[Senate Hearing 113-637]
[From the U.S. Government Publishing Office]




                                                        S. Hrg. 113-637

PROTECTING SMALL BUSINESSES AND PROMOTING INNOVATION BY LIMITING PATENT 
                              TROLL ABUSE

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

                                HEARING

                               before the

                       COMMITTEE ON THE JUDICIARY
                          UNITED STATES SENATE

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                               ----------                              

                       TUESDAY, DECEMBER 17, 2013

                               ----------                              

                          Serial No. J-113-43

                               ----------                              

         Printed for the use of the Committee on the Judiciary

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]







                                                       S. Hrg. 113-637

PROTECTING SMALL BUSINESSES AND PROMOTING INNOVATION BY LIMITING PATENT 
                              TROLL ABUSE

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

                                HEARING

                               before the

                       COMMITTEE ON THE JUDICIARY
                          UNITED STATES SENATE

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                               __________

                       TUESDAY, DECEMBER 17, 2013

                               __________

                          Serial No. J-113-43

                               __________

         Printed for the use of the Committee on the Judiciary
         
   [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
   
   
   
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                       COMMITTEE ON THE JUDICIARY

                  PATRICK J. LEAHY, Vermont, Chairman
DIANNE FEINSTEIN, California         CHUCK GRASSLEY, Iowa, Ranking 
CHUCK SCHUMER, New York                  Member
DICK DURBIN, Illinois                ORRIN G. HATCH, Utah
SHELDON WHITEHOUSE, Rhode Island     JEFF SESSIONS, Alabama
AMY KLOBUCHAR, Minnesota             LINDSEY GRAHAM, South Carolina
AL FRANKEN, Minnesota                JOHN CORNYN, Texas
CHRISTOPHER A. COONS, Delaware       MICHAEL S. LEE, Utah
RICHARD BLUMENTHAL, Connecticut      TED CRUZ, Texas
MAZIE HIRONO, Hawaii                 JEFF FLAKE, Arizona
           Kristine Lucius, Chief Counsel and Staff Director
              Kolan Davis, Republican Chief Staff Director
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
                            C O N T E N T S

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                    STATEMENTS OF COMMITTEE MEMBERS

                                                                   Page

Leahy, Hon. Patrick, a U.S. Senator from the State of Vermont....     1
    prepared statement...........................................    55
Grassley, Hon. Chuck, a U.S. Senator from the State of Iowa......     3
    prepared statement...........................................    57
    prepared statement, version 2................................    61
Cornyn, Hon. John, a U.S. Senator from the State of Texas, 
  prepared statement.............................................    64

                               WITNESSES

Witness List.....................................................    53
John Dwyer, President and Chief Executive Officer, New England 
  Federal Credit Union, Williston, Vermont, on behalf of the 
  National Credit Union Association..............................     4
    prepared statement...........................................    69
Michael Makin, President and Chief Executive Officer, Printing 
  Industries of America, Sewickley, Pennsylvania.................     6
    prepared statement...........................................    80
Dana Rao, Vice President and Associate General Counsel of 
  Intellectual Property and Litigation, Adobe Systems, Inc., San 
  Jose, California...............................................     8
    prepared statement...........................................    98
Philip S. Johnson, Senior Vice President and Chief Intellectual 
  Property Counsel, Johnson & Johnson, Coalition for 21st Century 
  Patent Reform, New Brunswick, New Jersey.......................    10
    prepared statement...........................................   111
Steve Bossone, Ph.D., Vice President, Intellectual Property, 
  Alnylam Pharmaceuticals, Cambridge, Massachusetts..............    40
    prepared statement...........................................   161
Harry A. Wolin, Senior Vice President, General Counsel and 
  Secretary, Advanced Micro Devices, Inc., Austin, Texas.........    41
    prepared statement...........................................   180
Hon. Q. Todd Dickinson, Executive Director, American Intellectual 
  Property Law Association, and Former Under Secretary for 
  Intellectual Property and Director, U.S. Patent and Trademark 
  Office, Arlington, Virginia....................................    43
    prepared statement...........................................   186

                               QUESTIONS

Questions submitted by Senator Patrick Leahy for John Dwyer......   214
Questions submitted by Senator Patrick Leahy for Michael Makin...   215
Questions submitted by Senator Patrick Leahy for Dana Rao........   216
Questions submitted by Senator Patrick Leahy for Philip Johnson..   217
Questions submitted by Senator Patrick Leahy for Dr. Steve 
  Bossone........................................................   216
Questions submitted by Senator Patrick Leahy for Harry Wolin.....   219
Questions submitted by Senator Patrick Leahy for Hon. Q. Todd 
  Dickinson......................................................   220
Questions submitted by Senator Sheldon Whitehouse for all 
  witnesses......................................................   221
Questions submitted by Senator Chuck Grassley for John Dwyer.....   222
Questions submitted by Senator Chuck Grassley for Michael Makin..   223
Questions submitted by Senator Chuck Grassley for Dana Rao.......   224
Questions submitted by Senator Chuck Grassley for Harry Wolin....   226

                                ANSWERS

Responses of John Dwyer to questions submitted by Senators Leahy, 
  Grassley, and Whitehouse.......................................   228
Responses of Michael Makin to questions submitted by Senators 
  Leahy, Grassley, and Whitehouse................................   238
Responses of Dana Rao to questions submitted by Senators Leahy, 
  Grassley, and Whitehouse.......................................   245
Responses of Philip Johnson to questions submitted by Senators 
  Leahy and Whitehouse...........................................   258
Responses of Dr. Steve Bossone to questions submitted by Senators 
  Leahy and Whitehouse...........................................   270
Responses of Harry Wolin to questions submitted by Senators 
  Leahy, Grassley, and Whitehouse................................   273
Responses of Hon. Q. Todd Dickinson to questions submitted by 
  Senators Leahy and Whitehouse..................................   281

                MISCELLANEOUS SUBMISSIONS FOR THE RECORD

Letter to Hon. John Boehner, Hon. Nancy Pelosi, Hon. Harry Reid, 
  and Hon. Mitch McConnell from 50 organizations in support of 
  legislation to address abuses of the legal system by patent 
  trolls, July 17, 2013..........................................   292
New England State Banking Trade Associations, letter to Hon. 
  Patrick Leahy, July 25, 2013...................................   294
Brattleboro Savings and Loan, Brattleboro, Vermont, July 29, 
  2013, letter...................................................   296
Tech companies in support of legislation to reform Nation's 
  patent system, October 18, 2013, letter........................   298
SPAN coalition supporting Senator Leahy on demand letters, 
  November 5, 2013, letter.......................................   305
Startup Investors Nationwide Support Broad Patent Reform, 
  Application Developers Alliance, November 6, 2013, letter......   307
National Restaurant Association, November 7, 2013, letter........   310
TechVoice, Elizabeth Hyman, Vice President, Public Advocacy, 
  CompTIA, November 19, 2013, letter.............................   313
EFF, November 19, 2013, group letter.............................   314
Professors' Letter in support of patent reform legislation, 
  November 25, 2013, group letter................................   328
Vermont Society of Certified Public Accountants, Montpelier, 
  Vermont, Deborah L. Riley, Executive Director and CEO, December 
  6, 2013, letter................................................   335
National Association of Realtors, Washington, DC, Steve Brown, 
  President, December 9, 2013, letter............................   336
TPL Group, Cupertino, California, Daniel E. Leckrone, Chairman 
  and CEO, December 10, 2013, letter and attachments.............   337
Recommendations on Patent Abuse Legislation, Louis J. Foreman, 
  Dr. Gary K. Michelson, M.D., and Dr. Gregory G. Raleigh, Ph.D., 
  December 11, 2013, letter......................................   391
``S.1720, The Patent Transparency and Improvements Act of 2013, 
  Is a Better Approach to Patent Reform,'' American Association 
  for Justice, statement.........................................   396
Printing Industries of America, December 16, 2013, letter........   401
Stop Patent Abuse Now (SPAN) Coalition, December 16, 2013, letter   404
Food Marketing Institute, Arlington, Virginia, December 17, 2013, 
  letter.........................................................   406
American Hotel and Lodging Association, Washington, DC, December 
  17, 2013, letter...............................................   413
Pharmaceutical Research and Manufacturers of America (PhRMA), 
  Chester Davis , Jr., Executive Vice President, Washington, DC, 
  December 17, 2013, letter......................................   415
Independent Community Bankers of America, Washington, DC, 
  December 17, 2013, letter......................................   417
American Bankers Association, Washington, DC, December 17, 2013, 
  statement......................................................   419
American Institute of Certified Public Accountants, Barry 
  Melancon, President and CEO, Washington, DC, December 17, 2013, 
  statement......................................................   423
EMC Corporation, Krish Gupta, Senior Vice President and Deputy 
  General Counsel, Hopkinton, Massachusetts, December 17, 2013, 
  statement......................................................   427
National Retail Federation, David French, Senior Vice President, 
  Government Relations, Washington, DC, December 17, 2013, 
  statement......................................................   431
Starwood Hotels and Resorts Worldwide, December 23, 2013, 
  statement......................................................   439
``Congress should act now to stop patent trolls,'' Michael 
  Beckerman and Paul DeRoche, Providence Journal, October 28, 
  2013, commentary...............................................   443
``Business Leaders seek relief from `patent trolls', '' Rhonda J. 
  Miller, PBN, November 25, 2013, commentary.....................   444
``Patent trolls--ugly, taxing brake on U.S., innovation,'' 
  Charlie Kroll and Kathie Shields, PBN, December 2, 2013, 
  commentary.....................................................   448
Alert Solutions, Inc., David Baeder, Founder and CEO, September 
  26, 2013, letter...............................................   450
Betaspring, Providence, Rhode Island, Alan Tear, Founder and 
  Managing Partner, September 25, 2013, letter...................   451
Greater Providence Chamber of Commerce, Laurie White, President, 
  September 16, 2013, letter.....................................   453
Newport County Chamber of Commerce, Middletown, Rhode Island, 
  Jody Sullivan, Executive Director, September 30, 2013, letter..   454
Rite Aid Pharmacy Legal Department, Harrisburg, Pennsylvania, Rob 
  S. Chima, Senior Counsel, October 11, 2013, letter.............   456
Tech Collective, Providence, Rhode Island, Kathie Shields, 
  Executive Director, October 10, 2013, letter...................   458
Iowa Bankers, Johnston, Iowa, John K. Sorensen, President and 
  CEO, December 10, 2013, letter.................................   460
``Patent Reform,'' Robert R. Rees, Jr., December 10, 2013, letter   462
``Current State of Patents from the Perspective of an Investor,'' 
  Robert R. Rees, Jr., December 10, 2013, letter.................   470
BettrLife, Urbandale, Iowa, Don Schoen, CEO, December 11, 2013, 
  letter.........................................................   477
Kum & Go, West Des Moines, Iowa, Charley W. Campbell, General 
  Counsel and Corporate Secretary, December 11, 2013, letter.....   478
Clickstop, Inc., Urbana, Iowa, Tim Guenther, December 12, 2013, 
  letter.........................................................   479
Kinze Manufacturing, Inc., Williamsburg, Iowa, Brad Powers, 
  Corporate Counsel, December 13, 2013, letter...................   480
Paul Morinville, Inventor and Entrepreneur, December 13, 2013, 
  letter.........................................................   482
The Internet Association, Washington, DC, Michael Beckerman, 
  President and CEO, December 16, 2013, letter...................   484
Illinois Tool Works, Inc., Glenview, Illinois, Mark W. Croll, 
  Vice President, Intellectual Property, December 16, 2013, 
  letter.........................................................   486
American Bankers Association; American Insurance Association; The 
  Clearing House; Credit Union National Association; Financial 
  Services Roundtable; Independent Community Bankers of America; 
  NACHA--The Electronic Payments Association; National 
  Association of Federal Credit Unions; National Association of 
  Mutual Insurance Companies: December 17, 2013, letter..........   488
``How the New Patent Abuse Reduction Act Levels the Playing 
  Field,'' Alan Schoenbaum, Cloud Industry Insights, May 23, 
  2013, commentary...............................................   489
Application Developers Alliance, Washington, DC, Courtney Lorrie, 
  May 22, 2013, statement........................................   491
``Op-Ed: Patent trolls threaten tech companies and Austin's 
  vibrancy,'' Emil Sayegh, Austin Business Journal, June 21, 
  2013, commentary...............................................   492
Austin Technology Council, Austin, Texas, July 1, 2013, letter...   494
Computer and Communications Industry Association (CCIA), Ed 
  Black, President and CEO, May 22, 2013, letter.................   497
Coalition for Patent Fairness, Washington, DC, May 22, 2013, 
  statement......................................................   499
``CEA Thanks Sen. Cornyn for Taking On Patent Trolls,'' Consumer 
  Electronics Association, Arlington, Virginia, May 22, 2013, 
  statement......................................................   500
``The Internet Association Applauds Senator Cornyn's Patent Abuse 
  Reduction Bill,'' The Internet Association, Washington, DC, May 
  23, 2013, statement............................................   501
JC Penney, Janet Dhillon, Executive Vice President and General 
  Counsel, May 23, 2013, letter..................................   502
National Retail Federation, Washington, DC, David French, Senior 
  Vice President, Government Relations, June 5, 2013, letter.....   503
Software and Information Industry Association, Washington, DC, 
  May 22, 2013, statement........................................   504
Texas Association of Business (TAB), Austin, Texas, May 22, 2013, 
  statement......................................................   506

 
PROTECTING SMALL BUSINESSES AND PROMOTING INNOVATION BY LIMITING PATENT 
                              TROLL ABUSE

                       TUESDAY, DECEMBER 17, 2013

                                       U.S. Senate,
                                Committee on the Judiciary,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 10:19 a.m., in 
Room SD-226, Dirksen Senate Office Building, Hon. Patrick J. 
Leahy, Chairman of the Committee, presiding.
    Present: Senators Leahy, Feinstein, Schumer, Durbin, 
Whitehouse, Klobuchar, Coons, Blumenthal, Hirono, Grassley, 
Hatch, Cornyn, Lee, and Flake.

OPENING STATEMENT OF HON. PATRICK J. LEAHY, A U.S. SENATOR FROM 
                      THE STATE OF VERMONT

    Chairman Leahy. Good morning, everybody. Senator Grassley 
and Senator Hatch and I have been over voting, so that is why 
we are starting a few minutes late. But I thank you all for 
being here.
    I also wanted to check with Mr. Dwyer about the amount of 
snow we had back home, because if we ever get out of here, my 
wife and I want to go and spoil the grandchildren on the ski 
slopes back in Vermont, which is probably what Senator Hatch 
wants to do on the ski slopes out in Utah, too. So I was glad 
to hear about the 10 inches, which in Vermont is considered a 
heavy dusting, and in Washington it is considered 
``Snowmageddon.'' This is the only city I have ever known that 
will close down for two or three inches. That snow back home, 
we just take a broom and sweep it off the walks. But, anyhow, 
on to more serious things.
    Last Congress, Members of this Committee and the Congress 
came together and passed common sense, bipartisan--Democrats 
and Republicans working together--reform to modernize our 
patent system. The America Invents Act has taken significant 
steps to improve the quality of patents that are issued by the 
Patent and Trademark Office. We have allowed outside parties to 
challenge the validity of a patent after it issues and improves 
the information available to patent examiners. This is the 
first real update of the patent laws in over 50 years.
    But having done that, there are still bad actors who are 
abusing the patent system. I have heard from an increasing 
number of businesses in Vermont and across the country that are 
being targeted by so-called patent trolls. Instead of asserting 
a patent claim against the manufacturer of a product, entities 
are targeting small businesses that simply use the product, 
figuring it is better for them just to pay them something to go 
away when they would not dare take on the manufacturer and 
could actually fight their spurious claims.
    In Vermont, small businesses have received aggressive 
demand letters claiming payments of $1,000 per employee for 
using document scanners in their offices. Across the country, 
and also in Vermont, thousands of coffee shops, hotels, and 
retail stores received demand letters and were threatened with 
patent suits simply for using a standard, off-the-shelf WiFi 
router. Many of the letters are vague form letters. They have 
no description of how the recipient infringes on a relevant 
patent. I have also heard examples of patent assertion entities 
sending letters through dozens of differently named shell 
companies so that businesses that receive the letters cannot 
easily find out who sent them.
    You do not have to be a patent expert to know what is going 
on. I mean, this is as close to robbery as you can think of. 
These actions abuse the patent system, trying to extort 
settlements from customers and small businesses that have no 
real means of fighting back. Predatory conduct that simply 
takes advantage of end users does not promote the important 
goals for which our patent system was intended, to advance 
science and the useful arts. I have to think how my parents 
with their small printing business would have reacted to 
something like this. They would not have had the ability to 
fight. But that is the same with small businesses everywhere.
    Over the past eight months, I have worked with Senator Lee 
and others to develop legislation to address these abuses in 
the system and to have a bipartisan bill. Our bill targets the 
sending of misleading demand letters as a deceptive trade 
practice that can be penalized by the Federal Trade Commission. 
It protects customers who have been sued for merely using a 
product when the defendant really should be the manufacturer 
who made the product and is in a better position to argue 
whether their technology infringes a valid patent. But usually 
it does not, and, of course, that is why the trolls will not go 
after the manufacturer.
    Our legislation promotes transparency so that those abusing 
the system can no longer hide behind shell companies to advance 
their scheme. It improves the PTO's outreach to business 
defendants and strengthens the post-grant review process 
implemented in the Leahy-Smith America Invents Act to improve 
patent quality.
    It takes significant steps to address the problem of patent 
trolls and misuse of the patent system. But, importantly, the 
measures also are balanced. They are targeted to preserve the 
rights of legitimate patent holders whose inventions help drive 
our economy. If they are not protected, we do not have new 
inventions. So as we discuss proposals to address the problem 
of patent trolls, I urge the Committee to stay focused on that 
balance. I want meaningful but targeted reform that can 
actually pass and can be signed into law by the President.
    To the witnesses appearing today, I thank you all for being 
here. I know it takes a lot of time out of your life, too. But 
it is important to us, and it is important to all Members of 
the Committee who want to reduce abuses in the patent system 
while ensuring that innovators and inventors continue to drive 
our economy.
    [The prepared statement of Senator Leahy appears as a 
submission for the record.]
    Senator Grassley, you have worked with me a long time on 
these things.

