[Senate Hearing 113-204]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 113-204

 
 DEMAND LETTERS AND CONSUMER PROTECTION: EXAMINING DECEPTIVE PRACTICES 
                      BY PATENT ASSERTION ENTITIES 

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

                                HEARING

                               before the

   SUBCOMMITTEE ON CONSUMER PROTECTION, PRODUCT SAFETY, AND INSURANCE

                                 of the

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                               __________

                            NOVEMBER 7, 2013

                               __________

    Printed for the use of the Committee on Commerce, Science, and 
                             Transportation

                         U.S. GOVERNMENT PRINTING OFFICE 

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       SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

            JOHN D. ROCKEFELLER IV, West Virginia, Chairman
BARBARA BOXER, California            JOHN THUNE, South Dakota, Ranking
BILL NELSON, Florida                 ROGER F. WICKER, Mississippi
MARIA CANTWELL, Washington           ROY BLUNT, Missouri
MARK PRYOR, Arkansas                 MARCO RUBIO, Florida
CLAIRE McCASKILL, Missouri           KELLY AYOTTE, New Hampshire
AMY KLOBUCHAR, Minnesota             DEAN HELLER, Nevada
MARK WARNER, Virginia                DAN COATS, Indiana
MARK BEGICH, Alaska                  TIM SCOTT, South Carolina
RICHARD BLUMENTHAL, Connecticut      TED CRUZ, Texas
BRIAN SCHATZ, Hawaii                 DEB FISCHER, Nebraska
MARTIN HEINRICH, New Mexico          RON JOHNSON, Wisconsin
ED MARKEY, Massachusetts
CORY BOOKER, New Jersey
                    Ellen L. Doneski, Staff Director
                   James Reid, Deputy Staff Director
                     John Williams, General Counsel
              David Schwietert, Republican Staff Director
              Nick Rossi, Republican Deputy Staff Director
   Rebecca Seidel, Republican General Counsel and Chief Investigator
                                 ------                                

         SUBCOMMITTEE ON CONSUMER PROTECTION, PRODUCT SAFETY, 
                             AND INSURANCE

CLAIRE McCASKILL, Missouri,          DEAN HELLER, Nevada, Ranking 
    Chairman                             Member
BARBARA BOXER, California            ROY BLUNT, Missouri
MARK PRYOR, Arkansas                 KELLY AYOTTE, New Hampshire
AMY KLOBUCHAR, Minnesota             DAN COATS, Indiana
RICHARD BLUMENTHAL, Connecticut      TED CRUZ, Texas
BRIAN SCHATZ, Hawaii                 DEB FISCHER, Nebraska



                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on November 7, 2013.................................     1
Statement of Senator McCaskill...................................     1
Statement of Senator Heller......................................     3
Statement of Senator Klobuchar...................................    48
Statement of Senator Ayotte......................................    58

                               Witnesses

Hon. Jon Bruning, Attorney General, State of Nebraska............     4
    Prepared statement...........................................     6
Jon Potter, President, Application Developers Alliance...........    10
    Prepared statement...........................................    12
Mark Chandler, Senior Vice President, General Counsel, and Chief 
  Compliance Officer, Cisco Systems, Inc.........................    15
    Prepared statement...........................................    16
Julie P. Samuels, Senior Staff Attorney, Mark Cuban Chair to 
  Eliminate Stupid Patents, Electronic Frontier Foundation.......    20
    Prepared statement...........................................    22
Lary Sinewitz, Executive Vice President, BrandsMart USA on behalf 
  of the National Retail Federation..............................    28
    Prepared statement...........................................    30
Adam Mossoff, Professor of Law, George Mason University School of 
  Law and Senior Scholar, Center for the Protection of 
  Intellectual Property..........................................    34
    Prepared statement...........................................    35

                                Appendix

Response to written questions submitted to Hon. Jon Bruning by:
    Hon. Claire McCaskill........................................    63
    Hon. Richard Blumenthal......................................    64
Response to written questions submitted to Jon Potter by:
    Hon. Claire McCaskill........................................    65
    Hon. Richard Blumenthal......................................    66
Response to written questions submitted to Mark Chandler by:
    Hon. Claire McCaskill........................................    67
    Hon. Mark Pryor..............................................    68
    Hon. Richard Blumenthal......................................    69
Response to written questions submitted to Julie P. Samuels by:
    Hon. Claire McCaskill........................................    69
    Hon. Richard Blumenthal......................................    71
Response to written questions submitted to Lary Sinewitz by:
    Hon. Claire McCaskill........................................    72
    Hon. Richard Blumenthal......................................    73
Response to written questions submitted by Hon. Richard 
  Blumenthal to Adam Mossoff.....................................    74


                      DEMAND LETTERS AND CONSUMER
                   PROTECTION: EXAMINING DECEPTIVE
                 PRACTICES BY PATENT ASSERTION ENTITIES

                              ----------                              


                       THURSDAY, NOVEMBER 7, 2013

                               U.S. Senate,
      Subcommittee on Consumer Protection, Product 
                             Safety, and Insurance,
        Committee on Commerce, Science, and Transportation,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 10:04 a.m. in 
room SR-253, Russell Senate Office Building, Hon. Claire 
McCaskill, Chairman of the Subcommittee, presiding.

          OPENING STATEMENT OF HON. CLAIRE McCASKILL, 
                   U.S. SENATOR FROM MISSOURI

    Senator McCaskill. This hearing will come to order.
    We thank our witnesses for being here. And I thank Senator 
Heller for being a great working partner with me on this 
subcommittee.
    This morning we are examining a growing consumer protection 
concern within our patent system. In recent years, the growth 
of patent assertion entities--also known as PAEs or referred to 
by many as patent trolls--has led to an increase in patent 
litigation and spawned greater use of the so-called demand 
letters. Too often, this appears to be an unfair and deceptive 
practice that is harming everyday businesses, consumers, and 
startups.
    Patent trolls send out hundreds and, in some cases, 
thousands of demand letters to unsuspecting entities alleging 
patent infringement. These letters demand payment and threaten 
to sue if payment isn't made. The demand letters we are talking 
about often don't even contain the most basic information that 
would allow recipients to know which patents they have 
allegedly infringed or how. Many times, recipients can't even 
tell who is sending the letter in question, because patent 
trolls use multiple shell companies to hide their identities. 
Sometimes the patents in question aren't even valid or already 
covered by an existing license. But, of course, none of this is 
disclosed in these ``demand letters.''
    The result is that the recipients are left in the dark, 
unable to know whether they should settle or fight the claim. 
Even if the allegations are outrageous and untrue, companies 
often choose to cough up the money anyway because they worry 
that going to court would simply be too costly. Never mind 
that, despite their threats to the contrary, many patent trolls 
have no intention of bringing suit or no basis on which to do 
so.
    It's hard to distinguish the deceptive nature of this 
conduct from the many other scams that prey on Americans who do 
not have the resources or expertise to go on the offensive.
    By many accounts, deceptive demand letters seem to be a 
growing problem. By some estimates, patent trolls are sending 
well over a hundred thousand demand letters a year, impacting a 
wide swath of innovative startups and other small businesses. 
Making matters worse, patent trolls are increasingly seeing 
dollar signs in targeting small businesses that have nothing to 
do with the patent system, such as coffee shops and brick-and-
mortar retailers. These small businesses aren't in the patent 
business, and they don't have the expertise or resources to 
evaluate the claims in a demand letter, much less hire an army 
of lawyers for what could be protracted litigation.
    Sometimes the alleged patent infringement is a technology 
patent that they have purchased for their business like 
scanners or Wi-Fi routers, or that is already covered by a 
license from the manufacturer. As we will hear today from 
Cisco, one patent troll sent 13,000 demand letters to Cisco's 
customers for using one of its products.
    This is not just an issue facing technology companies. I 
have heard from businesses in Missouri and across the country, 
large and small, that are facing similar challenges. Most are 
reluctant to share their stories because of ongoing litigation, 
terms of settlement agreements, or fear of becoming a target 
for other patent trolls. But for many retailers, banks, credit 
unions, app developers, hotels, restaurants, cable companies, 
and broadcasters, dealing with demand letters has become an 
additional cost of doing business.
    The issue here is not about the right to assert one's 
patent. Let me repeat that. The issue here is not about the 
right to assert one's patent. It's not really even about the 
patent system. It's about the deceptive and unfair practice of 
threatening businesses and consumers based on often--unfounded 
claims for the sole purpose of bilking them. It's about scam 
artists preying on the vulnerable.
    I'm pleased that the Federal Trade Commission recently 
launched an in-depth investigation into the patent troll 
industry. And I would like to applaud the various State 
Attorneys General, including Attorney General Bruning, who is 
here today, for taking steps to protect their constituents 
against harmful demand letter tactics.
    At the same time, perhaps there is something Congress can 
do, too. It seems to me that demand letters should, at a very 
minimum--well, nothing like missing electronics.
    [Laughter.]
    Senator McCaskill. Apple, do you hear me?
    [Laughter.]
    Senator McCaskill. At the same time, perhaps there is 
something Congress can do. It seems to me that demand letters 
should, at a very minimum, include basic common sense 
disclosures: who, what, when, where, and why. In addition to 
learning more about the impact of demand letters, I hope to 
hear from our witnesses today whether these demand letters 
could use some transparency to better protect American 
consumers and businesses.
    Senator Heller.

                STATEMENT OF HON. DEAN HELLER, 
                    U.S. SENATOR FROM NEVADA

    Senator Heller. Well, I have my opening statement here on 
my BlackBerry.
    Senator McCaskill. Good luck.
    Senator Heller. I think I better switch to the----
    Senator McCaskill. I got to the last paragraph.
    Senator Heller. Yes.
    Chairwoman, thank you for having this hearing. I want to 
take just a minute to thank her for her work that she's done 
recently with the FAA. I noticed the gentleman sitting next to 
me, as we were landing, was playing Angry Birds. So, for your 
help and work in keeping those apps open----
    Senator McCaskill. Did you send him Claire's love that he 
gets to keep playing Angry Birds as he lands?
    Senator Heller. While he lands, correct.
    I also want to thank our witnesses. I don't think that 
table was built for six witnesses, but you're squeezed in well. 
So, thank you very much for being here.
    Today we're taking a hard look at patent litigation. 
Specifically, we're looking at the practice of some entities 
that engage in aggressive pre-litigation practices based on 
alleged patent infringements.
    We all agree that patent holders should be protected under 
the law. They should be able to assert patent protection 
methods. Patents are incredibly important in our economy and we 
all agree that patent holders should receive compensation for 
their innovation. Unfortunately, there are some bad actors in 
this sphere who are aggressively asserting that a patent they 
own has been infringed on in a manner that some believe is, in 
fact, deceptive.
    Examples brought to our attention include a business that 
accumulates patents often by purchasing them from the PhoneGap 
companies or directly from individual investors. The companies 
then make use of patents that are ambiguous or broadly written 
in order to maximize the number of companies which they can 
assert the patent.
    These companies generally do not make or sell anything 
related to these patents. Instead they identify companies using 
a technology that it can allege as an infringement of the 
patent. Then, they write a letter to the alleged infringer 
stating that infringement has occurred and litigation will 
commence unless the licensing agreement is entered into. Either 
pay us or we will sue you for patent infringement.
    This practice seems to have initially started with 
technology companies. However, other industries including 
retailers, hospitals, banks, restaurants and the gaming 
industry have become targets as well. This practice concerns me 
as I am sure it concerns many Senators.
    If frivolous lawsuits are being filed across my state of 
Nevada because a coffee shop allows their customer to use Wi-Fi 
in Reno, or a Las Vegas Casino receives a demand letter on a 
game they offer, it can have a negative impact on the economy 
because it could hinder innovation and, of course, economic 
growth.
    So, I do not believe that there is any question that this 
practice is taking place. It is. What I hope this hearing today 
sheds light on is the scope of the problem, most appropriate 
method to stem this behavior.
    It is my understanding that the Federal Trade Commission 
has authority to act under the existing Section 5 authority to 
enforce against unfair and deceptive acts and practices. I also 
understand--I understand that they are waiting for the results 
of their own six-week study to be completed before moving 
forward.
    I think it's important to see that study or at least the 
very least have a strong understanding of the scope of the 
issues before us, especially before moving on to any proposal 
that they be used that may be under the Committee's 
jurisdiction regarding the FTC. I also know that patent reform 
is an issue that the Judiciary Committee has looked at and will 
continue to look at.
    Many of the issues that will be discussed here will also be 
solved by passing rulemaking authority instructing the Patent 
and Trademark Office to enforce standards on these demand 
letters.
    I hope that we can aid in solving this problem by using 
this hearing today to shed light on this issue, but this 
committee is somewhat limited due to the narrow scope and lien 
of jurisdiction that we have. Nevertheless, this is an 
important issue and I thank the Chairwoman for holding this 
hearing today and even by holding this hearing we're drawing 
attention to it and rightfully so.
    So again, thanks, Madam Chairwoman, for holding this 
hearing to discuss ways in which we can work to ensure patent 
holders can protect their faith that patents, frivolous patent 
lawsuits, are mitigated.
    Thank you.
    Senator McCaskill. Thank you, Senator.
    Let me introduce the witnesses. First, we have the 
Honorable Jon Bruning, who is the Attorney General from the 
State of Nebraska. Thank you for traveling here from Lincoln. 
Now that we're in different conferences, I can show you a lot 
more love.
    [Laughter.]
    Senator McCaskill. Mr. Jon Potter, who is President of the 
Application Developers Alliance from here in Washington, D.C.; 
Mr. Mark Chandler, who is Senior Vice President, General 
Counsel and Chief Compliance Officer of Cisco Systems from San 
Jose, California; Ms. Julie Samuels, who is Senior Staff 
Attorney, Electronic Frontier Foundation, also out of San 
Francisco, California; Mr. Lary Sinewitz, who is the Executive 
Vice President of BrandsMart USA, who is from Florida; and 
finally, Mr. Adam Mossoff, who is a Professor of Law nearby 
here in George Mason University School of Law.
    We will begin with your testimony, Mr. Bruning. Thank you 
very much.

       STATEMENT OF HON. JON BRUNING, ATTORNEY GENERAL, 
                       STATE OF NEBRASKA

    Mr. Bruning. Chairwoman McCaskill, Ranking Member Heller, 
thank you very much for holding this hearing. And Madam Chair, 
it's funny you say that about our conferences. I have in my 
office a Missouri tiger tail that was a gift from Robin 
Carnahan. I sent her a corn head from Nebraska; she sent me a 
tiger tail. I keep it proudly even though, of course, I cheer 
for the Huskers.
    [Laughter.]
    Mr. Bruning. Patent trolls abuse the open nature of our 
intellectual property system and they represent a destructive 
threat to small businesses, even out in nonprofit organizations 
and consumers. They offer little or no innovative value to our 
economy; they undertake their scheme in the shadows, often 
beyond the view of regulators.
    So the time is ripe for Federal and State authorities to 
work in concert to address this issue and stem the tide of 
patent trolling nationwide, but still protect the ability of 
legitimate patent holders to enforce their rights.
    I thought both your statements were right on and very well 
thought out. We want to protect the ability of legitimate 
patent holders but this is not about that. This is about a 
nationwide scheme that's happening because of a few.
    These patent trolls seek to only extract costly licensing 
fees from these alleged infringers. They lack any intention to 
develop the underlying technology, improve upon it, or bring it 
to market. They send scattershot demand letters, which include 
a vague description of the patent and a demand that the target 
pay up. Unfortunately, these targets are often small businesses 
and nonprofits. Recently, we've had several examples of this in 
my state.
    MPHJ Technologies has been an active and notorious patent 
troll in Nebraska and across the country. MPHJ claims it owns 
the patent for using a basic scan-to-e-mail technology. 
According to MPHJ and its lawyers, any person who has scanned a 
paper document to an e-mail attachment has infringed MPHJ's 
patent. That's about everybody in this country, seemingly.
    MPHJ demands a thousand dollars per employee from hundreds 
of organizations around the country. So for small businesses 
and nonprofits, this can be a death threat.
    MPHJ's scheme functions through dozens of shell companies 
that it and its lawyers have created. These shells go by names 
like AccNum, GosNel, FolNer and build themselves as licensing 
agents for MPHJ.
    One example of MPHJ's targets in Nebraska was Eldon 
Steinbrink. Mr. Steinbrink is perhaps the perfect example of 
not only the absurdity of MPHJ's campaign, but how little 
research that MPHJ does before they send out these letters 
scattershot across the country. MPHJ, through its shell company 
FosNel, somehow decided that Mr. Steinbrink was infringing on 
its scan-to-e-mail patent through his work for Phelps County 
Emergency Management and sent him a demand letter. And these 
are the--we have the letters right here, Exhibits A, B and C 
and we included them in our filing.
    Mr. Steinbrink never worked for Phelps County Emergency 
Management. He is an elderly gentleman; he lives in a nursing 
home in Holdrege, Nebraska. He once served on the Phelps County 
Board many years ago. He now has Alzheimer's.
    Other examples in Nebraska have included nonprofits, such 
as Voices of Omaha, which is a community choir group; they have 
a few hundred dollars in their checking account, small 
businesses ranging from plumbers to accountants. Very few of 
MPHJ's Nebraska targets would have had the resources to mount a 
full defense had MPHJ followed through on its threats, which 
they never do. They have never sued anyone.
    These letters are designed to frighten consumers and small 
organizations who lack the resources to mount an expensive 
legal fight. The average cost for such a defense is estimated 
in the hundreds of thousands of dollars, at a minimum. So 
accordingly, many of these people pay to make the patent troll 
go away. It's a silent extortion is what it is.
    My office and other state attorneys general have declared a 
bipartisan, multistate war on these patent trolls. In Nebraska 
and Vermont, my colleague, Bill Sorrell in particular, we've 
taken aggressive and innovative steps to use our state consumer 
protection laws to address these demand letters. My 
understanding is yesterday, Attorney General Martha Coakley who 
is a good friend of mine in Massachusetts, she's becoming 
involved. And attorney general after attorney general is now 
realizing we have to band together to fight these patent 
trolls.
    We're planning to introduce a bill in our legislature in 
Nebraska, which will further focus on patent abuse. But really, 
what we need is Congress to lead. The Senate has to lead here.
    This Committee, in particular, has an important role in 
conducting a national consumer protection investigation. You 
can bring national attention to some of America's worst patent 
trolls and their use of demand letters as weapons of extortion.
    We encourage Congress to use your subpoena powers to bring 
the most egregious patent trolls and their lawyers who enable 
them to account. Call MPHJ to this subcommittee. Have them 
explain why they sent a demand letter to Eldon Steinbrink in 
Holdrege, Nebraska, with no knowledge that he had violated 
their patent. Compel other patent trolls to come here and do 
the same. Explain themselves.
    This has to be a multipronged effort. It's not just the 
Attorney Generals, it's not just Congress reforming the patent 
system. States and the FTC have to be empowered to address 
these demand letter abuses using our consumer protection laws 
and we're going to go about doing that.
    This issue has to be given prolonged and meaningful 
attention. Through these efforts, we can stop the problem of 
patent trolling in America; we can protect our consumers, our 
small businesses, and our nonprofits who have been victimized.
    Again, I want to thank the Subcommittee for inviting my 
testimony. I look forward to your questions.
    Thank you.
    [The prepared statement of Mr. Bruning follows:]

       Prepared Statement of Hon. Jon Bruning, Attorney General, 
                           State of Nebraska
    Good morning, Chairman McCaskill, Ranking Member Heller, and 
members of the Subcommittee. I am the Attorney General of the State of 
Nebraska and have served in that capacity since 2003. I appreciate the 
Subcommittee's interest in addressing the growing problem of patent 
trolls and am pleased to have the opportunity to share the state 
enforcement perspective on this issue.
    Patent trolls abuse the open nature of our intellectual property 
system and represent a destructive threat to small businesses, 
nonprofit organizations, and consumers. They offer little or no 
innovative value to our economy and undertake their schemes in the 
shadows, often beyond the view of regulators. The time is ripe for 
Federal and state authorities to work in concert to address this issue 
and stem the tide of patent trolling nationwide, while protecting the 
ability of legitimate patent holders to enforce their rights. I am 
pleased to participate in that effort.
    I am charged with the obligation to enforce Nebraska's Consumer 
Protection and Uniform Deceptive Trade Practices statutes and view this 
role as one of my top priorities. My office includes a division of 
attorneys and staff devoted exclusively to combating fraud, unfair, and 
dishonest trade practices. We pursue these efforts using a broad 
spectrum of tools, including consumer mediation, multi-state 
investigations, and full-scale litigation. Because we understand that 
financial predators are often sophisticated, technically savvy, and 
adept at creating an air of legitimacy, we take our role as guardian of 
the public interest in this area very seriously.
    Over the past year, we have grown increasingly aware of the threat 
posed to Nebraska small businesses, nonprofits, and consumers by patent 
assertion entities, commonly known as ``patent trolls.'' Generally, 
patent trolls acquire patents solely for the purpose of using them to 
coerce license fees from legitimate charities or businesses they claim 
have infringed on the patent. Patent trolls typically lack any 
intention to develop the underlying technology, improve upon it, or 
bring it to market. Rather, they seek only to extract costly licensing 
fees and/or pretrial settlements from alleged ``infringers.''
    Our investigations and research have developed insight into the 
modus operandi of the prototypical patent troll. First, the patent 
troll acquires one or a handful of patents relating to a particular 
technology. The patent troll will then gather a list of targets against 
which it believes it can assert ``infringement.'' Very little research 
is likely performed at this stage. The troll simply assembles a list of 
a substantial number of targets it believes might be utilizing the 
patented technology.
    Our investigations have revealed little rhyme or reason to the type 
or size of entity a patent troll will include in its target list. We 
identified victims ranging from small businesses and nonprofits for 
whom patent trolls can represent an existential threat to global 
technology producers and nationwide telecommunications firms for whom 
patent trolls represent a drain on resources and constant annoyance. 
The former are often caught off-guard by the notion that they are 
``infringing'' on a patented technology totally unrelated to their 
organization's actual work.
    The scope of a patent trolling effort can be extraordinary in 
breadth and scope. A 2013 White House report noted that one patent 
troll sent eight thousand demand letters to coffee chains, hotels, and 
retailers seeking compensation for use of Wi-Fi equipment made by 
several manufacturers that the patent troll alleged to infringe on its 
patents. One constant has emerged, however: in virtually every case, we 
found the process began with a ``demand letter.''
    A patent troll's demand letter usually includes several components. 
It typically identifies the patent or patents owned by the troll, 
usually by number accompanied by a vague or generalized description of 
the nature of the patent(s), with a conclusory statement that the 
targeted company is infringing upon the specified patent. The demand 
letter will often indicate it is necessary for the targeted entity to 
engage in some type of negotiation to pay the patent troll a license 
fee and will explain, in very broad terms, why a license is needed. 
Though the demand letter may indicate the possibility that the targeted 
entity is, in fact, not infringing, this caveat is often at the end, 
coming well after a series of conclusory and ominous statements that 
the targeted entity's use of a particular technology--usually 
completely unrelated to the entity's actual business--has infringed on 
the patent or patents in question.
    If the initial demand letter carries the implicit threat of 
litigation, as described above, then subsequent correspondence from the 
patent troll will often include the explicit threat of litigation. 
Should a targeted entity not respond to the initial demand for license 
fee negotiations or should such negotiations stall or prove 
insufficiently profitable for the patent troll, additional letters may 
include a draft copy of a Federal court complaint, complete with the 
targeted entity's name in the caption and numbered allegations. Though 
the inclusion of such a document may appear to some to be the ultimate 
leverage as the final step toward litigation against the targeted 
entity, chosen by the patent troll solely toward the aim of winning a 
significant patent infringement award specifically from the target, it 
is often simply a template scare tactic. In reality, the same complaint 
with virtually the same language may well have been submitted to a 
number of other targeted entities as a result of their own alleged 
``infringement.''
    One patent troll active in Nebraska is ``MPHJ Technologies.'' 
Nationwide, MPHJ has become notorious. MPHJ has asserted it owns the 
patent for using a basic office scanner to scan a document to e-mail. 
According to MPHJ and its lawyers, anytime any person has scanned a 
document to e-mail, that person has infringed on MPHJ's patent. The 
potential financial consequences to MPHJ's targeted victims are 
significant. MPHJ has demanded a thousand dollars per employee from 
hundreds of organizations around the country. In many instances, such a 
claim can mean a death threat to a small business or nonprofit 
incapable of defending itself without incurring substantial legal 
expenses.
    MPHJ's scheme functions through dozens of shell companies it and 
its lawyers have created. MPHJ itself owns the patents--ostensibly for 
scan-to-e-mail technology--but the initial assertion of infringement 
comes from a veritable alphabet soup of LLCs such as ``AccNum,'' 
``GosNel,'' or ``FolNer.'' These shell companies bill themselves as 
``licensing agents'' for the patents owned by MPHJ and are the entities 
from which demand letters are sent to hundreds of alleged infringers.
    One example of MPHJ's targets in Nebraska was Eldon Steinbrink. Mr. 
Steinbrink is perhaps the perfect example not only of the absurdity of 
MPHJ's campaign but also of how little research MPHJ and its lawyers 
perform before sending threatening letters scattershot across the 
country. MPHJ, through its shell company FosNel, somehow decided that 
Mr. Steinbrink was ``infringing'' on its scan-to-e-mail patent through 
his work for Phelps County Emergency Management and sent him a demand 
letter. See Exhibit A (on information and belief, a demand letter 
virtually identical to the one sent to Mr. Steinbrink), Exhibit B (the 
second demand letter sent to Mr. Steinbrink), and Exhibit C (the third 
demand letter sent to Mr. Steinbrink which included a draft lawsuit 
complaint).
    The problem with this scheme was that Mr. Steinbrink never worked 
for Phelps County Emergency Management. He is an elderly gentleman 
living in a nursing home in Holdrege, Nebraska, and who once served on 
the Phelps County Board many years ago. It is obvious MPHJ and its 
lawyers performed little or absolutely no research prior to threatening 
Mr. Steinbrink.
    Mr. Steinbrink's story is but one of many. Others in Nebraska have 
included nonprofits, such as Voices of Omaha, a community choir, to 
small businesses ranging from plumbers to accountants. Very few of 
MPHJ's Nebraska targets would have had the resources to mount a full 
defense had MPHJ followed through on its threats and most were forced 
to find alternative means to resolve the issue. In sum, MPHJ represents 
patent enforcement abuse at its very worst.
    Patent troll demand letters, usually marked by a steady increase in 
pressure and aggression, are typically designed to ultimately achieve a 
single aim: the extraction of as big a payment as possible from the 
targeted entity. Indeed, it is our understanding that most patent 
trolls do not ordinarily desire their enforcement actions be fully 
adjudicated--or even subjected to a preliminary evaluation--by a 
Federal court. For if such adjudication occurs and the patent or 
patents are invalidated, efforts against other targeted entities based 
on the same patents are rendered useless and unprofitable.
    Instead, patent trolls generally seek to ``price'' their license or 
settlement demands such that the sum obtained will be high enough to 
make the effort worthwhile but low enough that it can actually be 
afforded (using the term loosely) by the targeted entity. In other 
words, it is worth it to simply pay the troll to go away (for a price 
which reflects not any true market value for the patented technology, 
but its litigation-induced value) instead of engaging in protracted and 
costly litigation.
    The latter point appears to be one of the main reasons patent 
trolls have been so successful and, thus, so destructive. To put it 
simply, most targeted entities have neither the time, resources, nor 
inclination to engage in a pitched legal battle to defend a patent. 
This is particularly so when the patent in question is collateral to 
the entity's actual line of business. The average cost of a full-scale 
patent defense ranges from $350,000 to $3 million. Regardless of the 
exact price, defending a patent can be fairly described as one of the 
most expensive forms of litigation in existence.
    A large entity, such as a software or technology firm (frequent 
targets of patent trolls), may have the resources to fight those 
efforts which are facially illegitimate, but it also has the resources 
to simply make a troll go away through settlement. Indeed, large 
corporations may employ an intellectual property specialist on staff to 
manage the large number of challenges it receives, in addition to one 
or more outside firms to handle disputes if they are ultimately 
litigated.
    Smaller entities, including nonprofits and firms who cannot afford 
to hire attorneys well-versed in the intricacies of patent litigation 
(which, candidly, applies to most attorneys, including seasoned 
litigators) are often even more eager to limit significant litigation 
risk and will pay the patent troll a sum to dispose of the case. 
Indeed, even if a targeted entity can hire an experienced patent 
litigator, prudent risk management strategy still often results in a 
settlement with the patent troll. This is so because a hired patent 
attorney will usually foresee the resources and expense which are the 
hallmarks of successfully defending almost any patent infringement 
enforcement effort and recommend the prompt resolution of the matter. 
In any event, a smaller entity will have little choice but to so hire a 
specialized patent attorney because few small organizations have the 
capacity to employ a patent lawyer on a full-time basis.
    The damaging effects of patent trolls are clear. Patent trolls 
succeed through the issuance of egregious threats which serve to 
advance no valid legal purpose or the legitimate protection of 
productive intellectual property but, rather, seek only to extract 
quick settlements from those otherwise committed to building their 
businesses and providing positive value to society. The question for 
policymakers charged with building a legal framework of robust consumer 
protection is how to stem the destructive tide of patent trolls and 
give targeted entities some support in what has, thus far, been a 
rather one-sided fight.
    As a preliminary matter, I proceed from the premise that America's 
intellectual property enforcement system, though in need of significant 
reform, should remain one which readily enables holders of valid, 
productive patents to enforce such patents without undue hurdles or 
unfair obstacles. I firmly believe in the principle that intellectual 
property is precisely that--property--and that legitimate enforcement 
of the rights which flow from such property should be protected. Patent 
trolls, however, have abused America's relatively open system that 
expressly provides for a presumption of validity of patents. To protect 
the integrity of that system while simultaneously protecting consumers 
and businesses from patent trolls, therefore, increased consumer 
protection tools are necessary at both the Federal and state level to 
address this issue.
    Several states, including Nebraska, have explored using our 
existing Consumer Protection and Unfair and Deceptive Trade Practices 
statutes to combat patent trolls. The theory behind this strategy is 
simple: if a patent troll sends a demand letter demanding licensing 
fees from an alleged ``infringer'' but in fact lacks a good faith 
belief in the validity in the underlying patent or its application to 
the target's technology, or if the troll threatens litigation 
categorically lacking any intention of ever filing suit, that may 
violate existing consumer protection laws.
    Though we are confident this approach using existing statutes can 
be highly effective, we are also exploring ways in which we can 
strengthen existing laws and further tailor their applicability to 
patent trolls. Such state legislation--which must be done in a manner 
that does not stray into the clearly pre-empted Federal sphere of 
patent regulation--may include stricter demand letter content 
requirements, the requirement of a bond posting by the asserting 
entity, or the inclusion of a sworn affidavit by the asserting entity 
that the assertion is legitimate and made in good faith. I look forward 
to continuing my work with my fellow state Attorneys General to develop 
what could ultimately be termed ``model legislation'' for this purpose.
    Congress must also act to align Federal consumer protection 
activities with state efforts. Though reform of the patent system 
itself must originate with your colleagues on the Judiciary Committee, 
the Commerce Committee possesses the jurisdiction to empower Federal 
enforcement authorities to take a hard line against unfair and 
deceptive demand letter practices. I encourage you to do so.
    I am pleased that the Federal government has already shown a 
willingness to address this problem. The FTC has proposed a patent 
troll information gathering project which is currently in the public 
comment phase. Vermont Attorney General William Sorrell and I have 
partnered to co-sponsor a multi-state letter of support for that 
project. I encourage the Subcommittee to champion that project and use 
its results as the basis for additional hearings on the workings and 
methods of patent trolls nationwide.
    In the meantime, however, I call upon Congress to utilize its 
subpoena power to bring the investigation of some of the worst known 
patent trolls to the national level. I encourage you to bring the most 
notorious patent trolls--and the lawyers who facilitate their schemes--
to account for their alleged abuses of the patent enforcement system 
and explain how they do business. For too long patent trolls have 
operated in the shadows with virtual impunity. It is now time for 
Federal and state authorities to bring them into the open.
    In conclusion, addressing the problem of patent trolls is 
achievable and necessary if we are to truly fulfill our consumer 
protection roles. Frankly, it is one of those rare issues which 
commands truly broad consensus on the need for reforms. Entities of all 
types and sizes--from the very large to the very small--view patent 
trolls as a threat to their productivity and, sometimes, their 
existence. Scholars and practitioners from across the intellectual 
property legal spectrum have voiced the problems posed by these 
financial predators. Democrats and Republicans alike view patent trolls 
as a direct threat not only to our constituents but to innovation, 
overall. In short, few other consumer protection concerns are more 
deserving of our immediate attention.
    Again, I appreciate the Subcommittee's attention to this issue and 
for the opportunity to share my views. I look forward to working in 
partnership with Congress to bring about changes which will enhance our 
consumer protection tools and put an end to the problem of patent 
trolls.

