    [House Hearing, 114 Congress]
    [From the U.S. Government Publishing Office]

              UPDATE: PATENT DEMAND LETTER PRACTICES AND SOLUTIONS

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

                                    HEARING

                                   BEFORE THE

               SUBCOMMITTEE ON COMMERCE, MANUFACTURING, AND TRADE

                                     OF THE

                        COMMITTEE ON ENERGY AND COMMERCE
                            HOUSE OF REPRESENTATIVES

                        ONE HUNDRED FOURTEENTH CONGRESS

                                 FIRST SESSION

                                   __________

                               FEBRUARY 26, 2015

                                   __________

                               Serial No. 114-14

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          Printed for the use of the Committee on Energy and Commerce

                            energycommerce.house.gov

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                        COMMITTEE ON ENERGY AND COMMERCE

                              FRED UPTON, Michigan
                                     Chairman

    JOE BARTON, Texas                    FRANK PALLONE, Jr., New Jersey
      Chairman Emeritus                    Ranking Member
    ED WHITFIELD, Kentucky               BOBBY L. RUSH, Illinois
    JOHN SHIMKUS, Illinois               ANNA G. ESHOO, California
    JOSEPH R. PITTS, Pennsylvania        ELIOT L. ENGEL, New York
    GREG WALDEN, Oregon                  GENE GREEN, Texas
    TIM MURPHY, Pennsylvania             DIANA DeGETTE, Colorado
    MICHAEL C. BURGESS, Texas            LOIS CAPPS, California
    MARSHA BLACKBURN, Tennessee          MICHAEL F. DOYLE, Pennsylvania
      Vice Chairman                      JANICE D. SCHAKOWSKY, Illinois
    STEVE SCALISE, Louisiana             G.K. BUTTERFIELD, North Carolina
    ROBERT E. LATTA, Ohio                DORIS O. MATSUI, California
    CATHY McMORRIS RODGERS, Washington   KATHY CASTOR, Florida
    GREGG HARPER, Mississippi            JOHN P. SARBANES, Maryland
    LEONARD LANCE, New Jersey            JERRY McNERNEY, California
    BRETT GUTHRIE, Kentucky              PETER WELCH, Vermont
    PETE OLSON, Texas                    BEN RAY LUJAN, New Mexico
    DAVID B. McKINLEY, West Virginia     PAUL TONKO, New York
    MIKE POMPEO, Kansas                  JOHN A. YARMUTH, Kentucky
    ADAM KINZINGER, Illinois             YVETTE D. CLARKE, New York
    H. MORGAN GRIFFITH, Virginia         DAVID LOEBSACK, Iowa
    GUS M. BILIRAKIS, Florida            KURT SCHRADER, Oregon
    BILL JOHNSON, Ohio                   JOSEPH P. KENNEDY, III,
    BILLY LONG, Missouri                 Massachusetts
    RENEE L. ELLMERS, North Carolina     TONY CARDENAS, California
    LARRY BUCSHON, Indiana
    BILL FLORES, Texas
    SUSAN W. BROOKS, Indiana
    MARKWAYNE MULLIN, Oklahoma
    RICHARD HUDSON, North Carolina
    CHRIS COLLINS, New York
    KEVIN CRAMER, North Dakota

               Subcommittee on Commerce, Manufacturing, and Trade

                           MICHAEL C. BURGESS, Texas
                                     Chairman
    LEONARD LANCE, New Jersey            JANICE D. SCHAKOWSKY, Illinois
      Vice Chairman                        Ranking Member
    MARSHA BLACKBURN, Tennessee          YVETTE D. CLARKE, New York
    GREGG HARPER, Mississippi            JOSEPH P. KENNEDY, III,
    BRETT GUTHRIE, Kentucky                  Massachusetts
    PETE OLSON, Texas                    TONY CARDENAS, California
    MIKE POMPEO, Kansas                  BOBBY L. RUSH, Illinois
    ADAM KINZINGER, Illinois             G.K. BUTTERFIELD, North Carolina
    GUS M. BILIRAKIS, Florida            PETER WELCH, Vermont
    SUSAN W. BROOKS, Indiana             FRANK PALLONE, Jr., New Jersey (ex
    MARKWAYNE MULLIN, Oklahoma               officio)
    FRED UPTON, Michigan (ex officio)

                                      (ii)

                                 C O N T E N T S

                                  ----------
                                                                       Page
    Hon. Michael C. Burgess, a Representative in Congress from the
      State of Texas, opening statement..............................     1
        Prepared statement...........................................     3
    Hon. Janice D. Schakowsky, a Representative in Congress from the
      State of Illinois, opening statement...........................     4
    Hon. Frank Pallone, Jr., a Representative in Congress from the
      State of New Jersey, opening statement.........................     5

                                   Witnesses

    Laurie Self, Vice President and Counsel, Government Affairs,
      Qualcomm.......................................................     7
        Prepared statement...........................................     9
    Vince Malta, 2015 Law and Policy Liaison, National Association of
      Realtors.......................................................    16
        Prepared statement...........................................    18
    Paul R. Gugliuzza, Associate Professor of Law, Boston University
      School of Law..................................................    31
        Prepared statement...........................................    33
    Vera Ranieri, Staff Attorney, Electronic Frontier Foundation.....    58
        Prepared statement...........................................    60

