[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
                                     ______

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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

                              ----------                              
                                                                   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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