    Senator McCaskill. Thank you, Attorney General.
    Mr. Potter.

              STATEMENT OF JON POTTER, PRESIDENT, 
                APPLICATION DEVELOPERS ALLIANCE

    Mr. Potter. Thank you, Chairman McCaskill and Ranking 
Member Heller.
    The App Developers Alliance and our more than 30,000 
members urge swift enactment of legislation to eliminate patent 
trolls' favorite weapon: vague, deceptive, baseless and 
threatening demand letters that inhibit investment and 
startups; cause app developers to stop hiring engineers; and 
bully companies into extortionist settlements because the 
settlements are cheaper than litigation.
    I invite you to join me this morning in your local version 
of startup land. At Lab1500 in St. Louis, Work In Progress, Las 
Vegas, and work share spaces nationwide, passionate, energetic 
app developers are creating new products and services to 
improve our lives. They dream about IPOs, but in reality money 
is tight, risk is the norm and threatening letters from patent 
trolls are devastating.
    Legitimate companies assert their patents by offering 
voluminous documentation after researching the letter 
recipients' business or technology. In contrast, smash and grab 
patent trolls buy cheap patents and use them to extract 
shakedown licenses from small companies and startup land. 
Letters threaten protracted litigation. They demand fixed-fee 
licenses regardless of how valuable the patented technology is 
for the recipient's businesses. They offer limited time, six 
figure settlement specials, and they threaten to increase 
royalties if a business hires a lawyer or requests more 
information about the patent.
    Please remember, patent trolls make no products and produce 
no services. They are the patent equivalent of the penny stock 
boiler room that sells worthless stock to our grandmothers and 
exterminators who help rid you of termites that they just flung 
into your garage.
    The patent troll racket has reached epidemic levels that 
require a legislative response. A study released this week 
documented that one third of VC funded startups have received 
patent demand letters and 60 percent of the letters were from 
trolls. Defending against patent demands cost at least $100,000 
and quickly rises into the millions. And every dollar wasted 
against a troll is another marketing person not hired, another 
engineer without a job, and a sales person who can't get work.
    Our website shows an interview of a moderately successful 
startup CEO lamenting that he now pays six lawyers but only 
five employees. He hasn't paid himself for a year and he names 
the three employees that he hasn't hired. Beyond the costs to 
fight, patent demand letters scare away potential business 
partners and customers and are a major deterrent to investment. 
For all these reasons, app developers are vulnerable.
    As several attorneys general and trade associations have 
documented, the trolls are taxing business, investment, growth 
and opportunity. Last week, visiting St. Louis, I learned of 
three local companies recently attacked by patent trolls. One 
company's service was built on a digital platform but the troll 
had an analogue technology patent. It didn't matter. The 
company had to hire a lawyer. The company ultimately settled 
because it couldn't afford the fight. Nationwide there are 
stories like this.
    Earlier, I was in Los Angeles with a four-employee startup 
that once held a highly ranked app in the iTunes store. A troll 
demanded an unjustified license in royalties, but the company 
couldn't even afford a lawyer. Instead of fighting, it gutted 
its own app. It took away all the features that were compelling 
and it created sales for it. So in one sense they think they 
have won because they haven't paid the troll, but they have 
lost because their app is no longer successful, the company is 
floundering, and they are no longer hiring.
    All across America app developers and main street 
businesses are frustrated by trolls and their demand letters. 
And they wonder how the government, which manages the patent 
system, has allowed this to happen. Skeptics suggest that 
trolls and demand letters and demand letter problems have been 
enabled by poor quality patents that our underfunded Patent and 
Trademark Office should not have allowed. The alliance agrees 
and we urge Congress to remedy this by legislating expanded 
opportunities for the Patent and Trademark Office to 
administratively review and cancel poor quality, previously 
issued patents through its covered business method program.
    Other skeptics suggest that Congress needs more demand 
letter data before we're legislating to stop the abusive 
startups, grocery stores, coffee shops and retailers. But app 
developers are being driven out of business today. Main street 
businesses are being sued or being attacked today and Americans 
are paying higher prices in food and lost innovation and lost 
jobs today.
    To be clear, I'm not asking this committee to amend the 
Patent Act. Rather, I'm urging the Committee to legislate very 
precise standards to prevent a new and growing strain of garden 
variety fraud--the transmittal of deceptive, unfair and abusive 
demand letters that just happen to be bolted onto our patent 
system.
    On behalf of our thousands of innovators and 
entrepreneurial members, I urge you to prohibit demand letters 
that knowingly overstate the breadth of a patent's coverage, 
that do not disclose the patent or claim being infringed, that 
accuse businesses of infringement without the sender having any 
knowledge of whether infringement has actually occurred, or 
that menacingly threaten litigation when there's no intention 
of following through.
    Please promote the patent system, promote app innovation 
and promote economic growth by ending demand letter abuse.
    Thank you.
    [The prepared statement of Mr. Potter follows:]

             Prepared Statement of Jon Potter, President, 
                    Application Developers Alliance
    Chairman McCaskill, Ranking Member Heller and Members of the 
Subcommittee:

    On behalf of the Application Developers Alliance, our more than 
30,000 individual members and 145 corporate members, I urge you to 
swiftly act to eliminate a favored weapon of America's patent troll 
bullies--vague, deceptive, baseless and fraudulent demand letters.
    In the last few years, a new business model has emerged. Patent 
trolls send demand letters that knowingly overstate the breadth of a 
patent's coverage, or alternatively do not disclose the patent or claim 
being infringed. The letters accuse businesses of infringement without 
the sender having any knowledge of whether infringement has actually 
occurred, and they menacingly threaten litigation when they have no 
intention of following through.
    These demand letters unnerve startups, cause better capitalized 
companies to needlessly hire lawyers, and force even large companies to 
pay extortionist settlements just to avoid the even higher costs of 
litigation discovery. But when the defending company fights back, the 
often thinly capitalized trolls retreat without punishment or regret, 
and simply move on to threaten another company or dozens of companies, 
knowing that several will sign unnecessary licenses and pay unjustified 
royalties because it is cheaper--much cheaper--than fighting.
    Demand letters that abuse our patent system are a relatively new 
phenomenon but no longer unusual. This is a business model; it is 
growing; and it must be stopped. On behalf of the mobile app industry 
and our thousands of innovative, entrepreneurial members, I urge you 
to:

  (i)  Prohibit patent infringement assertions that do not identify: 
        (a) the patent being asserted; (b) the claim that is allegedly 
        infringed; (c) the specific means by which the patent is 
        allegedly infringed; and (d) the parties that are financially 
        interested in the license and royalty demanded.

  (ii)  Require patent infringement assertions to be supported by 
        honest, good faith appraisals of the patent's validity, and by 
        reasonable efforts to determine whether and how the business 
        might actually be infringing the patent.

  (iii)  Punish those who knowingly in demand letters inflate the 
        breadth of a patent's coverage or its value, and thereby 
        attempt to bully defendants into quick settlements that are 
        either entirely undeserved or obligate unjustifiably high 
        payments.

    At the outset, it is important to clarify that my testimony is not 
about patent reform legislation. The Alliance supports legislation to 
reduce abusive patent litigation and to divert from expensive Federal 
courts wasteful infringement litigation based on low-quality patents. 
But today's hearing is about stopping fraud on small business, fraud on 
the American public, and fraud on the patent system.
    Ending demand letter fraud requires decisive action like that of 
General Bruning and other Attorneys General. But Federal agencies, 
including the Federal Trade Commission, must also have a critical role 
in preventing intentionally deceptive business practices that undermine 
public trust in the patent system, stifle innovation and hurt 
consumers.
    In the online world, a smash-and-grab patent troll's demand letter 
is the equivalent of the popup ad that says your computer has a virus, 
and for $49 the advertiser will remove it. The advertiser ``helpfully'' 
informs you about the high costs of not paying the fee, but it really 
has no idea if your computer has a virus. In the offline world, the 
troll is an exterminator who cheerfully offers to fix your termite 
problem for only $125. And though he has no knowledge of whether your 
house is infested, he is happy to give you a certificate after you pay 
him.
    Individually and in combination, many patent trolls' demand letter 
practices are unfair, deceptive, fraudulent and are the equivalent of 
legalized extortion. Patents are a grant of public trust, with the 
value of coveted, beachfront property. They are granted by the Federal 
government for a specific purpose, and enforced by Federal judges who 
act with extraordinary deference to the PTO regarding a patent's 
validity and scope. Just like land grants, research grants, tax-
exemptions and government contracts, rules regarding patents' assertion 
and exploitation can be--and should be--imposed or authorized by 
Congress in an effort to reduce abuse.
    Earlier this year the App Developers Alliance began surveying our 
members about abusive patent litigation and related legislative 
proposals. We quickly heard strong support for proposals to reduce 
litigation discovery costs, to increase the likelihood of abusive 
plaintiffs being sanctioned, and to divert litigation from courts to 
the Patent and Trademark Office so that questionable business method 
patents can be closely scrutinized before courts enforce them.
    But we also heard that the greatest challenge for the smallest 
companies happens well before litigation--when they first receive a 
patent assertion and demand letter. This is because the smallest 
companies cannot even afford to litigate in Federal court. This 
explains why patent litigation fee-shifting proposals are important to 
many companies and to a healthy patent system, but not as directly 
important to startups. For small companies the mere threat of expensive 
patent litigation can kill a young company's fundraising efforts and 
scare off potential customers.
    How prevalent are patent assertion and demand letters? Earlier this 
week a study was released documenting that fully one-third of startups 
responding to the survey have received patent assertions. Sixty percent 
of those assertions came from entities whose primary business is 
asserting and litigating patents. And just for startups, the cost of 
preparing for and defending patent demands generally exceeds $100,000--
and can easily reach millions of dollars in the very rare challenge 
that proceeds to trial. It is easy to understand why settlement is 
cheaper than fighting, even when the company is confident that the 
claim is specious.
    Last week I was in St. Louis with a serial entrepreneur who shared 
stories of three local companies attacked by audacious trolls. One 
innovator had built an entire company based on digital technology, but 
was being threatened by a troll whose patent was based on analog 
technology.
    All three companies had similar experiences after receiving abusive 
demand letters: they spoke to the troll's lawyer who offered a simple 
choice- sign a license, or hire litigation counsel and prepare for a 
lengthy, expensive battle. The first company retained counsel, but made 
a business decision to sign an unnecessary and unjustified license. 
This is a classic ``tax on innovation'' that our patent system was not 
intended to support and our startup economy cannot afford. The second 
two companies are still exploring options, undoubtedly while paying 
lawyers to help them appreciate the cost-benefit analysis of their 
choice--fight righteously and expensively, or settle quickly and feel 
extorted.
    An Alliance member in Los Angeles responded differently when he 
received an abusive demand letter. He called several lawyers and 
quickly realized that he could not afford to fight, though he was 
almost certain to win. He did not want, however, to reward the troll by 
signing a license, so instead he removed his app's community features, 
its interactive features, and its most successful upgrade path. His app 
quickly dropped from the App Store's Top 10 list and his business is 
suffering. In one regard, he feels victorious because he has avoided 
the troll's wrath and has not been extorted directly. But, his business 
is harmed; his three employees are questioning their futures; and his 
spirit has flagged.
    Legitimate companies asserting high-quality patents that they seek 
to license for a fair royalty do not hide behind vague and threatening 
letters. They disclose the patents; explain the breadth of the claims 
in detail; and justify financially the basis of their royalty requests. 
They are seeking to engage in a legitimate business relationship and 
they behave accordingly.
    Trolls, in contrast, rely on vague and overbroad patents, and 
bullying threats of costly litigation and years of executive 
distraction. Settlement becomes very attractive, even when it is 
unjustified.
    To be clear, as General Bruning knows, the worst trolls have 
absolutely no interest in litigation regardless of how strenuously they 
threaten lawsuits. This is because a defendant's first affirmative 
defense will be that the patent or the claims being asserted are 
invalid, and the troll's worst nightmare is that a court will address 
their validity on the merits.
    But only the bullying troll knows where its particular limit is. 
Will it back off when a business hires competent counsel, or prove 
willing to spend money on discovery, or only when discovery concludes 
and the case gets close to trial? Along the way the bloviating troll's 
goal is to increase defendants' legal fees, increase executive 
distraction, and continue to increase settlement costs--all in an 
effort to persuade the business to settle, sign an license, pay a 
royalty, and end the costly, painful litigation. And it all begins with 
a baseless, threatening, and fraudulent demand letter.
    One troll went so far as to demand a meeting at its office in 
California within ten days of contacting our New York-based member 
company, and then increased its settlement ``offer'' every time that 
our member contacted him again to learn more about the patent or to 
negotiate. In an ironically different but also abusive contrast, 
another troll thoughtfully offers a $300,000 flat-fee license without 
any pretense of knowing if that amount bears any relation to the letter 
recipient's alleged use of the invention in question, and then 
enthusiastically offers an early settlement discount for the low, never 
to be beaten, rate of $100,000. In this regard the troll resembles the 
stereotypical used car salesman--asking how much will you pay me if I 
agree to stop threatening you without justification today?
Congressional Action is Necessary, and Timely
    Often Congress is reluctant to tackle a problem unless and until it 
is absolutely clear that existing laws are insufficient. In this 
regard, some might believe that the important and worthy actions of 
General Bruning and his counterparts in Minnesota and Vermont 
demonstrate that Congressional action is premature. They might also 
look at the law enacted by the Vermont legislature this summer and 
conclude the same. The Alliance, however, believes that state and 
Federal action are complementary and that both are necessary right now.
    The efforts of General Bruning and his counterparts in other 
states, and of the Vermont legislature, only help the citizens of those 
states. The Alliance believes that Congress and Federal agencies also 
play an important role, by ensuring that citizens nationwide are 
protected against abusive patent troll demand letters.
    Courts--for example those handling patent infringement cases--do 
not have jurisdiction over pre-litigation demand letters except to the 
extent they are evidence of intentional infringement, which affects 
damages calculations.
    Also, the Federal Trade Commission's current authority over unfair 
and deceptive trade practices has not been exercised to address the 
problem of abusive demand letters. We believe the FTC could do more, 
but that its enforcement actions necessarily will be against only a few 
of the abusive trolls that send bullying, fraudulent demand letters.
    The Alliance proposes three complementary solutions that will 
reduce fraud and abuse, help demand letter recipients analyze demands 
less expensively, and restore public trust in the patent system.
    First, the FTC should set minimum standards on the transmittal of 
patent assertion communications, and to define that communications 
lacking indicia of good faith and fair dealing are per se ``unfair and 
deceptive'' under the Federal Trade Commission Act. Including this 
basic information will not conclusively define that the patent is valid 
or that the troll is acting in good faith, but they will increase the 
likelihood that the troll appreciates the gravity of its actions and 
will minimize the risk of demand letter abuse. The required information 
should include:

  1.  The patent number that is the subject of the assertion 
        communication;

  2.  The specific claims that are being asserted as being infringed;

  3.  The specific reasons why the asserting party believes that the 
        recipient of the communication is infringing the patent and/or 
        the claims, including a description of the specific 
        functionality or attribute of the receiving party's technology 
        or activity that is infringing;

  4.  The names of all parties with financial interests in the patent, 
        or in the settlement of the infringement, or in the licensing 
        fees or royalties that the asserting party is requesting to be 
        paid by the recipient of the assertion communication; and,

  5.  The names of all parties to whom the asserting party, or others 
        with financial interests in the patent, have sent assertion 
        communications with regard to the same patent.

    Second, the Alliance urges Congress to codify that patents are a 
public trust granted by the people's government, and that patent 
assertion communications must include a sworn statement of good faith 
and fair dealing regarding the breadth of the patent, that the 
assertion is based on thorough research and fair analysis including 
about the letter recipient's technology and business, and that the 
requested royalty amount is reasonably related to the benefit derived 
by the recipient by its use of the patented invention.
    Third, the Alliance urges Congress to impose on patent owners 
through the Patent Act the same terms and conditions delineated above, 
and to empower courts to revoke or reduce patent ownership rights and 
enforcement rights patents parties that deliberately or consistently 
fail to comply with these requirements.
    Irrespective of the agency or agencies empowered to act, the 
Application Developers Alliance urges Congress to swiftly enact 
meaningful minimum requirements for the form and content of demand 
letters, including a requirement of honesty and fair dealing, and to 
pair these requirements with potent penalties for failure to satisfy 
them. These steps will protect America's innovative startups and our 
Main Street businesses, and restore public trust in our patent system.
    Thank you for your consideration of the Alliance's views.

    Senator McCaskill. Thank you, Mr. Potter.

  STATEMENT OF MARK CHANDLER, SENIOR VICE PRESIDENT, GENERAL 
   COUNSEL, AND CHIEF COMPLIANCE OFFICER, CISCO SYSTEMS, INC.

    Mr. Chandler. Thank you, Chairman McCaskill, Ranking Member 
Heller, Senator Klobuchar.
    My name is Mark Chandler. I'm Senior Vice President and 
General Counsel of Cisco. Today I'll describe our experience 
with a new kind of scam that is based on a formula that's as 
old as the hills, but dressed up with the language of patent 
infringement and innovation.
    The perpetrators send out thousands of threat letters to 
small businesses and consumers and file lawsuits in the hopes 
of a big payday, not based on any merits of the case, but on 
the fears of victims who just want to make a problem go away. 
These victims, mom and pop stores, hospitals, pharmacies, car 
dealers, aren't manufacturers of products. They're simply users 
like you and me.
    I'm involved as General Counsel of Cisco because I want to 
defend my customers, but we need your help in bringing a little 
sunshine to a dark corner of the patent system.
    Cisco was founded 30 years ago to build equipment so that 
disparate computer systems could communicate with each other. 
Today, we're the world's largest manufacturer of devices that 
make up the backbone of the Internet and we also build Wi-Fi, 
telephone and video systems. We employ 36,000 people in the 
United States and create jobs for hundreds of thousands of 
more. Our products are used directly or indirectly by billions 
of people around the globe and are in tens of millions of 
American homes and businesses. We, ourselves, hold over ten 
thousand individual U.S. patents and we appreciate that your 
colleagues in the Judiciary Committee are tackling issues 
related to the patent system. But their efforts to make patent 
litigation more fair won't affect what I'm describing today.
    And let me tell you a story that unfortunately is not 
unique, as has been well documented by others on this panel 
including EFF which has collected many examples. Our story 
begins when a lawyer named Noel Whitley bought patents related 
to Wi-Fi from a great American chip company, Broadcom, and 
created a company that he cynically named Innovatio.
    Broadcom, for its part, didn't want the patents anymore 
since their intrinsic economic value, related to innovation, 
was coming to an end. They were near or past expiration, had 
been broadly cross licensed to other chip companies and were 
subject to binding contracts requiring licensing on fair terms.
    But Whitley was not deterred. Whitley and his lawyers at 
the Niro firm in Chicago, which specializes in this game, sent 
almost 14,000 threat letters to small businesses, cafes, 
bakeries, inns, hotels, a children's health clinic--basically, 
anyone that might use Wi-Fi in their place of business. Did 
they tell them what products might infringe? Nope. Instead, his 
lawyers just wrote, ``I represent an individual who has 
suffered injuries as a result of your company's business,'' in 
claiming that the Innovatio portfolio covers all Wi-Fi usage.
    Did his lawyers disclose that a huge proportion of Wi-Fi 
devices were already licensed through the chip companies and no 
more could legally be collected? No. Instead, they told them 
that thousands of companies had already paid Innovatio and 
referred to almost a billion dollars in royalties, without 
letting on they were talking almost exclusively about Broadcom 
cross licenses that have little or nothing to do with these 
particular patents.
    Did they tell them that the patents related to industry 
standards and had to be licensed on fair terms? No. Instead 
they told them, and again I quote, ``We wish to license your 
company at a very affordable rate; far less than the cost of 
patent litigation. I can quote you a rate of less than 
$3,000,'' this for patents that a court determined were worth 
pennies per chip.
    And did they tell them that manufacturers like Cisco were 
eager to defend them? No. Instead, they wrote that the 
equipment manufacturers, and I quote, ``have not stepped in to 
defend any of their users. This means we can still sue your 
client and they cannot expect equipment manufacturers to aid in 
their defense.''
    Finally, for those who had the temerity to resist, they 
enumerated thousands of pages of documents to be reviewed by 
counsel, meaning a mountain of legal fees. Sadly, this isn't an 
isolated incident as Attorney General Bruning has told you, as 
others in the panel will, and as I've described also in my 
written statement. This is a dangerous trend.
    Let me close by suggesting four simple steps that would 
make it much harder to carry out these schemes. First, require 
anyone who is sending more than ten patent demand letters to 
someone who is not a manufacturer or reseller of the accused 
product to file the letters in an online registry at the FTC. 
Second, require them to include a list of model numbers which 
are believed to possibly infringe, the fact that manufacturers, 
like Cisco, may be required to defend, and contact information 
for the manufacturers. Third, require any such letter include 
the names of the real entities or individuals who own the 
patents. And fourth, require the letters to include a list of 
all previous licenses and whether the patents are subject to 
special licensing rules that apply to standards.
    We aren't asking you to change substantive patent law, but 
these simple steps will provide basic transparency to protect 
the innocent end users. The paycheck I get every other week 
says Cisco on it, but every cent comes from my customers. 
That's why I'm passionate about making sure they don't get 
ripped off by charlatans dressed up as innovators when they 
trust us to supply them with products. And if the predators are 
forced to come to me, once they have disclosed what they are 
after, I can guarantee they will get a fair fight.
    Thank you.
    [The prepared statement of Mr. Chandler follows:]

  Prepared Statement of Mark Chandler, Senior Vice President, General 
       Counsel, and Chief Compliance Officer, Cisco Systems, Inc.
    Chairwoman McCaskill, Ranking Member Heller, members of the 
Subcommittee, I am grateful for the opportunity to appear before you 
today and describe our experience with a new kind of consumer scam that 
we are seeing with increasing frequency.
    This is deceptive behavior of the kind that has long existed but 
now comes clothed in language like ``patent infringement'' and 
``innovation.'' The goal is the same as in many old-fashioned consumer 
rip-off schemes that the government has long taken action against--
trying to scare or convince people to pay something they don't owe or 
buy something they don't need. The direct victims are not large 
companies like Cisco Systems, but small businesses, non-profit 
organizations and individuals.
    I am involved because I need to defend my customers. But we need 
your help.
    We need a little sunshine to disinfect this dark corner of the 
patent world--because once the practices used by these scam artists are 
exposed, and the harm to their victims better understood, these rip-off 
artists will be forced to change their ways.
Introduction
    I am Senior Vice President and General Counsel of Cisco Systems. We 
are a 30-year old company, founded by two Stanford graduate students, 
who developed the key technology to allow different computer systems to 
communicate with each other.
    Our products are used every day by billions of people around the 
world, and we sell everything from the core switches and routers that 
make up the backbone of the Internet, to Wi-Fi systems people use in 
their homes and businesses, to telephone and video conference systems 
used by tens of millions of businesses and consumers.
    Our annual revenue is approximately $50 billion, and we directly 
employ 36,510 people in the United States and indirectly provide jobs 
to hundreds of thousands more.
    We hold over 10,000 U.S. patents and file many hundreds of new 
patent applications every year. Our patents portfolio is regularly 
rated among the strongest in the telecommunications industry. Most 
importantly, our products are used in tens of millions, and perhaps 
over 100 million, American homes and businesses.
    Earlier this year I testified in front of your colleagues on the 
Judiciary Committee about the scourge of abusive patent litigation 
practices.\1\
---------------------------------------------------------------------------
    \1\ Abusive Patent Litigation: The Impact on American Innovation & 
Jobs, and Potential Solutions; Hearing before the House Judiciary 
Committee (Mar. 14, 2013) (statement of Mark Chandler), available at 
http://judiciary.house.gov/hearings/113th/03142013_2/chandler%2003
142013.pdf (last visited Nov. 4, 2013)
---------------------------------------------------------------------------
    I am pleased to report that your Judiciary Committee colleagues and 
their counterparts in the House of Representatives are working to make 
patent litigation fairer and more efficient.
    We are also hopeful that your Finance Committee colleagues and 
their counterparts on the House Ways and Means Committee will soon work 
to assure that International Trade Commission procedures can no longer 
be used for shakedowns by non-practicing entities that do not truly 
want an exclusion order. Exclusion orders are the only remedy available 
from the I.T.C., but often non-practicing entities only want to 
leverage the threat of such an order to obtain money to which they are 
not entitled.
    These reforms, which focus on litigation abuses, however, don't 
address the kind of rip-off I'm describing today--a rip-off that 
targets small businesses and consumers with threat letters, deception, 
and intimidation tactics.
Examples: Innovatio
    Our first story begins with a lawyer named Noel Whitley, who bought 
patents related to Wi-Fi from his former employer--a great American 
chip company, Broadcom--and then worked with a team of Chicago lawyers, 
the Niro firm, which specializes in representing patent assertion 
entities, to target legitimate businesses.
    He created a company which he cynically called ``Innovatio,'' since 
innovation is the last thing that the company does. Broadcom sold the 
patents because they were near their expiration date, heavily licensed 
to Broadcom's competitors and subject to binding commitments to license 
on fair and reasonable terms.
    So Mr. Whitley and the Niro firm came up with a scheme. He sent 
over 14,000 letters to small businesses, cafes, bakeries, inns and 
hotels, a children's health clinic--anyone who he thought might be 
using Wi-Fi.
    Mr. Whitley's team of lawyers and licensing ``consultants'' told 
these non-profits and small businesses: ``I represent an individual who 
has suffered injuries as a result of your company's business.'' They 
went on to say, ``We are highly confident that the Innovatio portfolio 
covers effectively ALL currently implemented embodiments of Wi-Fi 
technology in use today.''
    They didn't tell them that a huge proportion of Wi-Fi devices were 
already licensed, because of Broadcom's cross licenses and the license 
Broadcom kept for itself, and that therefore they might not even need 
any further permission or licenses from Innovatio. Instead, they 
claimed that almost a billion dollars had been collected in royalties 
already; referring mostly to amounts paid to Broadcom by its arch-
competitor Qualcomm to resolve numerous U.S. and foreign legal claims 
that had almost nothing to do with these patents.
    They also claimed that thousands of companies had already paid 
Innovatio as well. They didn't tell their targets that the patents 
related to industry standards and therefore had to be licensed on fair 
and non-discriminatory terms--something that all three of the former 
owners including Broadcom had irrevocably promised to do. Instead they 
told them, that ``[W]e wish to license your company at a very 
affordable rate--far less than the cost of patent litigation. I can 
quote you a rate of less than $3000 per location''--this for patents 
that a Federal court recently determined were worth pennies per 
chip.\2\
---------------------------------------------------------------------------
    \2\ In re Innovatio IP Ventures, LLC Patent Litig., MDL No. 2303, 
2013 WL 5593609 (N.D. Ill. Oct. 3, 2013).
---------------------------------------------------------------------------
    And he didn't tell them that the manufacturers of the products, 
including Cisco, were suing Innovatio to defend their customers. 
Instead he misrepresented to them that the equipment manufacturers, 
``have not stepped in to defend any of their users. This means we can 
still sue your client and they cannot expect equipment manufacturers to 
aid in their defense.''
    Finally, for those businesses who had the temerity to resist, 
Innovatio enumerated thousands of pages of documents that would have to 
be reviewed by counsel to even begin to defend against Innovatio's 
allegations, meaning thousands of dollars in legal fees. Unfortunately, 
thousands of businesses may have fallen for this scam.
    So, although Innovatio cloaks its business in the patina of patents 
and patent infringement, the reality is that Innovatio is just a modern 
take on an old scam.
    Innovatio conducts its racket by sending letters containing 
mistruths and omissions to thousands of consumers in an attempt to 
obtain money from these targets to which Innovatio is not entitled.
    And, unfortunately, Innovatio is only one example of this emerging 
type of consumer fraud.
Project Paperless/MPHJ
    There have been numerous news articles about a similar scam by an 
entity that originally was called Project Paperless and which 
ultimately became known as MPHJ. Project Paperless engaged in a letter-
writing campaign demanding $1,000 per employee from their targets.\3\ 
An online project \4\ discovered that some of the partners in Project 
Paperless's law firm likely had an ownership interest in the patents. 
Soon after the revelation of this inconvenient truth, Project Paperless 
dropped its lawsuits and sold the patents to another shell company 
called MPHJ Holdings, after which threatening letters started coming 
from a full alphabet soup of strangely named shell companies including 
AccNum, AllLed, AdzPro, CalNeb, ChaPac, FanPar, FasLan, FulNer, GosNel, 
and HunLos.
---------------------------------------------------------------------------
    \3\ See Joe Mullin, Meet the nice-guy lawyers who want $1,000 per 
worker for using scanners, arstechnica (Apr. 7, 2013), available at 
http://arstechnica.com/tech-policy/2013/04/meet-the-nice-guy-lawyers-
who-want-1000-per-worker-for-using-scanners/ (last visited Nov. 4, 
2013).
    \4\ See Stop Project Paperless website--http://stop-project-
paperless.com/the-patents/ (last visited Nov. 4, 2013).
---------------------------------------------------------------------------
    State attorneys general in Minnesota, Nebraska, and Vermont have 
taken various actions against MPHJ to protect business and consumers in 
their respective states from MPHJ's deceptive practices. For example 
the Vermont attorney general's action against MPHJ lists MPHJ's lies 
and abusive practices in gory detail including:\5\
---------------------------------------------------------------------------
    \5\ Consumer Protection Complaint in Vermont v. MPHJ Technology 
Investments, LLC, No. 282-S-13WNCV (Vt. Super. Ct.) (filed May 8, 
2013), available at http://www.atg.state.vt.us/assets/files/
Vermont%20v%20MPHJ%20Technologies%20Complaint.pdf (last visited Nov. 4, 
2013).

  1.  MPHJ entities sent threatening letters without doing any actual 
---------------------------------------------------------------------------
        investigation of whether their patents were being infringed.

  2.  MPHJ forced its targets to do the work of analyzing infringement

  3.  MPHJ deliberately targeted small businesses without ready access 
        to sophisticated representation

  4.  MPHJ told its targets that it had a successful established 
        licensing program when it fact it had signed very few licenses 
        with an average licensing fee of $900.

  5.  MPHJ's letters indicate that litigation would be imminent if a 
        license deal was not signed almost immediately yet MPHJ had 
        never actually filed suit.

