys,
thanks for your time.
Mr. Terry. All right. Go ahead.
Mr. Olson. My question may be from left field. I know being
a baseball fan from Houston, Texas, you got to think what does
he know about left field? There are no left fielders in pro-
ball for 3 years now.
My question to you, Mr. Potter, is there a role for the
State Bar Association to play in cases as the one you describe
when the attorney representing the troll declined to engage
making concert conversation about his communications?
Mr. Potter. The answer is maybe, but I can tell you that
every small company I have dealt with that has faced this
situation just wants to get out this mess and go back to work.
They don't want to be then hiring ethics lawyers to go bring
charges under the State Bar--in the State Bar Association.
Mr. Olson. Thank you. Again, I have five questions for the
record, four on threshold and one on the rebuttable
presumptions. I yield back the balance of my time.
Mr. Terry. Thank you. Succinct for a Texan.
Mr. Olson. I can go on longer.
Mr. Terry. But that does conclude our questions. As Mr.
Olson mentioned, we have the ability to submit written
questions to you, which I will ask of my colleagues that we
have them to our counsel on subcommittee by close of business
Wednesday, the 28th, and because we are kind of on a quick
timeline, if you would answer them within 10 days of receipt,
we would greatly appreciate that, but you are not going to be
locked into a room on the 11th day. You may be invited to
participate in some meetings, but then now for some wrap-up
business.
We have some letters for the record, the National
Association of Federal Credit Unions, National Association of
Realtors, Office of the Nebraska Attorney General, Main Street
Patent Coalition, and by the way, the Office of Nebraska
Attorney General John Bruning has his person sitting in the
audience today, lawyer Dave Lopez, so thank you for being here
as well.
So I ask unanimous consent to submit those four letters.
Hearing no objections, they will be part of the record. And
that, my friends, ends a rather great hearing, so thank you-all
for your participation.
[The information appears at the conclusion of the hearing.]
[Whereupon at 10:53 a.m., the subcommittee was adjourned.]
[Material submitted for inclusion in the record follows:]
Prepared statement of Hon. Fred Upton
I'd like to commend Chairman Terry for his continued work
on addressing the growing problem of patent trolls and their
practice of sending deceptive demand letters, extorting
thousands of dollars out of small businesses. We have heard
concerns from a range of businesses, from banks to homebuilders
to retailers, that patent trolls are a real threat to their
bottom line.
When we embarked upon this effort, it was clear that a
balanced and effective solution would require a deliberate
approach. On one hand, you have small businesses being
intimidated by what sound like legitimate claim letters and
deceived into paying large sums of money for licenses they
don't need. On the other, you have patent-intensive companies
and universities who send demand or licensing letters for
legitimate purposes every day.
The importance of intellectual property--and the rights of
inventors--was recognized in the earliest days of our country.
Article 1, Section 8 of our Constitution declares, ``Congress
shall have power.to promote the progress of science and useful
arts, by securing for limited times to authors and inventors
the exclusive right to their respective writings and
discoveries.'' The only way to protect one's rights is to put
others on notice of your invention. The remedy is up to the
patent holder--whether he or she demands an actor cease
infringing or pay compensation for the right to continue using
an invention.
We know that research and development is the lifeblood of
our leading economic sectors, and we don't want to tread on the
rights of legitimate companies to engage in legitimate
communications protecting their IP rights. We also don't want
to make protecting one's rights overly burdensome.
Concurrently, we don't want fraudsters to be able to bilk small
businesses out of thousands of dollars.
Striking that right balance is why we are here today. We
know that some of the concepts in this draft bill are not
universally embraced, and I hope that through our dialogue
today we can find a path forward. We need a solution that
enables rights holders to continue protecting their inventions
without overly burdensome regulation while stymying so-called
trolls from shaking down hardworking Americans for money to
which they have no claim.
And before I yield back, I'd like to take a moment to thank
longtime committee staff member Brian McCullough for his many
years of dedicated service. Brian began his tenure under
Chairman Bliley to work on securities issues, and he has served
us well ever since. Brian has been an important voice on some
the most important commerce-related issues to come before this
committee in the last several years. With his departure, we
truly lose a wealth of knowledge--from finance, to consumer
protection, to autos and the world of NHTSA--and I want to
thank him for his dedicated service and wish him well.
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