 OPENING STATEMENT OF HON. CHUCK GRASSLEY, A U.S. SENATOR FROM 
                       THE STATE OF IOWA

    Senator Grassley. I have a longer statement I will put in 
the record. I have some things, though, I want to say right 
now.
    First of all, this is a very important hearing, Mr. 
Chairman, so thank you. And since patents and our patent system 
are a very significant component of our American tradition of 
invention and innovation, we have got to make sure that it does 
not get harmed. And it is being harmed because the innovation 
and creativity that patents are supposed to protect are being 
threatened by purposely evasive and deceptive blanket demand 
letters and abusive litigation practices.
    There has been an increase of 62 percent of all patent 
lawsuits filed in 2012 under patent assertion entities; 92 
percent of these lose merit judgments. The bottom line is that 
patent litigation abuse imposes high costs on American 
businesses, wastes precious resources that ought to be used for 
research, development, job creation, economic growth.
    The phenomenon of trolls has hit companies all over the 
country. I had a meeting on this with a lot of business 
interests in western Iowa, in Council Bluffs, where we heard 
stories. Then, in the meantime, I received a lot of letters. 
One letter, I have one long quote I want to refer to.
    ``Fighting frivolous and burdensome patent lawsuits 
threatened and filed by patent trolls is an extremely expensive 
distraction for a large cross-section of Iowa businesses. 
Rather than focus their efforts on important economic 
development catalysts such as innovation, job creation, and 
business growth, entrepreneurs and business owners from all 
industries and sizes are more frequently finding themselves 
diverting valuable attention and limited resources to defending 
expensive and unnecessary legal threats by patent trolls. 
Indeed, businesses, everyday Iowans, and Iowa's economy as a 
whole are adversely affected by the trolls' seemingly endless 
barrage of legal threats and frivolous suits. The trolls' 
misguided and unbridled mischief unnecessarily drives up costs 
that are, in part, passed on to Iowa's hardworking families and 
consumers.''
    I have another quote here that I am not going to give from 
BettrLife in Urbandale; another quote from Kinze Manufacturing. 
Maybe an important part of that quote would be to say that 
these trolls' experience has left a lasting impact . . . . 
``Contract negotiations with suppliers and service providers 
now routinely include allocation of liability in the event of 
patent trolling. These negotiations require additional 
resources and delay research, development, and production of 
new products.'' That is a partial quote, but just to show you 
that a small convenience store--well, a big convenience store 
in my--I mean, they have lots of stores throughout Iowa, Kum & 
Go, they talk about problems for their business. You know, 
people would not anticipate that when you got into these patent 
issues that a convenience store would be involved.
    So this is very important, Mr. Chairman, and I have still 
got a longer statement to put in the record, but this gives you 
an idea of where I am coming from.
    [The prepared statement of Senator Grassley appears as a 
submission for the record.]
    Chairman Leahy. Well, I think there is a strong feeling and 
a bipartisan feeling on this question of trolls, and I am glad 
that John Dwyer, who is the president and CEO of the largest 
credit union in Vermont, the Williston-based New England 
Federal Credit Union, is with us. He joined the credit union in 
1987. He has held a variety of positions. He has served in his 
current role since 2010. He also serves on the Association of 
Vermont Credit Unions' Governmental Affairs Committee. He also 
served on the boards of the Greater Burlington YMCA, which is 
really a treasure in that area--it is something also strongly 
supported by my wife's family, too--and the Lake Champlain 
Regional Chamber of Commerce. He received his bachelor's degree 
from the University of Vermont, his MBA from RPI.
    Mr. Dwyer, glad to have you here. Please go ahead. We are 
going to hear from each of the witnesses. Then we will open it 
up to questions.

STATEMENT OF JOHN DWYER, PRESIDENT AND CHIEF EXECUTIVE OFFICER, 
NEW ENGLAND FEDERAL CREDIT UNION, WILLISTON, VERMONT, ON BEHALF 
            OF THE NATIONAL CREDIT UNION ASSOCIATION

    Mr. Dwyer. Thank you, Mr. Chairman.
    Mr. Chairman, Senator Grassley, and Members of the 
Committee, good morning. Thank you for inviting me to testify 
today. As the Senator said, my name is John Dwyer. I am the 
president of the New England Federal Credit Union. We are known 
as NEFCU in Vermont. I am testifying today on behalf of the 
Credit Union National Association representing nearly 90 
percent of America's 6,800 credit unions, State and federally 
chartered, and their 98 million members.
    My testimony today will bring light to how patent trolls 
are targeting small credit unions across the country with 
demand letters and provide support for reforms that will offer 
some measure of relief for credit unions.
    My credit union received a demand letter in June 2012 from 
a non-practicing entity whose only assets are a portfolio of 
highly questionable patents and claimed infringement without, 
we believe, having performed a proper investigation into 
whether NEFCU was, in fact, violating any of its patent claims. 
For the purpose of my testimony, I will refer to this entity as 
a ``patent troll.''
    The demand letter was vague, misleading, and lacking in 
critical information. It broadly referenced patent claims that 
I have since learned have been canceled by the Federal Circuit. 
Moreover, the demand letter did not specifically identify what 
my credit union had allegedly done wrong.
    For the record, my credit union has 23 ATMs used strictly 
for traditional banking transactions. The demand letter failed 
to identify any specific NEFCU ATM or indicate how NEFCU 
infringed any specific claim. NEFCU has no attorney on staff, 
so we hired an attorney to help us with a reply.
    The patent troll sent another demand letter a few months 
later, making all the same mistakes as were in the first 
letter, and not acknowledging our initial reply. My credit 
union is now in litigation with this patent troll. Therefore, 
there could be some questions this morning that I am unable to 
answer.
    We soon learned our experience with this patent troll was 
not unique. In fact, the same demand letter was sent to almost 
every credit union in Vermont, including one without any ATMs. 
While we believe this patent troll must be stopped, 
unfortunately no end is in sight. In fact, as recently as this 
past September, this patent troll moved on to target small 
banks in Ohio and Pennsylvania. And while the vague allegations 
and invalid patents in a demand letter remain the same, the 
patent troll is now demanding $2,000 per ATM, and a couple 
months later, following up on that letter with an increased 
demand of $5,000 per ATM.
    Reform and relief are desperately needed. Credit unions 
believe that true reform and meaningful relief will start at 
the beginning--the demand letter. These demand letter-writing 
campaigns work because patent trolls know that for a small 
credit union, an early settlement is much cheaper than a fight. 
Just to pick up the phone to consult with a patent attorney to 
determine the validity of the demand letter's claim and 
evaluate the demand costs tens of thousands of dollars.
    Chairman Leahy, we support your legislation to address the 
problem of unfair and deceptive demand letters. At a minimum, 
demand letters should require specific information to the end 
user--in this case, me--such as a detailed description of each 
patent allegedly infringed and a detailed description of which 
product or feature is infringed, including names, model 
numbers, and how the claim corresponds to functionality.
    We also support your bill's role for the Federal Trade 
Commission as an enforcement agency and encourage the addition 
of rulemaking to ensure that enforcement tools can evolve as 
patent trolls continuously modify their tactics.
    Because information is key, if credit unions have any hope 
for dealing with demand letters, we also support the creation 
of a registry. A patent troll that sends more than 10 demand 
letters in a year should be required to enter all letters into 
the registry that would be publicly available and maintained by 
a federal agency.
    Chairman Leahy, we also believe that your bill's language 
addressing customer stay exceptions could be very helpful in 
some circumstances. Unfortunately, most vendors have taken the 
position that small credit unions are on their own, disclaiming 
indemnification in connection with patent claims. Perhaps with 
stronger customer stay exception language, more vendors would 
step in to defend their end users against frivolous litigation. 
We encourage the addition of more end-user protections to 
assist those, like us, who do not have the resources or the 
market power to receive necessary assurances and indemnities 
from vendors.
    Other proposed reforms will help credit unions as well. For 
example, Senator Grassley's bill to require heightened pleading 
standards and fee shifting will make a patent troll think twice 
about harassing credit unions across the country with the same 
vague demand letter.
    In conclusion, without relief, small credit unions 
everywhere will just have to cross their fingers and hope they 
do not receive a demand letter like we did. Addressing demand 
letters will develop a strong foundation for meaningful reform 
to curb patent trolls.
    Thank you.
    [The prepared statement of Mr. Dwyer appears as a 
submission for the record.]
    Chairman Leahy. Thank you, Mr. Dwyer.
    Michael Makin is the president and CEO of the Printing 
Industries of America, a position he has held since 2002. He is 
also familiar with my own background as a son of printers. He 
is originally from Montreal. He formerly served as president of 
the Canadian Printing Industries Association. He has a degree 
in journalism from Carlton University in Ottawa and an MBA from 
the University of Phoenix.
    Mr. Makin, good to see you again. Please go ahead, sir.

   STATEMENT OF MICHAEL MAKIN, PRESIDENT AND CHIEF EXECUTIVE 
      OFFICER, PRINTING INDUSTRIES OF AMERICA, SEWICKLEY, 
                          PENNSYLVANIA

    Mr. Makin. Thank you very much, Mr. Chairman and Ranking 
Member Grassley. It is indeed a privilege to address the 
Members of the Senate Judiciary Committee on a topic that is 
very near and dear to printers all across America. It is also 
an honor to speak on behalf of the largest graphic arts trade 
association, along with its affiliates from coast to coast.
    If ever there was an industry that typified small business 
in the country, it is the printing industry. There are more 
than 30,000 printing plants all across the Nation in virtually 
every town and city. Our industry is predominantly a family 
owned industry with 80 percent of companies employing fewer 
than 20 employees. In the aggregate, 800,000 Americans earn 
their livelihood through printing.
    The roots of our industry date back hundreds of years, yet 
its modern face is high-tech and innovative. It must be in 
order to survive. Today's print marketplace is all about using 
an innovative cross-media mix to drive the economy.
    Unfortunately, we are also an industry that has attracted 
the attention of patent assertion entities or ``patent 
trolls.'' We believe this is the case because we are, in fact, 
small businesses and vulnerable to predatory legal actions 
which threaten our very viability.
    Prior to 2013, it was unheard of for printing companies to 
be accused of patent infringement. This is no longer the case. 
Currently we know of at least eight patent trolls that are 
seeking licensing fees from printers or threatening costly 
litigation. For small printers, especially, this is often their 
first experience with patent law and civil litigation, not to 
mention trolling. And they are astounded by the thuggish 
actions of these enterprises and the dollar figures associated 
with their demand letters.
    One extortive letter issued to a Kansas printer with just 
40 employees demanded $75,000 in licensing fees. If they did 
not pay within two weeks, that would go up to $95,000. This is 
reprehensible.
    Needless to say, threats of litigation are intimidating and 
place undue stress on an industry already struggling with low 
profits and challenging demand. Our average printers are forced 
to spend anywhere between $10,000 to $15,000 just to hire 
lawyers initially to protect themselves. One of our members in 
Colorado reports that he literally is bogged down under a stack 
of patent claim charts, and his business has had to take the 
back seat. This is a very common story all across America.
    Keep in mind, Mr. Chairman, that patent trolls do not 
innovate, they do not promote economic growth, they do not 
contribute to the good of education or scientific research. 
Most importantly, patent trolls do not create jobs. Our 
businesses do. And yet their actions threaten job creation. 
They hinder entrepreneurship and, most frighteningly, 
intimidate hard-working Americans for standing up for their 
rights. I have heard from dozens of companies who are even 
afraid to share their experiences for fear of retribution.
    In my written statement, I have included a chart that 
details the known patent infringement actions against the 
printing industry. Some of the technologies involved include:
    Computer-to-plate work flow, which is a ubiquitous process 
that has been used in printing plants for more than 15 years;
    Web-to-print ordering and inventory systems used in our 
industry, and countless others;
    And quick response codes used in advertising mail, 
magazines, and other printed material.
    I cite these examples, Senators, because I can assure you, 
if you were to ask small printers in the States you represent, 
the vast majority would tell you that they consider using the 
above technologies as essential to their business. That they 
now even fear being competitive because of patent trolls who 
have no intellectual or innovative skin in the game is also 
reprehensible in our view.
    Our overriding position is that legislation should 
demystify the patent process for end users like small printing 
companies so that their burden can be minimized and their 
solutions less costly. A number of reforms are critical. 
Cracking down on the deceptive behavior that accompanies bad-
faith demand letters is one example, and kudos to Senators 
Leahy and Lee for this provision. Reforming the system to 
include heightened pleading requirements to increase 
transparency, as promoted by Senator Cornyn. Allowing 
businesses threatened by similar suits to pool resources 
through an expanded permanent CBM review. Thank you, Senator 
Schumer. And adopting fee-shifting strategies, as supported by 
Senators Hatch, Cornyn, and Grassley, to deter frivolity within 
the patent system and to require trolls to put their money 
where their threatening mouths are.
    To conclude, Mr. Chairman, without a doubt, both small 
business and innovation drive the spirit of our economy and the 
Nation, and both equally deserve to be protected from abusive 
patent trolls. We believe that a common-sense, practical 
solution that protects all users of the patent system is indeed 
possible. But time is of the essence. The longer we wait, the 
longer we will expose innocent companies to the peril of 
trolls, which flies in the very face of entrepreneurship and 
fair play. We urge the Committee to take definitive and bold 
action.
    Thank you very much.
    [The prepared statement of Mr. Makin appears as a 
submission for the record.]
    Chairman Leahy. Thank you very much.
    I should also note we have received a number of written 
submissions for the record, and without objection, they will be 
included in the record. The staff will work out the appropriate 
place.
    [The information referred to appears as submissions for the 
record.]
    Chairman Leahy. Dana Rao is the vice president of 
intellectual property and litigation at Adobe. He oversees all 
aspects of intellectual property and litigation matters. Prior 
to joining Adobe, he spent 11 years as associate general 
counsel of Microsoft where he worked on patent-related matters. 
He has his undergraduate degree from Villanova and his law 
degree from George Washington here in Washington, D.C.
    Please go ahead, sir.

  STATEMENT OF DANA RAO, VICE PRESIDENT AND ASSOCIATE GENERAL 
COUNSEL OF INTELLECTUAL PROPERTY AND LITIGATION, ADOBE SYSTEMS, 
                   INC., SAN JOSE, CALIFORNIA

    Mr. Rao. Thank you. Mr. Chairman, Ranking Member Grassley, 
and other distinguished Members of the Committee, thank you for 
inviting me to testify on this important issue. I am appearing 
before you on behalf of Adobe, and I oversee all aspects of our 
intellectual property and litigation matters.
    Adobe provides leading-edge software to consumers and 
career professionals like Photoshop and Acrobat. We are also a 
leading provider of digital marketing software, which provides 
software to retailers and Websites all throughout the world. 
Today Adobe employs over 12,000 people and makes over $4.4 
billion of revenue.
    With over 3,000 patents and applications, Adobe is a strong 
believer in the importance of the patent system to drive the 
innovation economy. The inventions of Adobe's scientists 
represent genuine breakthroughs in 21st century technologies. 
With our products, you can use a video of your face to animate 
a 3D figure. We can remove the blur from a photograph caused by 
your hand shake. And we can even predict the audience reaction 
to a blog you post before you post it, all through the magic of 
software.
    And we rely on our Nation's patent system to protect these 
innovations and the investments we make and the jobs they 
create. Weakening patent protection from software would be 
shortsighted and would not help address the problem with patent 
trolls we are here to discuss today, as the House rightly 
decided in passing the Innovation Act with overwhelming 
bipartisan support.
    There is a problem with patent trolls and the patent 
system. Trolls are bad actors who are taking advantage of the 
asymmetric costs in patent litigation to extort settlements, 
and they are dramatically increasing their activities. Before 
2009, Adobe only had faced 19 suits in the history of its 
company. Today, this year, we have had over 20 lawsuits alone.
    Nationally the picture is also darkening. In 2007, trolls 
had targeted 834 defendants. According to the GAO report, in 
2011 this number quadrupled to over 3,000 defendants of patent 
troll litigation.
    One study estimates that troll litigation is a $29 billion 
cost to our economy. And are start-up companies and 
entrepreneurs celebrating this trend? Not at all. Fifty-five 
percent of these patent troll litigations are targeting 
companies that are making less than $10 million. And only a 
fraction of these patent troll proceeds end up in the hands of 
an inventor. This activity is not benefiting the small guy. It 
is harming the small guy and the big guy alike.
    The current patent litigation system is unbalanced in favor 
of trolls. Patent law has evolved to enable lawsuits to be 
filed with little diligence by the patent troll, high costs for 
the defendant, and no adverse consequences for a meritless 
suit.
    We are pleased that Chairman Leahy and Senator Lee have 
introduced legislation to address this problem. Taken together 
with other legislation by Senators Cornyn and Grassley and 
Senator Hatch, we believe we have the tools for the 
comprehensive bill that we need to address this problem.
    Strengthening patent laws' fee-shifting provision will be 
the most effective tool we can use to address and disrupt the 
trolls' business model. In one recent case against our company, 
a patent troll wanted to settle with us before reaching the 
merits of the lawsuit. After making a series of diminishing 
settlement offers to us, they granted us a covenant not to sue 
and settled for nothing, but only after Adobe had spent 
hundreds of thousands of dollars in defense costs. Pursuant to 
the existing fee-shifting standard in Section 285, we asked the 
court to make the patent troll pay. Regretfully, the court 
denied our motion, based on the belief that Section 285's high 
standard was not met.
    This has to change. Section 285 needs to be amended so that 
fees in patent cases are appropriately shifted to the 
prevailing party unless the non-prevailing party can show that 
they have a substantially justified position. If you bring a 
patent lawsuit, you should have a substantially justified 
position. If not, you are likely filing a meritless lawsuit.
    Fee shifting poses the only adverse consequence for the 
patent troll behavior. Without the risk of incurring shifted 
fees, trolls, who make no products and face no threat of a 
counterclaim, have nothing to lose.
    This business model will continue to grow and attract new 
investors. We need to give the courts the clarity they need to 
fix this problem.
    We also need to ensure that we can reach the real parties 
in interest behind these litigations. Otherwise, trolls hiding 
behind shell companies will not face any adverse consequences 
from these shifted fees. A discretionary bond provision, as 
provided in Senator Hatch's legislation, would effectively 
address this.
    Another important measure is Chairman Leahy and Senator 
Lee's customer stay provision. Staying suits in favor of the 
manufacturer's case helps judicial economy and protects end 
users from unnecessary litigation.
    Finally, we need to reform the patent litigation process. 
As a policy matter, we believe Congress should create 
heightened standards of quality throughout the patent 
litigation system to prevent abuse by trolls. Pleading reform 
and discovery reform are critically important to lower the 
costs of patent litigation for both plaintiffs and defendants.
    Troll litigation is a tax on innovation and innovators. We 
must address it by changing the economics of the system. I 
respectfully ask for this Committee's help to end this burden 
on American businesses.
    Thank you.
    [The prepared statement of Mr. Rao appears as a submission 
for the record.]
    Chairman Leahy. Thank you very much.
    Our next witness, the last one on this panel, is Philip 
Johnson, senior vice president and chief intellectual property 
counsel at Johnson & Johnson. He joined the company in 2000. 
Before that, he spent 27 years in private practice. He has 
extensive experience practicing patent law. He advised law 
makers serving on this Committee and others on patent issues, 
including serving on a committee of experts formed by the 
Director of the PTO to help implement the Leahy-Smith America 
Invents Act. He has a bachelor's degree from Bucknell and a law 
degree from Harvard.
    Mr. Johnson, welcome. Thank you for taking the time to be 
here.