    Minnesota reached a settlement with MPHJ forcing them to cease and 
desist from targeting Minnesota businesses.
Helferich
    Cisco also is aware of another such entity, Helferich Patent 
Licensing, LLC (``Helferich''). Helferich was founded in 2007 ``for the 
purpose of commercializing, licensing, and enforcing'' patents relating 
to delivery of content to a cell phone. Although Helferich had already 
licensed its patents to cell phone manufacturers, it sought to double 
dip by demanding payment from hundreds of companies who sent text 
messages to those very same licensed cells phones.
    Helferich's letters told its end user targets that companies that 
paid up immediately would get a discounted rate but threatened that 
this rate would go up if the target didn't pay up within 60 days.
    Numerous companies entered into licenses, but the New York Times 
and others decided to fight back. In the New York Times case, the 
District Court found that the original license to the cell phone 
manufacturers meant that no further license to the users was needed.
    We can only hope that Helferich was exaggerating when it claimed 
that over 100 companies already had signed licenses that it turned out 
none of the companies needed.
USEI
    Another example is an entity called United States Ethernet 
Innovations, LLC (``USEI''). USEI purchased a group of patents that 
were about to expire from 3Com prior to 3Com's acquisition by Hewlett-
Packard.
    In addition to filing numerous lawsuits, USEI has sent licensing 
threat letters to hundreds (or possibly thousands) of end user 
businesses. USEI's letters assert that Ethernet technology is covered 
by their patents and their technology ``is utilized in many day-to-day 
business activities within corporations, including Internet 
connections, data transmission, retail transactions, corporate 
transactions, networked security system cameras, point of sale 
information, and inventory management systems.''
    The letters further warn that USEI has hired ``the largest and most 
successful plaintiff's law firm in the world'' and has recently filed 
infringement lawsuits, but that it was willing to offer a license to a 
``select group'' of entities such as the letter target in order to 
avoid ``protracted litigation.''
    We understand that USEI has refused to provide its targets with 
information that would help them determine whether they actually need a 
license. For example, we understand that USEI has refused to disclose 
to its targets what entities already are licensed, a disclosure that 
would allow the target to determine whether the products it was using 
already were licensed and thus for which the target user did not have 
to pay. Targets of USEI's licensing campaign have included department 
stores, markets and other end user businesses both large and small.
    Cisco's customers have received licensing demands from many of 
these shake down campaigns. In each case, the campaigns are inherently 
deceptive. The patents are often invalid or irrelevant to their targets 
or already licensed. The target end-users do not get a real picture of 
the licensing history and the real likelihood of suit. The massive 
deceptive letter writing campaigns are just a way for the scam artists 
to get far more money than their patents are worth (if they are worth 
anything at all) just like in any other scam.
Recommendations
    Much of what we have said here is based on Cisco's own experiences 
and what Cisco's own customers have told us about their experiences.
    But we do not know the scope and extent of the deceptive practices 
in which these entities are engaging. Our customers, the end user 
consumers that these entities are targeting and which we are seeking to 
protect, know even less. That is why your help is needed.
    There are four simple steps that would make it much harder for 
these scam artists to use deceptive letter writing schemes to extract 
money to which they are not entitled from end user/consumer targets:\6\
---------------------------------------------------------------------------
    \6\ My proposal is very consistent with the White House's 
recommendations for reforming the patent system. See Fact Sheet: White 
House Task Force on High-Tech Patent Issues (June 4, 2013), available 
at http://www.whitehouse.gov/the-press-office/2013/06/04/fact-sheet-
white-house-task-force-high-tech-patent-issues (last visited Nov. 4, 
2013).
---------------------------------------------------------------------------
    First, require anyone sending patent demand letters to more than 
ten entities who are NOT the manufacturers of the accused products to 
file the letters in an on-line registry to be maintained by the FTC. 
The public, the targets of the campaigns and the FTC need to know the 
full picture.
    Second, require anyone in that category to include in the letter a 
list of products which are deemed to infringe, including the 
manufacturer and model number, and informing them that they may have 
the right to have the manufacturer defend the case, and providing 
contact information for the manufacturer.
    Third, require any such letter to include the names of the entities 
which own the patents or benefit from their enforcement and any related 
entities.
    And fourth, require the letters to include a list of all previous 
licenses granted for those patents, with a notice that if the recipient 
of the letter is using the products or services of a licensed entity, 
the recipient may require no further rights or permission from the 
patent holder. Also, the letter should say if there is a relevant 
licensing commitment to a standards organization.
    By adding a basic level of transparency and accountability, these 
simple steps will help protect innocent end users.
    The paycheck I get every other week says ``Cisco'' on it, but every 
cent comes from my customers. That is why I am passionate about making 
sure my customers who trust us to supply them with products don't get 
ripped off by these predators.
    And when these predators are forced to come to me, I can guarantee 
they will get a fair fight.
    Thank you. Please let me know if you have any questions.

    Senator McCaskill. Thank you, Mr. Chandler.
    Ms. Samuels.

  STATEMENT OF JULIE P. SAMUELS, SENIOR STAFF ATTORNEY, MARK 
 CUBAN CHAIR TO ELIMINATE STUPID PATENTS, ELECTRONIC FRONTIER 
                           FOUNDATION

    Ms. Samuels. Chairman McCaskill, Ranking Member Heller, 
Senator Klobuchar, I am Julie Samuels from the Electronic 
Frontier Foundation, and it is an absolute honor to be here 
today.
    EFF is a nonprofit civil liberties organization that has 
worked for more than 20 years to protect consumer interests, 
innovation, and free expression in the digital world. Today 
we're here to talk about patent assertion entities and their 
practice sending demand letters.
    I'm going to tell you the problem we saw and we continue to 
see, what we've done to fix it and why we still need your help. 
The so-called patent troll problem is not a new one, but in the 
past 18 months something shifted. We started hearing, sometimes 
daily, from people who had received demand letters, often 
vague, written in dense legalese, threatening litigation if the 
recipient didn't pay up.
    We heard from app developers, small business owners, 
startup founders, people who ran their companies out of their 
living rooms and garages. These victims didn't know what to do 
or how to respond. They couldn't afford patent lawyers and, 
frankly, they were scared.
    Even worse, the vast majority of these people were being 
accused of infringing a patent based on everyday technology: 
online shopping carts; Wi-Fi routers; document scanners and the 
like. I personally wanted to help everyone who called, but we 
couldn't. I wanted to give them more information on who was 
sending the letters but we didn't have it. I wanted to tell 
them about patent law, what the letter meant, and reinforce 
that they in fact had no legal obligation to respond to the 
letter. But that alone would have filled up all of our time. We 
couldn't represent everyone who needed our help.
    Something we quickly learned is that these letters really 
had nothing to do with patent law. They merely used the guise 
of patent law as leverage to conduct, frankly, run-of-the-mill 
extortion.
    Two main problems we saw were lack of information and 
underreporting. First, without simple facts about the threat it 
faces, such as who is really behind the demands and if the 
troll will ever actually sue, a recipient is unable to assess 
its risk. It is left with a host of undesirable options: to 
hire a lawyer; to pay the troll to go away; or to do nothing 
and simply hope the troll disappears.
    Second, because the vast majority of the deals entered into 
between trolls and their targets are not public, the exact 
scope and contours of the activity we're talking about are 
frankly hard to understand. So we came up with a solution.
    We've developed a website called Trolling Effects; a simple 
database that allows people to post the demand they received 
online, find letters received by others, and research who is 
really behind the threats. Finally, and most importantly, all 
of the information is freely available to anyone, period.
    Our experience so far with Trolling Effects has taught us, 
however, that many victims are often not willing or inclined to 
publicly share their letters. This has to do in large part with 
the public nature of the database and the fact that even with 
redactions, it is virtually impossible to safely anonymize all 
letter recipients.
    Larger, more established companies fear that making these 
demands public paints a target on their back while smaller 
companies and individuals are often even more afraid to attract 
attention from the trolls. That's why we're here today. To 
really solve this problem, we need Congressional help.
    Despite our best efforts, trolls continue to benefit from 
the asymmetry of information in the marketplace. Certain 
targeted legislative fixes could curb these abusive letter-
sending practices. Congress could create registries, similar to 
what we are trying to do with Trolling Effects and what Mr. 
Chandler also brought up. Legislation could require patent 
owners to report on details of their demands at the Patent 
Office, for instance. The Patent Office already has many kinds 
of reporting requirements for patent holders, so this would be 
nothing new. Making this information public would fundamentally 
change the landscape. Armed with more facts, everyday consumers 
will be better able to assess their options.
    The FTC could also maintain a registry of those who send 
demands and the scope of those demands. Registries, at either 
the Patent Office or the FTC, would create additional 
incentives for letter recipients to turn over information. At 
the Patent Office, a certain amount of complaints regarding a 
particular patent could lead to a sua sponte review of that 
patent. And at the FTC, a certain number complaints could 
trigger a Section 5 investigation. Both options create a value 
proposition for letter recipients; the hope that, in exchange 
for information, something might be done.
    Legislation could also define certain practices such as 
making false demands and failing to include certain basic 
details in those demands as presumptively unfair or deceptive. 
This would not only trigger existing Section 5 authority, but 
also many state consumer protection statutes already on the 
books. At least three states, including Nebraska, as Attorney 
General Bruning testified, have already targeted this type of 
behavior and we know that even more are interested.
    The importance of today's hearing cannot be understated, 
particularly because these trolls conduct the vast majority of 
their business behind a veil of secrecy. But a business model 
based on secrecy is antithetical to the entire patent system 
and it's destructive to consumers and our innovation economy.
    I thank you for your time and look forward to answering 
your questions.
    [The prepared statement of Ms. Samuels follows:]

  Prepared Statement of Julie P. Samuels, Senior Staff Attorney, Mark 
Cuban Chair to Eliminate Stupid Patents, Electronic Frontier Foundation
    Chairman McCaskill, Ranking Member Heller, and members of the 
Subcommittee, thank you for holding this hearing and inviting me to 
testify today about deceptive practices by Patent Assertion Entities. 
We are greatly encouraged by your interest in this important issue and 
its impact on consumers.
    I am a Senior Staff Attorney at the Electronic Frontier Foundation, 
where I also hold the Mark Cuban Chair to Eliminate Stupid Patents. EFF 
is a non-profit civil liberties organization that has worked for more 
than 20 years to protect consumer interests, innovation, and free 
expression in the digital world. Founded in 1990, EFF represents more 
than 24,000 active members. Many of those members are small innovators 
and tinkerers who often find themselves facing patent litigation or 
demands. Through litigation, the legislative process, and 
administrative advocacy, EFF seeks to represent those members' 
interests and promote a patent system that facilitates, and does not 
impede, what the Constitution defines as ``the Progress of Science and 
useful Arts.''
    PAEs use the threat of patent litigation to extort settlements in 
the form of what they might call ``licensing deals.'' These ``licensing 
deals,'' however, are not the kind of responsible technology transfer 
that benefits consumers. These companies, also known as non-practicing 
entities (NPEs) or, colloquially, as patent trolls, usually neither 
make nor sell anything but use patents to sue, and threaten lawsuits 
upon, unsuspecting businesses. As Judge Posner of the Seventh Circuit 
Court of Appeals explains, patent trolls ``are companies that acquire 
patents not to protect their market for a product they want to 
produce--patent trolls are not producers--but to lay traps for 
producers, for a patentee can sue for infringement even if it doesn't 
make the product that it holds a patent on.'' \1\
---------------------------------------------------------------------------
    \1\ Richard A. Posner, Why There Are Too Many Patents in America, 
The Atlantic (July 12, 2012), http://www.theatlantic.com/business/
archive/2012/07/why-there-are-too-many-patents-in-america/259725/.
---------------------------------------------------------------------------
    Patent trolls are causing enormous harm to innovators and 
consumers, not to mention job creators. Companies that actually create 
products, services, and jobs find themselves under siege by trolls who 
purchase vague and overbroad patents to launch or threaten lawsuits. As 
you know, the conduct surrounding those lawsuits, and solutions to curb 
further abuse, are being considered in both chambers of Congress.\2\ 
The harm to consumers, however, does not only arise out of actual 
lawsuits; instead, it also comes from dangerous and irresponsible 
demand letter-writing campaigns. Indeed, as the White House found: 
``The PAE business model is based on the presumption that in many 
cases, targeted firms will settle out of court rather than take the 
risky, time-consuming course of allowing a court to decide if 
infringement has occurred.'' \3\
---------------------------------------------------------------------------
    \2\ See, e.g., The Innovation Act of 2103 (H.R. 3309); The Patent 
Quality Improvement Act (S. 866); and the Patent Abuse Reduction Act 
(S. 1013).
    \3\ Executive Office of the President, Patent Assertion and U.S. 
Innovation, at 12, http://www.whitehouse.gov/sites/default/files/docs/
patent_report.pdf.
---------------------------------------------------------------------------
    These demand letters are often vague, lacking basic detail of what 
the recipient does to allegedly infringe the patent at issue. The 
letters frequently list patent numbers without detailing which parts of 
the patent--which typically comprises many pages of dense technical 
content and legalese--are at issue. While the recipient of the letter, 
most often an entrepreneur focused on building her business, has no 
legal obligation to reply, she might not know that, and the senders 
often include ``draft complaints'' and other enclosures in an attempt 
to threaten real litigation, even though the patent holders may have no 
intention of actually bringing a suit in court. And this is no wonder, 
as the letters' targets are ever more frequently individuals and small 
companies whose entire annual revenue would not cover the cost of a 
lawyer's time to obtain the information necessary to respond to the 
letter.
    To understand the threat to consumers that irresponsible demand 
letter practices pose, one first must understand the harms that flow 
from current patent litigation trends. Since 2002, litigation at the 
hands of patent trolls has grown from just five percent of total patent 
litigation to a majority of all patent cases.\4\ Moreover, patent 
trolls are targeting smaller companies, such as startups, that lack the 
resources to defend against a patent suit (which can cost well over $1 
million per side) and thus have no choice but to pay extortionate 
settlement demands.\5\
---------------------------------------------------------------------------
    \4\ James Bessen, Jennifer Ford and Michael Meurer, The Private and 
Social Costs of Patent Trolls, (``Bessen 2011'') at 7, http://
papers.ssrn.com/sol3/papers.cfm?abstract_id=1930272; Colleen V. Chien, 
Patent Assertion Entities, presentation to the December 10, 2012 DOJ/
FTC Hearing on PAEs, (``Chien Slides''), at slides 23-24, https://
papers.ssrn.com/sol3/papers.cfm?
abstract_id=2187314.
    \5\ Colleen V. Chien, Startups and Patent Trolls (Santa Clara Univ. 
Sch. of Law Legal Studies Research Paper Series, Accepted Paper No. 90-
12, 2012), (``Chien 2012''), http://papers.ssrn.com/sol3/
papers.cfm?abstract_id=2146251.
---------------------------------------------------------------------------
    This explosion of patent troll litigation has been very costly. The 
research shows that ``NPE lawsuits are associated with half a trillion 
dollars of lost wealth to defendants from 1990 through 2010. [And] 
during the last four years the lost wealth has averaged over $80 
billion per year.'' \6\ The burden of patent troll litigation falls 
particularly hard on small companies. Professor Colleen Chien recently 
found that at least 55 percent of unique defendants in patent troll 
suits have revenues under $10 million per year.\7\
---------------------------------------------------------------------------
    \6\ Bessen 2011 at 2.
    \7\ Chien 2012 at 1-2.
---------------------------------------------------------------------------
    Of particular note, the patent troll problem is quite often a 
software patent problem. Software patents serve as an attractive tool 
for patent trolls because they are notoriously difficult to interpret--
giving unscrupulous patent owners the ability to claim that their 
patent covers a wide range of technology.\8\ Thus, litigation involving 
software patents has increased dramatically--from fewer than 200 per 
year prior in 1997 to the current rate of over 1000 per year.\9\ Many 
of these suits are brought by patent trolls. In fact, more than 80 
percent of troll-filed suits assert high-tech patents, and more than 65 
percent have software-related claims.\10\ For the same reasons that 
software patents and their ``fuzzy boundaries'' result in an increase 
in litigation, they too provide patent holders a dangerous tool to send 
menacing demand letters.
---------------------------------------------------------------------------
    \8\ In other words, ``software patents have `fuzzy boundaries': 
they have unpredictable claim interpretation and unclear scope. . .and 
the huge number of software patents granted makes thorough search to 
clear rights infeasible, especially when the patent applicants hide 
claims for many years by filing continuations. This gives rise to many 
situations where technology firms inadvertently infringe.'' Bessen 2011 
at 23.
    \9\ James Bessen, A Generation of Software Patents, 18 B.U. J. Sci. 
& Tech. L. 241, 259 (2012) (Figure 3).
    \10\ See Brian J. Love, An Empirical Study of Patent Litigation 
Timing: Could a Patent Term Reduction Decimate Trolls Without Harming 
Innovators? (August 30, 2011), at 39, http://ssrn.com/abstract=1917709 
(forthcoming in University of Pennsylvania Law Review).
---------------------------------------------------------------------------
    Another dangerous demand-letter trend, too, has its roots in 
litigation, but directly results in extraordinary harm to consumers 
outside of the courtroom. PAEs now make a regular practice of targeting 
those who use generally available technology. In fact, six of the top 
ten largest patent litigation campaigns targeted end users and not the 
manufacturers or suppliers of the supposedly infringing product or 
technology.'' \11\ And the research shows that:
---------------------------------------------------------------------------
    \11\ Colleen V. Chien and Edward Reines, Why Technology Customers 
are Being Sued En Masse for Patent Infringement & What Can Be Done, 
Santa Clara University School of Law Working Paper No. 20-13 (August 
2013) (``Chien & Reines'') at 2, http://papers.ssrn.com/sol3/
papers.cfm?abstract_id=2318666.

        The burden for these suits falls disproportionately on small 
        companies, and too often results in nuisance settlements based 
        on the high cost of defending a patent case, not the merits of 
        the claim.\12\
---------------------------------------------------------------------------
    \12\ Id. at 4.

    Even worse, many of these letter recipients are not what we 
commonly think of as ``technology companies.'' Instead, they merely use 
technology, as we all do. In fact, retail is ``among the most highly 
pursued industries'' by PAEs.\13\
---------------------------------------------------------------------------
    \13\ Id. at 8.
---------------------------------------------------------------------------
    Because the use of technology is widespread, so is the harm from 
these types of patent demands. ``Indeed, many businesses have stopped 
adopting technology altogether to avoid patent infringement claims--for 
example, scanning to a USB stick to avoid infringing a PDF machine 
patent, not offering Wi-Fi to customers to avoid Wi-Fi patents, or, in 
some cases exiting the business or business line.'' \14\
---------------------------------------------------------------------------
    \14\ Id. at 12.
---------------------------------------------------------------------------
    Even though a demand letter is not a legal complaint, and even if 
it makes specious claims, the mere threat of litigation brings with it 
serious costs. As one study found:

        Patent demands can be costly to resolve, and particularly so 
        for small companies. The overwhelming majority of companies 
        said that resolving the demand required founder time (73 
        percent) and distracted from the core business (89 percent); 
        most experienced a financial impact as well (63 percent). 
        However, responses and the costs of these responses ran the 
        gamut; for example, 22 percent of those surveyed said they 
        ``did nothing'' to resolve the demand.\15\
---------------------------------------------------------------------------
    \15\ Chien 2012 at 10.

    Mere threats can cause this harm because the costs of patent 
litigation are, simply, outrageous. If taken to verdict, defending a 
lawsuit can easily cost nearly $3 million.\16\ Even if the case is 
dismissed early, legal costs will often run into the six and seven 
figures.\17\ Thus, when facing a vaguely worded demand letter that 
threatens immediate suit and the expensive and unpredictable world of 
litigation, it is no wonder that so many recipients will merely pay the 
troll, even when the PAE may have no intention of ever bringing a 
lawsuit.
---------------------------------------------------------------------------
    \16\ See http://news.cnet.com/8301-32973_3-57409792-296/how-much-
is-that-patent-lawsuit-going-to-cost-you.
    \17\ Chien & Reines at 3.
---------------------------------------------------------------------------
    These harms are not abstract. They affect real people everyday. 
Like Mark Egerman, founder of Cover. Cover is a smartphone application 
(``app'') that allows customers to easily split and pay their bills at 
restaurants. According to Mr. Egerman,

        When we launched in October, we were thrilled by the support we 
        got from restaurants and users. Unfortunately, the press 
        attention brought with it something else--our first patent 
        troll. Within days of launching we received a threatening 
        letter asking us to license a patent or else lawyers would get 
        involved. The patent doesn't address our product and yet we 
        find ourselves in the same unenviable position of hundreds of 
        other startups. Pay off the troll or face an unnecessary 
        lawsuit.

    Another app developer, Gedeon P. Maheux, found himself in a similar 
situation:

        [We] and several other companies were threatened by a well-
        known patent troll for a patent we (and thousands of other 
        software developers) supposedly violated dealing with in-app 
        purchases in iPhone apps. . . . At first we decided to use 
        legal means to fight the troll. We hired a lawyer who informed 
        us of our options. . . . The troll demanded payment by a given 
        date and unless we were prepared to go to court, we had to 
        comply. We're a small business and quickly found our mounting 
        legal fees becoming unreasonable. In the face of [the slow 
        legal system] and increasing costs dealing with the troll, we 
        decided as a group to take the license and pay the troll his 
        toll.

    En masse, these threats wreak havoc on consumers. Take Innovatio, a 
company that, ``using a portfolio of 31 patents directed at the 802.11 
wireless communication standard (most of which are expired or lapsed). 
. .has made demands of over 13,000 small and large end-users of wi-fi 
technology using devices sold by Cisco, Netgear, Apple, and others.'' 
\18\ In less technical terms, this means that coffee shops, hotels, and 
other small retailers who have bought a $40 router off-the-shelf at 
their local retailer find themselves facing letters with ominous 
warnings threating expensive litigation.
---------------------------------------------------------------------------
    \18\ Id. at 19.
---------------------------------------------------------------------------
    Or, MPHJ, a PAE that has sent letters to thousands of small 
businesses around the country demanding steep license fees for the use 
of standard office scanners.\19\ MPHJ's practices are particularly 
egregious--it has created a series of shell corporations with 
nonsensical names like AdzPro, GosNel, and FasLan, making them nearly 
impossible to track. MPHJ demands approximately $1,000 per employee who 
uses simple scanning technology--a claim that surely implicates office 
workers across the country
---------------------------------------------------------------------------
    \19\ Id. at 10.
---------------------------------------------------------------------------
    MPHJ sends demand letters (including letters with draft complaints 
attached) without any apparent intent of ever suing; indeed, there is 
no record that a single suit has been filed. MPHJ's practices have 
drawn the attention of at least three states' Attorneys General. In 
Vermont, the Attorney General sued MPHJ, claiming that its actions 
demonstrate unfair trade practices in commerce and deceptive trade 
practices in commerce.\20\ That suit is ongoing. Minnesota's Attorney 
General reached a consent decree with MPHJ prohibiting the PAE from 
sending correspondence to anyone in the state that seeks fees or 
payments or threatens litigation in connection with intellectual 
property infringement, unless MPHJ gives 60 days' written notice to the 
Attorney General or obtains consent.\21\ And, finally, Nebraska's 
Attorney General issued a civil investigative demand and cease and 
desist letter to Farney Daniels, one of MPHJ's law firms, who also 
represents another notorious PAE, Activision, in Nebraska.\22\ Farney 
Daniels has sued over the propriety of the cease and desist order and 
that litigation is ongoing.
---------------------------------------------------------------------------
    \20\ See http://www.atg.state.vt.us/news/vermont-attorney-general-
sues-patent-troll-in-ground
breaking-lawsuit.php.
    \21\ See http://www.ag.state.mn.us/Consumer/PressRelease/
130820StopPatentTrolling.asp.
    \22\ See http://www.ago.ne.gov/resources/dyn/files/
1069520z2e735d6e/_fn/071813+Bruning+
Patent+Troll+Release+.pdf.
---------------------------------------------------------------------------
    Massive PAE demand-letter campaigns like these lead to additional 
problems surrounding the sharing of and reporting on information. 
Because the demands by definition exist pre-complaint, they create no 
public record. And once a license or settlement is signed, it most 
likely will include a non-disclosure provision leaving the recipient 
unable to share its experience. This causes two problems: asymmetry of 
information and underreporting.
    The asymmetry of information problem is simple: the PAE holds all 
of the information surrounding its threat while the recipient is left 
with almost none. Without simple facts about the alleged threat it 
faces, such as who is really behind the demand and if the PAE's history 
makes it likely to further pursue its threats, a demand recipient is 
unable to assess its risk. It is left with a host of undesirable 
options: to hire a lawyer, to pay the PAE to go away, or to do nothing 
and simply hope the PAE disappears. In most instances, the PAE risk was 
not one that the recipient bargained for when it bought the product at 
issue or started its business, yet it finds itself with no choice but 
to face it.
    The second problem is underreporting. Because the vast majority of 
the deals entered into between PAEs and their targets are not public, 
the exact scope and contours of PAE activity is difficult for 
policymakers and others to properly understand.
    To combat these concerns, EFF, along with a broad coalition, 
launched Trolling Effects, a database to collect demand letters.\23\ 
The site was officially launched on July 31, 2013. The site allows 
demand letter recipients to post the documents online, find letters 
received by others, and research who is really behind the threats. The 
site also features comprehensive guides to the patent and additional 
relevant information. Finally--and most importantly--all of the 
information is freely available, not only to those who receive PAE 
demands, but to academics, policy makers, and the general public.
---------------------------------------------------------------------------
    \23\ See https://www.trollingeffects.org
---------------------------------------------------------------------------
    Our experience thus far with Trolling Effects has taught us that 
many demand recipients are often not willing or inclined to publicly 
share their letters. This has to do in large part with the public 
nature of the database and the fact that, even with redactions, it is 
virtually impossible to safely anonymize letter recipients. Demand 
recipients, both large and small, often chose to keep their identity 
hidden.\24\ Larger, more established companies fear that making these 
demands public ``paints a target on their back.'' Smaller companies and 
individuals are often even more afraid. It appears that ensuring more 
thorough transparency will require action from Congress.
---------------------------------------------------------------------------
    \24\ Professor Robin Feldman came to a similar conclusion: ``for a 
number of years, companies have been reluctant to speak to reporters or 
researches, partly out of fear of retaliation by large players with 
large patent portfolios.'' Robin Feldman, Patent Demands & Startup 
Companies: The View from the Venture Capital Community (Oct. 29, 2013) 
(``Feldman'') at 29, http://papers.ssrn.com/sol3/
papers.cfm?abstract_id=2346338.
---------------------------------------------------------------------------
Statutory Intervention is Necessary to Protect Consumers
    While questions of patent law usually find themselves before the 
Judiciary Committee, this Committee should consider and correct the 
negative impact that demand letter-sending practices have on consumers. 
Those practices can be regulated without disrupting the underlying 
patent laws and without negative impact on responsible technology 
transfer. Below, we set forth some potential targeted legislative 
solutions.
A. Defining Relevant Practices that Violate Consumer Protection 
        Statutes
    Section 5 of the FTC Act declares unlawful ``unfair methods of 
competition in or affecting commerce, and unfair or deceptive acts or 
practices in or affecting commerce.'' 15 U.S.C.A. Sec. 45(a)(1). 
Abusive demand letters are both an unfair method of competition and a 
deceptive practice. A law defining those practices as such would 
trigger not just Section 5, but many similar state law provisions 
already on the books.
    There can be no doubt that PAE actions cause significant economic 
harm. According to a congressional study, PAE activity cost defendants 
and licensees $29 billion in 2011, a 400 percent increase over $7 
billion in 2005, and the losses are mostly deadweight, with less than 
25 percent flowing to innovation and at least that much going towards 
legal fees.\25\ Moreover, a recent survey found that 74 percent of 
venture investors ``reported that patent demands had either a highly 
significant or a moderately significant impact on the companies that 
received them, including distracting management, expending resources, 
or altering business plans.'' \26\ The demand activity in these reports 
is not limited to letters, of course. But the demand letters do extract 
their toll, and make up a significant portion of those costs. For 
instance, Professor Colleen Chien has reported that there are at least 
100 demand threats for each filed lawsuit.\27\
---------------------------------------------------------------------------
    \25\ Brian T. Yeh, Cong. Research Serv., R42668, An Overview of the 
``Patent Trolls'' Debate, (2012) (``Yeh'') at Summary and 2, https://
www.eff.org/sites/default/files/R42668_0.pdf (citing James Bessen & 
Michael Meurer, The Direct Costs from NPE Disputes 2, 18-19, (Boston 
Univ. School of Law, Law and Economics Research Paper No. 12-34, 2012) 
(``Bessen 2012'')), http://papers.ssrn.com/sol3/
papers.cfm?abstract_id=2091210
    \26\ Feldman at 39-40.
    \27\ Chien Slides at slide 25.
---------------------------------------------------------------------------
    The FTC Act was enacted to protect consumers from the type of 
demand-letter practices many PAEs have lately practiced. By statutorily 
defining certain of those practices as ``unfair methods of 
competition'' or ``unfair or deceptive acts or practices,'' Congress 
could trigger existing Section 5 protections.\28\ For instance, the 
following type of demand-sending behavior might be addressed:
---------------------------------------------------------------------------
    \28\ FTC Chairwoman Edith Ramirez said in a recent speech she 
believed Section 5 authority could reach certain PAE activities, such 
as those ``that target small businesses with false claims made to 
induce the payment of illegitimate licensing fees.'' Opening Remarks of 
Chairwoman Edith Ramirez, Competition Law & Patent Assertion Entities: 
What Antitrust Enforces Can Do (June 20, 2013) at 9 http://ftc.gov/
speeches/ramirez/130620paespeech.pdf.

   Demands falsely threatening litigation;\29\
---------------------------------------------------------------------------
    \29\ See, e.g., The Federal Fair Debt Collections Practices Act, 15 
USC Sec. 1692(e), limiting the scope of threats that can be made in a 
debt collection letter.

   Demands sent without specifically listing the patents and 
---------------------------------------------------------------------------
        claims that are allegedly infringed;

   Demands sent without listing the products and services that 
        allegedly infringe those patents;

   Demands sent without any clear indication of who owns the 
        patent at issue;

   Demands sent following a failure to perform any pre-demand 
        investigation into the recipient; and

   Demands sent to businesses with the direct knowledge that 
        those businesses can neither afford to take a license or defend 
        themselves in Federal court.

    PAEs routinely send demands that do all of these things. They leave 
recipients without any meaningful information on how to mitigate and 
manage their risk, and leave them oftentimes with little choice but to 
take an unearned license. This is precisely the kind of behavior that 
may and should be regulated by consumer protection statutes. As the 
Commission itself has stated, it can target ``[c]onduct that results in 
harm to competition, and in turn, in harm to consumer welfare, [which] 
typically does so through increased prices, reduced output, diminished 
quality, or weakened incentives to innovate.'' \30\
---------------------------------------------------------------------------
    \30\ Statement of Commissioner Joshua D. Write, Proposed Policy 
Statement Regarding Unfair Methods of Competition Under Section 5 of 
the Federal Trade Commission Act (June 19, 2013) at 7, http://
www.ftc.gov/speeches/wright/130619umcpolicystatement.pdf.
---------------------------------------------------------------------------
    Defining the types of practices that PAEs like MPHJ rely on as 
unfair or deceptive practices would allow the FTC and various states 
with statutes similar to Vermont's to take advantage of existing 
statutory frameworks and end the dangerous PAE demand-sending 
campaigns. Moreover, it would present no risk to companies who engage 
in responsible licensing practices and technology transfer, who could 
easily obtain the information necessary to conduct proper business.
B. Creating Public Registries of Relevant PAE Information
    Because a patent is a government-granted monopoly, the government 
may impose conditions on that grant. Indeed, it does that all the time 
by requiring that certain conditions be met before a patent is granted 
and that patent holders keep their records up-to-date by, for instance, 
reporting on changes in ownership. Likewise, a patent holder should be 
required to provide certain information to the Patent Office when it 
asserts infringement of that patent in a letter.
    Patent owners could be required to report information such as how 
many demand letters have been sent regarding a specific patent; 
identification of all parties who stand to benefit financially from any 
resulting license; identification of any obligation to license the 
patents at issue on fair or reasonable terms; and how many times the 
holder has filed suit based on the patent at issue.
    There are various reasonable triggers that could require such 
reporting, such as a certain number of letters sent in a set period of 
time or notification to the Patent Office of a threshold number of 
letter recipients.
    At a minimum, reporting this information to the Patent Office would 
make it public (assuming the Patent Office provided it in a publicly-
accessible database, which it should be required to do). This 
information would fundamentally change the unfair information asymmetry 
facing demand recipients--armed with more facts, they will be better 
able to assess their options.
    Collecting the information might also assist the Patent Office in 
initiating sua sponte review of certain patents. If the Office has 
information regarding which patents are most often used as weapons by 
PAEs, it might prioritize those for such review. Indeed, in a world 
with literally millions of existing patents, it makes sense to focus 
challenges on those that pose the greatest threat to consumers.\31\ It 
is not until those patents are asserted in demands that we can 
ascertain just which patents will cause harm. Requiring reporting to 
the Patent Office will give the Office necessary knowledge to know 
which patents make the most sense to target for additional review.\32\ 
(The potential for Patent Office review of existing patents may 
likewise serve as an incentive for demand-letter recipients to provide 
information as well.)
---------------------------------------------------------------------------
    \31\ Dan L. Burk & Mark Lemley, Policy Levers in Patent Law, 89 Va. 
L. Rev. 1575 (2003).
    \32\ See Chien & Reines at 6.
---------------------------------------------------------------------------
    It is not just the Patent Office who may decide to subject existing 
patents to additional review (indeed, this is a very rare practice, 
though there is no reason it cold not happen more). It also gives third 
parties--including public interest groups like EFF--knowledge 
surrounding which patents they might choose to challenge. EFF alone has 
made more than 15 third-party patent challenges to patents and patent 
applications, one as recent as October of 2013. These challenges 
require significant resources, both financial and otherwise, and it is 
of great benefit to know which patents pose the greatest threat to 
consumers, end-users, and those who may not be in a position to put 
forth such a challenge themselves.
    In the alternative, the FTC could also house a similar registry of 
patent demands. It already does this in various other contexts, such as 
the Do Not Call Registry. When a certain threshold number of demands 
are sent involving a particular patent, or from a particular sending 
party, the FTC might initiate an investigation. Similar to a registry 
at the Patent Office, one at the FTC might be made up of patent holders 
self reporting or consumers submitting information on the demands they 
receive. Given the FTC's expertise in consumer-facing issues, it would 
be particularly equipped to house the latter type of registry; given 
the Patent Office's expertise in dealing with patent owners, it might 
focus on the former.
C. Increasing Public-Private Partnerships
    In virtually every area of the law there has been a long history of 
productive public-private partnerships. Patent law is no exception. The 
Peer To Patent project \33\ serves as a telling example. Peer To Patent 
provided the first ``governmental `social networking' Website designed 
to solicit public participation in the patent examination process.'' 
\34\ After its first two years, Peer To Patent attracted more than 
74,000 visitors; of those visitors, more than 2,600 went on the become 
peer reviewers.\35\ Also in its first two years, the project 
contributed relevant prior art in more than 25 percent of the 
applications it handled.
---------------------------------------------------------------------------
    \33\ http://www.peertopatent.org.
    \34\ Peer To Patent Second Anniversary Report at 4, http://
dotank.nyls.edu/communitypatent/CPI_P2P_YearTwo_lo.pdf
    \35\ Id. at 5
---------------------------------------------------------------------------
    EFF envisions a similar partnership with our Trolling Effects site. 
Trolling Effects may serve as a public-facing database for information 
collected by the Patent Office or otherwise work with the government to 
increase the reach and scope of that information. In combination with 
statutory provisions providing for submission of information, Trolling 
Effects or a project like it will serve as a powerful tool to curb the 
current demand letter abuses.
Conclusion
    In conclusion, EFF has grave concerns about the impact that PAE 
activities are having on consumers. The importance of today's hearing 
on those activities cannot be understated, particularly because PAEs 
conduct the vast majority of their business behind a veil of secrecy. 
Individual consumers, small start-ups, and ordinary Americans find 
themselves facing patent troll threats everyday, yet even the most 
basic information on those threats is often unattainable. Even just 
having us here today to talk about this problem is a crucial step 
toward solving it. We encourage you to continue this important 
conversation and consider legislative proposals that would limit the 
harm to consumers from PAE activity, particularly the direct harm that 
comes from demand letters.

           STATEMENT OF LARY SINEWITZ, EXECUTIVE VICE

  PRESIDENT, BrandsMart USA ON BEHALF OF THE NATIONAL RETAIL 
                           FEDERATION

    Mr. Sinewitz. Sorry.
    My name is Lary Sinewitz, and I am the Executive Vice 
President of BrandsMart USA. BrandsMart USA is a consumer 
electronics and appliance retailer in the Southeast. We have 
ten retail stores and one clearance center in South Florida and 
Georgia and a growing ecommerce presence at BrandsMartUSA.com. 
We employ 2,000 people; that actually represent 2,000 families 
throughout our business.
    I'm here today on behalf of, not only BrandsMart, but also 
the National Retail Federation and the Stop Patent Abuse Now 
Coalition. NRF represents retailers of all types and sizes 
including chain restaurants, industry partners from the United 
States and more than 45 countries abroad. Retailers operate 
more than 3.6 million U.S. establishments that literally 
support one in every four U.S. jobs.
    The SPAN Coalition represents the interests of retailers, 
advertisers, advertising agencies and direct marketers, 
increasingly targets of patent trolls' unfair and deceptive 
patent infringement demand letters. Members of the NRF and the 
SPAN Coalition appreciate the attention that the subcommittee 
is paying attention to the issue of demand letter transparency 
and the harmful effect patent trolls have on competitiveness 
and innovation.
    I'm just one retailer, but I really believe that my 
experience receiving these patent troll demand letters is 
fairly typical, not only of retailers but of also businesses 
and not-for-profits of all types who are the end users of 
technology.
    Over the course of the last several years, my company alone 
has received six patent troll demand letters. The scary thing, 
though, is that BrandsMart's experience is not unique. For 
example, in 2008, I received this short, two-paragraph letter, 
from a law firm, which you have a copy of up there, stating 
that it had come to their attention that my retail facilities 
were using credit, debit and gift cards that were activated in 
a manner that may raise issues with their client's patent.
    To be clear, the technology at issue in the demand letter 
is one that enables credit, debit and gift cards to read and 
process information via the magnetic stripe on the back of the 
card. Virtually, every retailer uses this type of technology. 
So imagine my shock when some law firm sends me a vague letter 
accusing me of patent infringement and trying to get me to pay 
them some unknown sum of money for a license.
    So I ask you to put yourself in my shoes, and the shoes of 
retailers and other businesses across the country. You receive 
a vague patent troll demand letter about some process you are 
using to enable credit cards to be used in your stores. What do 
you do? Do you consult a patent lawyer? Well, BrandsMart 
doesn't have an in-house patent lawyer. They don't even have a 
patent lawyer on retainer. So one can imagine, just to pick up 
the phone to consult a patent lawyer, to determine the validity 
of the infringement claim and evaluate the license demand, 
costs tens of thousands of dollars.
    Patent troll demand letters like this one puts the fear in 
you that a costly lawsuit could be forthcoming. So what do you 
do? You stop accepting credit, debit and gift cards? No way. 
That would be the death of your business. So, a business like 
mine either ignores the letter at their own peril, hopes the 
harassment goes away, or we begrudgingly try to settle for as 
little money as possible. And in every case, we've had to 
choose the latter approach and pay.
    Incidentally, we still incur the expense of consulting a 
patent lawyer about this letter. And when BrandsMart informed 
the PAE that we use a different technology to read cards, they 
still demanded a settlement, but reduced the amounts. We ended 
up paying this particular PAE five figures to settle, and our 
legal fees were five figures as well. In all, BrandsMart has 
spent a half a million dollars to settle patent infringement 
claims and attorneys' fees.
    We're a retailer trying to serve our customers and settling 
with patent trolls takes away from our resources. We would 
rather use those resources investing in our communities, our 
stores, our employees and for newer innovation.
    Patent trolls are increasingly harassing businesses and 
not-for-profits of every size across a wide swath of industries 
with demand letters. Retailers appear to be an easy prey 
because they often do not have the technical expertise, operate 
on thin profit margins, and lack the legal resources and 
expertise to fight complex patent infringement claims. Ninety-
one percent of the retail companies operate with fewer than 20 
employees and 95 percent of the retail companies operate just 
one location. Most retailers do not have the time or the money 
to engage in lengthy battles with patent trolls. Something most 
be done to help the retailers and other businesses get out from 
under the patent trolls' control.
    NRF and SPAN Coalition members support legislative 
proposals to have the Federal Trade Commission look into these 
unfair or deceptive demand letters which are so effective 
because they lack detail. And using their current consumer 
protection enforcement powers, rein in bad actors that target 
main street businesses.
    Patent trolls should not have free rein to assert expired 
patents, make repeated and false threats of litigation to 
extort fees, and materially mislead the recipients of these 
demands. At the very least, patent trolls should be required to 
provide more details in their letters. It's imperative that 
Congress act to give retailers and other businesses relief from 
this escalating problem.
    If I could just sum it up in one sentence or in a nutshell, 
it's all about fairness. That's all that we're asking for. We 
appreciate your attention to this issue. I thank you personally 
and I look forward to any of your questions.
    [The prepared statement of Mr. Sinewitz follows:]

    Prepared Statement of Lary Sinewitz, Executive Vice President, 
      BrandsMart USA, on behalf of The National Retail Federation
Introduction and Background
    Chairman McCaskill, Ranking Member Heller, and members of the 
Subcommittee, I thank you for the opportunity to appear before you 
today. My name is Lary Sinewitz, and I am Executive Vice President of 
BrandsMart USA. Founded in 1979, BrandsMart USA is a consumer 
electronics and appliance retailer in the Southeast. With 11retail 
stores in South Florida and the Atlanta area and a growing ecommerce 
presence at BrandsMart-USA.com, BrandsMart USA is the 8th largest 
appliance retailer in the country. We employ 2,000 people.
    I am here today on behalf of the National Retail Federation 
(``NRF'') and the Stop Patent Abuse Now (``SPAN'') Coalition to testify 
about the impact of demand letters sent by patent assertion entities 
(``PAEs'') or ``patent trolls'' on small businesses and consumers. 
Members of the NRF and the SPAN Coalition appreciate the attention the 
Subcommittee is paying to this particular issue.
    As the world's largest retail trade association and the voice of 
retail worldwide, NRF represents retailers of all types and sizes, 
including chain restaurants and industry partners, from the United 
States and more than 45 countries abroad. Retailers operate more than 
3.6 million U.S. establishments that support one in four U.S. jobs--42 
million working Americans. Founded in 1996, Shop.org's 600 members 
include the 10 largest online retailers in the U.S. and more than 60 
percent of the Internet Retailer Top 100 E-Retailers. The National 
Council of Chain Restaurants, a division of the National Retail 
Federation, has worked to advance sound public policy that serves 
restaurant businesses and the millions of people they employ for over 
40 years. NCCR members include the country's most respected quick-
service and table-service chain restaurants. Contributing $2.5 trillion 
to annual GDP, retail is a daily barometer for the Nation's economy. 
Retailers create opportunities for life-long careers, strengthen 
communities at home and abroad, and play a leading role in driving 
innovation.
    The SPAN Coalition represents the interests of retailers, 
advertisers, advertising agencies, and direct marketers who 
increasingly are being targeted by patent trolls with unfair and 
deceptive patent infringement demand letters.
BrandsMart's Experience with Patent Troll Demand Letters
    You have invited me to testify about my company's experience with 
unfair or deceptive demand letters. I am just one retailer, but I 
believe my experience receiving patent troll demand letters is fairly 
typical, not only of retailers, but also of businesses and not-for-
profits of all types who are the end-users of technology.
    Over the course of the last several years, my company alone has 
received six patent troll demand letters. For example, in 2008, I 
received a short, two paragraph letter from a law firm stating that it 
had come to their attention that my retail facilities were using debit 
and gift cards that were activated in a manner that may raise issues 
with their client's patent.
    To be clear, the technology at issue in the demand letter is a 
ubiquitous technology that enables debit cards and gift cards to read 
and process information via the magnetic strip on the back of the card. 
Virtually every retailer uses this type of technology. So imagine my 
shock when some law firm sent me a vague letter accusing me of patent 
infringement and trying to get me to pay them some unknown sum of money 
for a license.
    I do not believe this law firm did any due diligence truly to 
ascertain whether BrandsMart was infringing its client's patent. 
Rather, I believe, based on my conversations with other retailers in my 
region, that the firm simply picked the 150 biggest retailers in the 
Atlanta metropolitan area and sent the same vague demand letter to each 
of them.
    So, I ask you to put yourselves in my shoes--and the shoes of 
retailers and similarly situated small businesses across the country. 
You receive a vague patent troll demand letter about some process you 
are using to enable credit cards to be used in your stores. What do you 
do? Consult a patent lawyer? BrandsMart does not have in-house patent 
lawyers, and we did not even have a patent lawyer on retainer. As one 
can imagine, just to pick up the phone to consult a patent lawyer to 
determine the validity of the infringement claim and evaluate the 
license demand could cost tens of thousands of dollars. Moreover, the 
cost of litigating the claim in court or going to the Patent Trademark 
Office to challenge the patent could be prohibitive or imprudent to a 
business such as mine.
    Patent troll demand letters like this one put the fear in you that 
a costly lawsuit could be forthcoming. So what can you do? Stop 
accepting credit cards and gift cards? No way; that would be the death 
of your business. So, a business like mine either ignores the letter at 
our own peril (and hope the harassment goes away) or we begrudgingly 
try to settle for as little money as possible. In every case, we have 
chosen the later approach and paid.
    Incidentally, we did incur the expense of consulting a patent 
lawyer about this letter, and when BrandsMart informed the PAE that we 
used a different technology to read cards, they still demanded a 
settlement, but reduced the amount. We ended up paying this particular 
PAE for five figures, and our legal fees were five figures as well. I 
have submitted the redacted letter with my testimony today.
    Regrettably, in the past ten years, BrandsMart has spent 
approximately $500,000 consulting with attorneys on infringement claims 
and settling with patent trolls.
BrandsMart's Experience with Patent Troll Demand Letters is not Unique
    What NRF and the SPAN Coalition have learned is that BrandsMart's 
experience with patent troll demand letters is not unique. Patent 
trolls are increasingly harassing businesses and not-for-profits of 
every size, across a wide swath of industries, with demand letters. 
These letters come out of nowhere, and often allege that the mere use 
of everyday technology violates the patent holders' rights. Further, 
these questionable letters typically state vague or hypothetical 
theories of infringement, often overstate or grossly reinterpret the 
patent in question, and, in some cases, make allegations of 
infringement of expired or previously licensed patents.
    At their core, demand letters use the threat of litigation as 
leverage to extract a ``licensing fee'' from the recipient business. 
Businesses like BrandsMart often simply settle these nuisance claims 
rather than run the risk of protracted litigation in Federal court. Put 
simply, it is often much more expensive to hire a lawyer to review or 
defend against a suspect claim than it is to pay the requested ``fee.'' 
This is the trolls' business model.
    No one knows just how many thousands of patent-related demand 
letters are sent out by trolls each year; statistics only track actual 
patent infringement litigation in Federal courts. The troll has to 
actually file a case in court before a judge is even made aware of the 
infringement claim, therefore it is impossible to get an accurate 
understanding of the full breadth of this problem.
    End-user businesses such as retailers also appear to be easy prey 
because they often lack the legal resources and expertise to fight 
complex patent infringement claims. Many retailers do not even employ 
legal counsel in-house, let alone a highly specialized patent attorney. 
Ninety-one percent of retail companies operate with fewer than 20 
employees and 95 percent of retail companies operate just one 
location.\1\ Further, most retailers also do not have the time or money 
to engage in a lengthy battle with patent trolls. The average cost of 
fighting a patent troll is around $2 million and takes about 18 
months.\2\ Patent trolls knowingly exploit their targets' tactical 
disadvantages, often pricing a settlement demand (which may still be in 
the millions) just below the cost of litigation, effectively 
blackmailing a retailer into settlement. This is an abuse of the 
system.
---------------------------------------------------------------------------
    \1\ 2007 Economic Census, thisisretail.org.
    \2\ Mark Gibbs, ``A Patent Troll Wants to Charge You for E-mailing 
Your Scans,'' Forbes.com, January 5, 2013.
---------------------------------------------------------------------------
    Trolls' claims not only affect e-commerce applications and the 
everyday use of technology, but also affect the storefront operations 
of traditional ``brick and mortar'' retailers, like BrandsMart. Some 
real world examples of the latter are claims that purport to cover 
point of sale and inventory control equipment, including; scanning 
barcodes, printing receipts, the sale of gift cards, and the connection 
of any product, such as a computer or printer, to an Ethernet network.
    Today, too many businesses like BrandsMart are diverting precious 
capital resources to settle with or fight patent trolls. This is 
capital that they could otherwise use to invest in their businesses and 
in their communities, including; creating jobs, fostering innovation, 
and maintaining their stores. Because the retail industry contributes 
$2.5 trillion to our Nation's annual GDP, loosening the grip of patent 
trolls on retailers and others will allow innovation and growth to 
flourish, and undoubtedly benefit the overall U.S. economy.
    NRF and SPAN Coalition members support legislative proposals to 
have the Federal Trade Commission (``FTC'') look into these unfair or 
deceptive demand letters and, using their current consumer protection 
enforcement powers, rein in bad actors that target main street 
businesses. Patent trolls should not have free reign to assert expired 
patents, make repeated and false threats of litigation to extort fees, 
and materially mislead the recipients of these demands. At the very 
least, patent trolls should be required to provide more details in 
their letters. Currently, the letters are so effective because they 
lack specificity. Requiring greater and truthful disclosure will 
provide greater certainty to businesses, saving them time and money as 
they investigate the person or entity asserting the patent and 
determine the overall merits of the infringement claim.
    Combating the rise of patent trolls is a top priority for retailers 
and the SPAN Coalition as a whole. We look forward to discussing 
meaningful legislative solutions and demand letter relief as patent 
litigation reform legislation moves forward this year. We appreciate 
the Subcommittee's attention to this issue, and look forward to 
continuing our work together.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    Senator McCaskill. Yes, Mr. Mossoff.

          STATEMENT OF ADAM MOSSOFF, PROFESSOR OF LAW,

           GEORGE MASON UNIVERSITY SCHOOL OF LAW AND

          SENIOR SCHOLAR, CENTER FOR THE PROTECTION OF

                     INTELLECTUAL PROPERTY

    Mr. Mossoff. Chairman McCaskill, Ranking Member Heller, and 
members of the Subcommittee, thank you for this opportunity to 
speak to you today.
    There certainly are bad actors, deceptive demand letters 
and frivolous litigation in the patent system. The important 
question though is whether there is a systemic problem 
requiring further systemic revisions to the patent system. 
There is no answer to this question and that is the case for 
three reasons.
    First, the calls to rush to enact systemic revisions to the 
patent system are being made without scientifically established 
evidence that there is in fact systemic harm to innovation, let 
alone any harm to the consumers that Section 5 authorizes the 
FTC to protect. As the Government Accountability Office found 
in its August 2013 report on patent litigation, the frequently 
cited studies claiming harms are actually ``nonrandom'' and 
``non-generalizable,'' which means that they are unscientific 
and unreliable. These anecdotal reports and unreliable studies 
do not prove that there is a systemic problem requiring a 
systemic revision to the patent licensing process.
    Of even greater concern, is that the many changes to the 
patent system Congress is considering, including extending the 
FTC's authority over demand letters, would impose serious costs 
on real innovators and thus do actual harm to America's 
innovation economy and job growth. From Charles Goodyear and 
Thomas Edison in the 19th century, to IBM and Microsoft today, 
patent licensing has been essential to bringing patented 
innovation to the marketplace, creating economic growth and a 
flourishing society. But expanding FTC authority to regulate 
requests for licensing royalties under vague evidentiary and 
legal standards only weakens patents and creates costly 
uncertainty. This will hamper America's innovation economy, 
causing reduced economic growth, lost jobs, and reduced 
standards of living for everyone, including the consumers the 
FTC is charged to protect.
    Second, the Patent and Trademark Office and courts have 
long had the legal tools to weed out bad patents and punish bad 
actors. And these tools were just massively expanded 2 years 
ago with the enactment of the America Invents Act. This is 
important because the real concern with demand letters is that 
the underlying patents are invalid. No one denies that owners 
of valid patents have the right to license their property or to 
sue infringers, or that patent owners can even make patent 
licensing their sole business model as did Charles Goodyear and 
Elias Howe in the mid-19th century.
    Now, there are too many of these legal tools to discuss in 
my brief remarks, but to name just a few: recipients of demand 
letters can sue patent owners in courts through declaratory 
judgment actions and invalidate bad patents, and the PTO now 
has four separate programs dedicated solely to weeding out bad 
patents.
    For those who lack the knowledge or resources to access 
these legal tools, there are now numerous legal clinics, law 
firms and policy organizations that actively offer assistance, 
often times for free. Again, further systemic changes to the 
patent system are unwarranted because there are existing legal 
tools with established legal standards to address bad actors 
and their bad patents.
    Last, Congress is being driven to revise the patent system 
on the basis on rhetoric and anecdote, instead of objective 
evidence and reasoned explanation. Now there are certainly bad 
actors in the patent system as we have heard, but terms like 
patent assertion entity or patent troll constantly shift in 
meaning and there is no settled definition for them. These 
terms have been used to cover anyone who licenses patents, 
including universities, startups, companies that engage in R&D, 
and many others.
    Classic American innovators in the 19th century like Thomas 
Edison, Charles Goodyear and Elias Howe would be called patent 
assertion entities or patent trolls today. In fact, they and 
many other patent owners, some of them secondary owners who 
just license their patents, made royalty demands against 
thousands of farmers, dentists and other end users in the 19th 
century.
    Congress should exercise restraint when it is being asked 
to enact systemic legislation or regulatory changes on the 
basis of pejorative labels that lead us to condemn or 
discriminate against classic innovators like Thomas Edison who 
have contributed immensely to America's innovation economy.
    In conclusion, the benefits or costs of patent licensing to 
the innovation economy is an important empirical and policy 
question, but systemic changes to the patent system should not 
be based on rhetoric, anecdotes, invalid studies and incorrect 
claims about the historical and economic significance of patent 
licensing.
    As former PTO Director, David Kappos stated just last week 
in his testimony before the House Judiciary Committee, ``we are 
reworking the greatest innovation engine the world has ever 
seen almost instantly after it has just been significantly 
overhauled. If there was ever a case where caution is called 
for, this is it.''
    Thank you.
    [The prepared statement of Mr. Mossoff follows:]

  Prepared Statement of Adam Mossoff, Professor of Law, George Mason 
University School of Law and Senior Scholar, Center for the Protection 
                        of Intellectual Property
    Chairman McCaskill, Ranking Member Heller, and members of the 
Subcommittee:

    Thank you for this opportunity to speak with you today about 
patented innovation and the impact that licensing and threatened 
litigation have on our innovation-driven economy.
    Today, two propositions define the American patent system and yet 
they stand in stark contrast to each other. On the one hand, patented 
innovation plays a central role in the United States in creating a 
prosperous economy. It drove the Industrial Revolution in the 
nineteenth century with the cotton gin, sewing machine, railroads, 
steam engines, and many other inventions, and it is driving the Digital 
and Biotech Revolutions today with engineered drugs, wireless 
communication, tablets, smart phones, and more inventions still. As 
former U.S. Patent & Trademark Office (PTO) Director David Kappos 
recently remarked, the U.S. patent system is ``the greatest innovation 
engine the world has ever known.'' \1\ On the other hand, the ``smart 
phone wars'' and related patent litigation issues, as well as the 
commercial and legal activities of patent licensing companies, have 
lead many to believe that the ``patent system is broken,'' a mantra one 
reads almost daily on the Internet, in newspaper reports, and in op-
eds.\2\
---------------------------------------------------------------------------
    \1\ Innovation Act of 2013: Hearing on H.R. 3309 Before the Comm. 
on the Judiciary, 113th Cong. _ (Oct. 29, 2013) (statement of David J. 
Kappos, Partner, Cravath, Swaine & Moore LLP), p. 2, available at 
http://judiciary.house.gov/hearings/113th/10292013/Kappos%20
Testimony.pdf.
    \2\ See Adam Mossoff, The Trespass Fallacy in Patent Law, Florida 
L. Rev. (forthcoming 2013), p. 1 n. 1-2, available at http://ssrn.com/
abstract=2126595 (reviewing examples).
---------------------------------------------------------------------------
    It is without a doubt that the patent licensing business model and 
patent litigation have become a flashpoint of controversy. One area of 
concern, the topic of today's hearing, is the impact of demand letters 
sent by patent licensing companies, which are widely referred to as 
``patent assertion entities'' (PAE), ``non-practicing entities'' (NPE) 
or by the more fashionable and inflammatory term, ``patent trolls.'' 
\3\ For reasons that I will discuss shortly, I prefer instead to refer 
to these companies by their actual business model: patent licensing. 
Unless one works at a law firm, litigation (or threats of litigation) 
is not a business model; rather, the business model is licensing, in 
the course of which it can be necessary to threaten to sue or sue 
recalcitrant licensees. Since the early nineteenth century, many 
inventors and companies have licensed or sold their patents, rather 
than manufacture the technology. This has achieved tremendous 
efficiencies through the division of labor, and thus has been essential 
to America's flourishing innovation economy.
---------------------------------------------------------------------------
    \3\ As will be explained later, this term lacks an agreed-upon, 
objective definition and thus it should not be used by lawyers, 
commentators or scholars who care about precision and accuracy in 
discussions of patent law and policy. See Adam Mossoff, The SHIELD Act: 
When Bad Economic Studies Make Bad Laws, CPIP Blog (March 15, 2013), 
http://cpip.gmu.edu/2013/03/15/the-shield-act-when-bad-economic-
studies-make-bad-laws/.
---------------------------------------------------------------------------
    Nonetheless, terms like ``patent troll'' have easily captured the 
public's imagination. This has happened in part because it is 
undeniable that there are some rent-seeking patent owners who 
strategically exploit poor quality patents and the high costs of 
American civil litigation. Such bad actors exist in every legal system, 
and in fact have always existed--in the nineteenth century, the popular 
rhetorical epithet for these patent owners was ``patent shark.'' \4\ 
But whether such bad actors exist in large enough numbers today to 
cause a breakdown in the patent system requiring a systemic 
intervention via legislation or regulation is an entirely different 
question--and it is a question that remains largely unanswered.
---------------------------------------------------------------------------
    \4\ See Earl W. Hayter, The Patent System and Agrarian Discontent, 
1875-1888, 34 Miss. Valley Hist. Rev. 59 (June 1947); Earl W. Hayter, 
The Western Farmers and the Drivewell Patent Controversy, 16 
Agricultural Hist. 16 (Jan. 1942). See also Dan Mitchell, When Patent 
Trolls Were Simply Sharks, Fortune (June 7, 2013), http://
tech.fortune.cnn.com/2013/06/07/when-patent-trolls-were-simply-sharks/.
---------------------------------------------------------------------------
    Unfortunately, in addition to the mistaken empirical claims about 
patent litigation based on what the Government Accountability Office 
(GAO) has recognized as ``nonrandom and nongeneralizable'' studies,\5\ 
mistaken claims abound about patent licensing and its longstanding 
historical role in making patented innovation a commercial reality. 
Scholars and commentators claim that the patent licensing business 
model arises from a ``patent marketplace [that] is a relatively new 
secondary market.'' \6\ The inference is clear: this new commercial and 
legal activity requires new legislation and new regulations to address 
allegedly new problems.\7\ Rote repetition in scholarship, blogs, op-
eds and newspaper articles, has solidified these claims into 
conventional wisdom among policy and legal elites. This conventional 
wisdom in turn is driving numerous legislative and regulatory proposals 
to address the allegedly systemic problems caused by the allegedly new 
patent licensing business model.
---------------------------------------------------------------------------
    \5\ Government Accountability Office, Intellectual Property: 
Assessing Factors that Affect Patent Infringement Litigation Could Help 
Improve Patent Quality 26 (Aug. 2013), http://www.gao.gov/assets/660/
657103.pdf.
    \6\ Anne Kelley, Practicing in the Patent Marketplace, 78 U. Chi. 
L. Rev. 115, 117 (2011).
    \7\ Judge Richard A. Posner, for instance, has called for the 
adoption of a new legal rule ``that barred enforcement of a patent that 
was not reduced to practice within a specified time after the patent 
was granted.'' Richard Posner, Patent-Trolls--Posner, The Becker-Posner 
Blog (July 31, 2013), http://www.becker-posner-blog.com/2013/07/patent-
trollsposner.html.
---------------------------------------------------------------------------
    This conventional wisdom (like much conventional wisdom) is 
profoundly mistaken. We are racing to revise the patent system, a mere 
two years after the largest revision to the patent system since 
1836,\8\ on the basis of rhetoric and anecdote instead of objective 
evidence and reasoned explanations. Even worse, the proposed 
legislative or regulatory interventions will not fix the unproven 
systemic problems they purport to address, but instead will cause 
actual damage to the dynamic innovation that the patent system promotes 
and secures. In the rush to enact legislation to revise the patent 
system, there is too little regard for the harm to innovation that will 
result from the weakening of patent rights and the increased legal 
hurdles that make it harder to license patents and enforce these 
patents against infringers. As David Kappos stated in his testimony 
before the House Judiciary Committee last week: ``we are reworking the 
greatest innovation engine the world has ever known, almost instantly 
after it has just been significantly overhauled. If there were ever a 
case where caution is called for, this is it.'' \9\
---------------------------------------------------------------------------
    \8\ See Richard Maulsby, President Obama Signs the America Invents 
Act, Inventors Eye, vol. 2, issue 5 (Oct. 2011), http://www.uspto.gov/
inventors/independent/eye/201110/america
inventsact.jsp (referring to the America Invents Act of 2011 as ``the 
most significant reform of the U.S. patent system since 1836'').
    \9\ Kappos, supra note 1, at 2.
---------------------------------------------------------------------------
    In this testimony, I will provide a brief overview on two important 
issues regarding the patent licensing business model and the assertion 
of these licensed patents that have gone largely unrecognized by those 
calling for legislative or regulatory changes. First, the patent 
licensing business model, and even the litigation of patents owned by 
these companies, has long been an essential feature of the American 
patent system, reaching back to the early nineteenth century and 
playing a key role in the commercial distribution of patented 
innovation. Second, aside from anecdotes and deeply flawed studies, 
there is no evidence yet of systemic harm to innovation caused by 
patent licensing companies requiring legislative or regulatory 
intervention. Even more important, such intervention carries serious 
risk of overreach that could harm the dynamic innovation that the 
patent system promotes and secures.
What is a Patent Assertion Entity or ``Patent Troll''?
    As a preliminary matter, it is necessary to address a fundamental 
problem in the patent policy debates today--the terminology used in 
these debates is deeply confused and has produced misleading claims and 
arguments that have proliferated widely among scholars and laypersons 
alike. This hearing concerns the assertion of patents via demand 
letters by PAEs or patent trolls. The FTC has defined PAEs as ``firms 
whose business model primarily focuses on purchasing and asserting 
patents,'' \10\ but this is not the accepted definition among all 
commentators or necessarily even among the witnesses testifying today. 
In fact, there is no settled, agreed-upon definition of a PAE or patent 
troll that is universally adopted by scholars and commentators alike.
---------------------------------------------------------------------------
    \10\ Fed. Trade Comm'n, The Evolving IP Marketplace: Aligning 
Patent Notice and Remedies with Competition 8 n.5 (Mar. 2011), 
available at http://www.ftc.gov/os/2011/03/110307patentreport.pdf.
---------------------------------------------------------------------------
    Many commentators equate a PAE or patent troll with an NPE, another 
term that even the critics of these commercial entities recognize has 
yet to be objectively defined.\11\ Aside from the strange locution of 
identifying the active commercialization of a property right in the 
marketplace as ``non practicing''--it is tantamount to saying that 
landlords are ``non-practicing'' owners of their property rights 
because they do not live on their real estate parcels--this term is 
applied in inconsistent ways. For example, one of the first widely 
condemned NPEs in the high-tech industry was NTP, which successfully 
sued RIM (the maker of the Blackberry) after RIM refused to license 
NTP's patents on wireless e-mail communication.\12\ Prominent scholars, 
such as Mark Lemley and Carl Shapiro, among many others, have called 
NTP a ``patent troll.'' \13\ But NTP was a holding company formed by 
the inventor, Thomas Campana, Jr., and who did so only after numerous 
failed attempts at producing the technology.\14\ It seems strange that 
knowledgeable scholars and commentators are condemning inventors as 
``patent trolls,'' when almost everyone regards inventors as rightly 
excluded from such pejorative labels (and especially when Campana's 
patents were upheld as valid through repeated reviews both in court and 
under re-examination at the PTO).
---------------------------------------------------------------------------
    \11\ See, e.g., James Bessen & Michael J. Meurer, The Direct Costs 
from NPE Disputes, p. 11, available at http://ssrn.com/abstract=2091210 
(``There is no consensus among researchers on the proper definition of 
NPE.'').
    \12\ See NTP, Inc. v. Research in Motion, Ltd., 418 F.3d 1282 (Fed. 
Cir. 2005).
    \13\ Lemley & Shapiro, Patent Holdup and Royalty Stacking, 85 Tex. 
L. Rev. 2008-09 (2007) (discussing NTP as an example of how ``patent 
trolls [can] hold up defendants by threatening to enjoin products that 
are predominantly noninfringing''); Gerard N. Magliocca, Blackberries 
and Barnyards: Patent Trolls and the Perils of Innovation, 82 Notre 
Dame L. Rev. 1809, 1809-10 (2007) (observing that the BlackBerry 
litigation ``was brought by a `patent troll,' which is a derogatory 
term for firms that use their patents to extract settlements rather 
than license or manufacture technology''); Bruce Sewell, Troll Call, 
Wall St. J., Mar. 6, 2006, at A14 (criticizing NTP as a patent troll).
    \14\ See Barrie McKenna et al., Patently Absurd, Globe and Mail, 
Jan. 28, 2006, at B4 (discussing how Campana attempted to manufacture 
his patented invention but was unsuccessful, and thus NTP was formed in 
1992 only after his earlier firm, Telefind, went bankrupt in 1991).
---------------------------------------------------------------------------
    The PAE, NPE and patent troll terms thus have many different 
definitions such that they sometimes cover and sometimes exclude 
universities,\15\ startups, firms that both manufacture and license, 
firms that engage in research and development and then license this 
patented innovation, and even individual inventors--including classic 
American inventors like Thomas Edison, Elias Howe (the inventor of the 
lockstitch in the 1840s), and Charles Goodyear (the inventor of 
vulcanized rubber in the late 1830s).\16\ One oft-cited study that has 
played a significant role in the patent policy debates concluded that 
NPEs/patent trolls imposed $29 billion in costs on defendants in 
2011.\17\ This study has been rightly criticized by scholars and by the 
GAO for many methodological and substantive failings,\18\ and one of 
these problems is its extremely broad definition of an NPE/patent 
troll. The authors defined an NPE/patent troll as covering almost every 
person, corporation, or university that sues someone for infringing a 
patent that it is not currently being used to manufacture a product at 
that moment, including even manufacturing companies that sue on patents 
deemed to be ``well outside the area in which they make products.'' 
\19\ The scope of this definition is breathtaking. What patent owner 
isn't currently or potentially an NPE under this definition, especially 
given that the innovation industries are extremely heterogeneous and 
constantly evolving, with companies like IBM and Nokia shifting their 
business models, product lines and commercial activities?
---------------------------------------------------------------------------
    \15\ The University of Wisconsin has been called a ``patent 
troll.'' See Erin Fuchs, Tech's 8 Most Fearsome ``Patent Trolls,'' 
Business Insider (Nov. 25, 2012 2:01PM), http://www.business
insider.com/biggest-patent-holding-companies-2012-11?op=1.
    \16\ Cf. Joshua D. Wright, What Role Should Antitrust Play in 
Regulating the Activities of Patent Assertion Entities (Apr. 17, 2013), 
p. 3, available at http://www.ftc.gov/speeches/wright/
130417paespeech.pdf (``The entities qualifying as NPEs are wide-ranging 
and heterogeneous: they include all universities, which certainly do 
not manufacture or sell patented inventions, but also start-up 
companies, semiconductor design houses, and even some large, 
established commercial firms, like IBM. Thomas Edison would have been 
called an NPE, if that term existed 100 years ago . . .'').
    \17\ See Bessen & Meurer, supra note 11.
    \18\ See Government Accountability Office, supra note 5; David L. 
Schwartz & Jay Kesan, Analyzing the Role of Non-Practicing Entities in 
the Patent System, 99 Cornell L. Rev. (forthcoming 2013), http://
ssrn.com/abstract=2117421 (identifying serious methodological and 
substantive flaws in patent litigation study by Bessen and Meurer). Cf. 
Christopher A. Cotropia, Jay P. Kesan & David L. Schwartz, Patent 
Assertion Entities Under the Microscope: An Empirical Investigation of 
Patent Holders as Litigants (Oct. 28, 2013), available at http://
ssrn.com/abstract=2346381 (finding from publicly available data 
substantially less litigation rates than those found by Bessen and 
Meurer in a study using secret, proprietary data from RPX).
    \19\ Bessen & Meurer, supra note 11, at 10.
---------------------------------------------------------------------------
    Even the more restrictive definition of a PAE that limits it to 
companies who ``purchase and assert'' patents is still not applied as 
evenly as it may first appear. Again, ``assertion'' in patent law means 
filing a lawsuit, but the actual business model of the majority of 
companies who purchase patents is licensing, not litigation. Moreover, 
the real-world firms to which this term has been applied are more 
complex and heterogeneous than is often acknowledged. For instance, one 
company that is widely alleged to be a PAE, Intellectual Ventures, 
employs hundreds of inventors who engage in research and development, 
and the company licenses this homegrown patented innovation along with 
the other patents it purchases from third-party inventors and 
companies. In a recent presentation on Capitol Hill, Nathan Myhrvold, 
the founder of Intellectual Ventures, stated that his firm is a top-ten 
filer for new patents in the U.S., and that he personally has received 
about 1200 patents.\20\ Again, inventors and companies that produce 
patented innovation are being swept up in the terminology of PAE, NPE, 
and patent troll.
---------------------------------------------------------------------------
    \20\ See ``The Future of Invention--What's at Risk?,'' available at 
http://youtu.be/4IlNBhu7a_E.
---------------------------------------------------------------------------
    Given the variance and lack of clarity in these basic terms in the 
patent policy debates about patent licensing and patent litigation, I 
prefer instead to refer to these individuals and companies by their 
actual business model: patent licensing. This avoids the misleading 
shading of meaning that comes from loose rhetoric about mythical beasts 
or unverified litigation practices, and instead focuses the discussion 
on what these companies actually do in terms of their business model. 
By focusing on the business model of patent licensing, it also brings 
into sharper focus the historical pedigree of patent licensing, which 
inventors and companies have long employed to bring new patented 
innovation to market.
Patent Licensing as a Longstanding and Essential Feature of the 
        American Patent System
    Contrary to many claims today about PAEs or patent trolls, however 
they are defined, the patent licensing business model is not a new 
phenomenon in the commercialization of patented innovation in the 
marketplace. As award-winning economist Zorina Khan has explained, 
licensing has long been an essential feature of America's unique patent 
system, which secured property rights in innovation to both inventors 
and to the marketplace actors who commercialized this innovation.\21\ I 
have also explained in my scholarship how early American legislators 
and judges defined patents as property rights--specifically as civil 
rights securing fundamental property rights \22\--and that this had 
profound implications in securing the free alienation of patents in the 
nineteenth-century marketplace.\23\ Here, I can only briefly summarize 
some of this research and highlight its relevance to the concerns about 
patent licensing entities and their litigation practices.
---------------------------------------------------------------------------
    \21\ See B. Zorina Khan, The Democratization of Invention: Patents 
and Copyrights in American Economic Development, 1790-1920, at 9-10 
(2005) (``The analysis [in this book] emphasizes the role that patents 
and copyrights played in the securitization of ideas through the 
creation of tradeable assets: intellectual property rights facilitated 
market exchange, a process that assigned value, helped to mobilize 
capital, and improved the allocation of resources. . . . Extensive 
markets in patent rights allowed inventors to extract returns from 
their activities through licensing and assigning or selling their 
rights.'').
    \22\ See Adam Mossoff, Who Cares What Thomas Jefferson Thought 
About Patents? Reevaluating the Patent ``Privilege'' in Historical 
Context, 92 Cornell L. Rev. 953 (2007).
    \23\ See Adam Mossoff, Exclusion and Exclusive Use in Patent Law, 
22 Harv. J. L. & Tech. 321, 349-60 (2009); Adam Mossoff, A Simple 
Conveyance Rule for Complex Innovation, 44 Tulsa L. Rev. 707, 711-20 
(2009).
---------------------------------------------------------------------------
    In more recent scholarship, Professor Khan and other economists 
have shown that there was an active commercial market in both selling 
patents and licensing patent rights in the nineteenth century.\24\ Many 
early American inventors (and third parties) embraced this market to 
sell, purchase, and license patented innovation.\25\ For instance, 
Edison certainly meets the definition of an ``NPE,'' as he sold and 
licensed his patents, especially in his early invention-intensive 
career.\26\ He also assigned outright some of his later patents, such 
as transferring his patented innovation in incandescent light bulbs to 
the General Electric Company.\27\ Even earlier in the nineteenth 
century, inventors sold and licensed their patent rights. Charles 
Goodyear, the inventor of vulcanized rubber in 1839,\28\ never 
manufactured or sold rubber products, and instead made all of his money 
by selling the rights to manufacture, license, sell, and use his 
patented innovation.\29\ As the archetypical obsessive inventor, 
Goodyear was not interested at all in manufacturing or retail sales of 
his patented innovation.
---------------------------------------------------------------------------
    \24\ See, e.g., B. Zorina Khan, Trolls and Other Patent Inventions: 
Economic History and the Patent Controversy in the Twenty-First 
Century, _ George Mason Univ. L. Rev. _ (forthcoming 2014) (draft 
available at http://cpip.gmu.edu/wp-content/uploads/2013/09/Khan-
Zorina-Patent-Controversy-in-the-21st-Century.pdf); Naomi R. Lamoreaux, 
Kenneth L. Sokoloff, and Dhanoos Sutthiphisal, Patent Alchemy: The 
Market for Technology in U.S. History, 87 Business Hist. Rev. 3 (Spring 
2013).
    \25\ See Lamoreaux, Sokoloff & Sutthiphisal, supra note 24, at 20. 
Classified ads in nineteenth-century issues of Scientific American 
establish that patents and patent rights were actively offered for sale 
and purchased. See, e.g., Scientific American 383 (Aug. 12, 1854); 
Scientific American 143 (Aug. 28, 1869) [PDFs on file with author].
    \26\ See Lamoreaux, Sokoloff & Sutthiphisal, supra note 24, at 6 
(explaining how Edison sold 20 of his early patents to third parties in 
order to fund his ongoing research and development).
    \27\ Randall E. Stross, The Wizard of Menlo Park: How Thomas Alva 
Edison Invented the Modern World 165 (2008).
    \28\ U.S. Patent No. 3,633 (issued June 15, 1844).
    \29\ See Charles Slack, Noble Obsession: Charles Goodyear, Thomas 
Hancock, and the Race to Unlock the Greatest Industrial Secret of the 
Nineteenth Century (2002); Harold Evans, They Made America: From the 
Steam Engine to the Search Engine: Two Centuries of Innovators 92-100 
(2004).
---------------------------------------------------------------------------
    Even more relevant to today's policy debates, Goodyear and his 
assignees and exclusive licensees filed many, many lawsuits against 
individual end users, commercial firms, and manufacturers.\30\ End-user 
lawsuits in particular were a prominent tool in their litigation 
strategy. Moreover, these end-user lawsuits were commonplace. As legal 
historian Professor Christopher Beachamp has discovered in his 
research, over a thousand patent infringement lawsuits were filed just 
in the Southern District of New York in 1883 and almost all of these 
were against farmers for infringing a single patent on well drilling 
technology.\31\ These end-user lawsuits were brought by a company that 
Professor Beachamp recognizes as falling within the definition today of 
a NPE--a firm engaged solely in patent licensing.\32\ In fact, given 
its extensive litigation practice, this firm would likely be classified 
as a PAE as well. Professor Beachamp found similar litigation practices 
against end users of sewing machines, cheese frames, barbed wire, and 
other patented innovation reaching back to the 1840s.\33\
---------------------------------------------------------------------------
    \30\ For a few examples of the extensive litigation surrounding 
Goodyear's patent, see Adam Mossoff, Who Cares What Thomas Jefferson 
Thought About Patents? Reevaluating the Patent ``Privilege'' in 
Historical Context, 92 Cornell L. Rev. 953 (2007) (cases cited in 
footnotes 174, 183, 188, and 192-194); Adam Mossoff, A Simple 
Conveyance Rule for Complex Innovation, 44 Tulsa L. Rev. 707, 711-20 
(2009) (cases cited in foonotes 50 and 55).
    \31\ Professor Beachamp discusses his ongoing research into this 
issue in the panel, ``End-User Lawsuits in Patent Litigation: A Bug or 
a Feature of Patent Law'' (Aug. 29, 2013), available at http://
cpip.gmu.edu/events/teleforum-panel-end-user-lawsuits-in-patent-
litigation-a-bug-or-a-feature-of-patent-law/.
    \32\ Id.
    \33\ Id.
---------------------------------------------------------------------------
    The inventor of the lockstitch in the 1840s,\34\ Elias Howe, Jr., 
also licensed his patented innovation for most of his life. In fact, 
Howe engaged in ex post licensing: making royalty demands and suing 
retailers and manufacturers after discovering that they were infringing 
his patent rights. He also used ads to threaten liability for all 
purchasers of unlicensed sewing machines.\35\ One historian identified 
Howe's ``main occupation'' in the early 1850s as consisting entirely of 
``suing the infringers of his patent for royalties.'' \36\ His demands 
caused much ire. In fact, Howe's assertion of his patents against 
noncompliant infringers refusing his licensing offers precipitated the 
very first ``patent war''--called, at the time, the Sewing Machine 
War.\37\
---------------------------------------------------------------------------
    \34\ U.S. Patent No. 4750 (issued Sept. 10, 1846).
    \35\ See Mossoff, The Rise and Fall of the First American Patent 
Thicket: The Sewing Machine War of the 1850s, 53 Ariz. L. Rev. 165, 185 
(2011) (quoting one of Howe's advertisements that ``You that want 
sewing machines, be cautious how you purchase them of others than 
[Howe] or those licensed under [Howe], else the law will compel you to 
pay twice over.'').
    \36\ Ruth Brandon, A Capitalist Romance 71-72 (1977).
    \37\ See generally Mossoff, supra note 35.
---------------------------------------------------------------------------
    Even more important for understanding the practices of patent 
licensing and patent litigation, Howe's litigation practices were 
similar to many practices today. For instance, Howe was destitute and 
found investors to provide third-party financing for his patent 
infringement lawsuits.\38\ Ultimately, after being a principal legal 
pugilist in the Sewing Machine War, Howe joined the Sewing Machine 
Combination of 1856. This was the first patent pool in American 
history, which ended the Sewing Machine War and successfully licensed 
the patents in the sewing machine.\39\ Moreover, similar to the end-
user lawsuits by Goodyear's assignees and other patent owners, when 
Howe first sued Singer and many other retailers and manufacturers,\40\ 
these companies were the equivalent of today's ``mom and pop stores'' 
or ``start up'' companies.
---------------------------------------------------------------------------
    \38\ See id. at 183.
    \39\ See id. at 194-202.
    \40\ See, e.g., id. at 189 (noting how ``Howe quickly filed 
lawsuits in Boston against firms selling Singer Sewing Machines, and, 
as before, he sought preliminary injunctions'').
---------------------------------------------------------------------------
    This brief survey establishes that the patent licensing business 
model has not only existed from the early nineteenth century, it has 
long served a significant function in the commercialization of patented 
innovation in the United States. Other famous early nineteenth-century 
inventors also extensively assigned and licensed rights in their 
patented innovation, including William Woodworth (planing machine), 
Thomas Blanchard (lathe), and Obed Hussey and Cyrus McCormick 
(mechanical reaper),\41\ and many others. Such commercial practices 
continued into the twentieth century and up through today, with such 
innovative firms as Bell Labs,\42\ IBM,\43\ Apple,\44\ Microsoft,\45\ 
Research in Motion (Blackberry),\46\ and Nokia,\47\ among others, using 
this long-established, successful method of patent licensing to 
commercialize patented innovation in the marketplace.
---------------------------------------------------------------------------
    \41\ See Lamoreaux, Sokoloff & Sutthiphisal, supra note 24, at 8.
    \42\ See Jon Gertner, The Idea Factory: Bell Labs and the Great Age 
of American Innovation chpt. 6 (reprint ed. 2013) (discussing how Bell 
Labs licensed the transistor to any individual or firm willing to pay 
the $25,000 licensing rate).
    \43\ See David Kilpatrick, The Future of IBM. Lou Gerstner seems to 
have pulled off a miracle. Sam Palmisano will have to be at least as 
good, Fortune (Feb. 18, 2002), http://money.cnn.com/magazines/fortune/
fortune_archive/2002/02/18/318158/index.htm (``Throughout the Gerstner 
years IBM has been the world leader in new patents; it earns well over 
$1 billion a year licensing those patents.'').
    \44\ See Tom Haubert, The Troubled Life of Patent No. 6,456,881: 
Tracing the Tortured Legal Trail of a Simple Smartphone Patent, IEEE 
Spectrum (Apr. 23, 2013), http://spectrum
.ieee.org/at-work/innovation/the-troubled-life-of-patent-no-6456841 
(describing patent purchased from Mitsubishi by Apple, and then Apple 
sold the patent to a ``patent acquisition and licensing company'' that 
brought patent infringement lawsuits against many high-tech companies 
(but not against Apple)).
    \45\ See Rakesh Sharma, Six Answers About Rockstar's Suit Against 
Google, Forbes (Nov. 1, 2013 6:21PM), at http://www.forbes.com/sites/
rakeshsharma/2013/11/01/six-answers-about-rockstars-suit-against-
google/ (discussing the patent licensing entity, Rockstar Consortium, 
which is backed by Apple, Microsoft, Sony, Ericsson, and Research in 
Motion).
    \46\ Id.
    \47\ See Dan Levine, Why Nokia Didn't Sell Its Patents to 
Microsoft, Reuters (Sep. 3, 2013 7:05PM EDT), http://www.reuters.com/
article/2013/09/03/us-nokia-microsoft-patents-idUS
BRE9820ZZ20130903.
---------------------------------------------------------------------------
    Moreover, the litigation practices of these patent owners, 
including suing numerous defendants, suing end users, and receiving 
third-party financing for lawsuits, among others, have been common 
features of the patent litigation landscape since the early nineteenth 
century. It is simply untrue that these commercial and legal strategies 
are novel developments in recent years that require novel legislative 
or regulatory changes. While there are certainly some bad actors, 
Congress must be cautious in making systemic revisions to the 
longstanding legal rules governing how patented innovation is 
commercialized and litigated. This is especially the case when such 
revisions are based more on rhetoric about particular types of patent 
owners than evidence of systemic problems that are clearly harming 
innovation.
The PTO and Courts Have the Tools to Address Bad Actors in the Patent 
        System
    It is significant that the commercial and legal practices about 
which commentators and scholars today express extensive concern have in 
fact been longstanding features of both the American patent system and 
the Federal courts. The commercialization of patented innovation and 
resulting economic growth has occurred throughout every historical 
``patent war'' and periods of extensive litigation against 
manufacturers, retailers, and end users. The creation of patented 
innovation and the resulting economic growth continue today because the 
PTO and courts already have the tools to separate the bad actors from 
the legitimate patent licensing companies. Even more important, the 
America Invents Act of 2011 (AIA), a product of a six-year policy 
debate and rightly recognized as ``the most significant reform of the 
U.S. patent system since 1836,'' \48\ vastly expanded these tools as 
well.
---------------------------------------------------------------------------
    \48\ Maulsby, supra note 8.
---------------------------------------------------------------------------
    The concern about patent licensing companies demanding royalties 
from or even suing alleged infringers is that many people believe that 
the patents are invalid. In other words, the policy concern that needs 
to be addressed is the validity of the underlying property right, as an 
owner of a valid patent has every right to demand licenses from 
unauthorized users and to seek relief in court against recalcitrant 
infringers. There have long existed many legal tools, and even more 
exist today, for challenging and weeding out such bad patents.
    Consider two historical examples (among the many that exist). 
First, potential defendants have long had the right to bring 
declaratory judgment actions in Federal court to invalidate patents 
that might be asserted against them in a future lawsuit, and the 
Supreme Court recently liberalized the rules even further for when 
someone can bring a declaratory judgment action in its 2007 decision in 
Medimmune v. Genentech.\49\ Second, defendants or potential defendants 
have long had access to the PTO to challenge improperly issued patents. 
Singer instigated a lengthy proceeding at the Patent Office in 1850 in 
attempting to invalidate Howe's patent, for instance, and defendants in 
all of Howe's lawsuits repeatedly argued (and reargued) in Federal 
court that Howe's patent was invalid as well.\50\ Like any newly 
created asset or valuable resource, all commercially significant and 
valuable patents are always heavily disputed as to their validity, both 
in courts and at the PTO. This explains the historical prevalence of 
the patent wars that have occurred with every major technological leap 
forward.\51\
---------------------------------------------------------------------------
    \49\ MedImmune, Inc. v. Genentech, Inc., 127 S. Ct. 764 (2007).
    \50\ See Mossoff, supra note 35, at 187-89.
    \51\ See Adam Mossoff, Patented Innovation and Patent Wars: Some 
Historical Perspective, A Smarter Planet Blog (Jan. 11, 2013 8:00AM), 
available at http://asmarterplanet.com/blog/2013/01/patented-
innovation-and-patent-wars-some-historical-perspective.html.
---------------------------------------------------------------------------
    Today, such legal mechanisms continue to exist in the PTO and in 
the courts, which serve as a check on both bad actors and bad patents. 
In the courts, the Judicial Conference's Committee on Rules of Practice 
and Procedure has officially published proposed revisions to the 
pleading requirements in patent lawsuits, one of the sources of the 
much maligned minimal notice requirements in patent infringement 
complaints.\52\ Additionally, the Supreme Court recently granted cert 
in two cases that will likely result in liberalizing the rules on the 
issuance of sanctions in patent cases.\53\ Such legal changes will 
necessarily change the calculus of individual patent owners who are 
bluffing in demand letters, because those bluffs may now be called and 
courts will both make it harder to bring the actual lawsuits and will 
punish bad-faith assertions.
---------------------------------------------------------------------------
    \52\ See Committee on the Rules of Practice and Procedure of the 
Judicial Conference of the United States, Preliminary Draft of Proposed 
Amendments to the Federal Rules of Bankruptcy and Civil Procedure (Aug. 
2013), available at http://www.uscourts.gov/uscourts/rules/preliminary-
draft-proposed-amendments.pdf; see also Honorable Katherine O'Malley, 
Key Note Speech at Intellectual Property Owners Association Annual 
Meeting (Sep. 17, 2013), p. 9, available at http://www.ipo.org/wp-
content/uploads/2013/02/IPO-Annual-Meeting-Keynote-Speech-09-17-13.pdf 
(discussing this process).
    \53\ See Octane Fitness, LLC v. Icon Health & Fitness, Inc., No. 
12-1184, 2013 WL 1283843 (U.S. Oct. 01, 2013); Highmark Inc. v. Allcare 
Health Mgmt. Sys., No. 12-1163, 2013 WL 1217353 (U.S. Oct. 01, 2013).
---------------------------------------------------------------------------
    Even more important, at the PTO, the many new, AIA-created review 
proceedings are just beginning to be implemented and to produce 
results.\54\ And there are more reforms that can and should be adopted, 
such as securing full funding of the PTO to ensure complete and timely 
examination of patent applications. Full funding of the PTO will also 
ensure proper implementation of the many new administrative review 
programs created by the AIA to weed out invalid and vague patents that 
clog the innovation economy.
---------------------------------------------------------------------------
    \54\ See generally Kappos, supra note 1.
---------------------------------------------------------------------------
    And for those who lack the knowledge or wherewithal to navigate 
these processes, there are many law firms and policy organizations, 
such as Public Patent Foundation, Electronic Frontier Foundation (EFF), 
the Berkman Center for Internet and Society, and others who are 
offering assistance.\55\ For instance, the App Developers Alliance has 
created the ``Law School Patent Troll Defense Network,'' which involves 
law school clinics providing legal services to individuals or small 
businesses receiving demand letters or complaints.\56\ Moreover, two 
weeks ago, EFF joined with the Berkman Center to file an inter partes 
review of the widely known and notorious ``podcasting patent,'' which 
has been the subject of thousands of demands letters being sent to 
individuals, small companies, and large companies.\57\ In a world in 
which Internet searches easily and effortlessly produce such 
information, it is becoming harder to maintain that recipients of 
demand letters lack the resources and capabilities to respond 
effectively.
---------------------------------------------------------------------------
    \55\ On behalf of individual women lacking the funds to pay for 
expensive DNA testing (and thus lacking the funds to bring a lawsuit), 
the Public Patent Foundation brought the challenge to the patents on 
the BRAC1 and BRAC2 genes, which correlated with breast cancer. The 
Public Patent Foundation ultimately won before the Supreme Court. See 
AMP v. Myriad Genetics, 133 S. Ct. 1747 (2013).
    \56\ See Law Schools Join App Developers Alliance to Fight Patent 
Trolls (Oct. 10, 2013), available at http://www.ipwatchdog.com/2013/10/
15/law-schools-join-app-developers-alliance-to-fight-patent-trolls/.
    \57\ See EFF Files Challenge With Patent Office Against Troll's 
Podcasting Patent: Massive Crowdsourcing Effort Leads to Strong 
Petition Before the USPTO (Oct. 16, 2013), available at https://
www.eff.org/press/releases/eff-files-challenge-patent-office-against-
trolls-podcasting-patent.
---------------------------------------------------------------------------
The Harm to Dynamic Innovation from Legislative or Regulatory 
        Overreach
    It is against this backdrop that Congress must assess any proposal 
to intervene via commercial regulation in patent licensing and patent 
litigation practices. First, there is too much rhetoric and too many 
``nonrandom and nongeneralizable'' studies in the policy debates,\58\ 
and too little actual evidence definitively establishing that more 
revisions to the patent system are needed. Second, while there are 
certainly bad actors, there are a number of existing legal mechanisms 
at the PTO and in the courts to address them, especially after the 
enactment of the AIA just two years ago. Third, and certainly not 
least, there is too little regard for the serious costs that regulatory 
overreach imposes on the individuals and businesses who create the 
real-world innovative products and services that have become basic 
commodities of modern life.
---------------------------------------------------------------------------
    \58\ Government Accountability Office, supra note 5, at 26.
---------------------------------------------------------------------------
    While many pay lip service to the importance of promoting 
innovation, there has been too little regard given to the benefits of 
strong and certain patent rights and the costs of lost innovation when 
these rights become uncertain. In contrast to the many studies done on 
the alleged ``costs'' imposed by patent licensing companies on 
defendants and manufacturers, there has not been a single statistical 
study done on either (1) the costs imposed on patent owners in either 
licensing or enforcing their legal rights, or (2) the costs, especially 
the error costs, that further legislative or regulatory changes to 
patent licensing and litigation practices will impose on legitimate 
owners of valid patents--the modern-day Edison, Howe, and Goodyear.
    This is striking and reinforces the concern that proposed 
legislation and regulation is being driven today more by rhetoric than 
by a dispassionate, reasoned consideration of all sides of the policy 
equation. If there is objective harm established by the knowing abuse 
of invalid patents via demand letters--such as, for example, cognizable 
harms in lost production and lost business opportunities via in 
terrorem threats--then such harm must first be proven via established 
empirical methodologies and assessed according to known legal 
standards.\59\ If Congress intends to direct a regulatory agency to 
punish the licensing and litigation activities of certain types of 
patent owners, then such a radical alteration to the patent system 
should at least be supported by definitive evidence justifying such 
systemic changes. Otherwise, the in terrorem effect runs the other way, 
sweeping legitimate inventors and companies into an arbitrary 
regulatory environment that makes the licensing and enforcement of 
their patented innovation prohibitively costly.\60\ As a recent letter 
submitted by several Senators and Representatives to Chairwoman Edith 
Ramirez stated:
---------------------------------------------------------------------------
    \59\ See Commissioner Joshua D. Wright, Proposed Policy Statement 
Regarding Unfair Methods of Competition Under Section 5 of the Federal 
Trade Commission Act (June 19, 2013), available at http://ftc.gov/
speeches/wright/130619umcpolicystatement.pdf.
    \60\ See Donald Rosenberg, First Rule of Patent Reform: Do No Harm, 
Wall St. J. (Sep. 10, 2013 6:54PM), (``How will the proposed changes 
that make it harder and more expensive to enforce these patents affect 
small inventors, universities and companies that legitimately seek to 
protect their intellectual property rights? New legislation must take 
care not to sacrifice their rights or those of other inventors.'').

        The absence of clear parameters for the FTC's Section 5 
        authority based on empirical and economic justifications 
        engenders uncertainty in the business community. This 
        uncertainty acts as a deterrent to innovation and creativity, 
        which are critical drivers of the American economy and vitally 
        important in today's challenging economic environment.\61\
---------------------------------------------------------------------------
    \61\ Letter from Chairman Bob Goodlatte, House Comm. on the 
Judiciary, Ranking Member Charles Grassley, Senate Comm. on the 
Judiciary, Chairman Spencer Bachus, House Comm. on the Judiciary 
Subcomm. on Regulatory Reform, Commercial, and Antitrust Law, and 
Ranking Member Mike Lee, Senate Comm. on the Judiciary Subcomm. on 
Antitrust, Competition Policy, and Consumer Rights, to Chairwoman Edith 
Ramirez, Fed. Trade Comm'n (Oct. 23, 2013).

    Such concerns are endemic in any legal intervention into patented 
innovation.\62\ As Commissioner Joshua Wright has similarly observed in 
his previous academic scholarship, after a careful review of the 
economic literature to date:
---------------------------------------------------------------------------
    \62\ See Mossoff, A Simple Conveyance Rule for Complex Innovation, 
supra note 23, at 120-30 (identifying inherent difficulties in 
assessing or predicting commercial innovation and the high error costs 
this portends for commercial regulation).

        Our economic knowledge regarding innovation itself, conduct 
        affecting innovation, and how to assess competitive outcomes 
        involving tradeoffs between product market competition and 
        innovation are far less impressive than our knowledge in a 
        purely static setting. The costs of false positives leading to 
        a chilling of pro-competitive innovation are significant.\63\
---------------------------------------------------------------------------
    \63\ Joshua D. Wright, Antitrust, Multi-Dimensional Competition, 
and Innovation: Do We Have an Antitrust-Relevant Theory of Competition 
Now?, in Regulating Innovation: Competition Policy and Patent Law under 
Uncertainty 230 (Geoffrey A. Manne & Joshua D. Wright eds., 2010).

    This is not to diminish the existence of individual bad actors and 
the particular harms they might be imposing via improper demand 
letters. But anecdotes alone do not justify legislative or regulatory 
action. Given the lack of an established and proven connection between 
these individually harmful acts and systemic harm to innovation, the 
lack of cognizable legal standards for acting in this area, the 
preexisting tools at the PTO and in courts to address the problems, and 
the ever-present threat of causing even greater harm to the innovation 
economy through legislative or regulatory overreach, this is an issue 
on which Congress should exercise restraint.
Conclusion
    Contrary to popular myth today, the patent licensing business model 
has long played an essential role in distributing patented innovation 
through the marketplace. These commercial activities reflect the basic 
economic principle of the division of labor that Adam Smith famously 
recognized as essential to a successful free market and flourishing 
economy--in this context, it is the division of labor between inventors 
and businesspersons.\64\ This fundamental economic principle is just as 
applicable to patented innovation as it is to any other economic 
activity; as Henry Ford famously said of his friend and business 
partner, Edison was ``the world's greatest inventor and the world's 
worst businessman.'' \65\ Thus, it is significant, as Commissioner 
Wright has observed, that ``[t]he PAE is a specialist in licensing and 
enforcing patent rights.'' \66\
---------------------------------------------------------------------------
    \64\ See Adam Smith, The Wealth of Nations Book I Chpt.1 (1776).
    \65\ Stross, supra note 27, at 165. Ford knew of which he spoke, 
because he provided Edison a total $1.2 million in business loans, and 
some of which he was forced to forgive. Id. at 253.
    \66\ Wright, supra note 16, at 5.
---------------------------------------------------------------------------
    Of course, the twenty-first century innovation economy is 
incredibly different from that of the nineteenth century. The exogenous 
market and technological variables at work in this economy are 
different as well. But it is still wrong to claim that the patent 
licensing business model and secondary markets are novel practices 
today. It is equally wrong to call for legislative or regulatory action 
based on the admittedly potent mix of mistaken historical claims, 
undefined and inflammatory rhetoric, the disregard of existing legal 
mechanisms addressing the concerns, and with little regard for symmetry 
of costs and benefits.\67\ Whether there are benefits or harms from 
specific commercial and legal practices in the innovation economy is an 
important empirical and policy question, but such benefits or harms 
should no more be based on rhetoric, anecdotes, and incorrect claims 
about historical practices than they should be based on ``nonrandom and 
nongeneralizable'' studies.\68\ Congress should exercise restraint, 
avoid ``[a]ttempting to label and then discriminate based on 
identity,'' and be cautious in accidentally killing ``the goose laying 
our golden egg.'' \69\
---------------------------------------------------------------------------
    \67\ See Lamoreaux, Sokoloff & Sutthiphisal, supra note 24, at 4 
(``To many critics, there is something new and unethical about 
profiting from intellectual property by marketing the rights rather 
than using it in production.'').
    \68\ Government Accountability Office, supra note 5, at 26.
    \69\ Kappos, supra note 1.