STATEMENT OF PHILIP S. JOHNSON, SENIOR VICE PRESIDENT AND CHIEF 
INTELLECTUAL PROPERTY COUNSEL, JOHNSON & JOHNSON, COALITION FOR 
     21ST CENTURY PATENT REFORM, NEW BRUNSWICK, NEW JERSEY

    Mr. Johnson. Thank you, Chairman Leahy, Ranking Member 
Senator Grassley, and distinguished members of the panel. I 
appreciate very much the opportunity to testify today on the 
subject of protecting innovation and small businesses while 
deterring troll abuse. I am testifying here today as a 
representative of the 21st Century Coalition for Patent Reform, 
21C, the Steering Committee of which also includes General 
Electric, Procter & Gamble, Caterpillar Tractor, Eli Lilly, and 
3M.
    By our definition, troll abuse is the misuse of a court 
proceeding, or the threat thereof, to press specious patent 
claims or defenses for the sole purpose of coercing an opponent 
to settle the dispute to avoid otherwise inevitable litigation 
costs. This abuse can be perpetrated by any litigant, and while 
the effectiveness of the tactic will vary based on the party's 
circumstances and means, the identification of the abuser turns 
not on who the party is but, rather, on how they behave.
    The problem of patent litigation abuse is not new to the 
patent system, nor is it new to this Committee. You devoted a 
great deal of attention to the problem while developing the 
Leahy-Smith America Invents Act, and have already gone a long 
way toward giving the courts and the Patent Office the tools 
they need to address the problem.
    But not everything that can be done has been done. One 
promising proposal in S. 1720, the Leahy-Lee bill, cosponsored 
by Senators Klobuchar and Whitehouse, would favor suits between 
patentees and manufacturers of the allegedly infringing 
products over suits against customers. If drafted properly to 
automatically stay patent suits against off-the-shelf retailers 
and end users who are doing no more than using purchased 
products in the manner as instructed, the troll business model 
of suing many customers, but never their suppliers, could 
become a thing of the past.
    The Leahy-Smith bill would also improve transparency of 
patent ownership, correct an error in the AIA relating to the 
estoppel to be applied in post-grant reviews, and properly 
direct the Patent Office to follow the same claim construction 
rules as applied in the courts and the ITC. In addition, the 
Leahy-Lee bill proposes to stem the use of bad-faith demand 
letters by authorizing the FTC to treat them as unfair and 
deceptive trade practices. With further development to address 
preemption, free speech, and safe harbor issues, we see this as 
a promising approach for dealing with this aspect of the patent 
abuse problem.
    Until recently, I would have added to this list of remedies 
the modified attorney fees shifting proposals advanced by 
Senators Cornyn and Grassley in S. 1013 and Senator Hatch in S. 
1612, but because the Supreme Court has recently agreed to hear 
two cases to address patent fee shifting, Congress should 
consider waiting for the Supreme Court to act in these cases 
before legislating on the subject. But whatever the Supreme 
Court decides, problems will remain when plaintiffs are 
structured as shell corporations so they can bring specious 
suits knowing that they have insufficient assets to satisfy any 
fee awards that they might incur. Of the three approaches 
suggested to address this aspect of the problem--joinder, 
bonding, or legal recourse against persons with a financial 
interest in the proceeds of the suit--our coalition favors the 
third. Treating this aspect of the problem as the collection 
problem that it is will preserve free access to the courts, not 
disrupt good-faith patent assertions, and be the most difficult 
for abusers to avoid.
    Other proposals relating to heightened pleading standards, 
mandatory stays, and the specifics of managing discovery in 
patent cases should be referred to the Federal Judicial 
Conference for further development. Particularly troubling is 
the proposal to impose mandatory discovery stays pending 
Markman rulings, leaving very little discretion, if any, to the 
courts as to what is right for each particular case. Such an 
approach would be an open invitation to copyists to enter the 
U.S. market safe in the knowledge that the patent actions 
brought against them will come to a virtual standstill for an 
extra year or more while the parties wrangle over the meanings 
of patent claim terms. In the meantime, manufacturers' market 
shares, and the jobs they support, will shrink as the 
infringement continues.
    Finally, especially now that the Supreme Court has agreed 
to hear an overall challenge to the patentability of computer-
implemented inventions, 21C believes it would be best not to 
adopt Senator Schumer's proposals in S. 866 to expand and 
extend the transitional program for financial sector business 
method patents.
    The innovation ecosystem in this country is extremely 
sensitive to changes in our patent system. With the help of 
this Committee, our country has come a long way by enacting the 
AIA and the pilot patent courts bill. Let us move forward with 
remedies that are sharply focused on abusive behaviors, while 
exercising restraint as to those which may have broader 
ramifications on the innovation community and our economy as a 
whole.
    Thank you very much.
    [The prepared statement of Mr. Johnson appears as a 
submission for the record.]
    Chairman Leahy. Thank you.
    I want to start with my questions. We have got a lot of 
people here, so we will try to keep on schedule.
    I would also note that Senator Cornyn, as the Deputy 
Republican Leader of the Senate, may have to be leaving here at 
some point for a leadership meeting, which I understand he has 
worked very, very hard on this subject, and we will make sure 
both his statement and his questions will be in the record. And 
to the extent there are questions of members of the panel, I 
would urge them to answer them as quickly as they could.
    Senator Cornyn. Thank you, Mr. Chairman. If I could just 
beg your indulgence a moment and thank the witnesses and the 
Chairman and the Ranking Member for taking up this important 
matter.
    I would also like to note Harry Wolin from AMD from Austin, 
Texas, which is my home town, is here as a witness, and I have 
had a chance to thank him for his participation.
    Thank you for your indulgence.
    Chairman Leahy. We are delighted he is here, and I 
appreciate your helping to arrange that.
    [The prepared statement of Senator Cornyn appears as a 
submission to the record.]
    Chairman Leahy. Mr. Dwyer, let me ask you about your 
testimony about these abusive demand letters. I am hearing 
about this issue from a number of different businesses in 
Vermont and, of course, from across the country. The 
legislation Senator Lee and I introduced targets those abuses 
by saying that it is a deceptive trade practice to send these 
misleading letters. But, of course, we also want to be able to 
distinguish such letters from legitimate licensing inquiries.
    Give me some examples of how demand letters that you found 
could be misleading or predatory or sent without any reasonable 
due diligence.
    Mr. Dwyer. Thank you, Mr. Chairman. I think the best way to 
frame that is that a person in my position, whether they are 
running a credit union or any other small business, when they 
receive a demand letter, they are in the immediate position of 
trying to understand what the claim is. What is the basis for 
the claim that the entity is infringing? What is the patent 
that is associated? What is the terminology in the patent? A 
letter should put the person who is receiving it in the best 
possible position to understand where we sit and not have to 
spend a lot of time and resources hiring somebody, in effect, 
to look up patent numbers, to try to understand what the 
context of those patents is, what the content of those patents 
is, and really evaluate whether your organization would be 
infringing on that. We think that is reasonable. I think it is 
reasonable to expect that that information would be provided in 
a basic demand letter.
    Chairman Leahy. I have had some people tell me they get 
this demand letter, and they try to find where it comes from, 
and the best they can do is trace it back to a mailbox 
somewhere or a shell company. My measure, which would ensure 
that current ownership information for a patent be listed on 
file with the Patent Office, would that help some of these 
concerns?
    Mr. Dwyer. It would certainly help. To understand the 
true--you know, the ownership structure behind--in most cases, 
the letter is going to come from an attorney, so who is the 
entity that is working with that attorney. To be able to 
understand that from day one in terms of when you receive the 
letter would be very helpful.
    I work in financial services, and obviously financial 
services is arguably one of the most transparent companies or 
industries that exists.
    Chairman Leahy. If you send something out, the people have 
to know where it came from.
    Mr. Dwyer. Right. We need to tell our customers, we need to 
tell our members, what the basis is for almost everything we do 
with them, and that is the way it should be. When I get a 
letter claiming that I am infringing and referencing a patent, 
it would certainly be helpful to understand the clarity around 
why we would be--or why they think we are infringing.
    Chairman Leahy. And, Mr. Makin, I see these entities 
targeting the users of a product, not the manufacturer who made 
the product. My parents, as you know, as we have discussed 
before, had a small printing business, the Leahy Press, which 
is a venture they sold when they retired, but it is still 
operating in Montpelier, Vermont. But we certainly did not keep 
a patent attorney on staff, and I cannot think of many printing 
businesses that would, certainly not of the type you are 
talking about. I would think the manufacturer who made the 
product is in the best position to litigate.
    Have your members experienced this problem of being 
targeted for products just because they are using them?
    Mr. Makin. Absolutely, Mr. Chairman. It is the most 
frightening component of the patent issue because innocent 
companies--small printers, small American printers that employ, 
you know, 20, 30, 40 people, are being harassed by these 
entities claiming that they have infringed something. Printers 
do not go to work every single day, ladies and gentlemen, 
assuming that they are going to have to be dealing with a 
patent issue. It is not even on their radar screen. They 
purchase technologies, they purchase software from 
multibillion-dollar companies assuming that the due diligence 
is undertaken by those entities. And so for them to be held 
hostage with these shell letters is very intimidating, and it 
is reprehensible.
    We are all about protecting innovation in America, Mr. 
Chairman, but that does not mean that small businesses have to 
be pursued in a very predatory, very threatening way, and it 
needs to change. And we are very pleased to see some of the 
provisions that you and your colleagues have introduced.
    Chairman Leahy. Thank you. I have other questions that I 
will submit for the record for the next two witnesses because 
their testimony has been extremely helpful, and some of these 
follow-up things will be even more important.
    [The questions of Chairman Leahy appear as submissions for 
the record.]
    Senator Leahy. I will try to set an example with everybody 
here, and I will stop at this point and yield to the Ranking 
Member.
    Senator Grassley. Mr. Rao, you made clear that since you 
have so many patents, defending against infringers is a top 
priority for Adobe. Now, I want to say what a lot of people say 
would be bad if we went in the direction of some of this 
legislation. Some patent holders are concerned that proposals 
to heighten pleading requirements restrict discovery, institute 
fee shifting, that would hamper the ability of small inventors 
and other legitimate patent holders to enforce their patent 
rights.
    I want to know your opinion, if you believe these concerns 
are justified.
    Mr. Rao. Thank you, Senator Grassley, for the question. The 
provisions you just mentioned are designed to limit the troll 
abuse behavior that we are seeing today and we have talked 
about, and so I will just start by saying that, you know, as I 
mentioned in my oral testimony, 55 percent of these patent 
troll litigations are being targeted against small businesses. 
So reducing patent troll litigation will help small businesses 
and entrepreneurs and small innovators, first of all.
    And, second, the reforms that you are talking about, the 
pleading reform and the fee-shifting reform, these will have 
beneficial aspects for many people who are trying to enforce 
patents. Fee shifting, I will note, also has--can have--a 
positive impact for the person trying to bring the patent. 
First of all, getting fees in other areas of law where fee 
shifting is allowed enables a small company to retain a 
contingency fee lawyer because the fees are very attractive. 
The millions of dollars in defense costs that can be won by a 
plaintiff in a fee-shifting case can be used in case the 
damages are small. So fee shifting can actually work in favor 
of the plaintiff.
    The other point in Senator Hatch's fee-shifting standard--
for example, he also has the conduct of the party as a factor 
for fee shifting. So one of the problems small inventors have 
when they bring lawsuits is that the defendants engage in 
dilatory tactics and they have discretion, and they are not 
going to shift the fees. All they have to do is look at that 
provision.
    The discovery aspects of the heightened pleading and the 
case management, one of the other ways the defendant can use 
litigation tactics to defeat a small inventor is by dragging 
out the case and making it very expensive. So these discovery 
provisions that you have mentioned in these bills, they can 
actually lower the overall costs of the case for both the 
plaintiff and the defendant. This allows the plaintiff to get 
to the merits of the case sooner. The faster they get their 
claim construction, the sooner we are going to understand what 
the patent is about, and then they can start getting 
settlements. So these provisions actually help both sides.
    Senator Grassley. I am going to ask a question of Mr. Makin 
and Mr. Dwyer. I know that in general you would like to see 
patent troll abusers stopped before any litigation actually 
commences, because it is risky and costly to engage in that 
litigation. However, do you believe that the proposals to 
strengthen pleading requirements, institute fee shifting, and 
impose some discovery limitations could have a beneficial 
impact in discouraging frivolous demand letters and reducing 
litigation, extortion, and abusive practices? And do you think 
that these reforms can make a positive difference? Mr. Makin 
and then Mr. Dwyer, and then that will have to be my last 
question.
    Mr. Makin. Thank you very much, Senator Grassley. We 
absolutely support the measures that you have introduced. We do 
believe they will curb the activity.
    Again, I stress that we need to have a balance in the 
system that preserves innovation but also does not hinder the 
growth of jobs in this country, which is the small business 
community. No printer is going to go out of their way to 
purposely infringe upon an issue. So all of the measures--
heightened pleading, the fee shifting--they all make it more 
difficult for these vile creatures underneath the bridge to do 
the things that they are doing. It stops them from doing that. 
We are not against people having the ability to protect 
legitimate innovation in this country. What we are against is 
companies that purchase antiquated patents for the sole purpose 
of extorting money from small business. That is anti-American, 
and it is just wrong.
    Senator Grassley. Mr. Dwyer, whatever you have to add.
    Mr. Dwyer. I would be happy to add to that, Senator. I 
think it is important to state on behalf of CUNA and, arguably, 
all financial services companies that if part of the result of 
legislation is to add to the cost for the side--in this case, 
the plaintiff, that plaintiff then has to really think through 
the complete process, not just the ability to send a letter, 
which costs a buck, but all of the costs that can be the result 
of what happens when they go forward with litigation. So we are 
supportive of steps that are put in place to ensure that there 
is more balance. I think balance is an important word in this 
context.
    Thank you.
    Senator Grassley. Thank you, Madam Chairman.
    Senator Feinstein [presiding]. Thank you very much.
    Senator Coons, you are next.
    Senator Coons. Thank you, Senator Feinstein, and I want to 
thank Chairman Leahy for holding this important hearing and to 
the witnesses for sharing your experience with us today. As 
some of you know, I was in-house counsel for eight years to a 
materials-based science company that relied very critically on 
its patent portfolio for its growth and its ongoing innovation.
    The patent system in our country offers a basic trade-off 
to inventors: Share with the world your greatest discoveries, 
and you get a right to exclude others from practicing that for 
a limited period of time. In fact, this is enshrined in our 
Constitution in Article I, Section 8. It is a very important 
foundational idea that has led to entrepreneurship and 
innovation in our country. And for many sectors of our economy, 
patent protections are absolutely critical to promoting 
innovation, and I think the title of today's hearing suggests 
two complementary goals, as you have stated: that we want to 
limit patent troll abuse while also protecting small business 
and promoting innovation.
    From individual inventors who are just trying to solve 
everyday problems to those who are discovering new 
pharmaceuticals or medical devices, certain companies and, 
indeed, whole industries, rely on our patent system to attract 
investors and to create jobs.
    And if intellectual property rights are to have any 
meaning, they have to be enforceable. That means giving valid 
patent owners sufficient access to the courts to deliver 
justice when they need it, whether through injunctions or 
litigation.
    But in different sectors, patents play different roles. For 
other sectors, some companies value secrecy over the right to 
exclude, so they choose trade secret protection over patents, 
for example. Other companies value speed to market, and so the 
long time required for quality patent issuance means they do 
not choose to pursue patents.
    Ultimately, unfortunately, as you have described in detail, 
our system has been subject to some abuse. Baseless demand 
letters and frivolous lawsuits have harmed innocent end users 
and added little value to our innovation economy.
    Our task, I think, is clear but not easy, which is to 
provide relief to small businesses and start-ups that are 
innocent end users without weakening the economic value of U.S. 
patents, and I would like to thank Mr. Dwyer and Mr. Makin for 
giving some examples from credit unions and from printers.
    In my view, strengthening the American patent system begins 
with ensuring that we provide full funding for the Patent and 
Trademark Office and for the federal courts to ensure, as Mr. 
Johnson suggested, that the judiciary is able to play its 
appropriate role in managing litigation and to ensure that the 
patents that are being enforced are sound and solid rather than 
the lesser-quality ones that were referred to by Mr. Makin.
    In my view, we are just beginning now to see the impact of 
the Leahy-Smith America Invents Act, which has a number of 
provisions designed to increase patent quality, not least among 
them pre-issuance submissions, post-grant reviews, inter partes 
reviews, and the transitional program for CBM, or covered 
business method, patents. Each of these programs creates new 
hurdles for patent applicants and patent holders, and our hope 
is that, in return, we will have higher patent quality in the 
market.
    So as we consider the proposals before us, I think we need 
to understand the impact of these changes of the law, which was 
really recently enacted and is only newly having an impact on 
the patent system.
    Let me, if I might, turn to some questions. Mr. Johnson, 
you of the panel offered an interesting definition of a patent 
troll, which I think is an important thing for us to focus on. 
You focused on distinguishing a troll from a valid patent owner 
based on their behavior, on their litigation behavior, which 
also implies that there are valid patent owners who also pursue 
patent litigation and that we are at some risk if we do not 
correctly distinguish between them.
    Our current patent laws protect against infringement by 
companies that make, use, or sell infringing products, and so 
our court challenges protecting the innocent end user without 
destroying that right.
    How do you suggest, Mr. Johnson, that we draw a line 
between innocent end users and companies that are profiting 
from the use and sale of infringing products in a way that does 
not hurt innovation but defends the truly innocent end user?
    Mr. Johnson. Well, you are absolutely right. There is a 
fine line between someone who is zealously advocating a 
position on behalf of their client, believing that the patent 
is infringed, and one who crosses that line and overadvocates. 
But that line can be crossed by defendants as well as 
plaintiffs. Large, well-heeled companies faced with a small 
business trying to enforce a foundational patent against them 
can press defenses, take unending appeals, and also engage in 
behavior that I believe is abusive.
    So we have to look at the merits of the behavior. 
Unfortunately it is not as easy as categorizing people by who 
they are or what their business structure is. We have to look 
at what they are actually doing, which is why the fee-shifting 
approach has some strong advantages, because fee shifting only 
kicks in after the case is over and you know and the judge 
knows whether or not the case was frivolous or not.
    Now, I do see the problem for some of the end users and 
small businesses who say that is a very expensive trip for us 
to go on in order to end up there. But certainly it will deter 
frivolous assertions to some degree, I think coupled with the 
customer stay provisions so that these actions do not proceed 
against the banks and the printers themselves but, rather, the 
manufacturers of the technologies, because, after all, these 
end users are only using these products in the manner in which 
they were intended and as instructed by the manufacturer. The 
real dispute should be between the patent owner and whoever is 
manufacturing the product and providing it with those 
instructions, not against the innocent end users. And so the 
customer stay provisions, I think, and end-user provisions are 
very important so that these cases can be consolidated and 
fought out where they ought to be. Those two things alone will 
go a long way toward helping this problem.
    Senator Coons. Thank you, Mr. Johnson. I look forward to 
having another round of questions.
    Chairman Leahy. And I appreciate your answer because it 
anticipated one of the questions I was going to ask you. Thank 
you very much.
    Senator Hatch.
    Senator Hatch. Well, thank you, Mr. Chairman.
    Mr. Chairman, I ask unanimous consent that we place in the 
record from the American Bankers Association, American 
Insurance Association, the Clearinghouse, Credit Union National 
Association, Financial Services Roundtable, Independent 
Community Bankers of America, National Association of Federal 
Credit Unions, National Association of Mutual Insurance 
Companies, to mention a few, in the record at this point.
    Chairman Leahy. Without objection. Some of them may already 
be, but we will make sure----
    Senator Hatch. I think they may be.
    Chairman Leahy. They will be.
    [The information referred to appears as a submission for 
the record.]
    Senator Hatch. Let me go to you, Mr. Rao. The idea of using 
mandatory fee shifting to discourage frivolous patent 
litigation is not a new concept. In fact, Senator Leahy and I 
first introduced the proposal back in 2006 in that patent 
reform bill at that time. Our fee-shifting language, similar to 
the test used in current law, would require courts to award 
attorneys' fees to the prevailing party in cases where the non-
prevailing party's legal position was not substantially 
justified.
    The House of Representatives recently passed its own patent 
bill by a bipartisan vote of 325-91, which includes a fee-
shifting provision similar to the 2006 Hatch-Leahy or Leahy-
Hatch language in my bill, the Patent Litigation Integrity Act.
    Now, you stated in your written testimony that the standard 
for fee shifting in current law is too high. In your 
experience, why would changing the legal standard in the Patent 
Act make fee shifting a more reasonable option in patent cases 
and do more to address the threat of patent trolls?
    Mr. Rao. Thank you for the question. In one recent case we 
just had, a patent troll was suing Adobe, and when we were 
approaching the merits, approaching claim construction, the 
patent troll said, ``I do not want to have my patent examined, 
so I am walking away,'' gave us a covenant not to sue, and it 
was settled for nothing.
    Unfortunately, as I mentioned earlier, we had already spent 
hundreds of thousands of dollars at that point defending 
ourselves, and we moved for fees. Under the current fee-
shifting standard, you have to show that the case was 
exceptional, so that they had to have an objectively 
unreasonable position.
    Well, the court found that since they had not gotten to the 
merits of the case because the patent troll walked away before 
they got to the merits of the case, they could not find 
exceptionality, so no fees were shifted.
    Under your language, where the prevailing party would get 
the fees, unless the non-prevailing party could show 
substantial justification, in that case we were the prevailing 
party--right? The patent troll walked away from the lawsuits--
we would have gotten the fee shifted, and the money would have 
moved over and the patent troll would have had to pay those 
fees. The patent troll could not contest that because they did 
not get to the merits, so they would not be able to show that 
they had a substantial justification in their position.
    So in that case, this is a perfect example of ensuring that 
people who have got meritorious patent claims are going to be 
protected, but if they do not have meritorious patent claims, 
they are not going to be protected, and the new standard that 
is articulated in these various bills would protect us in that 
situation.
    Senator Hatch. Well, thank you. Many patent trolls are 
shell companies with few or no assets, and any court-ordered 
award still leaves defendants holding the bag. In my view, fee 
shifting without the option to seek a bond is like writing a 
check on an empty account. You are purporting to convey 
something that is not, and to obtain a fee award against a 
judgment-proof troll, some have argued for expanding the rules 
on joinder instead of bonding.
    How do you compare the House and Senate joinder proposals 
with the bonding provision I am advocating for in the bill that 
I have presented?
    Mr. Rao. Well, first, I would absolutely agree with you 
that some manner of reaching the real party interest is 
critical to give life to fee shifting. If you are just awarding 
fees, the companies we are being sued by were set up two days 
before the lawsuit. They have a filing cabinet who is their CEO 
in a closet in Texas. There is nothing there. There is no money 
there. Getting a fee award against them is meaningless. So you 
need a way to reach the real party, the investors who are 
driving this problem.
    When we talk about the right way to approach it, we really 
think the bonding approach is the correct way. The problem with 
joinder is there are due process issues with bringing people 
into the case after the judgment. So you have to join these 
people, whoever they are, at the beginning of the case, or at 
least give them notice, and that means in every single case you 
have to notice everybody who might possibly be an interested 
party, even if you do not know if you need fee shifting. And 
then you have to give them the opportunity to renounce their 
interest or engage in the process before you can join them.
    So you are either--you are going to have to set up a 
complicated process for the defendant to join these interested 
parties, which is going to be burdensome and expensive for the 
defendant, and they would have to do it in almost every case.
    The bonding procedure that you have outlined is much 
simpler. You have a hearing. The court has total discretion. 
They may order bond. And there are a bunch of factors the court 
has to look at before they decide to order bond. And the 
factors that are outlined in your proposal protect the small 
inventor. They protect universities, they protect people who 
have the ability to pay. So it is a hearing. Both sides would 
make the argument. The court decides if a bond is appropriate 
or not. And the courts are smart. They know what they are 
looking for in these situations. They know what a patent troll 
looks like. And if it is a small start-up that is 
entrepreneurial, they are not going to require a bond because 
they know it is going to burden their non-patent activities.
    But they look at that company, and they see it is Search 
Retrieval, Incorporated, LLC, who has only been in existence 
for a week, they are going to say, you know, in this particular 
case we probably need a bond. And so that is why we think your 
bond provision is much more effective.
    Senator Hatch. Well, thank you.
    Thanks, Mr. Chairman.
    Chairman Leahy. Thank you very much.
    Senator Hirono.
    Senator Hirono. Thank you, Mr. Chairman.
    I recognize that patent law is a very specialized area of 
the law, and it is very complicated, complex. So I want to be 
sure to understand the impact and potential unintended 
consequences of changes to the patent law.
    Mr. Johnson testified that the innovation ecosystem is very 
sensitive to changes we make to the patent law, so, you know, I 
want to understand what the impacts might be, and I certainly 
would want to hear the perspective of, for example, small 
universities that engage in this kind of research. I would like 
to hear from the entrepreneur, the small inventors, before we 
go forward in a big way. And I am glad that the Chairman 
mentioned that what we are after is, of course, addressing the 
problem of the patent trolls. None of us support those kind of 
activities. I think, though, that--Mr. Chairman, I appreciate 
your saying that we would like to fashion a bill that is 
focused on the problem that we are seeking to address.
    Mr. Dwyer, you testified that you support the bill's 
provisions relating to the FTC being empowered to pursue--to be 
engaged in getting after patent trolls, and also you support 
the disclosures and demand letters, et cetera. Do you think 
that it would be a good idea to also empower State Attorneys 
General to also be able to enforce these kinds of provisions?
    Mr. Dwyer. Senator, honestly, I am not an attorney, and I 
do know that, obviously, in Vermont we have recently passed 
legislation to provide Vermont companies defenses in the 
situation of a patent troll sending letters to Vermont 
companies. So with regard to what State Attorneys General can 
do to follow up, I think the real risk is that if this is 
handled on a State-by-State basis, it would add to the 
complexity that we are very much trapped in in terms of the 