    Senator McCaskill. Thank you, Mr. Mossoff.
    You know, I don't think anybody, at this hearing anyway--
this is not the Judiciary Committee. We're not talking about 
systemic changes to the patent law system. We're talking about 
bottom feeders. We're talking about scam artists and my 
question to you, Mr. Mossoff, is how would we ever know 
anything other than anecdotal if these guys are completely 
free? And if you go on Ms. Samuels' website, which I took a 
moment to do while she was testifying, I think you can clearly 
see that. I know you're a smart guy, and you know this area of 
the law very well. You're not going to sit there and tell me 
you don't think these letters are scams.
    Mr. Mossoff. Well, thank you, Senator.
    I mean, it's an excellent question about to what degree 
patent owners and even secondary owners of patents are 
deceptively asserting demand letters and are deceptively 
asserting invalid patents. The problem is that we don't have 
any established statistical evidence in comparison to the 
entire patent system that tells us that this is actually a 
systemic problem. The types of regulations that would be 
adopted at the FTC or the type of legislation that would be 
adopted would effect a systemic change that all patent owners 
who license their patents and send royalty requests would be 
affected by.
    Senator McCaskill. Well, how about if we just, to get 
beyond anecdotal, if we just--I don't think Edison would have 
been offended if he would have been asked just to file the 
letter that he was sending that clearly states what patent he's 
asserting and his bases for doing it.
    I mean, isn't the registry a way we would get past 
anecdotal? How in the world would we get past anecdotal if we 
let these scam artists, these bottom feeders, operate in the 
shadows without--I mean, how do we ever do anything other than 
you saying we have anecdotal?
    How do we get at the problem?
    Mr. Mossoff. Again, Senator, these are excellent questions 
and you're right. Anecdotes are a type of evidence, but when 
you're talking about adopting a legal regime that will be 
applied to all patent owners, that's a systemic change. And 
then we have to determine whether there is actually a systemic 
problem that justifies a great systemic change because costs 
are always symmetrical.
    And, yes, while we need to be concerned about the costs of 
inappropriately sent demand letters to retailers and other end 
users, we need to be aware of and sensitive to the cost that 
additional regulations or legislation impose upon companies 
working within the innovation industries.
    Senator McCaskill. Well, I got a good idea. We have 
somebody on the panel that owns a bunch of patents.
    Mr. Chandler, how many patents do you own?
    Mr. Chandler. We have about 10,000 issued U.S. patents.
    Senator McCaskill. Does anybody else own patents on the 
panel?
    All right, let's talk to the expert.
    You own 10,000 patents. If you were going to send a letter 
asserting your patents, would you find it something that would 
really negatively impact your business if you had to file them 
on a registry with no other requirement other than you had to 
file them?
    Mr. Chandler. I'm conscious in being called an expert, that 
I'm always mindful of the fact there are people on my staff who 
have the word intellectual in their title and I don't.
    Senator McCaskill. Right.
    Mr. Chandler. You know, we have no issue; we generally 
don't assert our patents. Our position on standards bodies, for 
instance, is that not only do we license freely but we license 
for free because we believe in disseminating standards and 
encouraging the adoption of technology; that happens to be our 
personal policy.
    I propose a registry, whenever anyone is sending a letter 
to more than ten end users, and I'd have no problem complying 
with that myself were I going to be in that business.
    Senator McCaskill. The other part of your testimony, Mr. 
Mossoff, that I found interesting was that there are plenty of 
legal clinics out here for these small businesses. I don't know 
how in touch you are with the legal community right now. They 
have suffered through this recession like all other 
communities. And one of the reasons probably a lot of these 
bottom feeder firms have popped up is that everyone is 
scrambling for legal business.
    Now I don't know what legal aid is like in your state, 
Senator Heller, but ours is on life-support. They are 
overwhelmed with desperately poor people trying to assert even 
basic rights.
    I'm not aware of any entities that are funded well in my 
state that any small business--that a local coffee shop that 
wasn't a franchise--could call and say, hey, ``I got a letter 
today that they're threatening to sue me if I don't pay them 
$3,000. What should I do?'' I know no where that small 
businesses in Missouri can call.
    Are you aware of some burgeoning legal clinic, free pro 
bono services, that I don't know, or should we just give them 
your phone number?
    Mr. Mossoff. That would be excellent, and thank you, 
Senator----
    Senator McCaskill. Don't say that would be excellent, 
because you don't know me.
    [Laughter.]
    Senator McCaskill. I'll give them your phone number.
    Mr. Mossoff. Well, you should give them my phone number 
because it gives me the opportunity to expand upon this point 
and I know exactly where to send to them. The App Developers 
Association has announced that it is now working with law 
schools and they have created six law school clinics and the 
announcement indicated that more are coming at law schools 
throughout the country that are specifically dedicated to 
assisting individuals. And I assume that the individuals that 
they would be most directing their services to are end users 
and small businesses who receive letters or become defendants 
in lawsuits.
    Thus, there appear to be private organizations that are 
working with law schools and providing them the funds to better 
assist in the provision of defense for the actual deceptive 
practices that you've heard about. As well, there are some 
organizations and law firms that actually are filing actions in 
the new administrative review procedures at the patent office. 
Thus, I am certain that Julie Samuels can tell us about the 
work that EFF has done in recently filing a challenge in the 
Inter Partes Review Program at the Patent Office to address the 
notorious podcasting patent.
    Senator McCaskill. I'll save, for my next round, some of my 
questions about civil claims against the trolls and criminal 
behavior and for you, General Bruning, about your activity. And 
now, I will turn it over to Mr. Heller for questioning.
    Senator Heller. Thank you, Mr. Chairman. And I certainly do 
appreciate everybody being here, spending time and sharing your 
stories with us. I think the message is loud and clear, what's 
going on out there, and for that, I can't thank you enough.
    We've heard all the words; this practice is deceptive, it's 
wrong, it's harassment, there's fear. I think unfair is a 
clear, descriptive word of how this practice has impacted small 
businesses and the economy.
    But, Jon, out in Nebraska, I just want to ask you: When you 
deal with this, is anything that's going on there, this 
practice, is it actually illegal?
    Mr. Bruning. We believe it's illegal on two fronts. Our 
consumer protection statutes, which I enforce as Attorney 
General, because these patent trolls, number one, don't have 
any intent to sue and number two, don't have any evidence that 
the recipient of the extortion letter has actually violated 
their patent, we believe it's a violation of our consumer 
protection statutes to send the letter. So before you send that 
extortion letter, you have to have knowledge that there has 
been some violation of the patent. They don't have any 
knowledge. They don't know anything about Eldon Steinbrink; 
they just got his name off a list somewhere. And they don't 
actually have any intent to sue. MPHJ has never sued anybody, 
other than us. We alleged that in court and they said, well, we 
have sued somebody--we sued you, Mr. Attorney General. And they 
did sue us. But they never actually sued an alleged infringer. 
So, we think it's a violation for that reason. We're actually 
looking into the criminal statutes as well. We have a RICO 
statute in Nebraska we've modeled after the Federal RICO 
statute and we're considering whether or not that's applicable 
as well.
    So, we're looking at this from all fronts. We consider this 
very similar to just garden variety extortion, where the mafia 
walks in, says, it's nice that your front window hasn't been 
broken out. For $50 a month, I can make sure it never gets 
broken. That's essentially what this is, in our opinion.
    Senator Heller. How much of your time do you deal on this 
issue?
    Mr. Bruning. Well, we've been spending a lot lately, and 
I've got my chief deputy and one of my top lawyers with me. We 
have four or five of our top people. But we're trying to get a 
national coalition group formed. Met with Mr. Chandler earlier 
and we're very interested in having some of the top legal minds 
in the business community aid our coalition. We think we're on 
the side of the angels on this one, and I'm very grateful that 
you Senators have called this hearing, because this is very, 
very important. As I think was mentioned by Ms. Samuels 
earlier, in the last 18 months, this has exploded. These 
letters now are going to individuals and non-profit 
organizations. That choir in Omaha? I mean, they must have $300 
in their checking account for robes. They get a letter? I mean, 
how on earth can they be alleged to have violated someone's 
patent? They were simply culled off a list that these 
fraudsters have gathered from somewhere.
    Senator Heller. Why do you think this has exploded in the 
last 18 months? Is it economically driven?
    Mr. Bruning. I think there's no question. What has happened 
is, they have--these patent trolls have kind of run to the end 
of the line with Mr. Chandler in Cisco that actually has in-
house patent lawyers. They've realized that Mr. Chandler's 
going to fight. He's willing to spend tens of millions of 
dollars. He's gotten to the point where he says, I'm not going 
to put up with it anymore. Because what America's larger 
businesses have realized is as soon as you pay out and you pay 
out again, they'll come back for more. It's a typical extortion 
scheme. If you pay the first time, they're going to come back 
again and again. So they've run to the end of their rope with 
the big boys and now they're going after the little guy who 
can't fight back because they don't have a patent lawyer, 
they've never had one, and when they call one, it's $20,000 up 
front and $500 an hour to get that person in gear.
    Senator Heller. Ms. Samuels--your Trolling Effects website; 
what kind of activity do you get on that?
    Ms. Samuels. Thanks for the question, Senator Heller. We 
get less than we would like and that we would have hoped. I 
think we've had somewhere in the neighborhood of only 30 
submissions. And we launched a couple months ago and it made a 
lot of news, so it's not for lack of people knowing.
    We've held meetings with people from large companies, in-
house attorneys from large companies and we've talked to a lot 
of smaller individuals. And pretty much across the board, 
everyone we've talked to says, we'd like to submit our letters, 
but we're afraid to. We're afraid to make it public. And we 
think that our website only has value if it's public because 
we're really worried about the small individuals that get these 
letters and have no idea what to do when they get them. I mean, 
no clue whatsoever.
    So we want to create a space where they can go and Google 
the name of who sent it, Google the patent number, end up at 
our site, say, oh, well you know, this person sent out 
thousands of letters and they only sued twice; maybe I'll just 
ignore it. Or say, wow, this person sues all the time; maybe I 
do need to find a way to hire a lawyer. Understand what their 
options are; I mean, have the most basic facts. But, you know, 
the problem is, again, that people are afraid, which is why I 
think we need some Congressional help to give those companies 
some cover so that they're more willing to share the data.
    Senator Heller. Very good. Thank you.
    Senator McCaskill. Thank you. Senator Klobuchar.

               STATEMENT OF HON. AMY KLOBUCHAR, 
                  U.S. SENATOR FROM MINNESOTA

    Senator Klobuchar. Well, thank you very much, Chairman 
McCaskill and Senator Heller, for holding this important 
hearing.
    I'm on the Judiciary Committee and chair the antitrust 
subcommittee. Many of you remember we had a hearing related to 
this--Senator Lee and I did. And I also wrote to the FTC asking 
them to examine the abusive assertion tactics and to bring 
enforcement actions if they violate the FTC prohibition on 
false and deceptive practices. I've heard a lot about this in 
my state. I actually got interested in this because what was 
happening to many of our companies who--we're home to many 
innovative companies and are proud of that. We brought the 
world everything from the pacemaker to the Post-it note in 
Minnesota, so we care a lot about patents.
    And I know, Mr. Chandler, that this subcommittee, under 
Chairman McCaskill's great leadership, is focused on protecting 
consumers from not only deceptive practices but also market 
inefficiencies. And using your case as an example, how did the 
demand letters drive up cost or negatively impact consumers?
    Mr. Chandler. Well, I think it's clear that that's what the 
goal ultimately is. Interestingly, just last week, one of the 
leading lawyers in Texas who represents patent assertion 
entities spoke at a conference in Austin and actually referred 
to the Innovatio case specifically and the fact that the judge, 
when he looked at it, found that all of the technology related 
to these patents was embodied in chips that were sold to 
companies that built routers and that as a result, the chips 
were worth $5 a piece and this particular technology had a 
value of about $.10 a chip. And he bemoaned that result and 
described driving from Dallas to Austin and seeing signs for 
free Wi-Fi. And he said the reason Wi-Fi is free at all of 
these places is because the judiciary isn't putting enough 
value on patents and allowing people, like in Innovatio, to 
collect the money they want to collect.
    So I think it's--I viewed that statement last week as a 
gift in preparation for this hearing.
    Senator Klobuchar. I imagine you did.
    Mr. Chandler. But what has gone on--and the answer to the 
question that was asked a moment ago is, we have a very vibrant 
and liquid market for patents in the country. And I think that 
ultimately is a good thing in general for a patent system; when 
it is leveraging litigation games, though, as opposed to 
underlying intrinsic economic value of patents, it runs amok. 
And, because of this liquid market, big companies often will 
have patents that no longer have economic value in their 
businesses like these Broadcom patents. But people who can 
exploit the litigation system can buy them up and rely on cost 
asymmetry to send letters to thousands of people and know that 
some of them will pay, either because they don't know better or 
because it's cheaper than hiring a lawyer, as the Innovatio 
people pointed out.
    And that's really what has driven it over the last 18 
months is big companies selling patents to people who will go 
do this, then, and take advantage of people.
    Senator Klobuchar. Thank you.
    Attorney General Bruning, if I could. I have limited time, 
and then maybe at the end we'll come back if the Chairman will 
allow me.
    Attorney General Bruning, I'd first like to note: I 
wondered if you watched the Nebraska-Minnesota game where the 
Gophers----
    [Laughter.]
    Senator Klobuchar. I know that the Chairwoman already 
brought up football, but I just wanted to make sure.
    [Laughter.]
    Mr. Bruning. I was there, yes, thank you.
    Senator Klobuchar. You were there? I was there, too.
    Mr. Bruning. Yes.
    Senator Klobuchar. I had a lot of fun.
    [Laughter.]
    Senator Klobuchar. Really great. And I had a bet the last 
time with Senator Nelson, and so I had to call him afterwards 
to say that I bet the wrong year. But this was the time, so 
anyway.
    Mr. Bruning. Congratulations.
    Senator Klobuchar. Thank you very much.
    [Laughter.]
    Senator Klobuchar. But now to some more serious questions.
    We've heard compelling testimony about abusive use of 
demand letters. But as we consider the issue, we need to also 
be mindful of the importance of intellectual property rights 
and the correspondence that takes place each and every day 
among patent owners and innovators to assert their patent 
rights in good faith.
    How do we ensure that any potential solutions to the 
problems of abusive demand letters do not adversely impact 
generally accepted licensing practices, which could include 
demand letters or other similar types of correspondence?
    Mr. Bruning. Senator, I thank you for the question.
    And I think, generally, the answer to that is, more 
disclosure, whether it's a registry for a minimum number of 
letters, whether it's a registry for each individual letter, 
whether it's disclosure of the owner of the patents. Remember 
at MPHJ, that I talked about in my testimony in particular, 
they have a whole series of alphabet soup shell companies that 
they use that are registered in Delaware. We can't even get to 
who owns this thing, who's asserting the patent. It's MPHJ 
through Accuver, whoever that is; we don't even know. So this 
seems to be, by all accounts, a simple scheme. And so 
disclosure--if somebody stands up and says, I'm John Smith, I 
own the patent, even if they bought it on the open market, 
that's OK, but explain who they are. That's the first thing. 
The second thing is, explain how the person receiving the 
letter or the organization receiving it violated the patent. 
Right now, they don't even have to assert that. They simply say 
in these letters, you have to prove that you didn't violate our 
patent; that you didn't infringe on our patent, which is a very 
topsy-turvy way to go about it.
    So Eldon Steinbrink, the 80-year-old gentleman in Phelps 
County, Nebraska, he gets this 20-page letter and it says, Mr. 
Steinbrink, we think you violated our patent. We have no 
evidence to prove that, but you have to prove to us that you 
didn't. And that's a very perverse result, where it's simply 
extortion dressed up using the patent system.
    Your attorney general--if I may, Senator? Your attorney 
general in Minnesota, Attorney General Swanson, effectuated a 
settlement with MPHJ where MPHJ agreed not come into Minnesota. 
I haven't talked to her yet, but I'm very interested in the 
terms of that, how she got that done.
    I want to protect all Americans, but, of course, I want to 
protect Nebraskans. How did she figure out to keep these people 
out of Minnesota? I don't know.
    Senator Klobuchar. Maybe it's the cold weather.
    [Laughter.]
    Mr. Bruning. She's very smart. Good for her.
    Senator Klobuchar. OK. Could I just follow up? I know, Mr. 
Mossoff----
    Senator McCaskill. Sure.
    Senator Klobuchar.--you wanted to, if that's all right. You 
wanted to respond.
    Mr. Mossoff. Well, thank you, Senator, because I just 
wanted to have the opportunity to expand a bit upon Mr. 
Chandler's comments because I worry that what patent lawyers 
call the secondary market, the buying and the selling of patent 
rights from inventors to other commercial entities, is being 
perceived in some sort of pejorative sense. That large 
companies are unloading patents to small companies that then 
exploit these for deceptive or inappropriate purposes.
    In fact, a vibrant market in the sale of patents and of 
patent rights has existed from the very early 19th century. 
People then bought and sold patents in classified ads. The end 
of Scientific American issues were littered with offers to buy 
and sell patents and patent rights. And this was important for 
the efficiencies achieved by the American patent system from 
the very beginning because it permitted the division of labor 
to be embraced; for inventors to focus on inventing, for 
business persons to focus upon business; for manufacturers and 
retailers and others, etc. And it was a key to why the American 
patent system ultimately gave birth to an explosive growth in 
the economy in the 19th century. We were surpassing other 
countries--England and other countries--by the mid-19th 
century. And they were marveling at us and recognizing that it 
was our patent system that was bringing this innovation 
economy.
    Fundamental to this innovation economy was the secondary 
market in patents. And so, it wasn't just Thomas Edison and 
Charles Goodyear, the inventors; there were also people who 
were buying and selling patents and were embracing what I call 
the patent licensing model, which involved sending royalty 
letters and making demands upon infringers. One historian found 
in 1883 that a thousand cases were filed in the Southern 
District of New York just that year, and almost all of them 
were involving a single patent--a well-drilling technology--and 
almost all of those lawsuits were filed against farmers. Well, 
the farmers were infringing, and this entity was going to these 
farmers and saying, we think you're infringing, please pay us a 
royalty. And they did not, so they were required to enforce 
their patent rights in order to legitimately recoup the 
investment that they had in their property.
    Senator Klobuchar. Thank you.
    Senator McCaskill. Thank you.
    Let me take a moment on the record to say how much we would 
welcome whistleblowers that work in any of these factories that 
are churning out these letters.
    Speaking of algorithms that are well-known to people in the 
tech world, clearly there's a financial algorithm that has 
being used. You're going to get an average of ``x'' dollars for 
every letter you send; let's cast a wide net; you know, the 
chances of there being any negative consequences to casting a 
wide net are very low; the chances of driving up what you 
receive per letter are very high. Someone is working in one of 
these ``law firms''--I put ``law firm'' in quotes because I 
don't consider this legal work--and we would welcome a whistle-
blower that is inside one of these entities. And we are very 
used to, in my office, protecting whistleblowers because we've 
done so much work in the contracting area, where we have done 
great oversight work with contracting. So I wanted to put that 
on the record, that your identity and where you work will be 
protected if you can give us a dirty inside glance as to how 
this actually--how they're figuring out what lousy patents to 
buy, how they're figuring out who to send the letters to, where 
they're getting the list, how much they're receiving. Maybe 
that would get us beyond anecdotal if we could pull back the 
curtains and see what's actually going on behind the scenes.
    Let me ask you this: Are any of you aware of anyone who has 
turned the tables and brought a civil cause of action for 
damages against these entities? It seems to me, there's a 
great--I think it would be really fun for somebody to get a 
really good class action going against one of these law firms. 
And, you know, I'm not a class action lawyer, but it seems to 
me that there's a class here.
    Yes.
    Mr. Chandler. We brought a RICO claim against these 
individuals at Innovatio based on the deceptive letters that 
they were sending, their fraudulent purpose in doing so, and 
the conspiracy among the individuals to do it. And that 
approach failed in a ruling by Judge Holderman, the Chief Judge 
in the Northern District of Illinois. And the reason it failed 
was that our Constitution protects the right of citizens to 
petition the government for redress of grievances and 
litigation is considered a form of petitioning with an 
exception where the litigation is deemed a sham. And since they 
sent 13,000 letters and we felt that since they knew that a 
huge proportion, if not a majority of devices were already 
licensed, that that was a sufficient sham to take action under 
RICO. And the judge said, no, that's not a sufficient sham to 
shut off their ability to litigate or to hold their actions in 
litigating to be actionable under RICO.
    And I understand the ruling. I felt differently, which is 
why I brought the case. On the other hand, it brings me to this 
hearing and to the fact that I think some action to shed some 
light on this to create a registry to get the data to force 
them to tell end users who the manufacturers are will go a long 
way toward resolving the most abusive problems that are out 
there.
    So yes, we did take an action. It happened to fail, but I 
think that brings it back to all of you.
    Senator McCaskill. Mr. Potter.
    Mr. Potter. On two counts. One is, there's a company called 
Find the Best in California which is a member of ours. We 
brought them to D.C. last week and, in fact, I think they're 
coming back next week. They have sued the plaintiff on a RICO 
action. They have counterclaimed, essentially against the so-
called inventor and their so-called law firm and their eight or 
ten or twelve shell corporations that they pass it through so 
that this guy and this woman in Connecticut won't be found out 
and uncloaked as, essentially, people who pushed through 
patents at the patent office and then go around and sue people.
    I want to reiterate. I want to respond to two other points, 
if I might, Madam Chairman.
    Senator McCaskill. Sure.
    Mr. Potter. Number one, the Application Developers Alliance 
has launched the Patent Troll Defense Network with six law 
schools around the country. We're pleased, we're proud, and 
we're doing the darn best we can. We now have 12 or 13 law 
students, while they're not in class and while they're not 
always studying for the bar and while they're not trying to get 
some sleep, to----
    Senator McCaskill. That's a lawyer I want.
    [Laughter.]
    Senator McCaskill. No, just being a little sarcastic.
    [Laughter.]
    Mr. Potter. They have made one or two students available to 
us for a certain number of hours per week at these law firms 
and we're figuring it out. To say that they're ready, willing 
and able to fight arm-in-arm with highly trained, aggressive 
litigators who are around the country--is a sham. And it's just 
pathetic.
    Number two, let me reinforce what Julie said about the 
fear. We brought, I think, 15 companies to D.C. two or three 
weeks ago, maybe 6 weeks ago, to meet with members and staff 
and talk about their experiences. And some of them I talk about 
in my testimony. If you go to our website and you look at that 
CEO on our website who the video's on, his face is pixelated 
and his voice is changed. And it's done that way because he's 
afraid. He's been funded by substantial brand-name venture 
capitalists who don't want him to go public. The idea that 
anecdotal evidence isn't good enough is preposterous.
    Senator McCaskill. Yes.
    Ms. Samuels. Thank you for the question.
    And while Jon and Mark have talked about going into court 
to go after these bad actors, I think EFF is probably one of 
the organizations in the country that has the most experience 
trying to challenge bad patents. You know, knock off one-by-
one, protect consumers. And I briefly just want to tell you 
that that's incredibly hard work. It is incredibly resource-
intensive. We do it on a one-by-one basis and we recently, as 
Mr. Mossoff just said earlier, have challenged a patent that is 
being asserted against podcasters, and it took help from 
students at Harvard, pro bono help from a giant law firm, and 
we had to still pay more than $30,000 in fees.
    This is not an easy thing to do. And that's why we need 
more help.
    Senator McCaskill. Transparency is what sounds like we 
need.
    Senator Heller.
    Senator Heller. Thank you.
    Mr. Mossoff, listening to you, I'm trying to get a 
description of your testimony that you discuss the need for 
objective evidence--reasoning explanation before legislative 
steps are taken. I'd assume that's a fair description of what 
you said.
    Mr. Mossoff. Yes.
    Senator Heller. And also that your concern is that 
legislation enacted could weaken patent rights or increase 
legal hurdles.
    Mr. Mossoff. Yes.
    Senator Heller. That could be a burden on innovation.
    Is that also a fair description?
    Mr. Mossoff. Yes.
    Senator Heller. OK.
    Have you seen any specific proposals out there? Any 
specific proposals that address these demand letters that would 
weaken patent right?
    Mr. Mossoff. Well, the concern is over the proposal that 
we're discussing here before this committee about authorizing 
the FTC to regulate and punish the sending of demand letters 
because under Section 5 the authorization is to protect 
consumer welfare. The inferential leaps that one has to go from 
receipt of demand letter to, ultimately, the impact upon 
consumer welfare is significant. I'm not saying that it may not 
necessarily be proven, but it would have to be shown. And it 
would have to be established through evidence that there is 
actually existing harm to consumer welfare that would then 
establish the basis for having definitive legal standards that 
would not increase uncertainty for legitimate companies and 
owner of legitimate patents. Because I think the concern here 
is we have to get clear on what the underlying problem is, and 
that's why we need more evidence. Because I don't deny, and one 
can't deny, that there are bad actors. But there are over 3,000 
lawsuits filed every year in this country in Article 3 courts. 
And if the majority of the demand letters that are being sent 
are being sent by 10 or 12 bad actors, then that's not a 
significant impact within the patent system relative to the 
people who are filing legitimate patent lawsuits and will have 
increased burdens imposed upon them because costs are always 
symmetrical.
    And so, the increased ability to punish under vague legal 
standards the sending of demand letters in one context can be 
exploited by a real infringer of a legitimate patent in another 
context. And that's something that we have to be aware of, 
understand and investigate as well.
    Senator Heller. Mr. Sinewitz, do you want to respond?
    Mr. Sinewitz. You know, I'm listening to organizations and 
I'm listening to all the other testimony. At the end of the 
day, maybe I come from a little bit of a different angle 
because we're just a small company. And the answer, very 
simply, is when I call a patent attorney and he tells me I can 
settle something for $50,000 or $60,000 and probably $50,000 in 
his fees, or I can take this to court and it's going the cost 
me $2 million, it's just not happening. And even though I'm a 
small company compared to somebody who has a coffee shop, or 
somebody who only owns one little location, I mean, I'm huge 
compared to them.
    We had a call--or actually, a letter, just a week ago from 
a company called Red Star. Red Star owns the patent to DVD 
players and the ability to read the DVD players. And in it was 
a very detailed, very explicit letter explaining to us that we 
had a machine on our floor that came from China that had not 
paid the North American Philips patent. Within 15 minutes, I 
pulled every one of those machines off the shelf, contacted the 
manufacturer, or the person who imports them, and told them 
that I wanted a return authorization to send these back. 
Because they did identify the product, because they did make it 
very clear, and they were very specific as to where they felt 
this thing was being infringed, we were able to react to that.
    I will also probably tell you that at the end of the day, 
they will now pay that fee. They'll pay for the royalties of 
that fee. And that's what we're really here for. You know, I 
said in my testimony that really the bottom line here is 
fairness, OK? We can get involved in all the websites you want, 
we can get involved in all the legal things that happened in 
the 1800s and 1900s; that's really great. Today, technology is 
moving so quickly and there are so many more new things that 
are coming out and things are so much more broad and so much 
different than worrying about drilling rights and farmers. 
Today, every single day, some new technology is showing up. You 
know, as the Senator saw when her Apple wasn't able to read and 
she had to go back to paper--the world changes every 24 hours 
for us in the electronics world. And the bottom line's going to 
be is that if the consumer wants to continue to participate in 
this kind of technology and everything else, then yes, we have 
to protect the people who are inventing things.
    Senator Heller. Thank you.
    Mr. Sinewitz. I don't think anybody wants to argue that.
    Senator Heller. Ms. Samuels, do you want to comment?
    Ms. Samuels. I have two brief points to make.
    First, just to be clear, we're not talking about regulating 
all demand letters, ever. We're talking about regulating 
certain bad behavior. And it can be limited. And I think that's 
really important because there is a place for responsible 
technology transfer in this country and I don't know anyone who 
would disagree with that statement.
    Senator Heller. Do you believe the FTC has the authority to 
act?
    Ms. Samuels. I actually believe the FTC already has the 
authority to act. My understanding is the FTC also believes it 
already has the authority to act but, you know, a little nudge 
maybe wouldn't be the worst thing in the world.
    And the second point I'd like to make, and I'll try and be 
brief here, on this whole, you know, anecdotal versus real, let 
me just quickly tell you some things we do know. And this is in 
my written testimony.
    We do know that troll lawsuits are associated with half a 
trillion dollars of lost wealth to defendants from 1990 through 
2010. Academics and economists average that patent trolls in 
2011 imposed a direct cost of $29 billion to companies. And 
while, you know, we're talking, of course, about mainly 
litigation costs because that's the data we have, Innovatio's a 
great example.
    Eighteen thousand letters, did you say?
    Mr. Chandler. Thirteen.
    Ms. Samuels. Thirteen thousand letters and about 30 
lawsuits.
    Another professor, Colleen Chien, has said that she 
estimates there are about 100 demands per a single lawsuit. So 
to the extent the data we have surrounds lawsuits, when you 
extrapolate it, then that's something.
    And finally, I would just say one business that goes out of 
business because of a patent troll is one business too many.
    Thank you.
    Mr. Mossoff. Senator, may I just quickly note, if I may, 
that the studies and figures that she's citing are exactly the 
studies and figures that were identified by the Government 
Accountability Office as being ``non-random and non-
generalizable.'' They were taken from proprietary, secret data 
owned by companies and firms with a real policy interest and 
financial interest in these issues. No one has any access to 
the data to test whether these claims are legitimate or not. 
And follow-on studies from publicly available data have 
actually shown that these figures are actually heavily 
inflated, including a study that was just placed up on the 
Internet this week by professors Jay Kesan, David Schwartz, and 
Chris Cotropia.
    Thank you.
    Senator McCaskill. Just as a note, it sounds like to me 
that, honestly, the more you testify, Mr. Mossoff, the more I 
believe we need the registry, because then we will no longer 
have to worry about whether or not we've got real data.
    Senator Klobuchar.
    Senator Klobuchar. Thank you very much.
    Mr. Sinewitz, Minnesota is also--I mentioned some of our 
innovative companies. We're also a big place for retailers. As 
you know, the retail industry contributes $2.5 trillion to our 
Nation's annual GDP. We're the home of companies in Minnesota 
like Target and Best Buy as well as being the home to the Mall 
of America--the biggest retail space in the country, which I 
suggest everyone visit during the holidays.
    [Laughter.]
    Senator Klobuchar. Mr. Sinewitz, how much do retailers end 
up paying out because of demand letters, either in settlement 
or in litigation?
    Mr. Sinewitz. I'm not sure I can answer for either Best 
Buy's or Target which are two of the, obviously, large firms 
that are based in Minneapolis. But I can tell you that we've 
spent a half a million dollars already either in settlements 
and legal fees. And a half a million dollars for a small 
company our size is outrageous.
    Senator Klobuchar. And do you see this--has it been 
exponential in terms of the increase? What were you seeing, you 
know----
    Mr. Sinewitz. It has been----
    Senator Klobuchar.--ten years ago?
    Mr. Sinewitz.reasonably steady, it's, like, one a year that 
we're getting. I will tell you that I sit with both of those 
companies on the Florida Retail Federation and on the Georgia 
Retail Association, where I have stores. Both of those 
companies are every bit as concerned about this as I am. And to 
be perfectly honest, one of the suits that we got hit with, 
they just took every major retailer in Atlanta and they nailed 
us. And they were both nailed in that same process because both 
of them have stores in Atlanta.
    So the reality of it is, is that if they win--and, you 
know, to answer the other question of a second ago about 
wanting to come out, I have real problems bringing you guys 
letters because when I settle these things, I have to settle 
non-disclosures. And it opens me right back up to getting sued 
again.
    Senator Klobuchar. By someone else.
    Mr. Sinewitz. By the same people.
    Senator Klobuchar. The same?
    Mr. Sinewitz. I mean, the same people that I gave them 
$50,000----
    Senator Klobuchar. Oh, because they'll sue you because of 
your violation of the non-disclosure agreement.
    Mr. Sinewitz. Because they gave me non-disclosures as part 
of settlement. Because they surely don't want me to go out 
there and tell people what I've done.
    Senator Klobuchar. Were you in this business 20 years ago? 
Or is it----
    Mr. Sinewitz. Oh, I've been with my company for 32 years.
    Senator Klobuchar. So you've seen it change over time?
    Mr. Sinewitz. For us, this is in the last six, seven years 
that we have seen this kind of a problem.
    Senator Klobuchar. But you have numbers because you know 
your bottom line.
    Mr. Sinewitz. Yes, I do have that. I mean, I can tell you 
I've given the Committee the eight letters--heavily redacted, 
unfortunately--but I did give the Committee all eight letters 
that we had to settle on. I will tell you that that isn't the 
only letters that we've gotten. And I will tell you again that 
when we see one and it's legitimate, I don't think there's 
anybody that wouldn't want to honor that.
    Senator Klobuchar. And speaking of these trends, since 
there have been some issues raised--you know, I kind of believe 
my constituents when they tell me this stuff and then when I 
hear it about 15 times, I know it's real. But there were some 
issues raised by Mr. Mossoff about whether this is truly a 
problem.
    And Ms. Samuels, when did the trend switch from primarily 
legitimate use of demand letters--from your perspective, 
largely to manufacturers--to more deceptive letters that go to 
all end users?
    Ms. Samuels. Thank you for the question, Senator Klobuchar.
    I will tell you my personal experience. It was about 18 
months ago that it really was noticeable, and it started with a 
troll called LODSYS, L-O-D-S-Y-S, who started targeting app 
developers for using technology that's provided to them by 
Apple and Google. You know, when they put their apps in the 
smartphone marketplaces. And, you know, I literally got to work 
one morning and my phone was ringing and I had a bazillion e-
mails from these app developers who'd gotten these scary 
letters. There was one who is somewhere in Western Europe and 
the little FedEx package he had gotten, you know, the receipt 
showed how much it cost to send it. And it cost more to send a 
package to him than he'd ever made on his app.
    You know, these people did not know what to do. And that 
was kind of--from my perspective that was the tipping point. 
But since then it has really just been a torrent.
    Senator Klobuchar. Mr. Chandler, just one last question 
here. As I mentioned before, I urged the FTC to approve a 6(b) 
study--and Chairwoman Ramirez testified at our hearings--and 
the Commission has taken the first steps now to begin this 
study.
    Do you think this study is enough, or should the FTC take 
additional action? Should it put out an interim report, for 
instance, to highlight the findings so far so the market sees 
what they're looking at? And should it bring enforcement 
actions against the senders of the demand letters? It's really 
a two-part question. Should they do some kind of interim report 
and then should they do something with enforcement?
    Mr. Chandler. Senator, thank you for your leadership on 
this issue, not just here but also in your other life on the 
Judiciary Committee.
    Senator Klobuchar. That is another life.
    [Laughter.]
    Mr. Chandler. The FTC study is a very broad one that looks 
at the entire universe of non-practicing entities including 
large patent aggregators who license portfolios to operating 
companies such as Cisco, all the way down to individual non-
practicing entities that pursue this type of activity.
    So it's a very broad study. I think it will take a long 
time to bring forward. I think an interim report would be a 
very good step, so I would urge the FTC to consider issuing an 
interim report and ask you to use your good offices with them 
to encourage that step as well.
    I do think more is needed sooner, given the trend that 
we're seeing. And I don't think the FTC today has been very--
and historically--has not used its very unique rulemaking 
capability to pursue issues like this very effectively. They do 
enforcement. On some occasions, the Congress has asked them, 
such as in the Child Online Privacy Act, to adopt specific 
rulemaking to pursue particular problems. And I think that's a 
step that this committee could begin, to ask the FTC to create 
a registry like this and to collect information and to allow 
manufacturers like me to then step in and help our customers 
deal with these. Because for the customers, when they're told 
do you want to pay $2,000 to avoid spending $10,000 to solve a 
problem, they will pay the $2,000 even if the thing they're 
paying for is worth $.10. If the manufacturers can get 
involved, we can aggregate it and deal with it.
    I spent $13 million dealing with Innovatio, but I'm proud 
of every cent, and I'm a guy who packs my lunch every day.
    [Laughter.]
    Senator Klobuchar. Very good.
    Well, I think that I saw a lot of nodding heads and I know 
we have a new colleague here, so I'll ask the questions later 
on the record to get your ideas. Because I think how we move 
forward is just as important as identifying the problem.
    So thank you, everyone.
    Senator McCaskill. Senator Ayotte.