patent law.
    Patent law is federal law. It is something that is decided 
by Congress. So for States to try to put in place enforcement 
capacity or for a State's Attorney General to do so, they are 
oftentimes working in situations where the case is in federal 
court so that it may not be as--there may not be as much 
capacity.
    With regard to the FTC and the regulatory authority, CUNA 
is supportive of that. It is fair to say that whatever--if 
there is legislation passed, that the tactics that are utilized 
by some of the people and some of the entities we are 
discussing will be modified, and they will work within the 
legislation that is passed. And so for FTC to have the 
authority or the rulemaking authority on a limited basis, very 
structured perhaps, but to be able to adapt to those changes 
could assist companies like mine from having to come back and 
see you again, perhaps.
    Senator Hirono. I was going to ask you, Mr. Dwyer, this 
question, because you noted in your testimony that perhaps a 
mandatory joinder would be a way to go. But you are not an 
attorney, so perhaps Mr. Johnson might want to respond to this, 
because the State provisions that we are contemplating only 
come into play if a manufacturer actually agrees to step in, 
and many of them may not want to get involved. And I do not 
know how this option of a manufacturer stepping in, therefore 
resulting in a mandatory stay of those proceedings on the end 
user, how that would help small businesses. But maybe a 
mandatory joinder would work better for small businesses. Mr. 
Johnson, would you like to opine?
    Mr. Johnson. Sure. The biggest problem with joinder is that 
you have to have venue in order to go forward with the 
proceeding. So someone who is so inclined can structure the 
assertion so that joinder of other parties will not be 
available in the jurisdiction that they choose, so it is easily 
avoided, which is why we do not prefer joinder. There are other 
issues that have been mentioned about the need for notice if 
you are going to collect from people, but I do not believe you 
need to join them in order to get that.
    Senator Hirono. Since you are responding right now, Mr. 
Johnson, are you aware of efforts within the judiciary and also 
in the Patent and Trademark Office to address some of the 
concerns that are being raised in today's hearing?
    Mr. Johnson. Yes, I am. The Federal Judicial Conference is 
in the process of addressing many of the issues, especially 
relating to pleading, the pleading requirements, and also 
discovery, the asymmetries in discovery and the best ways in 
which to efficiently manage discovery in patent cases and in 
other complex cases. And, in fact, there are advisory committee 
recommendations out that are currently going through the public 
hearing process. The comment period is open until February. 
This is the normal way that we manage the court docket and 
court procedures, through the Federal Judicial Conference 
process.
    Senator Hirono. I am running out of time so--well, it looks 
as though my time is up. So is it your view that because of the 
very sensitive nature of the innovation ecosystem, we should 
ask the appropriate questions and understand what the 
ramifications of what we are contemplating would be before we 
go forward in a rapid way? I will put it that way.
    Mr. Johnson. Absolutely. While we are focusing on one kind 
of case, the troll type of case here, there are hundreds or 
thousands of different kinds of cases involving different 
technologies, different plaintiffs, different businesses. And 
it is very dangerous to try to enact a one-size-fits-all-type 
approach, especially when it comes to procedures and other 
things. And the courts, fortunately, have the discretion under 
the rules to treat each case the way that is best for them.
    Senator Hirono. Thank you.
    Thank you, Mr. Chairman.
    Chairman Leahy. Thank you very much.
    Senator Lee.
    Senator Lee. Thank you, Mr. Chairman, and thank you, Mr. 
Chairman, for letting me work with you on this legislation, 
which I think is very important. And I want to thank all of our 
witnesses as well for coming. This has been informative.
    Mr. Johnson, let us pick up with you sort of where you left 
off. I am curious to know why you seem to believe that the 
courts, rather than Congress, should address these issues and 
why we might want to wait for the Supreme Court, for example, 
to address the issue in the Octane Fitness case and the 
Highmark case this year before we act? I mean, after all, they 
are interpreting law, and we make the law. So to the extent 
there is ambiguity in the law that is requiring them to address 
it, why couldn't we or why shouldn't we just address it on our 
own?
    Mr. Johnson. Well, you certainly could. The issue here is 
whether the exceptional case standard has been interpreted too 
strictly by the Federal Circuit in its decisions, and the 
Supreme Court seems likely to reinterpret that in order to 
lower the standard for fee awards to hold that exceptional 
cases are more of the kinds of cases we have heard about. And 
if they do that, Congress may feel that it is not necessary to 
act in that way. It is not that Congress cannot or could not do 
that, but then by waiting for the Supreme Court to act, you 
will be able to decide whether the way that they have acted is 
a better way to go forward than whatever legislation you may 
wish to write.
    Senator Lee. Right. But you would not disagree that we 
could also just decide that we want to clarify the issue on our 
own?
    Mr. Johnson. That is the way our government works, yes.
    Senator Lee. Mr. Rao, I wanted to address with you the 
argument that some have been making that perhaps we need to 
give the AIA a chance to work, that, you know, it has been just 
a couple years since it was passed, and maybe the AIA can take 
care of many of these problems that we are trying to address 
through this legislation that we are talking about at this 
hearing today. What do you say in response to that?
    Mr. Rao. Well, the AIA has been enacted and some of the 
provisions have been enacted over a year ago, and a lot of what 
we are talking about today in terms of litigation reform and 
the fee-shifting standard were actually discussed during the 
AIA and decided--we did not move forward on them. So those 
issues were actually discussed, and we did not move forward on 
them, and the provisions we have in the AIA were there to 
address part of the problem but not all of the problem.
    Senator Lee. A different set of problems related 
specifically, more specifically, to litigation involving 
patents.
    Mr. Rao. That is right. And that is the topic we are here 
to discuss today, is how do we rebalance the patent litigation 
system, which has really been untouched by Congress, to ensure 
this activity that we have all been hearing about today is no 
longer economical for these patent trolls. And that is the 
legislation today we will address. The AIA, which is really 
focused on harmonization and patent quality, is not going to 
address this patent troll industry.
    Senator Lee. And as you know, one of the litigation reform 
measures that Chairman Leahy and I have included in this 
legislation deals with the customer problem, when the customer 
is sued, and allows for a stay to be issued in those 
circumstances. Can you just describe for me the kind of 
scenarios in which this might be of help to a company like 
yours?
    Mr. Rao. Sure. So as I mentioned, we sell enterprise 
software to retailers, retailers across the country. In one 
case, we have had to grant indemnification to 10 of our 
customers. They ended up in six different courts across the 
country. And so we filed declaratory judgment in one of those 
courts because we wanted to defend the product in one court. It 
makes it very expensive for a manufacturer to have to defend 
their customers all across the country, and it makes it--
frankly, some manufacturers were reluctant to step in, which 
are some of the problems we have been hearing about today.
    So the ability to get a stay granted allows us to focus the 
resources on one place. It is good for judicial economy. Only 
one judge has to hear. It is the same patent, same product, the 
same validity issues, same infringement issues all being 
decided in one place. And then we can take that decision, and 
then all the other cases can leverage the information from 
that.
    So we really think it is helpful. It certainly would help 
Adobe in its cost management. But we do actually look at it as 
more of a case management issue as opposed to actually 
addressing the patent troll economics that we have talked about 
today.
    Senator Lee. And collateral estoppel would apply as to the 
issues in common.
    Mr. Rao. Correct.
    Senator Lee. Finally, what do you say to those who 
criticize this provision by saying there is a risk that 
defendants will collude--collude so as to put off the 
litigation, collude by agreeing to a stay where it might not be 
appropriate?
    Mr. Rao. Well, first I would say the provision is drafted 
very clearly to balance the patent holder, the manufacturer, 
and the customer's interests. There are three parties who have 
interests here, and so in order to get the stay, the automatic 
stay, the customer and the manufacturer have to consent in 
writing. They have to agree to be bound by the issues. It has 
to be the same patent or product. And then the patent holder 
can get the stay lifted. They can move in the second action and 
say, look, this is not going to resolve a major issue, so the 
stay can be lifted. Or there is going to be some sort of 
manifest injustice or prejudice, and so the stay can be lifted. 
So there is protection built in there for the patent holder in 
case that sort of collusion occurs.
    I will say from an economic perspective, it is rare as a 
manufacturer I am going to step into a case, spend my own money 
for something I am not actually liable for.
    Senator Lee. Fair point. Thank you very much.
    Thank you, Chairman.
    Chairman Leahy. Thank you very much, Senator Lee, and thank 
you--I thanked you before you came in, but I want to thank you 
personally for all your help in developing this legislation.
    Senator Feinstein.
    Senator Feinstein. Thank you very much, Mr. Chairman, and 
thank you for holding this hearing. The one thing that I find 
there is agreement on with the California constituency in this 
area is please have another hearing. And as you know better 
than anybody else, this is such a difficult, complicated arena 
that I have got universities weighing in, and they want an 
opportunity to come to the table. And so I hope that there is 
another hearing.
    One of the things that I have found and that I am very 
concerned about is that the Patent Office, the Patent and 
Trademark Office, in 1990 was changed through a 69-percent user 
fee surcharge so that it became funded entirely through fees 
paid by its users. So it became independent from government 
largesse.
    So what has happened? By 1992, $886 million in fees that 
were paid for the operation of the Patent and Trademark Office 
had been diverted to other uses, and that has been a consistent 
thread.
    Now, the procurement of permanent office space for two new 
satellite offices has been put on hold because of 
sequestration, and this is for an agency that receives no 
taxpayer funds. They are in Colorado and Texas. Detroit has 
gone ahead. And the office in San Jose, California, has only 
gone ahead because San Jose is picking up the charge along with 
California. And San Jose, the city, is providing pro bono 
office space. It should not be that way.
    So it is my intention to introduce a bill that hopefully 
will become an amendment on one of these that will contain a 
provision that these patent fees cannot be diverted, that the 
Patent and Trademark Office should remain wholly self-
supporting. And I hope you, Mr. Chairman, will take that into 
consideration as you move your bill.
    I also wanted to go into this very convoluted process of 
joinder, which I hear a lot of different things about. A 
company with analytics in San Diego told my office of a case 
where they were sued for infringement, and they actually 
managed to obtain an award of costs against the plaintiff for 
filing an unjustified action. However, the plaintiff had only 
$600 in their account. Now, if a separate interest like a hedge 
fund was financially backing the litigation, the proposed 
joinder reforms would have permitted this computer to seek 
recovery of the award against the backer.
    Now, a number of start-ups and small companies have 
criticized the reform as being drafted overly broadly, 
encompassing shareholders and investors. Language has been 
proposed, as I understand it, that would keep paragraph 11 of 
this part of Senator Cornyn's bill, including an owner, co-
owner, assignee, or exclusive licensee of a patent, but would 
replace the reference in paragraph 13 which covers ``any person 
with a direct financial interest in the outcome of the action'' 
with a ``third party providing funds for the litigation in 
return for an investment in the financial outcome but that has 
no other involvement in the litigation.''
    So my question to all of you is: Would this be an 
acceptable compromise? Mr. Johnson, you are smiling.
    Mr. Johnson. Well, it is an interesting proposal, and we 
have always felt that, rather than joinder, recourse is what is 
needed, and that the one way that you can get recourse is to go 
after the people who have a stake in the proceeds of the 
litigation.
    I am not sure I followed your substitution exactly, but it 
sounded like that is what you were after as well, and provided 
appropriate notice provisions were in place so that they knew 
that they were on the hook in the event that a fee award was 
not going to be satisfied, I think you could overcome due 
process issues, which are always a concern, and go after them. 
And I think that the result would likely be that when they put 
together these investment vehicles, they would assure that the 
plaintiff was funded at least enough to cover a fee award or 
they would take that into account. And so I do think that the 
parties would be able to collect the fees if that language 
could be worked out.
    Senator Feinstein. Could Mr. Rao just respond?
    Chairman Leahy. Sure. Mr. Rao.
    Senator Feinstein. Mr. Rao, would you respond? I would like 
to have your--I am not sure of it myself. That is why----
    Mr. Rao. So as I understood the language, I think it said 
that instead of having a direct financial interest, third 
parties would be--could be joined to have no other interest in 
the litigation but were funding the litigation, I think is----
    Senator Feinstein. That is correct.
    Mr. Rao. So I would worry a little bit about this idea that 
they have no other interest in the company. It seems fairly 
easy, then, for the patent troll backer to have some other--if 
this is the law, to say, oh, I have some other interest now, so 
I cannot be joined because I am really not this ``no other 
interest'' party.
    Senator Feinstein. Which I do not want to have happen.
    Mr. Rao. Right, exactly. So that would be my concern with 
that approach.
    Again, I would say, if your start-ups and small companies 
are worried about being dragged unnecessarily, that Senator 
Hatch's bonding provision actually explicitly removed them from 
somebody who might get a bond, and so we do not have a joinder 
issue, they would not be someone the court would attach a bond 
to because they have other activities unrelated to patent 
licensing or patent litigation, and then the bond might avoid 
all of this complication.
    Senator Feinstein. Thank you.
    Thank you, Mr. Chairman.
    Chairman Leahy. Thank you.
    Senator Flake.
    Senator Flake. Thank you, Mr. Chairman.
    Mr. Johnson, it seems that the root of the problem is vague 
and broad patents, some of which are close to expiration. The 
America Invents Act was designed to correct some of that and to 
improve the quality of these patents.
    How has that helped? Mr. Rao seemed to suggest that the 
America Invents Act still will not get at some of these 
litigation issues? Do you share that view? Or has it been given 
time to work? And what can be done besides that?
    Mr. Johnson. Well, first of all, I do not know whether I 
agree with him, but I can say the America Invents Act 
established three new post-grant proceedings which are 
available to people, including people in litigation, if they 
start them in a timely manner, so they can take the patent back 
and challenge the patent in the Patent Office in an 
administrative proceeding. So the idea was indeed that you 
provide a lower-cost forum to bring some of these issues to 
bear, and perhaps that will result in the cancellation of any 
overly broad or invalid claims so that that will be cheaper and 
quicker than what would happen in court.
    That is especially true where there are issues of prior art 
involved, which there always are. But I do think that that is 
one way the America Invents Act will help.
    Of course, the real force of the America Invents Act is 
going to a first-inventor-to-file system with objective 
patentability requirements and getting rid of secret prior art 
so that the Patent Office will be able to do a complete 
examination and do a better job at getting patents out that are 
truly enforceable.
    Senator Flake. Thank you.
    Chairman Leahy. Thank you very much.
    Senator Klobuchar.
    Senator Klobuchar. Thank you very much, Mr. Chairman. I am 
proud to cosponsor your bill and know that this is a really 
important issue in my State. We have many, many companies that 
are innovative, and it is one of the reasons our unemployment 
rate is down to 4.8 percent, the fact that we have invented 
things and make stuff and export to the world. In fact, at 3M, 
we actually have more patents than there are employees, so we 
like to say that we have a patent for each employee.
    I just met recently with about 30 patent lawyers--it was a 
lot of fun--back in my home State for over an hour, and we 
talked about this problem. And I thought one of the most 
startling statistics was that last year 62 percent of all 
patent lawsuits were filed by patent trolls compared to 19 
percent in 2006. So if that statistic does not hit home, I do 
not know what will.
    One of the most amazing stories I heard was a case that 
Smith's Medical, which is a Minnesota medical device company, 
has brought against them for infusion pumps that they make to 
save the lives of patients, including premature babies. They 
were sued by a patent troll who is asserting a patent for a 
fuel delivery nozzle, and the cover page of the patent has a 
diagram of a tractor-trailer on it. They have been forced to 
divert millions of dollars and R&D resources away from 
innovative new solutions and instead are defending against this 
lawsuit. So I love that example because it just shows how out 
of bounds this is.
    The American Intellectual Property Law Association 
estimates that the median litigation cost of a patent case is 
now $2.6 million, an amount that has increased by more than 70 
percent since 2001. So that is why I am so glad that we are 
moving forward with these issues.
    Now, my first question would be of you, Mr. Johnson, that 
example I used. As a medical device manufacturer, how do you 
respond to these? How do you settle them? And I am especially 
interested--and this goes into the small-company issue about 
the stay that I know both the big and small companies are 
interested in, because the customer stay, I think, would help 
to do a better, more unified defense against these atrocious 
suits. Mr. Johnson?
    Mr. Johnson. Thank you. If you do not mind, I will not 
comment on the tractor-trailer patent because my company is a 
defendant----
    Senator Klobuchar. Oh, really?
    Mr. Johnson [continuing]. Because we also provide drugs 
that are infused into the human body, which is alleged to be a 
``container,'' according to the plaintiff. So I will not 
comment on that.
    But I will say that the considerations involving suits 
brought by non-practicing entities against a company are quite 
different than when you are a manufacturing entity and you have 
built a market and you have products out there and then someone 
enters that market who infringes. When they enter the market, 
especially for a medical device type of product, you usually 
cannot get a preliminary injunction because the public interest 
is to keep medical products on the market, at least until it is 
proven that they are infringing. And so you are after, in that 
kind of case, as quick a resolution as you can, not only to 
stop the bleeding if they are taking your market share, but to 
collect lost profits and hopefully to get a permanent 
injunction.
    Now, the provision that you mentioned, the discovery stay, 
is really very hard on manufacturers because it will add 12 to 
18 months to the length of a case. The case will come to a 
virtual standstill while people wrangle over the meaning of 
patent claim terms, and all the while the infringement will 
continue, the market share will be lost, the jobs will be 
threatened, and with no real advantage, because once--they come 
to a decision on what the claims mean, then you start your 
case. And so that is very bad for manufacturing patentees, and 
there was a provision--there is a provision in the Innovation 
Act which starts to address the problem, but stops by saying it 
is only in cases where there are preliminary injunctions. And 
that is not enough. We need to protect all patentees who are 
selling products, who have competitive entries, infringing 
products entering their markets where they are enforcing their 
patents.
    Senator Klobuchar. Anyone else who wants to comment on 
this?
    [No response.]
    Senator Klobuchar. Okay. I think one last question I have 
is that I think we need to be mindful of the importance of 
these intellectual property rights and the correspondence, the 
demand letters that take place each and every day among patent 
owners and innovators to assert their patent rights in good 
faith. And how can we better ensure that patent licenses are 
based on the true value of the inventions claimed in the 
patents rather than on the hold-up value as measured by what a 
defendant is willing to pay in order to avoid the cost of 
litigation? Do you want to tackle that, Mr. Johnson? It is this 
balance of asserting rights but trying to take on the patent 
troll issue at the same time.
    Mr. Johnson. Sure. That is the trick, isn't it? For one 
thing, we know that certain things are required in order to run 
a patent troll business model. You have to assert your patents 
against hundreds or thousands of people, not just a few license 
offers but very large numbers of license offers, and you have 
to make it clear that you are offering--that the reason they 
should settle is to avoid the costs of litigation, not because 
of the merits of the patent.
    So when we look at this, when we start seeing these mass 
demand letters, the widespread blanketing of industries as we 
have heard about today, that is an immediate tipoff--and with 
very low license demands, it is an immediate tipoff that that 
is what you are looking at. And then we can look at the 
behaviors themselves. We have heard it detailed today. The lack 
of information, the misrepresentations, the deceptions are all 
part of that business model. So we focus on that bad behavior 
and address that bad behavior. We can leave the rest of 
American business to operate pretty much as it does now. We 
offer licenses. We receive offers of licenses. We freely 
communicate with our competitors to advise them and be advised 
of patents. We negotiate hundreds of licenses. We pay 
royalties. None of the problems we have heard about affect 
legitimate business. And so as long as we target this at the 
troll behavior, the rest of business should be okay.
    Chairman Leahy. Thank you.
    Senator Hatch, you said you had another follow-up question. 
Go ahead, please.
    Senator Hatch. This has been a very good panel, as far as I 
am concerned. I think you all have acquitted yourselves very, 
very well.
    I have been asked to ask this question on behalf of Senator 
Cornyn. Mr. Rao, in your view, are the reforms in Senator 
Leahy's bill adequate to address the threat from patent trolls 
that you confront? And if not, why not?
    Mr. Rao. Thanks for the question. So I actually do not 
think they are adequate to solve the entire patent troll issue, 
even with Senator Klobuchar's examples that sort of remind us 
why. So in order to disrupt the patent troll problem that we 
have today, we have to look at the economics, and the economics 
are they face no risk from bringing these lawsuits. And when 
their hedge fund investors are choosing to invest in patent 
litigation as an asset class, as we have heard, they are doing 
it because there is no risk to them. They know that if they can 
invest in the patent troll industry, a public company that just 
asserts patents, there is no downside. It is all upside. They 
either walk away from the case, or they collect nuisance 
settlements, or they get the occasional big judgment. But there 
is no penalty for their activity.
    So unless we introduce some economic consequence into this 
behavior, it is not going to stop. So we absolutely need a fee-
shifting provision. Obviously we have talked about the bonding 
provision is important to actually reach back to the real 
parties of interest. And then even the heightened pleading 
issue is really important. As Mr. Johnson just said, part of 
the patent troll activity is sending out hundreds of demand 
letters. Well, they can do that right now because there is no 
requirement under the current law that they state with any 
particularity what their claim is, what the product is at 
issue, you know, even--they may accuse Adobe. They say, ``It is 
all of your products.'' Well, it is not all 200 of our 
products. It is one product that might infringe, but they are 
not required to say. If they were required to say that in the 
law, it would be very hard for them to send out 200 letters 
with that kind of level of detail, and that would also help 
disrupt this model.
    Senator Hatch. Thank you.
    Chairman Leahy. Thank you. I thank this panel very much, 
and we will keep the record open for questions. I thank all the 
Senators who came here. We will take a three- or four-minute 
break while we bring the other panel up. And I am going to ask 
Senator Coons--I have to be at another event for a little bit--
if he could take over as Chair.
    I would ask the panel to stay. I have just been advised 
that Senator Schumer asked this panel to stay. Mr. Rao and Mr. 
Johnson, if you could stay. Apparently----
    Senator Coons. I will offer another question, if I might, 
Mr. Chairman, since we are asking the panel to stay.
    Chairman Leahy. You are going to be chairing, so why don't 
you move up here? And Senator Schumer and Senator Durbin are 
coming back to ask questions.
    Senator Coons [presiding]. If I might continue with this 
panel simply by asking one question. Mr. Johnson, at the very 
conclusion of your response to questions, I think posed by 
Senator Hirono, you closed with a very intriguing question. You 
stated, and I think I am roughly paraphrasing, that it is very 
dangerous to enact a one-size-fits-all solution, and it has a 
potential for a negative impact on the whole ecosystem of 
patenting and innovation.
    Could you expand on that a little bit as we wait for my 
senior Senators?
    Mr. Johnson. Certainly. You mentioned how important it is 
for innovators to get patents that they know that they can 
enforce, and many of the provisions that we have talked about 
today--heightened pleading standards, stays of discovery, core 
discovery limitations, and the like--while they may be 
appropriate for certain cases--and the troll cases are what 
people have had in mind--they may be completely inappropriate 
in other cases, such as the case we talked about with Senator 
Klobuchar, where you have someone who is suffering competitive 
harm, where you have extreme needs to move forward with the 
case rapidly in order to get the competitive relief that you 
need.
    And there are many other different kinds of cases. I mean, 
we have talked about the need, for example, to move the cases 
expeditiously. Many cases do not turn at all on claim 
construction issues. Yes, it is part of what has to be done. 
But many cases involve whether the party is already licensed. 
Or perhaps there is not really a dispute over liability; the 
dispute is really over damages. And the parties, if they move 
quickly to the damages issue, might be able to resolve the 
case. But instead, if you have a one-size-fits-all approach to 
patent cases, you end up going down a road you do not need to 
go down in order to resolve them.
    Senator Coons. Mr. Johnson, I have heard concern, as has 
Senator Hirono and Senator Feinstein, from the university in my 
home State, from a number of small inventors, and from some 
very large players in medical devices and pharmaceuticals who 
express concern that some of these provisions, while they might 
be very effective in ending truly meritless patent troll 
litigation, which have the unintended negative consequence of 
preventing a truly valid patent holder from protecting their 
patent rights.
    How would you narrow the provisions here in a way that 
deals with the behavior that you described in your opening as 
patent trolling without preventing those who need the financing 
to continue to invest, to continue to innovate, who are 
genuinely contributing to the innovation economy without 
harming them and their interests?
    Mr. Johnson. Well, the obvious way to do this is to 
narrowly focus the provisions so that they are not going to 
affect people who are true innovators, who have meritorious or 
good-faith claims. And we have talked about having fee shifting 
decided at the end of the case, when you know whether or not it 
was a frivolous case, as one approach to that. Other approaches 
are to look at the kinds of behavior and recognize who is truly 
innocent, such as the innocent end users. That is not going to 
affect basic innovation.
    But as to some of the other provisions that start to 
impinge on the ability of the patent system to work for 
innovators, I think we should be restrained when we look at 
those. It is important to everyone in this room and everyone in 
the country that universities be able to continue to innovate 
and rely on the patent system. Companies, down-the-stream 
people who take the insights from universities and invest into 
turning them into useful medical devices or pharmaceuticals, 
are the future of health care in this country. It is what is 
going to lower the cost of health care and keep us healthy. We 
cannot do anything to upset the ecosystem and to cut off the 
flow of innovation from the small companies, the start-ups, the 
universities, and independent inventors. We have to be very 
protective of them.
    Senator Coons. Well, thank you, Mr. Johnson. I share that 
concern that we both meet the very real concerns and threats 
facing completely innocent end-user small businesses without 
causing needless harm to what is a very vital and, I think, 
somewhat fragile ecoystem that is unique and vital to our 
economy.
    I believe next is Senator Blumenthal.
    Senator Blumenthal. Thank you, Mr. Chairman.
    I think we all approach this subject with a lot of humility 
because we know how important it is to American invention, job 
creation, and economic growth, but any of us who have been in 
litigation for a while also know that frivolous is often in the 
eye of the beholder. And one of the extraordinary, 
distinguishing features of American democracy is our court 
system, which gives to everyone an equal right to be heard and 