                STATEMENT OF HON. KELLY AYOTTE, 
                U.S. SENATOR FROM NEW HAMPSHIRE

    Senator Ayotte. Thank you very much, Madam Chairwoman.
    I wanted to first of all say to my former colleague, 
Attorney General Bruning, it's great to have you here today. 
And let me just ask you based on your testimony, you said the 
time is ripe for Federal and state authorities to work in 
concert to address this issue and stem the tide of patent 
trolling nationwide.
    What do you view the role of state attorneys general, state 
authorities, on this issue versus cooperation with Federal 
authorities on how to address these problems? Often people 
think that Washington is the answer to everything, but the 
state AGs and state authorities are much closer on the ground 
level.
    What role do you think they can play and how can we help 
consumers on this issue?
    Mr. Bruning. Well, thank you for the questions, Senators.
    Very nice to see you as well. I always look forward to 
seeing you when I'm in Washington. I'm glad to be before the 
Committee today.
    I would say it's a two-pronged effort. One, the attorneys 
general, as you recall, would gather, you know, in concert. 
Tobacco is an example that's very well-known, in 1999, where 
the attorneys general pursued Big Tobacco. I would say this is 
a case where the collective action of the attorneys general is 
warranted. We can use our consumer protection statutes. These 
are fraudulent actions; they have no intention of suing, they 
have no knowledge of any of these individuals actually 
violating their patents. So I think it violates Nebraska's 
consumer protection statutes. I think it probably violates most 
states' consumer protection statutes.
    For those of us that also have concurrent criminal 
authority--which is, you know, 35 or so attorneys generals, to 
my recollection--we have to analyze that because this is fraud; 
is it a criminal fraud? And certainly, our office is analyzing 
that. That's a higher bar to get over, but we're analyzing 
whether or not we should use our criminal statutes as well.
    And at the Federal level, I certainly think the power of 
the FTC and the national scope of the FTC and the subpoena 
power of the U.S. Senate to lift the curtain on these folks, we 
can't even figure out who's behind MPHJ. Who are these people? 
Who is this? There's some guy right now at his country club in 
Austin, Texas or Atlanta, Georgia and everybody thinks he's a 
great, successful business guy, and what he is is a fraudster. 
And I want to see the U.S. Senate lift the curtain on it and 
say, here you are. And I want to see Steve Kroft at 60 Minutes 
standing on the guy's driveway with a microphone----
    [Laughter.]
    Mr. Bruning.--saying, why is it you held hostage these 
voices for--you know, this choir in Omaha that got this letter? 
Or this 80-year-old man with Alzheimer's in Holdrege, Nebraska 
that got this letter? I want to see those national news people 
standing on the driveway of this guy that everybody thinks is a 
preeminent business man; I want to see him exposed. And you can 
do that with your subpoena powers.
    And I think a small tweak in the statutes or in the rules 
at the FTC to require registration of these letters, I think 
there seems to be some agreement that that may be useful.
    Senator, I think you've said it extremely well. I mean, as 
we listen to Mr. Mossoff, perhaps registration is one way to 
lift the veil. We just need to have openness in this process. 
Legitimate patent holders, none of us have any problem with 
them enforcing their rights using the court system, but this 
isn't about patents; this is about fraud. This is about 
extortion. This is about fear with little companies that Mr. 
Potter represents, little app developers that it's their life 
or death. Some guy that has invested his last $100,000, this 
letter will take him down.
    Senator Ayotte. Right.
    Mr. Bruning. And so, I think that's how--I know I went far 
afield there, Senator, but I think there is a role for each of 
us to play.
    Senator Ayotte. Great. I appreciate it. Thank you.
    And this is something that I'm concerned about. We're 
blessed, in this country, to have incredibly great innovators. 
Many of them start out of their garages. So in New Hampshire, 
we have a great one--Dean Kamen. So when I was preparing for 
this hearing, we reached out to him and he rightly raised the 
issue that I want to hear from you on, which is--and I think 
Mr. Chandler, you can help me with this. You think about 
Cisco's revenue, so much of it comes from small businesses. And 
how do we make sure that by trying to address the patent 
trolls, we aren't harming or decreasing the value of legitimate 
small innovators? These people who start out of their garage 
and have such great ideas--and that is what America is all 
about.
    So when we address this problem, we've got to get that 
right to make sure that we are not hurting these wonderfully 
brilliant individuals who just have a great idea in America.
    So can you comment on this, Mr. Chandler? And can you also 
comment on it, Mr. Mossoff?
    Mr. Chandler. You know, I think that's a very, very 
important concern and I've testified on a panel together on 
patent reform with Dean and have a huge amount of respect for 
his contributions. And I know that when he has concerns about 
infringement, he doesn't send letters to individual Segway 
users asking them to send $10 each and don't look too closely 
at the patent. So he knows exactly how to enforce his patents 
in an effective way. And there are issues related to how the 
patent litigation system works and what's fair and not. And I 
think those are being appropriately dealt with at the Judiciary 
Committee.
    I think what we're looking at today is something that is 
not something that flows into the way Dean Kamen goes about 
conducting his business and enforcing his patents, and that is 
making sure people who are targeting end users who buy a 
product that incorporates someone else's technology aren't 
victimized when there's a huge cost and information asymmetry, 
but that the information is out there and there's some 
transparency so they know who to go to in order to get help and 
solve their problems. And that's something that I would be arm-
in-arm with Dean Kamen in supporting. And I'd be surprised if 
he would want a business model where he was out sending 
thousands of letters to people using counterfeit Segways.
    Senator Ayotte. I would agree.
    Mr. Mossoff. Thank you, Senator.
    I think you raise a very, very important point. In fact, at 
a conference this past September here in D.C., Dean Kamen spoke 
and he spoke out on the issue of patent trolls. And he actually 
said, the phrase applies to me. In fact, he said, I am Trolls-
R-Us. And he was very proud of that, he said, because I needed 
investors when I came up with my inventions when I was still 
working in my parents' basement when I created my first 
inventions. And he said, so I embraced that division of labor 
where I was the inventor and there were business persons and 
other experts and lawyers who could commercialize and enforce 
my patents for me. And thus, that's why he refers to himself as 
a troll. And it shows you the difficulties and problems with 
the labels that we're using and the rhetoric that we're using 
because it covers lots of different actors in a very complex 
and heterogeneous innovation economy.
    And as you mentioned, small businesses and individual 
inventors need very strong patent rights. And it's individual 
inventors and small businesses, who are oftentimes not 
manufacturing yet, who in negotiating with large companies, are 
essentially told sue us. If you think we're infringing, then 
sue us. And in fact, one transactional attorney who testified 
at the FTC/DOJ workshop last December actually stated that he 
hears that a lot from his clients and in deals that he 
negotiates. That small businesses and individuals are told when 
attempting to negotiate licenses with large companies: sue us. 
And then those small companies and businesses are immediately 
painted as ``patent trolls'' that are attacking these large 
companies who are painted as innovators.
    And so this is a real concern because small businesses and 
inventors actually do need very strong patent rights--patent 
rights that are necessarily weakened by additional burdens that 
will be imposed upon them, both in trying to license their 
inventions as well as in trying to enforce them, which is 
always the backstop that makes licensing possible.
    And in this respect, to go back to Attorney General 
Bruning's comments and Senator McCaskill's--your comments about 
a registry--I think we also need to be aware of the existing 
legal tools and the implementation of regimes that actually 
address the issues of disclosure. The Patent Office is about to 
issue rules following notice and comment on transparency of 
ownership following President Obama's Executive Orders last 
June 4.
    And so, we have to always hold in context that the 
discussion that we're holding here is part of a very large and 
vast discussion about revising the patent system. And something 
that I really hope that we hold in context--that another 
massive revision of the patent system just 2 years after the 
America Invents Act, which was also a massive revision to the 
patent system, creates a lot of uncertainty. And that's an 
uncertainty that effects and makes it much more costly not just 
for large companies to implement innovation into the 
marketplace, but also small businesses and individuals who are 
much more sensitive to cost, as Mr. Sinewitz has been reminding 
us about.
    Senator Ayotte. Thank you, Mr. Mossoff.
    Senator McCaskill. Thank you, Senator Ayotte.
    Let me reassure you, Mr. Mossoff. This committee doesn't 
have the jurisdiction or the appetite for any massive change to 
the patent system. We're talking about end users and consumer 
protection--is what we're talking about.
    So, I know, Ms. Samuels--I'm not going to take my full time 
because we're going to have two votes at 11:45 and I want to 
make sure that if either Senator Heller or Klobuchar or Senator 
Ayotte has anything else to add to the record, they have an 
opportunity.
    I just want to follow up with something you said. I believe 
you stated that the FTC has authority now, which is correct for 
end users that are consumers of products in terms of fraud 
being committed upon them, but I don't believe they currently 
have the authority to establish a registry----
    Ms. Samuels. Correct.
    Senator McCaskill.--of these letters or require 
transparency in the letters as to who owns the patent and what 
patent is actually being asserted in the demand letters.
    Ms. Samuels. Thank you, Senator.
    That is actually what I meant, that the authority the FTC 
already has extends to what it can do under Section 5, not the 
registry.
    Senator McCaskill. Thank you.
    Ms. Samuels. Thanks for clearing that up.
    Senator McCaskill. Senator Heller, do you have anything 
else for the record?
    Senator Heller. I don't.
    Senator McCaskill. Senator Klobuchar, do you have anything 
else for the record?
    I want to thank all of you very much. We will leave the 
record open for any submissions.
    I especially want to thank you, Mr. Sinewitz, for traveling 
as far as you have.
    And those of you from California, thank you for coming 
across the continent, and, certainly, thank you, General 
Bruning, for taking time away from Nebraska to come and talk 
with us. I hope you continue to educate your fellow attorneys 
general across the country about this opportunity we have.
    You know, I'm old-fashioned about this. I'm not a big fan 
of Federal law enforcement. I'm a big fan of local law 
enforcement. I'm a local prosecutor by my background, and I 
think that a lot of this work can be done on a state-by-state 
basis much more effectively than we can do from Washington. So 
good for you and your work, and I look forward to hearing that 
many of your colleagues across the country have joined your 
important crusade to protect innocent consumers from these 
kinds of scams.
    Thank you all for being here, and the hearing is adjourned.
    [Whereupon, at 11:38 a.m., the hearing was adjourned.]
                            A P P E N D I X

  Response to Written Questions Submitted by Hon. Claire McCaskill to 
                            Hon. Jon Bruning
    Question 1. At the hearing, we heard about several policy proposals 
that could help protect consumers and small businesses from harmful 
demand letters. One potential idea widely discussed was the 
establishment of a demand-letter registry--whether at the Federal Trade 
Commission (FTC) or at the U.S. Patent and Trademark Office (PTO)--that 
would increase transparency and facilitate better data on the problem's 
extent. What protections for consumers and small businesses would such 
a registry provide that would address the current harms inflicted on 
them by demand letters?
    Answer. The creation of a demand letter registry would add much-
needed protection for consumers and small businesses who too frequently 
find themselves targeted by unscrupulous patent trolls. The simple 
knowledge that ``someone is watching'' can serve as a valuable 
deterrent to a patent troll who may otherwise feel free to send demand 
letters scattershot to hundreds of targets around the country without 
first performing some basic due diligence as to whether those targets 
actually merit contact.
    As it stands now, patent trolls can fairly view the demand letter 
process as a regulatory ``Wild West.'' Demands can be made and license 
fees extracted more or less in the shadows. Even if nothing else is 
done to address this problem, this relatively simple first step should 
be implemented, because it would provide valuable sunlight on those who 
are targeting so many of our constituents with unfair and deceptive 
patent enforcement demand letters.

    Question 1a. Do you have an opinion about whether it would be more 
effective to house such a registry at the PTO or the FTC? Please 
explain why.
    Answer. Though I am not fundamentally opposed to the housing of a 
demand letter registry at the PTO, I believe the problem of unfair and 
deceptive demand letters is, primarily, one of consumer protection. 
Accordingly, the creation of a Federal demand letter registry would 
best take place within the FTC as the Federal agency best equipped to 
engage in consumer protection activities.
    However, I believe there is a role for state consumer protection 
authorities to play on this proposal, as well. In Nebraska, we are 
currently drafting legislation which would include a requirement that 
any person who sends demand letters to a certain number of Nebraskans 
over a specified period of time must notify the Attorney General's 
Office. Such a notification requirement would do nothing to burden the 
lawful enforcement of a legitimate patent, but would enable my office 
to know in real time when such campaigns are underway. That way, if we 
observe evidence of unfair or deceptive practices in the sending of 
such demand letters, we can take appropriate action.

    Question 2. Another potential idea from the hearing was to require 
certain baseline disclosures in demand letters to provide recipients 
with more useful information and to help stem the large numbers of 
demand letters being sent. Do you believe such mandatory disclosure 
requirements would protect consumers and small businesses from the 
current harms inflicted on them by demand letters? Would mandatory 
disclosure requirements provide a more effective consumer protection 
solution than a registry?
    Answer. Absolutely and I do not view it as an either-or 
proposition. Mandatory disclosure requirements and the creation of a 
registry should go hand-in-hand.
    Many of the demand letters patent trolls send to targeted small 
businesses and consumers are heavy on threats but light on specifics. 
Given the one-sided nature of patent litigation, it is inevitably 
extremely expensive for a target to defend itself, or even to simply 
determine whether the ``specifics'' exist. This creates strong 
incentives for targets to settle or pay license fees, which in turn 
keeps the patent trolls' business model profitable and worth 
continuing. Requiring more detail in demand letters would work to level 
the playing field between trolls and targets, and likely reduce the 
most egregious examples of demand letter abuse.

    Question 2a. Please detail, specifically, the types of information 
that should be required in demand letters to achieve the goal of 
improved consumer protection.
    Answer. At minimum, every demand letter should include the name, 
address, and contact information of the owner of the patent, the patent 
number, an admonishment to seek counsel from an attorney and specific 
factual allegations regarding how the target has infringed or is 
believed to have infringed on the patent. The fourth item is perhaps 
most important given how little research so many patent trolls perform 
before sending demand letters. If enforcers of patents were required to 
inform a target of why they were targeted, those targets for which 
there is no substantive evidence of infringement would likely not 
receive demand letters in the first place. This shifts some of the due 
diligence responsibility back to the patent enforcer, which is 
appropriate.

    Question 3. We also discussed whether current law would allow 
effective implementation of the various policy proposals to protect 
consumers and small businesses from unfair or deceptive demand letters. 
Do you believe the FTC--under its existing Section 5 authority to 
prevent unfair and deceptive practice or any other statutory 
authority--has the ability to effectively carry out any of the proposed 
solutions that you have proposed or that were discussed at the hearing, 
such as establishing a demand-letter registry or including mandatory 
disclosure requirements? Please specify which potential solutions the 
FTC would or would not be able to implement.
    Answer. I believe the FTC already possesses the authority to 
implement either a demand letter registry or specific disclosure 
requirements. I note that FTC officials have commented publicly on the 
need to address the problem of patent trolls and that the agency is 
currently considering launching a broad investigation into the 
practices, composition, and structure of patent trolls nationwide. The 
implementation of certain rules to limit demand letter abuse seems a 
logical next step and entirely consistent with the FTC's consumer 
protection mission and statutory mandate.
    I would also note that I believe states possess the authority under 
their own consumer protection laws to address this problem. To prevent 
bad actors from using unfair or deceptive demand letters to extort 
license fees from legally unsophisticated small businesses and 
consumers is indisputably a consumer protection problem. Our authority 
to combat such violations is not and should not be limited by Federal 
pre-emption of any type.
                                 ______
                                 
 Response to Written Questions Submitted by Hon. Richard Blumenthal to 
                            Hon. Jon Bruning
    Question 1. Demand letters are often sent to people who will never 
see the inside of a courtroom. They will settle--often they will feel 
that they must settle--before a case is even filed. In your opinion, 
are the reforms being considered in pending legislation targeted at 
what happens during litigation adequate to fully address the problem 
with demand letters?
    Answer. I believe there are provisions in the bills currently 
pending in both the Senate and House which contain valuable increased 
protections against bad faith demand letters. Furthermore, the 
provisions in those bills which clarify the FTC has the authority to go 
after the ``worst of the worst'' abusers of the patent demand letter 
process are commendable. I also believe that, though not specifically 
related to consumer protection, addressing the structural issues within 
our patent system which have allowed patent trolls to thrive is 
necessary. The pending Senate and House bills each contain provisions 
which would structurally level the playing field between trolls and 
their targets. More can be done, however.

    Question 1a. Are there additional reforms Congress should consider 
specifically targeted at the issue of demand letters?
    Answer. Yes. I touched on several of them above. Though I believe 
the FTC is already empowered to create a demand letter registry, 
Congress should expressly provide for it to ensure it happens in a 
timely and effective manner. Additional demand letter specificity 
requirements, such as those discussed above, should be included. 
Finally, it should remain expressly clear that state consumer 
protection authorities possess the requisite powers to address unfair 
or deceptive demand letter abuses which violate consumer protection 
laws. The states and Federal government must work as partners on this 
issue, never as competitors.

    Question 2. As a former Attorney General, I believe that the states 
have an important role to play in protecting consumers. Do you agree 
that states have a role to play in protecting consumers from abusive 
demand letters?
    Answer. Absolutely. In fact, my office has already initiated 
consumer protection investigations into several entities which have 
undertaken coordinated demand letter campaigns within Nebraska over the 
past year. We have engaged in active litigation related to one of those 
investigations and are preparing patent troll-specific legislation to 
be introduced in our Legislature's upcoming spring session.
    I view consumer protection as being among my office's top 
priorities. I view the use of unfair or deceptive demand letters to 
extract costly license fees from small businesses and consumers as 
clear consumer protection violations. Accordingly, I believe it is my 
obligation as Nebraska's chief law enforcement officer to aggressively 
pursue those violations to protect consumers.

    Question 3. Are there advantages to state enforcement in this area?
    Answer. Yes. Though, as summarized above, I believe there are 
important steps the Federal government can and should take, there are 
distinct advantages to state enforcement against unfair and deceptive 
demand letter practices.
    First, my office is invariably going to be more responsive to and 
aware of consumer protection violations within our state. This is 
simply a matter of proximity and recognition of the fact that our 
resources can more quickly be marshalled to address a problem as it 
arises than the Federal government can.
    Second, we have already made the determination that our existing 
consumer protection laws provide us the tools to go after patent 
enforcement abuse. Understandably, it may take the Federal government 
some time longer to come to a point at which it is actually taking 
enforcement action. Meanwhile, the harm to targets of patent trolls 
continues unabated and state authorities, especially our nations 
Attorneys General, are ideally suited to addressing the problem head 
on.

    Question 4. Should Congress take action to allow states to protect 
their citizens?
    Answer. See answer to question [5].

    Question 5. What kind of action would be helpful?
    Answer. I will answer questions [4] and [5] together. First, I do 
not believe Congress needs to take any specific action which would 
``allow states to protect their citizens.'' We already have a variety 
of consumer protection tools at our disposal. To the extent patent 
troll-specific legislation is useful at the state level, states are 
already free to pursue such statutes. Vermont has already done so and, 
as stated above, we plan to follow suit in Nebraska.
    Congress should ensure that any action it takes complements state 
efforts and enables state consumer protection authorities and the FTC 
to work in concert against patent trolls. The magnitude and complexity 
of this issue necessitates that we work as partners and not ever engage 
in jurisdictional turf battles. Accordingly, I would ask that Congress 
continue to allow for concurrent jurisdiction between the states and 
the FTC to address unfair or deceptive demand letters from a consumer 
protection standpoint.
                                 ______
                                 
  Response to Written Questions Submitted by Hon. Claire McCaskill to 
                               Jon Potter
    Question 1. At the hearing, we heard about several policy proposals 
that could help protect consumers and small businesses from harmful 
demand letters. One potential idea widely discussed was the 
establishment of a demand-letter registry--whether at the Federal Trade 
Commission (FTC) or at the U.S. Patent and Trademark Office (PTO)--that 
would increase transparency and facilitate better data on the problem's 
extent. What protections for consumers and small businesses would such 
a registry provide that would address the current harms inflicted on 
them by demand letters?
    Answer. A demand-letter registry would be very beneficial to 
consumers and small businesses. Today, one of the primary reasons that 
consumers and small businesses pay extortionist license fees to trolls 
is because the fees--though unjustified--are significantly less than 
the cost of determining the validity of the asserted patent and its 
associated claims and determining whether one has actually infringed 
the patent. Paying these extortionist licensing fees is also, though 
unjustified--extraordinarily less than the cost of defending an 
infringement litigation. A publicly accessible and easily searchable 
demand-letter registry would enable victims of demand-letter scams to 
contact each other and to act collectively in their common interests. 
Groups of letter recipients are more likely to stand strong against the 
abuses of patent trolls, as they will be better able to collectively 
finance challenges to patents' validity, and collectively challenge the 
patent assertions as fraudulent. Knowing that one does not have to 
fight alone is beneficial; the ability to develop collective strategies 
and responses will be empowering.

    Question 1a. Do you have an opinion about whether it would be more 
effective to house such a registry at the PTO or the FTC? Please 
explain why.
    Answer. The PTO has extraordinarily qualified staff and surely is 
capable of developing this database. But the PTO is also 
extraordinarily burdened with many new programs and modernization 
efforts, and to my knowledge has not had the opportunity to build 
publicly accessible databases like the proposed registry.
    In contrast, I understand that the FTC has developed registries 
like this, and done so successfully.
    Regardless of where the registry is housed, the PTO should be 
willing to consider evidence of fraudulent, abusive or otherwise 
questionable demand-letter tactics that registry analysts uncover, and 
should use this evidence in its consideration of director-initiated re-
examinations and petitions to waive fees associated with re-
examinations and post-grant reviews.

    Question 2. Another potential idea from the hearing was to require 
certain baseline disclosures in demand letters to provide recipients 
with more useful information and to help stem the large numbers of 
demand letters being sent. Do you believe such mandatory disclosure 
requirements would protect consumers and small businesses from the 
current harms inflicted on them by demand letters? Would mandatory 
disclosure requirements provide a more effective consumer protection 
solution than a registry?
    Answer. Mandatory disclosures aid consumers and small business by 
reducing the cost of responding substantively to a demand/assertion 
letter. Lowering the cost of substantive responses reduces the 
likelihood of unjustified settlements that are due solely to the costs 
of responding and fighting.
    Mandatory disclosure requirements provide needed transparency to 
each recipient of a patent assertion/demand letter, and they are a 
necessary supplement to a registry that provides transparency to all 
recipients. Neither is effective individually, but in combination they 
are very helpful.

    Question 2a. Please detail, specifically, the types of information 
that should be required in demand letters to achieve the goal of 
improved consumer protection.
    Answer. Five types of information should be required in demand 
letters:

  1.  The number of the patent being asserted.

  2.  The specific claims of each patent that are alleged to have been 
        infringed.

  3.  The specific technology, functionality or activity, that the 
        defendant is employing or doing, that triggers or implicates 
        each assertion of infringement.

  4.  The basis of a proposed license amount if any specific license 
        amount is proposed.

  5.  The names of all other entities that have been sent assertion/
        demand letters relating to the specified patents.

    Question 3. We also discussed whether current law would allow 
effective implementation of the various policy proposals to protect 
consumers and small businesses from unfair or deceptive demand letters. 
Do you believe the FTC--under its existing Section 5 authority to 
prevent unfair and deceptive practice or any other statutory 
authority--has the ability to effectively carry out any of the proposed 
solutions that you have proposed or that were discussed at the hearing, 
such as establishing a demand-letter registry or including mandatory 
disclosure requirements? Please specify which potential solutions the 
FTC would or would not be able to implement.
    Answer. I am not an expert on the FTC's Section 5 authority, but my 
initial concern is that the FTC's authority is limited to (a) 
investigational authority; and (b) enforcement authority with respect 
to specific actions and actors. Thus, I am not certain that FTC Section 
5 authority is sufficiently broad to regulate either (a) the form or 
content of demand letters, or (b) to require that demand letters be 
uploaded into an online registry.
                                 ______
                                 
 Response to Written Questions Submitted by Hon. Richard Blumenthal to 
                               Jon Potter
    Question 1. Demand letters are often sent to people who will never 
see the inside of a courtroom. They will settle--often they will feel 
that they must settle--before a case is even filed. In your opinion, 
are the reforms being considered in pending legislation targeted at 
what happens during litigation adequate to fully address the problem 
with demand letters?
    Answer. Ninety percent of patent assertions are resolved prior to 
litigation, but the bills currently being considered by the Congress do 
not fully address the problems with abusive pre-litigation demand 
letters. Specifically, these bills do not (a) authorize the FTC to 
define what data points must be included in a demand letter; (b) 
require that the FTC use its enforcement authority against unfair and 
deceptive demand letters; or (c) impose self-executing penalties 
against those who send abusive demand letters.

    Question 1a. Are there additional reforms Congress should consider 
specifically targeted at the issue of demand letters?
    Answer. Five additional reforms should be considered:

  1.  The Director of the Patent & Trademark Office should be required 
        to consider Director-initiated re-examinations and post-grant 
        reviews when there is evidence of demand letter abuse by a 
        patent owner or its agent.

  2.  Demand-letter abuse should be punishable by permanent elimination 
        of the patent owner's right to heightened damages, e.g., for 
        willful infringement, or by elimination of all enforcement 
        authority with respect to that patent.

  3.  Demand-letter abuse should be punishable by a lower-standard for 
        fee-shifting by courts.

  4.  Upon an administrative holding that a patent owner has sent 
        demand letters abusively (either by asserting a substantively 
        overbroad interpretation of a patent), that patent owner should 
        pay for the costs of the administrative proceeding and should 
        pay a remedial penalty directly to all recipients of the 
        abusive demand letters.

  5.  Demand letters should be required to include a certification of 
        honesty and good faith with regard to the patent's validity, 
        its interpretation as asserted in the letter, and the 
        infringement that it asserts.
                                 ______
                                 
  Response to Written Questions Submitted by Hon. Claire McCaskill to 
                             Mark Chandler
    Question 1. At the hearing, we heard about several policy proposals 
that could help protect consumers and small businesses from harmful 
demand letters. One potential idea widely discussed was the 
establishment of a demand-letter registry--whether at the Federal Trade 
Commission (FTC) or at the U.S. Patent and Trademark Office (PTO)--that 
would increase transparency and facilitate better data on the problem's 
extent. What protections for consumers and small businesses would such 
a registry provide that would address the current harms inflicted on 
them by demand letters?

    Question 1a. Do you have an opinion about whether it would be more 
effective to house such a registry at the PTO or the FTC? Please 
explain why.
    Answer. While Cisco has first-hand experience with the harms of 
deceptive demand letter practices, the full scope and extent to which 
deceptive practices are taking place, and the harm it is inflicting on 
small businesses and consumers, is not known because much of it is not 
publicized, and it is difficult for recipients of such letters to 
coordinate and collect the information on their own. A registry would 
call attention to the magnitude and scope of demand letter campaigns, 
and make it easier for recipients of letters to gather and disseminate 
information regarding the demands against them. It would also give 
everyone the full picture. For example, a demand letter recipient may 
be more likely to learn that the asserted patents are RAND-encumbered, 
that certain accused products are already licensed and do not infringe, 
or that manufacturers have stepped up and initiated litigation to 
defend their products. A registry would therefore discourage deceptive 
and unfair practices, while adding a basic level of transparency and 
accountability that will help protect innocent end users.

    Question 2. Another potential idea from the hearing was to require 
certain baseline disclosures in demand letters to provide recipients 
with more useful information and to help stem the large numbers of 
demand letters being sent. Do you believe such mandatory disclosure 
requirements would protect consumers and small businesses from the 
current harms inflicted on them by demand letters? Would mandatory 
disclosure requirements provide a more effective consumer protection 
solution than a registry?

    Question 2a. Please detail, specifically, the types of information 
that should be required in demand letters to achieve the goal of 
improved consumer protection.
    Answer. In addition to a registry, it is important that demand 
letters provide adequate notice to the recipients concerning what is 
being accused, as well as other critical information from which a 
demand letter recipient can either reach out to the appropriate 
supplier[s] of infringing technology, or better understand its rights 
and the patent holder's obligations. At a minimum, demand letters 
should disclose:

   a list of products which are deemed to infringe, including 
        the manufacturer and model number, and informing them that they 
        may have the right to have the manufacturer defend the case, 
        and providing contact information for the manufacturer;

   the names of the entities which own the patents or benefit 
        from their enforcement and any related entities; and

   a list of all previous licenses granted for those patents, 
        with a notice that if the recipient of the letter is using the 
        products or services of a licensed entity, the recipient may 
        require no further rights or permission from the patent holder, 
        as well as whether there is a relevant licensing commitment to 
        a standards organization.

    Question 3. We also discussed whether current law would allow 
effective implementation of the various policy proposals to protect 
consumers and small businesses from unfair or deceptive demand letters. 
Do you believe the FTC--under its existing Section 5 authority to 
prevent unfair and deceptive practice or any other statutory 
authority--has the ability to effectively carry out any of the proposed 
solutions that you have proposed or that were discussed at the hearing, 
such as establishing a demand-letter registry or including mandatory 
disclosure requirements? Please specify which potential solutions the 
FTC would or would not be able to implement.
    Answer. The FTC presently has the authority to under Section 5 to 
prohibit unfair or deceptive acts or practices, and this includes 
deceptive or unfair demand letter assertions. However, specific 
legislation requiring a registry and that demand letters include 
specific information would be helpful in curbing deceptive demand 
letter practices.
                                 ______
                                 
     Response to Written Questions Submitted by Hon. Mark Pryor to 
                             Mark Chandler
    Question 1. I have heard reports that some foreign governments have 
formed, or announced intentions to form, state-sponsored patent 
assertion entities (PAEs). According to these reports, it is unclear 
how these PAEs might assert their patent holdings in the future and to 
what extent. Are state-sponsored PAEs something your company is aware 
of? If so, how would you characterize the nature of such organizations?