essentially leaves a level playing field so that everyone has 
that right to assert the claims that the law gives to that 
company or individual without undue burdens.
    And so I guess I am wary of overkill. I am wary of 
unintended consequences and of limiting rights without knowing 
what the end results are going to be. And as each of you knows, 
because each of you has been both, I think, the beneficiary and 
perhaps the defendant in cases where rights are asserted, we 
have a very important obligation here to assure that we do no 
harm. First of all, do no harm.
    So let me ask you, Mr. Rao, do you see any unintended 
consequences, any overbreadth here in the legislation either 
that has been passed by the House or now before this Committee?
    Mr. Rao. Thank you for the question. We agree that the 
patent system is complicated, and we do not want to take 
measures that go too far, and Adobe certainly believes that the 
judiciary has an important role to play in case management. But 
we do believe it is also Congress' responsibility to act when 
there is a problem, and I think there is very clear evidence on 
the record that there is a problem and something needs to be 
done.
    When we talk about fee shifting, which is one of the places 
where people talk about barriers to access, again, I will note 
that fee shifting is present in other areas of the law besides 
patent law. There is already fee shifting in the patent law. 
And patent law is, frankly, unique in how high the burden is to 
get fees with the word ``exceptional.''
    So restoring patent law to mimic some of the other areas of 
the law having that fee-shifting standard be similar, I think 
we can take some comfort that there are other areas of the law 
where consumers are regularly being able to file lawsuits. 
Under the Fair Debt Collection Practices Act, for example, 
there is fee shifting. But they can file it, and they are not 
concerned about the fee shifting. And, frankly, they are 
getting their cases heard because there is fee shifting, 
because the damages are low. A contingency fee lawyer is going 
to look at the shifting fees and say, ``I now have an 
opportunity to make some money off of this case.''
    So we can take some comfort from other areas of the law and 
say fee shifting has not suddenly barred the access to justice 
from these plaintiffs, and there is already fee shifting in the 
patent law. So I think we do need to act. I think there is a 
current and real present problem, and I think fee shifting is a 
fairly safe way to address it. And it certainly goes right to 
the heart of the economic problem we have.
    Mr. Makin. Senator, if I might.
    Senator Blumenthal. Yes.
    Mr. Makin. The notion of everyone having access to the 
courts is great and it is part of the American system, but 
unfortunately you have to have money to do that. And small 
businesses are not equipped to utilize the current court system 
in this situation. And it is really--as we continue to debate 
the merits of whether we are going to disenfranchise this 
community or disenfrachise that community, we are going to 
continue to see innocent players hurt--innocent players so hurt 
that they could actually go out of business because----
    Senator Blumenthal. I understand that innocent players are 
hurt by the costs of having to defend what are regarded as 
frivolous lawsuits, and I think we have a responsibility to 
impose responsibility so as to alleviate those costs where they 
are truly frivolous. But I think that our system also has 
trusted in the discretion of courts to dismiss cases. That is 
part of this democracy as well, that we accord a great deal of 
discretion to courts to look to the merits and see whether, in 
fact, claims, valid claims are stated under the law. That is 
the standard.
    And so I think that, you know, I am just looking for a 
limited solution to the problem that you have very well 
outlined here.
    Mr. Johnson, do you have any additional comments?
    Mr. Johnson. I do agree with Mr. Rao that fee shifting 
encourages plaintiffs with meritorious cases to bring their 
actions and discourages plaintiffs who see their actions as 
frivolous to withhold bringing action. And in that sense, I do 
think it is a good balance, it is a good shift.
    But I would point out that the proposals that have been 
made so far are far from the English rule of automatic fee 
shifting. There is some question, given the limitations 
relating to whether the defense--or the claim was substantially 
justified or whether there was undue hardship as to how often 
fees actually will be shifted.
    Senator Blumenthal. Thank you. My time has expired, but I 
want to thank each of you, and I would personally join a number 
of my colleagues in seeking some additional perspectives. And I 
think your thoughts and observations have been very 
illuminating. I think that the Committee would benefit by 
hearing perhaps some additional views as well, and thank you, 
Mr. Chairman.
    Senator Coons. Thank you, Senator Blumenthal. I share your 
concerns about the need for some additional voices.
    Senator Durbin.
    Senator Durbin. Thank you, Mr. Chairman. I thank the panel 
for your patience. I stepped out for a moment, but I was here 
for some earlier testimony.
    It strikes me when we try to take the high-altitude long 
view of this, we are talking about access to our government, in 
this case access to the court system--a concern that we share 
at the legislative level when people argue that, ``Unless I can 
hire a lobbyist, I do not have access to Congress. How do I 
petition for redress of grievances? '' The same question could 
be raised, of course, on the executive branch.
    And so I start with some skepticism when the premise is to 
reduce the access to the judicial system. And in this case, Mr. 
Johnson, I want to make certain that you and I are on the same 
page here, or at least understand the terms similarly. We are 
shifting the presumption, are we not, when it comes to this 
question of fee shifting? Currently, as I understand it--you 
are a practitioner and I am an observer for the most part here. 
Currently, if I want to prove up attorneys' fees, I have got to 
come up with this exceptional test, which, as you mentioned, is 
going to be brought before the Supreme Court. As I understand 
the Goodlatte, Cornyn, and Hatch provisions, the presumption 
shifts and says that I have to prove as the party who is being 
asked to pay, losing party paying, I have to prove, as you 
mentioned here, reasonable justification under law or fact and 
special circumstances that make the award unjust. There is a 
shift of presumption, is there not?
    Mr. Johnson. You understand it absolutely correctly. That 
is what is happening.
    Senator Durbin. So since the trolls are not represented on 
this panel, perhaps on a later panel, but I want to try to 
raise the point that I have been told by people in Illinois, 
that when you think of the mendacious, meddlesome lawsuits that 
cost money and take time and are unfair and so forth, the 
complaints that I have received about this loser-pays fee 
shifting have not come from categories that I consider to be 
adequately described that way.
    For example, I received a letter yesterday from 
Northwestern University, the University of Chicago, and the 
University of Illinois saying that fee-shifting provisions in 
the Goodlatte bill would ``create a powerful disincentive for 
universities to enforce their patent rights.'' The argument, I 
believe, is that you need pretty deep pockets to live under 
this new system, fee-shifting system, because you may end up, 
if it does not turn out your way, holding a pretty big bag of 
obligations. Is that true?
    Mr. Johnson. Well, I am surprised they feel quite as 
strongly about it because they have many litigations, and 
generally if you see yourself as bringing meritorious cases, 
you are going to come out above instead of below the line in 
the end. But I would think in terms of access to the courts 
they would be much more concerned about the possibility of 
having to post bonds under some of the proposals because 
bonding is extremely expensive and in some of the proposals 
would be required in every case without any showing at all that 
there was anything wrong with the claim that was being brought. 
And if you take a small business or a university, the cost of a 
bond can be the full amount of the bond plus additional charges 
on top, which will have to either be posted or assets will have 
to be frozen in order to satisfy the bond. So that to me is a 
much bigger issue in terms of access to the courts than the 
fee-shifting issue.
    Senator Durbin. Understood. This is clearly high-stakes 
legal poker when we are talking about this. But in addition to 
the universities, many small start-ups and independent 
investors have come in with the same worry about fee shifting.
    I would like to address the change in discovery that has 
been proposed in the House bill and Senator Cornyn's bill, 
because the argument comes from Illinois Tool Works--and you 
may be familiar with the company--a large manufacturing 
employer in my State. They are concerned about this provision 
and urge that it not be included in the Senate bill. The letter 
that they sent me said this provision would unnecessarily 
increase the cost of litigation when you limit the discovery to 
meet the Markman ruling, Markman test, between competitors 
where the issues can be easily defined or where the defendant 
can prove through discovery that no infringement occurred.
    Mr. Johnson and anyone else on the panel, do you agree with 
this company's conclusion that this stay of discovery provision 
could have the effect of prolonging litigation and making it 
even more expensive?
    Mr. Johnson. Yes, it will in every case.
    Senator Durbin. Is there anyone who disagrees?
    Mr. Rao. We do. We actually think that Markman is something 
that is part of every case, and so everybody has to reach this 
point. And we also have found--and I think it is fairly 
common--that once the parties agree what the patent is about, 
then there are a lot of cases that end at that point because 
now we know what the patent holder thinks, what the court 
thinks the patent is, and now the patent--either the plaintiff 
or the defendant is in a better position and cases go away. We 
had a case recently where we had Markman, we had a good ruling 
in our favor, so the plaintiff stipulated non-infringement. The 
case was over. They appealed it. And the case just ended right 
there.
    So we actually think in a lot of cases it will actually 
shorten time, because you get to the merits of what is the 
patent about. And then once you know what the patent is about, 
it also reduces the cost of discovery because now discovery can 
be focused on the particular infringement theory that fits this 
claim construction.
    Senator Durbin. So I am just going to close by recalling 
some words from law school. I believe the goal is to create a 
chilling effect on trolls who are misusing and abusing the 
system. It seems to me that it goes too far and it reaches into 
possibly meritorious cases that would be discouraged if not 
stopped by these rules that are really put in place to try to 
deal with the exceptions rather than the rule.
    Thank you, Mr. Chairman.
    Senator Coons. Thank you very much for your questions, 
Senator Durbin.
    I believe next in the first round of questions is Senator 
Schumer.
    Senator Schumer. Thank you. And first let me thank you, Mr. 
Chairman, and the previous Chairman in this hearing for holding 
the panel for me, and that it benefited both Senators 
Blumenthal and Durbin, who came in as well. So thanks. And I 
want to thank Chairman Leahy for his hard work on these issues 
and convening the hearing, and our witnesses for being here 
today.
    I have been very concerned about the problem of patent 
trolls for years, and I think it comes down to two problems: 
one, there are poor-quality patents out there being abused, and 
most businesses, especially small businesses, cannot afford to 
lay out the legal costs to see if they can win.
    Another way to put it is this: Getting hit with a patent 
lawsuit is like being forced onto a highway that has only two 
exits, both of which exact a high toll. You can pay the 
plaintiff either as a settlement or in licensing fees, or you 
pay your lawyers to litigate the case and hopefully win. And we 
all know that patent litigation costs a fortune. It is often 
marginally cheaper and certainly less risky for a defendant to 
pay up front and make the case go away. So it is no surprise 
that the patent trolls take advantage of this, and there is a 
cottage industry of patent trolls now.
    This is particularly galling when patents that are being 
used to sue are of poor quality to begin with. A recent 
PricewaterhouseCoopers study noted that patent trolls lose 85 
percent of the time when they assert business method or 
software patents. But we never see that most of the time 
because small businesses cannot afford to call the trolls on 
their bluff because of the high cost of litigation. Eighty-five 
percent are not good patents. That is outrageous.
    My concern over this issue is why I fought to have Section 
18, the Schumer-Kyl Covered Business Method Patent Program, 
included in the America Invents Act, and the CBM has worked. 
Everyone agrees it has worked. It has provided a cost-effective 
administrative review for the types of poor-quality patents 
that cover intangible methods of doing business. The existing 
review program under Section 18 has only been operational for 
about a year. It is working well and as intended. Nearly 100 
requests for review have been made with the PTO, and the cases 
are proceeding smoothly.
    So the CBM provides a cost-effective off-ramp from the 
patent litigation highway. That is why I introduced the Patent 
Quality Improvement Act earlier this year to expand it and make 
it available to all poor-quality business method patents, not 
simply those that read on financial products or services. We 
need to make it permanent.
    The expansion of Section 18 is especially important for 
small businesses who cannot afford to engage in lengthy 
litigation in hopes of prevailing.
    For any business that actually has been sued, it provides a 
cheaper exit strategy. More broadly, the very existence of this 
off-ramp discourages patent trolls from suing using invalid 
patents. If a troll knows he can no longer trap a defendant in 
expensive litigation, his interest in the suit will diminish.
    At the end of the day, if we do not address the fundamental 
problem of patent quality, trolls continue to abuse poor-
quality patents, and we will be right back having the same 
debate. A patent reform bill that does not address patent 
quality is like treating the symptoms instead of the disease.
    I understand my proposal is not without detractors, but if 
anyone thinks they have valid patents, they should not be 
afraid of a preliminary proceeding. The only people who are 
afraid of this know their patents are invalid. And it is really 
a shame that those who believe in valid patents are so strongly 
defending the invalid patents as well. I find that appalling, 
frankly.
    So let me ask a few questions of our witnesses. I do not 
have too much time left.
    Mr. Makin, I was pleased to see an endorsement of the CBM 
expansion in your testimony. I would like you to explain why it 
is helpful for businesses like those--like your members to have 
it. And, Mr. Dwyer, credit unions are exactly the type of small 
businesses the CBM program is intended to help. Do you agree 
that making it more widely accessible would be a useful tool in 
your fights against patent trolls? Mr. Dwyer first, then Mr. 
Makin, and that is my final question.
    Mr. Dwyer. Senator, first of all, thank you for your 
efforts in providing both credit unions and banks the Section 
18 tool that you described. It is very effective in providing 
financial institutions a way of, as you said, addressing the 
validity of the patents early on, and it is a tool that we all 
appreciate. We do not take a position, as I speak for CUNA, in 
the expansion of it. It is really not a position that we are 
involved in.
    Senator Schumer. Mr. Makin.
    Mr. Makin. Thank you, Senator Schumer. Obviously we applaud 
your fortitude on this issue. It is not a politically popular 
position, but we think it is the right position. You are 
exactly right that small businesses in America are being held 
hostage by the patent trolls who count on leveraging fear and 
the fear of the litigation system to their benefit. They want 
people to settle. They want the low-hanging fruit. They want to 
intimidate people.
    Senator, Tony Soprano has nothing on these patent trolls. 
They are thugs and reprehensible entities. And for us to just 
debate the merits of very esoteric patent legislation when real 
people in this country are hurting through no legitimate fault 
of their own, it is un-American and it is wrong.
    And so we do need to have off-ramps, to use your eloquent 
words, to be able to get out of that system. We want to avoid 
litigation at all costs. Small companies, printers, you name 
it, they are not interested in going into litigation. They are 
afraid. So all these measures after the fact of fees, et 
cetera, are too late. We have already seen the problem.
    Senator Schumer. We have seen in New York many high-tech 
businesses put out of business by illegitimate patent trolls, 
new start-up businesses. We have also seen companies that will 
not even start up because they know they will be pounced upon 
by these patent trolls, and a new business that is just 
starting up cannot afford to hire the lawyers. And I have to 
say, a lot of companies I work with in New York, they are 
protecting their own patents. But it is really wrong for them 
to say, ``I want my protection to be so complete and so great 
that I am going to allow the patent trolls to continue.'' I 
find it disgraceful. Disgraceful. Because this is hurting 
start-up businesses, high-tech businesses, the future of 
America. It is the little people who cannot afford the suits.
    Mr. Makin. Right.
    Senator Schumer. The future of America. So your words were 
very strong, Mr. Makin.
    Mr. Makin. Thank you.
    Senator Schumer. I tend to think they were appropriate in 
this particular case, and I would urge those larger companies, 
those large universities that have the ability and have counsel 
on their staff to look at this carefully for the good of the 
country. It does not hurt you to go to court. It hurts the 
small businesses that are represented here. And, again, in New 
York, when you ask our high-tech businesses, our booming high-
tech businesses, what is their number one problem, it is 
probably getting good people. That is why we need an 
immigration bill. Their number two problem is the patent 
trolls. Seriously.
    Thank you, Mr. Chairman. Sorry I went on. I feel really 
strongly about this issue.
    Senator Coons. Senator Lee has got a second question.
    Senator Lee. Thank you very much, Mr. Chairman.
    First of all, I would like to ask Mr. Rao and Mr. Johnson 
if they would like to respond to the argument that we need to 
expand CBM and also, secondarily, whether that impacts, whether 
that lessens the need for patent litigation reform like fee 
shifting or anything else.
    Mr. Rao. I will go first. So I do think that CBM, the 
Covered Business Method Patent Program, was sort of referred to 
as an off-ramp, but it is still expensive. You still have to 
hire a lawyer to prepare the petition. You still have to spend 
hundreds of thousands of dollars to go through the process. So 
it is not a free process. It is not a solution for small 
businesses to say, ``I can avoid a patent troll litigation 
without spending any money.'' And typically people are only 
going to file this while they are in litigation. No one is 
going to incur this cost, especially not small businesses, just 
because they got a letter. They are going to incur this cost if 
they have been sued. So they are already in the mix once this 
has happened, and that is why we think the other provisions are 
much more important because they are a disincentive and a 
disruption to the business model. Fee shifting is a disruption 
to the business model, and without that disruption, these acts 
are going to continue.
    And I think Senator Klobuchar's example of the medical 
device patent troll is another example of you may take away a 
particular field from the patent troll, but if you do not 
disrupt the business model, they are just going to move to 
another place that is not covered and then flourish there.
    So we really need to address the economics as opposed to 
just this one particular issue.
    Senator Lee. Mr. Johnson, do you concur with that?
    Mr. Johnson. The covered business method patent provision 
is a transitional program that was put into the America Invents 
Act because of a very small class of patents that was perceived 
to have quality problems, having been issued after the State 
Street Bank decision and before In re Bilski cabined down the 
number--the type of patents. And therefore, it's titled a 
transition program, it was designed to sunset, and it was 
designed to address a very narrow slice of financial services 
business method patents, and the legislative history on that is 
very clear.
    The rest of the AIA puts in overarching post-grant 
proceedings, the post-grant reviews and the inter partes 
reviews that are available for all patents, in the case of 
inter partes reviews for the life of the patents.
    Senator Lee. And do any of those reforms obviate the need 
for any of the reforms we are discussing today?
    Mr. Johnson. No. The reforms that we have recommended 
assume that those programs will stay in place and that they 
will be part of the solution going forward, but that more is 
needed.
    Senator Lee. Thank you. And, Mr. Rao, how do you respond to 
the argument that access to justice will be limited? You know, 
whether it is Brigham Young University or some other university 
or some other entity or individual who wants to sue, do they 
still have access to justice? And how do you respond to this 
point that their access to justice will be unfairly, unjustly 
limited by fee shifting?
    Mr. Rao. I think we have discussed the issues around how 
fee shifting can actually help plaintiffs have access to 
justice because with the ability to get fees from the 
defendant, they are going to be able to retain contingency fee 
lawyers who are going to be able to take the fees in case the 
damages are low. So I think the point we have not, maybe, 
discussed as much--Mr. Johnson did touch on it--is why the fee-
shifting standard is not a burden for the universities. And, 
again, the fee-shifting statutes that we have been discussing 
all have this provision that says if you have got a 
substantially justified position, the fees are not going to 
shift. The court has discretion to not shift the fees. And if 
your university--Adobe collaborates with a lot of universities. 
A lot of the technologies that enter into our products like 
Photoshop are the result of university collaborations. We 
license patents from universities. These are high-quality 
patents. I do not really feel that they should be the ones who 
are worrying about meeting this bar. This bar is fairly low. 
And it seems to us that the universities are going to be able 
to meet it.
    Senator Lee. With regard to some of the pleading 
requirements and the filing requirements that we have talked 
about, aren't we really talking about infringement here? In a 
real property context, if somebody infringed your property, you 
would want to identify the metes and bounds of the property 
alleged to have been infringed. Isn't that all we are doing 
here? And wouldn't it be unwise for us not to require that kind 
of metes and bounds description?
    Mr. Rao. Absolutely. We do believe that the heightened 
pleading requirement that we have been discussing is merely 
setting forth the basic information that we think they should 
know anyway, any patent holder has to know anyway, in order to 
satisfy the federal rules. They need to know this information. 
Unfortunately they are not required to disclose this 
information today, and so this heightened pleading requirement 
will force them to say what the patent is, who they are, is 
there a real party of interest. They have to say what product 
is being accused, and, amazingly, today they do not have to say 
what product is being accused. And they have to allege a theory 
of infringement, which is very helpful for the defendant to 
understand why they think the product is being infringed.
    So these are the basic requirements that we think should be 
part of every patent case, and very similar to the real 
property concerns that you mentioned.
    Senator Lee. Thank you. I see my time has expired. Thank 
you, Chairman.
    Senator Coons. Thank you, Senator Lee.
    Senator Whitehouse.
    Senator Whitehouse. Thank you, Chairman.
    Rhode Island is facing this same problem. Darrell Ross is 
the CEO of Ross-Simons, which is a big retailer of jewelry. He 
writes that ``At Ross-Simons, we have been the target of a 
number of these frivolous patent troll threat letters and 
lawsuits, faced with years of expensive litigation versus 
paying a license fee. We often settle even though we believe 
the underlying patent is of highly dubious quality. This is 
extremely frustrating and diverts capital that could otherwise 
be used to invest in our business, to create jobs, refurbish 
stores, and better serve our customers.''
    We have a start-up accelerator named Betaspring, and Allan 
Tear, who is its founder, states ``Small businesses, like the 
tech start-ups we work with, are forced to settle these 
challenges out of court as they lack the financial resources 
necessary to fight back against patent troll's frivolous 
infringement claims. That is billions of dollars every year 
that could go toward developing innovative new products and 
services that is instead going to patent trolls.''
    David Baeder is the founder and CEO of a Cranston-based 
messaging technology and communications company called Alert 
Solutions. He says, ``Alert Solutions has received a number of 
threat letters from patent trolls claiming infringements 
related to things as basic as sending emails and faxes.''
    And I could go on. We have industry leaders like Charlie 
Kroll and Kathy Shields who have written about this in the 
Providence Business News. We have a good Providence Journal 
commentary on this by Rhode Island business advocates Michael 
Beckerman and Paul DeRoche. And I would ask unanimous consent 
that letters of support from the Greater Providence and Newport 
County Chambers of Commerce be added to the record.
    Senator Coons. Without objection.
    [The letters appear as submissions for the record.]
    Senator Whitehouse. I raise all that to say that, you know, 
I think Rhode Island is very much with you and attentive to 
these concerns. But I would humbly suggest some advice to you, 
and that is that, first off, you have a pearl beyond price. You 
have a bill that the House has passed. The House has not been 
very effective at passing legislation recently, unless it is 
the 42nd repeal of Obamacare, as you may have noticed. So being 
able to get a bill through the House is very significant.
    You now need to get a bill through the Senate, and it will 
then go to conference with the House bill, and that conference 
will be a very important conference. You do not want to 
vindicate your ire at the deplorable conduct of these patent 
trolls at the expense of getting a bill through the Senate, 
because you do not get to conference if you do not get that. So 
be as flexible as you can be to get a bill through the Senate 
that can then get you into conference with the House.
    And do bear in mind, as you face these choices, that there 
are very strong interests here in Washington that have very 
strong ulterior motives to try to knock down and diminish the 
civil justice system as much as they can because, frankly, big 
corporations do not like being sued. They like coming to the 
branches of government where they have greased them with 
campaign contributions and lots of lobbyists and super PAC 
threats and all that good stuff. They do not like getting in 
front of a civil jury, for instance, where if you try to tamper 
with them, it is a crime and where they have to stand equal 
before the law with ordinary mortals.
    So beware of pushing or being pushed too far into that 
fight. That is not a fight you need to have. You need to get a 
bill through the Senate that gets you into conference with the 
House. And then the conferees, I think, can work on sensible 
legislation that will help get after these patent trolls while 
protecting the innocent garage inventor who is still, I think, 
at the heart of all of your concerns. It is not any of your 
desire, as I understand it, to roll over the garage inventor 
who has a legitimate claim but no resources, really, to defend 
it with. So for what it is worth, Mr. Chairman, those are my 
hopes for progress going forward.
    Senator Coons. Thank you very much, Senator Whitehouse, and 
thank you very much to the four members of our first panel. 
This has been a broad and rich and informative conversation, 
and I look forward to our second panel, which also includes a 
wide range of practitioners. I think a number of us have 
expressed concerns that we still want to hear from, at some 
future hearing, representatives of universities and small 
inventors, but I look forward to the second panel and we will 
thank the first panel.
    Senator Coons. Ladies and gentlemen, I would like to 
continue this hearing and proceed to the second panel, if we 
might. Folks, if we could have order in the room, please, so we 
could proceed with the second panel of this hearing.
    Let me briefly introduce our next three witnesses and then 
ask you to proceed in series to your opening statements.
    First, Dr. Steve Bossone is the vice president for 
intellectual property at the biotech company Alnylam in 
Cambridge, Massachusetts, and you will correct my pronunciation 
if that was wrong, Dr. Bossone. Dr. Bossone has unique 
experience on this panel as he has worked both as a lawyer and 
a scientist in the field of biotechnology. He joined Alnylam in 
2010 and previously was senior patent attorney at Shire. He 
began his career at Millennium Biotherapeutics, where he worked 
as a scientist in oncology. Dr. Bossone received his doctorate 
from SUNY Stony Brook and law degree from Suffolk. Thank you 
for joining us today.
    Mr. Harry Wolin is senior VP and general counsel for AMD, 
Advanced Micro Devices. He joined AMD in 2000 and served as VP 
for intellectual property before he became general counsel in 
2003. Prior to joining AMD, he spent 12 years at Motorola. Mr. 
Wolin also serves on the Board of Governors of LifeWorks, one 
of the largest nonprofit organizations in the Austin, Texas, 
area. He received his undergraduate degree from the University 
of Arizona and his law degree from Arizona State. Thank you for 
joining us, Mr. Wolin.
    And Mr. Dickinson, the Honorable Q. Todd Dickinson, is the 
executive director of the AIPLA. Mr. Dickinson also has 
extensive experience in the intellectual property field, having 
served as Under Secretary of Commerce and Director of the 
Patent and Trademark Office. Mr. Dickinson has served as vice 
chair of the Intellectual Property Law Section of the American 
Bar Association and on the executive committee of the 
Intellectual Property Owners Association. He received his 
bachelor's degree from Allegheny and law degree from the 
University of Pittsburgh.
    Gentlemen, thank you so much for joining us. If I might 
invite you to make your opening statements first, Dr. Bossone.