    Question 1a. Has your company had any experience in dealing with a 
state-sponsored PAE? If so, could you please describe the nature of the 
interaction?

    Question 1b. Would you please describe any other role, be it 
positive or negative, you believe state-sponsored PAEs may play in the 
technology sector?

    Question 1c. Do you see a need for Congressional action with 
respect to state-sponsored PAEs? If so, please describe.
    Answer. State-sponsored PAEs have already filed suit against Cisco 
and other American companies. For example, we have been sued by CSIRO, 
an agency of the Australian government and our customers have been sued 
by TR Labs from Canada. These entities are exploiting the imbalances of 
the American system against American companies.
    Furthermore, a new form of large scale well-funded state-sponsored 
PAE is now emerging in some foreign countries. We have not yet directly 
interacted with them but are aware that they are accumulating large 
amounts of capital to purchase large numbers of patents including U.S. 
patents. In many ways we expect them to function like other PAEs but 
due to state sponsorship these are unusually large and well-funded. 
They also are intended to serve national economic objectives in taxing 
our industries to generate a return for their industries. They will 
likely harm U.S. companies and consumers but it will be a harm that we 
have inflicted upon ourselves by having an imbalanced patent 
enforcement system in the United States. The solution is to reform our 
own system so that foreign entities cannot exploit it against us.
                                 ______
                                 
 Response to Written Questions Submitted by Hon. Richard Blumenthal to 
                             Mark Chandler
    Question 1. Demand letters are often sent to people who will never 
see the inside of a courtroom. They will settle--often they will feel 
that they must settle--before a case is even filed. In your opinion, 
are the reforms being considered in pending legislation targeted at 
what happens during litigation adequate to fully address the problem 
with demand letters?
    Answer. Legislative reforms to patent litigation and proposals to 
specifically address demand letters are complementary solutions to the 
problems of meritless patent assertions. Because demand letters often 
seek an amount that is so low--a few thousand dollars--that litigation 
is unlikely, the current legislative proposals directed to litigation 
do not fully address the harm caused by deceptive demand letter 
campaigns. Also, hundreds of demand letter recipients may pay for a 
license before a single case is litigated, at which point the damage to 
such innocent end users is already done. Demand letter reform would 
therefore address problems not addressed by litigation reform.

    Question 1a. Are there additional reforms Congress should consider 
specifically targeted at the issue of demand letters?
    Answer. Congress should pass legislation directed to the problem of 
demand letters. For example, in my testimony I called for the 
establishment of a repository at the FTC. Everyone who sent more than 
ten letters to end users would have to log their letter into the 
repository and the letters would have to include, among other things, 
complete information on ownership, the basis for the infringement 
accusation, and the licensing history of the patents. Making this 
information broadly available will allow us as suppliers to give the 
patent assertion entities a fair fight.
                                 ______
                                 
  Response to Written Questions Submitted by Hon. Claire McCaskill to 
                            Julie P. Samuels
    Question 1. At the hearing, we heard about several policy proposals 
that could help protect consumers and small businesses from harmful 
demand letters. One potential idea widely discussed was the 
establishment of a demand-letter registry--whether at the Federal Trade 
Commission (FTC) or at the U.S. Patent and Trademark Office (PTO)--that 
would increase transparency and facilitate better data on the problem's 
extent. What protections for consumers and small businesses would such 
a registry provide that would address the current harms inflicted on 
them by demand letters?
    Answer. Such a registry would provide protection by supplying 
information--something that the system currently woefully lacks. For 
instance, if a consumer finds him or herself facing a threat, he or she 
will often have no idea how to respond. Hire a lawyer? Call the sender? 
Ignore the letter? Hiring a lawyer to navigate the process is not 
cheap; often costing well into the thousands of dollars just to 
understand the scope of the threat and how it relates to the technology 
at issue. Take the now infamous troll, MPHJ (otherwise known as the 
``scanner troll''). MPHJ created a series of shell companies with names 
constructed of random letters,\1\ making it nearly impossible to google 
the letter's sender and understand the scope of the threat. A robust 
database would give consumers basic information about who is sending 
the letter and what kind of threat that entity poses. Does it often sue 
its targets? If so, it might be worth hiring a lawyer. Does it rarely 
so? If so, the best advice might be to ignore the letter.
---------------------------------------------------------------------------
    \1\ See http://arstechnica.com/tech-policy/2013/01/patent-trolls-
want-1000-for-using-scanners/
---------------------------------------------------------------------------
    A registry could also include additional crucial content, such as 
basics on the patent system and resources for how to understand and 
respond to the immediate threat. (This is something we've tried to do 
at Trolling Effects at https://trollingeffects.org/learn and something 
that the President has already instructed the Patent Office to do; we 
understand the Patent Office is currently working on education 
materials in response to that request.)
    A registry would also protect consumers by chilling dangerous 
trolling activities. We believe that trolls target ordinary consumers, 
end-users, and non-patent-sophisticated parties because of the 
asymmetry of information problem and the ability of those trolls to 
hide behind shells. Simply, it is cheap and easy for a party to send 
out hundreds or even thousands of demand letters and see what kinds of 
payments come back. In fact, a letter sender need not even be an 
attorney. A registry's ability to lift this veil of secrecy would solve 
the asymmetry of information problem, thus making the patent troll 
``business model'' a less attractive one. Will certain bad actors still 
exploit the system and target consumers? Probably. But we believe at a 
much slower rate. We also believe emboldening consumers with 
information will increase the instances of those consumers fighting 
back, another important element that will help squelch the trolls' 
dangerous actions.

    Question 1a. Do you have an opinion about whether it would be more 
effective to house such a registry at the PTO or the FTC? Please 
explain why.
    Answer. I strongly believe the most important thing is to have a 
publicly available, easily searchable registry. To that end, I believe 
one held at either FTC or PTO would be effective and efficient. That 
said, each has unique benefits, which I will discuss in turn.
    The FTC has valuable experience in hosting public-facing 
registries, such as the Do Not Call Registry. While the Do Not Call 
Registry's submissions are not public facing, the educational materials 
and outreach are directed to everyday consumers and citizens, the same 
class of people who would most benefit from a demand letter registry. 
Moreover, the FTC could monitor submissions and, upon receiving a 
certain number involving a particular patent or patent holder, could 
begin an investigation under 15 U.S.C. Sec. 45. Finally, and arguably 
most significantly, the FTC has experience defending consumer 
interests, unlike the Patent Office, whose sole relevant experience for 
the most part has been dealing with patent owners.
    The PTO, on the other hand, has valuable experience navigating and 
compiling information on the patent system. It keeps voluminous files 
on every patent--from application and through its lifecycle. Those 
databases are notoriously hard to navigate and are not user-friendly, 
however, which is something that should be considered. Simply put, the 
PTO is an agency that, for the majority of its life, has been tasked 
with growing the patent system. However, the PTO has recently shown 
aptitude and interest in making its site more user friendly and in 
reaching out to and working with third parties who are not necessarily 
patent applicants.
    Finally, the PTO (not unlike the FTC) could monitor submissions and 
chose to sua sponte reexamine certain patents. To my knowledge, the PTO 
has only done this once (for a method of swinging on a swing, of all 
things \2\), yet there is no reason to believe it could not institute 
similar reexams in the future.
---------------------------------------------------------------------------
    \2\ U.S. Patent No. 6,368,227 at http://www.google.com/patents/
US6368227

    Question 2. Another potential idea from the hearing was to require 
certain baseline disclosures in demand letters to provide recipients 
with more useful information and to help stem the large numbers of 
demand letters being sent. Do you believe such mandatory disclosure 
requirements would protect consumers and small businesses from the 
current harms inflicted on them by demand letters? Would mandatory 
disclosure requirements provide a more effective consumer protection 
solution than a registry?
    Answer. I believe certain mandatory disclosures would protect 
consumers and small businesses from the current harms inflicted by 
demand letters for many of the same reasons I believe a registry would 
help. First, such disclosures would provide valuable information to 
consumers and small businesses who need it to make informed decisions. 
Second, it would discourage the worst actors who use the guise of the 
patent system to extort funds from consumers.
    I believe that a combination of mandatory disclosures and a 
registry would be the most effective solution to the problem. That 
said, if I had to chose just one, I would have a slight preference for 
a demand letter registry. It is a longer-term solution, which would 
provide valuable information not just to consumers and small 
businesses, but to academics and policymakers and others who try to 
understand the scope of the problem. Also, if constructed properly, it 
provides a better safeguard against the actions taken by current letter 
senders to get around disclosure requirements. In short, the registry 
would impact all bad actors, the disclosure requirement would only 
impact the bad actors who don't provide enough information. While this 
is an incredibly dangerous subset of letter senders, it is still only a 
subset.

    Question 2a. Please detail, specifically, the types of information 
that should be required in demand letters to achieve the goal of 
improved consumer protection.
    Answer. The types of information include:

   Every party that has an ongoing financial interest in the 
        patent(s) at issue.

   The specific patent(s)--and claims of those patent(s)--at 
        issue.

   The products or services that allegedly infringe those 
        claims.

   Any obligations to license the patent(s) on reasonable 
        terms.

   Any current instances of reexaminations of the patent(s) at 
        the PTO or any ongoing litigation surrounding the patent(s).

   If any of the above information is not included, the sender 
        must include a statement explaining why it was not accessible, 
        and what efforts it made to find that information.

    Question 3. We also discussed whether current law would allow 
effective implementation of the various policy proposals to protect 
consumers and small businesses from unfair or deceptive demand letters. 
Do you believe the FTC--under its existing Section 5 authority to 
prevent unfair and deceptive practice or any other statutory 
authority--has the ability to effectively carry out any of the proposed 
solutions that you have proposed or that were discussed at the hearing, 
such as establishing a demand-letter registry or including mandatory 
disclosure requirements? Please specify which potential solutions the 
FTC would or would not be able to implement.
    Answer. I believe the FTC, under its existing Section 5 authority, 
could target certain entities currently sending letters for unfair and 
deceptive practices. However, legislation would be helpful in defining 
certain practices--such as failure to include certain information in a 
demand letter--as per se deceptive or unfair.
    As to an FTC registry, legislation is likely necessary for its 
creation, not unlike 15 U.S.C.A. Sec. 6101, et al, which authorizes the 
Do Not Call registry.
                                 ______
                                 
 Response to Written Questions Submitted by Hon. Richard Blumenthal to 
                            Julie P. Samuels
    Question 1. Demand letters are often sent to people who will never 
see the inside of a courtroom. They will settle--often they will feel 
that they must settle--before a case is even filed. In your opinion, 
are the reforms being considered in pending legislation targeted at 
what happens during litigation adequate to fully address the problem 
with demand letters?
    Answer. Certain legislative proposals would help the demand letter 
problem, but those proposals contain provisions that are directed 
specifically at letter sending, not litigation. The more traditional 
litigation reforms that largely currently make up the Innovation Act 
(H.R. 3309) that is quickly moving through the House would help the 
demand letter problem insomuch as they would chill the so-called 
``troll business model.'' So the short answer to the question of 
whether the pending litigation reforms would ``fully address'' the 
demand letter problem must be no.
    To be fair, other proposals, such as Sen. Leahy's Patent 
Transparency and Improvement Act (S. 1720), do directly address the 
demand letter problem. For instance, that bill's current Section 5, 
entitled Bad-Faith Demand Letters, would define certain practices 
(``widespread'' sending of letters that, for example, make false 
threats) as violations of existing Section 5. The Patent Transparency 
and Improvement Act also contains a so-called savings clause that 
explicitly says it is neither an expansion nor a reduction of its 
existing Section 5 authority.

    Question 1a. Are there additional reforms Congress should consider 
specifically targeted at the issue of demand letters?
    Answer. The reforms I believe Congress should consider that would 
specifically and successfully address the demand letter problem 
include:

   Legislating the creation of demand letter registries at 
        either the FTC or PTO (see answers above for details).

   Mandating that certain information be included in demand 
        letters, and when that information is not included the letter 
        sender must detail why.

   Defining certain practices as per se violations of existing 
        FTC Section 5 authority, which would also have the added 
        benefit of triggering state statutes already on the books in 
        various states.

    Question 2. Congressional action specifying when the use of demand 
letters constitutes an unfair or deceptive act or practice could 
actually limit FTC authority by defining the standard against which the 
FTC must operate. In your opinion, would such Congressional action 
constitute an expansion or contraction of FTC authority?
    Answer. Such Congressional action could be done in a way to neither 
expand nor contract current FTC authority. Ideally, legislation could 
define certain practices as per se deceptive or unfair (some examples 
would be making false threats or purposely hiding information on who 
retains an interest in the patent(s) at issue). The legislation should 
explicitly not preclude the FTC from finding other unlisted practices 
as violating Section 5.
    Of course, by listing certain activities as per se deceptive or 
unfair, the legislation merely makes the FTC's job a little easier by 
reducing the amount of elements it needs to prove in the most egregious 
cases.

    Question 2a. Could Congressional action in this area give companies 
that are not engaged in wrongdoing greater certainty as to what does 
and what does not constitute unfair or deceptive conduct? Could this 
greater certainty actually facilitate licensing activity that is legal, 
reasonable, and appropriate?
    Answer. Congressional action could help shape and create public 
guidelines about practices that are and are not unfair and deceptive. 
At a minimum, it could delineate what is per se unfair and deceptive. 
Resulting FTC rulings, which we believe would be issued more quickly 
following legislation, would help create even additional certainty.
    To be certain, there is undoubtedly a place for legal, reasonable, 
and appropriate licensing activities. Not only could legislative action 
help define what that looks like, but it would also push the bad actors 
out of the market, leaving more space for those acting responsibly.

    Question 3. As a former Attorney General, I believe that the states 
have an important role to play in protecting consumers. Do you agree 
that states have a role to play in protecting consumers from abusive 
demand letters?
    Answer. Without a doubt. States like Nebraska, Minnesota, and 
Vermont have been leaders in the fight against abusive patent troll 
practices.

    Question 3a. Are there advantages to state enforcement in this 
area?
    Answer. States are closer to their own business communities and 
will be able to more quickly assess the entities that pose the greatest 
risk. The current economic climate also dictates that states are 
competing to be pro-business. One way to do this is to protect local 
businesses from threats posed by demand letter abuses. Congress should 
help incentivize states to continue this trend.

    Question 3b. Should Congress take action to allow states to protect 
their citizens?
    Answer. I believe Congress should take action that would allow 
states to protect their citizens.

    Question 3c. What kind of action would be helpful?
    Answer. First, as discussed above, Congress could define certain 
actions as per se unfair or deceptive. This act of defining alone would 
trigger statutes already on the books in many states.
    Second, Congress should make clear that any action it takes will 
not preempt the efforts of state Attorneys General to bring consumer 
protection actions based on patent demand letters. Moreover, Congress 
should confirm that states do indeed have the right to bring such 
actions.
    Third, Congress should clarify that sending unfair and deceptive 
patent infringement letters into a state satisfies the due process 
requirement for personal jurisdiction.
    Finally, the creation of a registry at FTC or PTO would also 
benefit the states who want to bring consumer protection actions. 
States would be able to investigate who is sending letters and to whom, 
making their job deciding which entities to focus on easier.
                                 ______
                                 
  Response to Written Questions Submitted by Hon. Claire McCaskill to 
                             Lary Sinewitz
    Question 1. At the hearing, we heard about several policy proposals 
that could help protect consumers and small businesses from harmful 
demand letters. One potential idea widely discussed was the 
establishment of a demand-letter registry--whether at the Federal Trade 
Commission (FTC) or at the U.S. Patent and Trademark Office (PTO)--that 
would increase transparency and facilitate better data on the problem's 
extent. What protections for consumers and small businesses would such 
a registry provide that would address the current harms inflicted on 
them by demand letters?
    Answer. Most retailers do not have the resources to litigate a 
patent infringement lawsuit, let alone the legal fees to assess 
purposely vague, unfair, and deceptive demand letters. As such, 
Congress ought to provide the FTC with more statutory guidance on what, 
under its existing unfair and deceptive trade practices authority, 
should be in a demand letter to make them more transparent to the 
recipient. Consumers and small businesses would benefit greatly from 
such transparency because it will allow businesses to make more 
efficient, economical decisions as they investigate the claim. In 
conjunction with such a provision, an appropriately-scaled demand 
letter registry could assist small businesses and their counsel, along 
with public interest groups, in discerning and exposing patterns of 
demand letter abuse.

    Question 1a. Do you have an opinion about whether it would be more 
effective to house such a registry at the PTO or the FTC? Please 
explain why.
    Answer. If, as requested above, Congress provides the FTC with more 
statutory guidance as to what should be in a demand letter, it might 
make sense to include such a registry at the FTC, as it might assist 
the FTC in discerning targets for enforcement.

    Question 2. Another potential idea from the hearing was to require 
certain baseline disclosures in demand letters to provide recipients 
with more useful information and to help stem the large numbers of 
demand letters being sent. Do you believe such mandatory disclosure 
requirements would protect consumers and small businesses from the 
current harms inflicted on them by demand letters? Would mandatory 
disclosure requirements provide a more effective consumer protection 
solution than a registry?
    Answer. Yes, as described above, disclosure requirements would 
provide more effective consumer protection than a registry. Disclosure 
in demand letters is a critical component to reform because it will 
allow businesses to make more efficient, economical decisions as they 
investigate the claim. They will also be able to spend less money on 
patent attorneys' fees because the claim will be better laid out.

    Question 2a. Please detail, specifically, the types of information 
that should be required in demand letters to achieve the goal of 
improved consumer protection.
    Answer. At a minimum, disclosure should include: Requiring the 
letter to identify the owner of the patent, the specific patent alleged 
to be infringed, and the reasons for the good faith belief that the 
patent in being infringed.

    Question 3. We also discussed whether current law would allow 
effective implementation of the various policy proposals to protect 
consumers and small businesses from unfair or deceptive demand letters. 
Do you believe the FTC--under its existing Section 5 authority to 
prevent unfair and deceptive practice or any other statutory 
authority--has the ability to effectively carry out any of the proposed 
solutions that you have proposed or that were discussed at the hearing, 
such as establishing a demand-letter registry or including mandatory 
disclosure requirements? Please specify which potential solutions the 
FTC would or would not be able to implement.
    Answer. Yes, we believe the policy solution proposed above (i.e., 
giving the FTC additional guidance on demand letters) could be 
implemented by the FTC since it well comports with the FTC's existing 
authority under Section 5. In fact, the FTC recently stated that it 
already has authority under Section 5 to pursue patent assertion 
entities for unfair methods of competition or false or deceptive acts 
or practices.
                                 ______
                                 
 Response to Written Questions Submitted by Hon. Richard Blumenthal to 
                             Lary Sinewitz
    Question 1. Demand letters are often sent to people who will never 
see the inside of a courtroom. They will settle--often they will feel 
that they must settle--before a case is even filed. In your opinion, 
are the reforms being considered in pending legislation targeted at 
what happens during litigation adequate to fully address the problem 
with demand letters?
    Answer. Most retailers do not have the resources to litigate a 
patent infringement lawsuit, let alone the legal fees to assess 
purposely vague, unfair, and deceptive demand letters. As such, in 
addition to litigation reforms (which we generally support), Congress 
also ought to focus on pre-litigation issues and provide the FTC with 
more statutory guidance on what, under its existing unfair and 
deceptive trade practices authority, should be in a demand letter to 
make them more transparent to the recipient. Consumers and small 
businesses would benefit greatly from such transparency because it will 
allow businesses to make more efficient, economical decisions as they 
investigate the claim. We would note that Section 5 (``Bad Faith Demand 
Letters'') of the Leahy-Lee ``Patent Transparency and Improvement Act 
of 2013'' represents a very meaningful approach to the problem, and we 
look forward to working the Senate Commerce Committee on this issue.

    Question 1a. Are there additional reforms Congress should consider 
specifically targeted at the issue of demand letters?
    Answer. In conjunction with an FTC provision (discussed above), an 
appropriately-scaled demand letter registry (perhaps housed within FTC) 
could assist small businesses and their counsel, along with public 
interest groups, in discerning and exposing patterns of demand letter 
abuse.
                                 ______
                                 
 Response to Written Questions Submitted by Hon. Richard Blumenthal to 
                              Adam Mossoff
    Question 1. Demand letters are often sent to people who will never 
see the inside of a courtroom. They will settle--often they will feel 
that they must settle--before a case is even filed. In your opinion, 
are the reforms being considered in pending legislation targeted at 
what happens during litigation adequate to fully address the problem 
with demand letters?
    Answer. As a preliminary matter, it is important to recognize that 
there are no reliable, scientifically valid studies that have 
definitively proven that there is in fact a systemic problem with 
demand letters requiring legislation making systemic changes to how all 
patent-owners license their property or assert their property against 
infringers. The policy debates thus far are defined almost entirely by 
nonobjective rhetoric, such as the term, ``patent troll,'' \1\ and what 
the Government Accountability Office has described as ``nonrandom and 
nongeneralizable'' studies, which means that the studies done thus far 
are unscientific and unreliable.\2\ Thus, there is no definitive proof 
yet that there is a widespread, systemic problem with the issuance of 
demand letters, as opposed to merely a few bad actors who are 
requesting royalties for potentially bad-quality patents.
---------------------------------------------------------------------------
    \1\ See Demand Letters and Consumer Protection: Examining Deceptive 
Practices By Patent Assertion Entities: Hearing Before the Subcomm. on 
Consumer Prot., Prod. Safety, and Ins. of the S. Comm. on Commerce, 
Sci. and Transp,, 113th Cong. 67 (Nov. 7, 2013) (statement of Adam 
Mossoff, Professor of Law, George Mason University School of Law) p. 3-
5, http://www
.commerce.senate.gov/public/?a=Files.Serve&File_id=c5cc328a-af61-4f12-
bea7-e2ae6fb42ce3
    \2\ Government Accountability Office, Intellectual Property: 
Assessing Factors that Affect Patent Infringement Litigation Could Help 
Improve Patent Quality 26 (Aug. 2013), http://www.gao.gov/assets/660/
657103.pdf.
---------------------------------------------------------------------------
    In fact, the real concern about the demands for royalties or even 
threats of lawsuits is that many people believe that the patents are 
invalid. In other words, the policy concern that needs to be addressed 
is the validity of the underlying property right, as an owner of a 
valid patent has every right to demand licenses from unauthorized users 
and to seek relief in court against recalcitrant infringers. For this 
reason, the pending legislation that proposes significant changes to 
litigation practices still does not address the real policy concern--
the validity of the underlying property right--and instead imposes 
substantial legal burdens and additional costs on legitimate owners of 
valid patents.
    In recognizing that the real policy concern that animates the many 
complaints about demand letters is the invalidity of the underlying 
patents, one can then focus on the proper legal tools that are 
necessary to address this entirely valid and legitimate concern. In 
fact, the concern about bad actors improperly using bad patents to 
squelch legitimate commercial activity in the marketplace is not new; 
Congress, the courts and the U.S. Patent & Trademark Office (PTO) long 
ago created many legal tools, and even more exist today, for 
challenging and weeding out these bad patents. Even more important, the 
America Invents Act of 2011 (AIA), a product of a six-year policy 
debate and rightly recognized as ``the most significant reform of the 
U.S. patent system since 1836,'' \3\ vastly expanded these tools as 
well.
---------------------------------------------------------------------------
    \3\ Richard Maulsby, President Obama Signs the America Invents Act, 
Inventors Eye, vol. 2, issue 5 (Oct. 2011), http://www.uspto.gov/
inventors/independent/eye/201110/americainvents
act.jsp.
---------------------------------------------------------------------------
    Consider two longstanding examples of such legal tools (among the 
many that exist). First, potential defendants have long had the right 
to sue patent owners in Federal court to invalidate patents that might 
be asserted against them in a future lawsuit. It is a special type of 
lawsuit called a declaratory judgment action. The Supreme Court 
recently liberalized the rules for when someone can bring a declaratory 
judgment action in its 2007 decision in Medimmune v. 
Genentech,\4\making it even easier for retailers or consumers to 
initiate proceedings against patent owners when they receive improper 
demand letters. Second, defendants or potential defendants have long 
had access to the PTO to challenge improperly issued patents. In 1850, 
for instance, Isaac Singer instigated a lengthy proceeding at the 
Patent Office in attempting to invalidate Elias Howe's patent on the 
lockstitch following Howe's demand that Singer pay him royalties, and 
defendants in all of Howe's lawsuits repeatedly argued (and reargued) 
in Federal court that Howe's patent was invalid as well.\5\
---------------------------------------------------------------------------
    \4\ MedImmune, Inc. v. Genentech, Inc., 127 S. Ct. 764 (2007).
    \5\ See Mossoff, The Rise and Fall of the First American Patent 
Thicket: The Sewing Machine War of the 1850s, 53 Ariz. L. Rev. 165, 
187-189 (2011).
---------------------------------------------------------------------------
    Today, such legal mechanisms continue to exist in the PTO and in 
the courts, which serve as a check on both bad actors and bad patents. 
Such legal tools necessarily affect the calculus of individual patent 
owners who are bluffing in demand letters, because those bluffs may 
called and courts will make it harder to bring the actual lawsuits and 
will punish bad-faith assertions. Thus, in the courts, the Judicial 
Conference's Committee on Rules of Practice and Procedure has 
officially published proposed revisions to the pleading requirements in 
patent lawsuits, one of the sources of the much maligned minimal notice 
requirements in patent infringement complaints.\6\ Additionally, the 
Supreme Court recently granted cert in two cases that will likely 
result in liberalizing the rules on the issuance of sanctions in patent 
cases.\7\
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    \6\ See Committee on the Rules of Practice and Procedure of the 
Judicial Conference of the United States, Preliminary Draft of Proposed 
Amendments to the Federal Rules of Bankruptcy and Civil Procedure (Aug. 
2013), available at http://www.uscourts.gov/uscourts/rules/preliminary-
draft-proposed-amendments.pdf; see also Honorable Katherine O'Malley, 
Key Note Speech at Intellectual Property Owners Association Annual 
Meeting (Sep. 17, 2013), p. 9, available at http://www.ipo.org/wp-
content/uploads/2013/02/IPO-Annual-Meeting-Keynote-Speech-09-17-13.pdf 
(discussing this process).
    \7\ See Octane Fitness, LLC v. Icon Health & Fitness, Inc., No. 12-
1184, 2013 WL 1283843 (U.S. Oct. 01, 2013); Highmark Inc. v. Allcare 
Health Mgmt. Sys., No. 12-1163, 2013 WL 1217353 (U.S. Oct. 01, 2013).
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    Even more important, at the PTO, the many new, AIA-created review 
proceedings for eliminating improperly issued patents are just 
beginning to be implemented and to produce results.\8\
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    \8\ See generally Innovation Act of 2013: Hearing on H.R. 3309 
Before the Comm. on the Judiciary, 113th Cong. _ (Oct. 29, 2013) 
(statement of David J. Kappos, Partner, Cravath, Swaine & Moore LLP), 
available at http://judiciary.house.gov/hearings/113th/10292013/
Kappos%20
Testimony.pdf.
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    And for those who lack the knowledge or wherewithal to navigate 
these PTO or court processes, assistance is now provided by many law 
firms and policy organizations, such as Public Patent Foundation, 
Electronic Frontier Foundation (EFF), the Berkman Center for Internet 
and Society, and others.\9\ For instance, the App Developers Alliance 
has created the ``Law School Patent Troll Defense Network,'' which 
involves law school clinics providing legal services to individuals or 
small businesses receiving demand letters or complaints.\10\ Moreover, 
EFF recently announced that it joined with the Berkman Center in filing 
an inter partes review at the PTO of the notorious ``podcasting 
patent,'' which has been the subject of thousands of demands letters 
being sent to individuals, small companies, and large companies.\11\
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    \9\ On behalf of individual women lacking the funds to pay for 
expensive DNA testing (and thus lacking the funds to bring a lawsuit), 
the Public Patent Foundation brought the challenge to the patents on 
the BRAC1 and BRAC2 genes, which correlated with breast cancer. The 
Public Patent Foundation ultimately won before the Supreme Court. See 
AMP v. Myriad Genetics, 133 S. Ct. 1747 (2013).
    \10\ See Law Schools Join App Developers Alliance to Fight Patent 
Trolls (Oct. 10, 2013), available at http://www.ipwatchdog.com/2013/10/
15/law-schools-join-app-developers-alliance-to-fight-patent-trolls/.
    \11\ See EFF Files Challenge With Patent Office Against Troll's 
Podcasting Patent: Massive Crowdsourcing Effort Leads to Strong 
Petition Before the USPTO (Oct. 16, 2013), available at https://
www.eff.org/press/releases/eff-files-challenge-patent-office-against-
trolls-podcasting-patent.
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    In a world in which Internet searches easily and effortlessly 
produce such information, it is hard to maintain that recipients of 
demand letters lack the resources and capabilities to respond 
effectively. The Internet also makes it easier for law firms and 
organizations to provide this assistance. During the November 7 
hearing, for instance, Julie Samuels of EFF stated that filing the 
inter partes review proceeding at the PTO against the podcasting patent 
cost ``$30,000 in fees'' and that it was ``incredibly resource 
intensive,'' \12\ but she failed to mention that EFF raised over 
$77,000 in just 10 hours in its fundraising campaign on the 
Internet.\13\ It bears emphasizing the significance of this fact: EFF 
raised in less than one-half day more than double the $30,000 it needed 
to file an inter partes review of one of the patents underlying many 
improper demand letters being sent to consumers and retailers--the 
podcasting patent.\14\ This certainly proves that there are existing 
resources and legal tools to address the very problems with improper 
patents about which EFF and others are complaining.
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    \12\ See Demand Letters and Consumer Protection: Examining 
Deceptive Practices By Patent Assertion Entities: Hearing Before the 
Subcomm. on Consumer Prot., Prod. Safety, and Ins. of the S. Comm. on 
Commerce, Sci. and Transp, 113th Cong. _ (Nov. 7, 2013) (statement of 
Julie Samuels, Senior Staff Attorney, EFF) p. 67 of draft transcript of 
hearing.
    \13\ See https://supporters.eff.org/donate/save-podcasting (``Wow. 
In under 10 hours, you met and exceeded our funding goal to bust the 
bogus, overbroad patent being used to threaten podcasters!'').
    \14\ Id. (stating that the funding goal was $30,000).
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    It is against this backdrop that Congress must assess any proposals 
to intervene via legislation or regulation in patent licensing and 
patent litigation practices. First, there is too much rhetoric and too 
many ``nonrandom and nongeneralizable'' studies in the policy 
debates,\15\ and too little actual evidence definitively establishing 
that more revisions to the patent system are needed. Second, while 
there are certainly bad actors, there are a number of existing legal 
mechanisms at the PTO and in the courts to address them, especially 
after the enactment of the AIA just two years ago. Third, and certainly 
not least, there is too little regard for the serious costs that 
legislative and regulatory overreach imposes on the individuals and 
businesses who create the real-world innovative products and services 
that have become basic commodities of modern life.
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    \15\ Government Accountability Office, supra note 2, at 26.

    Question 1a. Are there additional reforms Congress should consider 
specifically targeted at the issue of demand letters?
    Answer. As discussed above, the real policy concern is the quality 
and validity of the patents underlying the offers of licenses or 
threats of litigation being sent to retailers and consumers. Congress 
should consider reforms that will address this legitimate policy 
concern by securing full funding of the PTO to ensure complete and 
timely examination of patent applications. Full funding of the PTO will 
also ensure proper implementation of the many new administrative review 
programs created by the AIA to weed out invalid and vague patents that 
clog the innovation economy.
    As former PTO Director David Kappos recently remarked in testimony 
before the House Judiciary Committee, the U.S. patent system is ``the 
greatest innovation engine the world has ever known.'' \16\ He rightly 
cautioned that Congress should exercise restraint and be cautious in 
accidentally killing ``the goose laying our golden egg.'' \17\ Thus, 
Congress should ensure that the PTO and the courts have the financial 
resources to deploy the preexisting tools specifically directed at any 
low-quality patents, as these are the real scourge of innovation and 
economic growth.
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    \16\ Kappos, supra note 8, at 2.
    \17\ Id.
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