STATEMENT OF STEVE BOSSONE, PH.D., VICE PRESIDENT, INTELLECTUAL 
  PROPERTY, ALNYLAM PHARMACEUTICALS, CAMBRIDGE, MASSACHUSETTS

    Mr. Bossone. Senator Coons, Members of the Judiciary 
Committee, thank you for inviting me today to testify on the 
subject of protecting small businesses and promoting innovation 
through further patent reform.
    By way of personal introduction, I am vice president of 
intellectual property at Alnylam Pharmaceuticals in Cambridge. 
I am a registered patent attorney and have a Ph.D. in 
experimental biology and over 18 years' experience in the 
biotech field, both as a bench scientist and as a lawyer. While 
I speak today on behalf of Alnylam, my views are informed by 
the shared corporate experience of many of my colleagues in the 
biotech industry from companies both large and small.
    Alnylam is an innovator company. We actively practice our 
intellectual property to develop cutting-edge medicines for 
patients suffering from diseases such as liver cancer, heart 
disease, and many other serious conditions.
    My emphasis today is going to be on the collateral impact 
of pending legislation on investment-intensive innovation, 
especially in the life sciences sector. And to start, I would 
like to share with you three things my experience has taught me 
relevant to today's hearing.
    First, the interplay or, as some have termed it, the 
``innovative ecosystem'' of university research, technology 
transfer to the private sector, venture capital funding, and 
industry collaborations, all contributing to drug development, 
is a lengthy, expensive, and high-risk enterprise.
    Second, changes that create uncertainty about the strength 
and enforceability of patents threaten to perturb this 
interplay and the jobs created by hundreds, if not thousands, 
of companies such as ours.
    And, third, this perturbation has real health care 
consequences, namely, patients, caregivers, and families who 
are affected by life-threatening and debilitating illnesses and 
are counting on these partnerships to produce the next wave of 
cures and therapies for so many currently unmet medical needs. 
Let us not ignore them in this debate over patent litigation 
reform.
    So I am here today not to defend or attack the abusive 
patent enforcement practices of the so-called patent trolls. I 
am here today because I am concerned that many of the 
proponents of patent litigation reform, in their well-
intentioned efforts to curb objectionable patent enforcement 
practices, are clamoring to remake the patent litigation system 
in fundamental and untested ways while insufficient 
consideration is given to the impact of these changes on the 
vast majority of those companies like Alnylam who engage in 
legitimate and good-faith patent licensing and enforcement.
    I am also concerned that several of the pending bills 
threaten to selectively strip the courts in patent cases of the 
discretion to allow legitimate cases to proceed unencumbered by 
needless and sometimes senseless procedural obstacles. These 
concerns are especially acute for fields such as biotech, which 
is largely made up of small investment-intensive businesses 
like Alnylam that are at the cutting edge of innovation in 
America. We are particularly concerned with several of the 
pending litigation provisions such as routine delays of 
discovery until claim construction hearings have taken place, 
excessive pleading requirements, and the byzantine, overly 
broad joinder and fee-shifting provisions. These and other 
proposals routinely and indiscriminately increase cost, risk, 
and delay for all the patent owners and licensees who must 
protect and enforce their patents, and cause serious harm, 
especially to the life sciences innovators.
    We do believe, on the other hand, that willing 
manufacturers should be better enabled to step in and relief 
infringement litigation pressure on their small business 
customers and end users. But the scope of such a provision 
needs to be carefully tailored to avoid allowing such 
manufacturers to deflect their own liability to their parts 
suppliers, for example.
    As the Committee assesses the impact of such proposals on 
the life sciences sector, I ask that you consider the views 
submitted by our research partners in academia as well as the 
views of the venture capital community, without whom many 
inventions would never be developed into life-saving products.
    We are all united in supporting targeted reforms that will 
protect all of us from unscrupulous patent assertion 
activities. But we also firmly believe that if we do not go 
about such reforms in the right way, the long-term costs to the 
entire innovation sector and overall American job creation will 
be far greater than any short-term benefits that might accrue 
primarily to large companies in one or two sectors of our 
economy.
    I commend Chairman Leahy for holding this hearing with a 
variety of stakeholder perspectives. I urge the Committee and 
the full Senate to proceed thoughtfully in this complex area 
and to focus on those reforms that would clearly target abusive 
behavior without undermining the ability of small investment-
intensive businesses to rely on the enforceability of their key 
business assets--their patents.
    I appreciate your attention to our concerns and am happy to 
take any questions. And I also would like to ask that a letter 
from the Biotechnology Industry Organization dated December 3, 
2012, be made part of the hearing record.
    Thank you very much.
    [The prepared statement of Mr. Bossone appears as a 
submission for the record.]
    Senator Coons. Thank you, Dr. Bossone. The letter will be 
made a part of the record, without objection.
    Mr. Bossone. Thank you.
    Senator Coons. Mr. Wolin.

  STATEMENT OF HARRY A. WOLIN, SENIOR VICE PRESIDENT, GENERAL 
 COUNSEL AND SECRETARY, ADVANCED MICRO DEVICES, INC., AUSTIN, 
                             TEXAS

    Mr. Wolin. Thank you, Mr. Chairman.
    Mr. Chairman and Members of the Committee, thank you for 
the opportunity to share information about abuses plaguing the 
U.S. patent system and the significant harm they are causing to 
U.S. companies and the U.S. economy. I am the senior vice 
president, general counsel, and secretary of AMD. I am also a 
registered patent attorney and spent the last 25 years working 
for technology companies on IP protection, licensing, and 
enforcement. AMD has been both a plaintiff and a defendant in 
patent litigation matters, and I share that perspective in my 
testimony today.
    AMD is a semiconductor company headquartered in Silicon 
Valley. We design technology that powers personal computers, 
some of the U.S. Government's most powerful supercomputers, and 
game consoles like the new Microsoft Xbox One and Sony 
Playstation 4.
    AMD invests approximately 20 percent of our annual revenues 
on research and development activities, and we have built a 
large patent portfolio that represents an investment of many 
billions of dollars. AMD's business depends on our ability to 
vigorously protect our IP.
    Each year, AMD is forced to spend millions of dollars to 
defend against patent infringement allegations that are often 
completely unfounded. Every dollar we spend to defend against a 
frivolous claim reduces the number of jobs we can create or we 
can retain. In my written testimony, I have provided two 
examples of lawsuits faced by AMD that demonstrate the cost, 
harm, and disruption that patent litigation abuses impose. 
These cases demonstrate that defending against frivolous patent 
cases is very expensive and that discovery is often used as a 
weapon to drive up costs in approaching an often meritless 
settlement.
    The courts do not have the tools needed to address these 
problems, and without legislative reform, the current abuses 
will continue. We are encouraged by the legislation introduced 
by Senators Leahy and Lee which will increase transparency by 
shedding light on the patent marketplace and curb the abusive 
practice of mass mailing frivolous demand letters in the hope 
of securing settlements from unsuspecting victims.
    These provisions alone, however, are insufficient to 
address widespread abuses plaguing our patent system. We urge 
the Committee to include the heightened pleading, discovery 
reform, and fee-shifting provisions, such as those found in the 
bill cosponsored by Senators Cornyn and Grassley. We note that 
these provisions are included in the Innovation Act, which was 
overwhelmingly passed by the House earlier this month. This was 
an encouraging show of bipartisan support, and the bill also 
has the support of the White House.
    First, heightened pleading requirements will require a 
plaintiff to allege patent infringement with specificity, 
identifying the particular products at issue and the 
plaintiff's reason for believing that these products infringe. 
This provision will require the plaintiffs to do their homework 
before subjecting a defendant to millions of dollars in 
attorneys' fees and expenses, reducing the number of frivolous 
lawsuits clogging our courts, and without placing an 
unreasonable burden on legitimate plaintiffs of any size.
    Second, discovery reforms will reduce the cost and the 
efficiency of discovery in patent cases--I am sorry--and 
improve the efficiency. Discovery cost shifting will 
dramatically reduce a litigant's ability to use discovery as a 
tool to increase an opponent's cost. The discovery staging 
proposals are even more important to reduce cost and 
inefficiency because a claim construction order will often 
simplify the disputed issues. This makes it clear what 
discovery is necessary.
    Third, attorney fee shifting will provide a particularly 
strong deterrent to frivolous patent suits. Today many patent 
assertion entities have little risk in litigating meritless 
claims. A defendant, however, is almost always assured of high 
litigation costs. The risk-reward imbalance results in uneven 
bargaining power, which is often used to unfairly extract 
settlements. This imbalance can be corrected by enacting 
legislation that awards attorneys' fees and expenses to the 
prevailing party when the losing party does not have a 
justified position. This provision will have no effect on 
legitimate plaintiffs who justifiably pursue their claims.
    Finally, I urge the Committee to act quickly. Unwarranted 
patent litigation acts to the detriment of U.S. companies of 
all sizes as well as to consumers and the U.S. economy.
    [The prepared statement of Mr. Wolin appears as a 
submission for the record.]
    Senator Coons. Thank you, Mr. Wolin.
    Mr. Dickinson.

    STATEMENT OF THE HONORABLE Q. TODD DICKINSON, EXECUTIVE 
 DIRECTOR, AMERICAN INTELLECTUAL PROPERTY LAW ASSOCIATION, AND 
FORMER UNDER SECRETARY FOR INTELLECTUAL PROPERTY AND DIRECTOR, 
     U.S. PATENT AND TRADEMARK OFFICE, ARLINGTON, VIRGINIA

    Mr. Dickinson. Senator Coons and distinguished Members of 
the Judiciary Committee, on behalf of the American IP Law 
Association, I would like to thank you for the opportunity to 
present our views today.
    Founded 116 years ago as the American Patent Law 
Association, and with 15,000 members, we believe that AIPLA 
brings a unique perspective to the questions before this 
Committee. We are lawyers, we are judges, we are law professors 
and patent examiners, and our members represent a diverse 
spectrum of policy and p kc issues.
    Accordingly, when we as an organization develop our 
positions, we try to achieve a necessary consensus, and to do 
that we must strive to find not what is right for this entity 
or that technology, but hopefully what will achieve the best 
outcome for the intellectual property system as a whole.
    Also, as you noted in your introduction, prior to becoming 
the executive director, I was also the Under Secretary of 
Commerce for IP and the Director of the USPTO, and so I come 
here today to address these issues with the benefit of those 
perspectives.
    We once again find ourselves discussing the issue of the 
behavior of certain patent owners, and as far back as 2005, we 
came before you to testify on this same broad question. Someone 
who owns a patent was using the procedures of patent litigation 
in an infringement dispute with another party, often in a high-
tech field. The specific litigation issues then were different. 
Injunctive relief and damages were on the table then, but the 
charge was the same: that the state of these legal issues at 
the time gave too much power to the patent owner in settlement 
discussions.
    You will recall that we spent almost six years together 
debating, tinkering with language, trying to find good 
compromises. You did that. We did that together. We found 
collectively broad support, and the Senate passed the Leahy-
Smith America Invents Act, which we at AIPLA were proud to 
support.
    So what brings us back here today only two years later? 
Well, a key aspect of that business has changed. It has been 
addressed many times today. Before, it was primarily large 
aggregators going after large businesses. Now you have this 
phenomenon of widespread distribution of demand letters to 
small end users with little experience with the system and less 
resources. Vaguely worded, overthreatening, and very persistent 
are the folks who send these letters.
    We believe that this is a significant and corrosive 
problem, not only for those on the receiving end but one that 
undermines the American public's confidence in the patent 
system as a whole. We also believe, however, that it is a focus 
problem that we should deal with in a focused way. Fortunately 
many of the provisions of S. 1720 hone in on this problem in 
just that way.
    So in that light, let me turn to our broader 
recommendations today.
    First, I was very pleased to hear Senator Feinstein address 
the--and I would be very remiss as a past Director of the USPTO 
if I did not address the question of funding for the PTO, 
sustainable funding. No issue is more important to the quality 
of patents overall and to solving the issues that come before 
us today than solving that problem. You all, we all thought 
that that problem was solved in the AIA. We thought we put it 
to bed. And less than two years later, the problem came back 
again, this time in sequestration. We have to solve this 
problem. The stakeholders need it and the system needs it.
    But, first, to other issues, we find that we feel it is 
important to let the reforms of the AIA have a chance to do 
their work. As we said, one of the major reforms to deal with 
the troll issue was the expansion of the post-grant processes 
in the PTO. These were intended to create alternative means to 
improve the quality or challenge the validity of patents in 
lower-cost, expedited proceedings. Now, these various post-
grant processes have only recently come online. There has only 
been one CBM case proceeding to completion, and the first PGR 
case was just filed. Early indications are that these 
procedures are working as they were intended, and as a former 
Director of the USPTO, I urge you to let the PTO processes play 
forward before we consider changing them or instituting other 
options. We do not know where this is all going to lead. It is 
too soon to start experimenting again.
    Second, the courts continue to understand and deal with the 
problems of reform as they did during the debates on the AIA. 
Back then, on litigation after litigation issue, whether it was 
injunctions or damages or willfulness or venue or obviousness, 
they reformed surgically and deliberately. And this continues, 
as has been pointed out. Just this term, the Supreme Court will 
take up the issue of fee shifting. AIPLA has filed amicus 
briefs in both those cases, and we have advocated a more 
aggressive approach in the awarding of such fees.
    On the procedural side, the Judicial Conference, the body 
charged by statute with promulgating procedural rules, has 
gotten the message, and they have begun to draft rules which 
will govern patent trials more uniformly.
    Third, more reliable data is needed to understand the 
nature and scope of the problem. For example, a lot of early 
studies came out that suggested big increases in patent 
litigation were due to patent assertion entities. Recently, 
however, more empirically based studies suggest that any 
increase is due to other causes, in particular the unintended 
consequences of the joinder provisions of the AIA.
    Finally, and most importantly, we need to remember that 
some of these proposals apply to all patent holders, not just 
the bad actors, and we need to assure that attempted solutions 
are not so broad that they have unintended consequences.
    I was going to turn to some of the provisions of 1720, but 
I see the time is running out, and so I will let my written 
statement speak for itself. But let me address specifically, 
however, the one issue that I touched on, and that is, bad-
faith demand letters.
    We believe this is primarily a consumer fraud issue and it 
is best dealt with by those traditionally tasked with combating 
it, such as the FTC and the State Attorneys General. And we 
urge you to consider the fact that those entities have dealt 
with these as consumer fraud and are to be charged with doing 
it again. However, care is needed, however, to make sure that 
the proposals do not impede legitimate licensing activities.
    Excuse me, Mr. Chairman.
    As a Time Magazine poll recently noted, our patent system 
is the envy of the world and the gold standard of protection. 
Forty percent of respondents, more than four times the next 
closest nation, viewed the U.S. as the country that does ``the 
best job of protecting ideas.'' We need to remember that the 
stewards of that system, when considering changes to it, need 
to take a sober, careful, and empirical view of the concerns at 
hand and deliver a measured and appropriate response.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Dickinson appears as a 
submission for the record.]
    Senator Coons. Thank you very much, Mr. Dickinson. And I 
take to heart, given the breadth and the character of the 
organization you represent and its unique role in America's 
intellectual property system, the charge for us to take a 
measured and thoughtful review here and to focus in our 
potential solutions.
    You have suggested that it is too early for us to start 
experimenting again, that we took six years to craft the Leahy-
Smith America Invents Act, and that it is just a few years past 
that, and that we do not have enough empirical evidence to 
really draw concise conclusions about what is the scope of the 
patent troll phenomenon. And you urged us to find a focused 
solution to that problem.
    Let me support Senator Feinstein's call for more PTO 
funding dealing with the quality of patents and patent issuance 
by providing the PTO the resources it so badly needs and richly 
deserves, in part by ending diversion, I think should be one of 
our first priorities.
    But I would be interested if you would speak to the patent 
quality improvement programs embedded in the AIA. You briefly 
referenced that post-grant review, inter partes review, the CBM 
transitional program were all just beginning to work. Given the 
claims made in the first panel that this is a widespread 
terrible problem that is really affecting small businesses 
across the country, how long would you ask them to wait for the 
AIA to work? Or as you suggested, do you think there are other 
consumer fraud-based mechanisms or the specific provisions that 
have to do with engaging the FTC in the Leahy-Lee bill that 
could appropriately deal with this without causing needless 
harm?
    Mr. Dickinson. Thank you, Mr. Chairman. To go to your first 
point, I absolutely believe that the USPTO was given the 
charter by the AIA to take up this broad question of improving 
the quality of patents, and that is, for example, as the GAO 
study indicated, at the heart, at the root in many ways of the 
troll problem that we are discussing today.
    And so the principal recommendation that came out of the 
National Academy study that started the whole thing back at the 
turn of the last century was to have very vibrant, robust post-
grant processes, a post-grant system, which we did not really 
have.
    It comes in two types, and it was the product of a very 
careful, very long-discussed negotiation. There is a first part 
called the post-grant review, called the first window 
sometimes. It is a fairly wide-open process. Almost any grounds 
can be used during that process. It comes right after the 
patent issues, and it allows third parties to come in and to 
make the case that the PTO overlooked something, there was some 
art they were not aware of, there was an argument not made, and 
that office is charged within nine months of taking care of 
that.
    We urge that most people--we hope that most people will use 
that process, and we think there are things built in that would 
incent that process. We also, by the way, support the 
clarification and a correction of the estoppel provision in 
that, which we believe would do the same thing, to try to get 
people to use that process early before investments are made, 
before jobs are created, before people have relied on those 
patents down the road.
    The second phase is a rework of the traditional re-
examination process, now called inter partes review. It is a 
somewhat higher threshold. It relies on traditional factors 
like the use of patents and publications, and it is available 
throughout the life of the patent as that patent progresses 
through the system.
    The CBM we have significant difficulties with. We think the 
better approach, by far, since that was intended to attack a 
very, very narrow slice of patents for a short period of time, 
the kinds of things, for example, which Senator Schumer was 
addressing, can be best addressed in the IPR system.
    Senator Coons. Thank you, Mr. Dickinson.
    Dr. Bossone, before my time runs out, if I might, I was 
interested in Alnylam and its specific sort of example. This is 
a company that is investing a huge amount of money in 
developing new intellectual property in inventions that could 
have a significant impact on human health and the quality of 
life. But you have to get investors to buy into and support 
your commercialization efforts.
    How would the loser-pay rule or the other provisions, the 
procedural obstacles that I think you suggested were excessive, 
if adopted, how would they impact the balance of power between 
a start-up innovator and a larger company if it is infringing 
your patents? How would it impact your ability to attract 
investors and to get the capital formation that you need to 
continue to invent and innovate?
    Mr. Bossone. Senator Coons, you are actually correct. We 
would be impacted in a negative way if all of these provisions 
in these bills were put in in the aggregate. For instance, in 
fee shifting, if we were to enforce our patents and there was 
the threat that, you know, considering the vagaries of 
litigation that we could lose, we may have to make a hard 
choice of whether actually to file that litigation in the first 
place. I am the one that actually has to go before the board 
and justify filing this litigation, knowing that the cost 
associated with filing the litigation has to come from 
someplace else. So maybe it is a clinical study that we would 
not be able to complete.
    Now you add the added burden of shifting fees in a case 
where I cannot predict whether I am going to win or lose. I 
think I have a good case, but the standard that has been 
proposed, you know, is the same standard that has been adopted 
from the Equal Access to Justice Act where, you know, veterans 
who have lost benefits will sue the government and then they 
will try to get, you know, the government to pay. And I think 
in about 30 percent of the cases the government cannot meet 
that burden.
    So I would have to then say maybe there is a 30-percent 
chance that we are going to have to pay if we lose. So that may 
make a difference with my being able to assert these patents. 
If I cannot assert these patents, what value do they have to a 
large company? So if the company knows that I am not going to 
be able to assert these patents, what is the incentive for them 
to actually license these patents from us?
    We have had a great deal of success in offering these 
patents for license. We have taken that money, put it into our 
R&D. We have accelerated development to a point where our 
technology was discovered in 1998 in the worm, and a mere six 
years later, because of this, you know, intellectual property 
that we held, using it to attract investors, taking that money, 
putting it into our business, six years later we actually had 
clinical trials in humans. So this would negatively impact our 
ability to get this capital that we need.
    Senator Coons. Dr. Bossone, just in closing, to summarize, 
if we were to adopt all the provisions that are in the House 
bill--fee shifting, discovery limitations, customer stays--in 
your view, for your company, the ability to the raise the 
capital to continue with innovation would be significantly 
harmed and your ability to assert your patent rights would be 
significantly harmed, and those would be of some significance 
or consequence, and thus those proposals might be overreach if 
that is the way we are trying to stop a class of baseless 
demand letters that are really problematic for commercial 
businesses, retailers, but that are not involved in innovation. 
Is that your testimony today?
    Mr. Bossone. That is exactly correct.
    Senator Coons. Thank you, Dr. Bossone.
    I will turn to Senator Lee.
    Senator Lee. Thank you very much, Mr. Chairman.
    Mr. Wolin, I would like to ask you a couple of questions. 
First of all, we have heard today some examples of how patent 
litigation abuse can negatively impact businesses. But, of 
course, before we enact legislation, we need to make sure that 
there is empirical evidence behind the data to back up the 
claim that this is a sufficiently significant problem that it 
warrants action by Congress.
    Would you agree with the assertion that there is adequate 
evidence? And what would you point to as evidence that action 
by Congress is warranted here?
    Mr. Wolin. I do believe that action by Congress is 
warranted, and I do believe that there is empirical evidence to 
point that out. I think if you look at some of the various 
studies that have been done, if you look at the one that was 
mentioned earlier today with 62 percent of all patent 
litigation cases being brought by patent assertion entities and 
upwards of 85 percent of those cases that go to trial end up 
being losers, I think that is pretty good empirical evidence 
that this is a pretty significant toll that is being taken on 
U.S. industry and patent defendants as a whole.
    From my own personal experience, I see a number of issues. 
Significantly more than 62 percent of the patent litigation 
that we face is brought on by patent assertion entities. But 
what I am proposing in fixing this problem is something that I 
would be willing to take on not only as a defendant but also as 
a patent plaintiff, as a company that asserts, you know, its 
patent's rights--I will not say a lot of the time, but it is 
not rare that we do that.
    And so I think the three things that I outlined in my 
remarks--the attorney fee shifting, the heightened pleadings, 
and the discovery reforms--are something that would increase 
the efficiency of our patent litigation system and put us in a 
position to streamline that patent litigation and get us to a 
point where it would be much more manageable with getting rid 
of some of the spurious cases that we see today than what we 
currently have.
    Senator Lee. And as someone representing a business that 
has a significant patent portfolio, I am assuming that you have 
got pretty strong views regarding the importance of 
intellectual property and the need to safeguard it, you know, 
within the debate that we are having about patent litigation 
abuse. I think it is important for us to keep our focus on bad 
behaviors within patent litigation rather than focusing on 
anything that would tend to minimize or undermine the rights of 
property owners of intellectual property interests.
    Do you agree that we ought to focus on these bad behaviors 
in this debate? And do you think that the legislation we are 
talking about today maintains adequately a focus on those bad 
behaviors?
    Mr. Wolin. I think that it does, because if you looked at 
the three things that I mentioned in my last answer and that I 
proposed in both my opening testimony and in my written 
testimony, those are things that are specifically aimed at the 
bad behaviors that we are seeing in patent litigation today. 
So, for example, when you are in a position when an entity can 
assert a patent against you for a nominal fee and put you in a 
position where it costs millions of dollars to defend against 
that often spurious assertion, that is, you know, taken well by 
both the attorney fee shifting as well as the heightened 
pleading requirement.
    When somebody can assert a patent against you by just 
saying, ``Your microprocessor infringes,'' well, that is 
equivalent to somebody telling Ford that their car infringes. 
They do not say which car. They do not say what part of the 
car. They do not say whether it is the wheels or the steering 
wheel or the trunk. And you are left to spend a lot of money to 
find that out and have to bring to bear what their case might 
be and often educate them in doing it. That is what discovery 
is for when you get down the line, but it is not what it is for 
at the very beginning of the case. When a patent asserts--when 
an owner of a patent asserts that, they should have some 
definiteness of what they are asserting and what their reason 
for believing there is infringement is.
    Senator Lee. Thank you very much.
    Thank you, Mr. Chairman.
    Senator Coons. Thank you, Senator Lee.
    Senator Hirono.
    Senator Hirono. Thank you, Mr. Chairman.
    In my remarks before I began questioning to the first 
panel, I did note that we need to be very careful in proceeding 
in an area as complex as patent law, and I mentioned that I 
would like to hear from universities and from inventors. And a 
group that I neglected to mention that I would like to hear 
from are the venture capitalists, because these are the folks 
who are providing the early stage funding for inventors.
    Mr. Dickinson, I found it very interesting when you talked 
about the focus of this hearing, which is on the bad practices 
of patent trolls, and my understanding of what you were saying 
is that many of these kinds of behaviors really rise to 
consumer fraud kinds of activities that are dealt with both at 
the federal level and at the State level, and there are certain 
State Attorneys General who have become very aggressive in 
pursuing these kinds of folks.
    So I take it that you would support the FTC authorization 
language that is in the Leahy bill?
    Mr. Dickinson. Thank you, Senator. You are correct in 
focusing on that piece of my testimony which we believe is a 
major issue and maybe ought to be the focus of a lot of this, 
which is indeed the big widespread demand letters that get sent 
out, oftentimes, oddly enough, even without filing litigation. 
The Vermont Attorney General's complaint, for example, notes 
that one of the most egregious sent something like 10,000 
letters and never filed a single lawsuit. And so that literally 
rises to consumer fraud.
    This was similar to about 10, 15 years ago, we had a 
problem with invention promotion firms, when people would go 
after small inventors and say, ``We will give you a patent and 
promote your patent,'' and that was fraudulent. And the FTC and 
the State Attorneys General went after those folks. We think 
they can do that again.
    The question of whether or not the FTC needs additional 
authority or not, I think, is one that is open to debate. The 
FTC has got a study they have just initiated now, and I think 
that study will shed a lot more light on that question. And so 
I think at the moment it is something of an open question, but 
it is certainly one worth considering.
    Senator Hirono. Well, we have certainly heard evidence of 
abuse by patent trolls, and, yes, there is a question as to how 
extensive this kind of abuse is. And there have been references 
by a number of our testifiers regarding, I think, references to 
the GAO study that was done, which, in fact, indicated that 
those who make products brought most of the lawsuits, and that 
the non-practicing entities who brought lawsuits represented 
about 20 percent. So I would just like to set the record 
straight on who is doing what in this arena.
    Mr. Dickinson. Senator, could I----
    Senator Hirono. That is not to say that we do not have a 
problem.
    Mr. Dickinson. I agree. Can I have two seconds? Because 
part of the challenge here is definitional, to be real honest 
about it. It has always been definitional as to how we define 
``troll,'' how we define ``patent assertion entities.''
    One figure that gets tossed around a lot is the study that 
showed that, allegedly, $29 billion in direct costs are 
associated with this. But the definition there is so broad, for 
example, all universities get swept in. I dare say that the 
Members of the Committee's State universities, when they assert 
patent, do not really feel they are being a troll, but some of 
this definitional question is one that rides over top of all 
this data, and it is an example of why we need to make sure we 
look behind it.
    Senator Hirono. Mr. Bossone, one of the proposals--this is 
Senator Cornyn's proposal--would require heightened pleadings, 
very specific as to what the assertions are. Can you share your 
thoughts on how such a heightened pleading proposal would 
impact a typical patent dispute? Would it lead to fewer of 
these cases being brought even in the legitimate infringement 
type of cases? Would it result in delays? You know, can you 
share with us your thoughts?
    Mr. Bossone. Yes, thank you. I think that it would--could 
yield delays. You have this incredible amount of detail that a 
lot of it is not really known until you get into the discovery 
process. Perhaps if you are accusing someone who has a machine 
out in the public, the earlier examples of an ATM machine, you 
may understand how that works, and you know if you have a 
patent that covers a particular piece of equipment, it may be 
easy to identify exactly the claim that it covers. But if you 
have, for instance, in our field a pharmaceutical product or if 
you have a manufacturing process and, you know, companies 
have--a lot of their manufacturing processes are secret, and, 
you know, we may see that--or may think that because there is a 
particular product that it had to have been made by a 
manufacturing process that would infringe, for instance, a 
patent that we held, if we wanted to assert that, we would not 
be able to rise to this level of this incredible amount of 
detail. Should we not be able to assert that patent that we 
actually, you know, got, we paid a lot of money, we put a lot 
of effort into getting it?
    I think that could then lead to, for instance, litigation, 
a lot of early motion practice on sufficiency of our pleading. 
And so there I think it would actually delay the case and 
create, you know, issues for a small company like ourselves.
    Senator Hirono. Thank you, Mr. Chairman.
    Senator Coons. Thank you, Senator Hirono.
    I would like to thank our second panel, Dr. Bossone, Mr. 
Wolin, and Mr. Dickinson. Thank you for the perspectives you 
have brought and for the breadth this has added to this 
hearing. Like a number of the other Senators, I look forward to 
further briefings, sessions, and hearings on this topic. If we 
could dedicate six years to getting the AIA right, I think we 
could dedicate a few more months to making sure that we get 
this topic right and that we find a narrowly tailored solution 
to address what I think is a real challenge with patent trolls 
without risking unintended consequences for the whole ecosystem 
of innovation.
    I would like to thank Chairman Leahy for convening this, 
and I would like to thank our panel. We will leave the record 
open for a week for those Members of the Committee who had 
further questions or who were unable to attend.
    Thank you.
    [Whereupon, at 1:06 p.m., the Committee was adjourned.]
    
    
    
    
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