                               Submitted Material

    Letter of February 24, 2015, from Carrie R. Hunt, Senior Vice
      President of Government Affairs and General Counsel, National
      Association of Federal Credit Unions, to Mr. Burgess and Ms.
      Schakowsky, submitted by Mr. Burgess...........................   103
    Statement of American Bankers Association, et al., February 25,
      2015, to Mr. Burgess and Ms. Schakowsky, submitted by Mr.
      Burgess........................................................   104
    Statement of National Retail Federation, et al., February 26,
      2015, by David French, Senior Vice President, Government
      Relations, National Retail Federation, submitted by Mr. Burgess   109

              UPDATE: PATENT DEMAND LETTER PRACTICES AND SOLUTIONS

                                  ----------

                          THURSDAY, FEBRUARY 26, 2015

                      House of Representatives,
    Subcommittee on Commerce, Manufacturing, and Trade,
                              Committee on Energy and Commerce,
                                                        Washington, DC.
        The subcommittee met, pursuant to call, at 10:17 a.m., in
    room 2322 of the Rayburn House Office Building, Hon. Michael C.
    Burgess (chairman of the subcommittee) presiding.
        Members present: Representatives Burgess, Lance, Harper,
    Guthrie, Olson, Kinzinger, Bilirakis, Brooks, Mullin,
    Schakowsky, Clarke, Kennedy, Cardenas, and Pallone (ex
    officio).
        Also present: Mr. Massie.
        Staff present: Charlotte Baker, Deputy Communications
    Director; Leighton Brown, Press Assistant; James Decker, Policy
    Coordinator, Commerce, Manufacturing and Trade; Graham Dufault,
    Counsel, Commerce, Manufacturing and Trade; Melissa Froelich,
    Counsel, Commerce, Manufacturing and Trade; Kirby Howard,
    Legislative Clerk; Paul Nagle, Chief Counsel, Commerce,
    Manufacturing and Trade; Olivia Trusty, Professional Staff,
    Commerce, Manufacturing and Trade; Michelle Ash, Democratic
    Chief Counsel, Commerce, Manufacturing and Trade; Lisa Goldman,
    Democratic Counsel, Commerce, Manufacturing and Trade; Tiffany
    Guarascio, Democratic Deputy Staff Director; and Jeff Carroll,
    Democratic Staff Director.
        Mr. Burgess. The Subcommittee on Commerce, Manufacturing,
    and Trade will now come to order.
        The Chair recognizes himself for 5 minutes for the purposes
    of an opening statement. And I certainly want to welcome
    everyone on our panel to the hearing, to provide an update on
    patent demand letters, the practices and possible solutions.

    OPENING STATEMENT OF HON. MICHAEL C. BURGESS, A REPRESENTATIVE
                  IN CONGRESS FROM THE STATE OF TEXAS

        Unfortunately, abusive patent demand letters are not a new
    problem, and they are not new to this subcommittee. Patent
    trolls continue to send demand letters in bulk to induce
    victims to pay unjustified license fees rather than fight back.
    Last year, under Subcommittee Chairman Terry, this subcommittee
    held an oversight hearing, a legislative hearing, and
    eventually produced and marked up draft legislation targeting
    bad-faith demand letters. As this subcommittee learned through
    its process, the act of defining a so-called troll is a
    difficult task. In protecting companies from trolls,
    legislation must also not prevent legitimate patent holders
    from protecting their rights from being infringed upon by other
    actors. But a task that is difficult is not a task that is
    impossible, and I have a sincere belief that in the realm of
    patent demand letters, like so many other areas under the
    jurisdiction of this subcommittee, can effect a bipartisan
    agreement and legislation.
        So here we are in the new year, in a new Congress, and we
    renew the effort to forge ahead to achieve this goal. We again
    take aim to solve a small piece of the patent world that has
    caused some of the greatest consternation. I sincerely believe
    that a targeted solution to this problem is the best one, and I
    hope that our hearing today will restart the conversations on
    how best to stop this activity, yet allow legitimate patent
    holders to proceed.
        The truth is that the destructive business model of the so-
    called patent troll has largely skated just beyond the reach of
    law, and as a result, crime pays. And because Federal law has
    been slow to keep up with the evolving world of patent trolls,
    even in a subject area where Federal jurisdiction is clearly
    delineated in the Constitution's Article I enumerated powers of
    Congress, the States now have felt an obligation to begin
    looking at ways to protect their constituent companies.
    Protection of intellectual property rights is a Federal issue.
    Indeed, Article I, Section 8, clause 8 clearly envisions
    Congress as having both the power and the duty to promote the
    Progress of Science and useful Arts, by securing for limited
    Times to authors and inventors the exclusive rights to their
    respective writings and Discoveries. It would appear from the
    stories we have all heard about patent trolls that the
    protection of these rights is not being considered. This
    committee wishes to change that equation.
        I am especially concerned about the effects these fraud
    schemes have on small businesses. When a business receives a
    demand letter, especially one that is intentionally vague or
    misleading, many small business owners simply lack the tools
    necessary to distinguish a bogus assertion from a legitimate
    infringement claim. However, the United States Patent Office
    lists three Web sites; Stand Up To the Demand, ThatPatentTool,
    and Trolling Effects, as resources that companies can use to
    protect themselves. There is work going on beyond this
    subcommittee to address some of this--these issues. For
    example, a number of Web sites have popped up for demand letter
    recipients to verify the legitimacy of infringement claims
    against them. Eighteen States have also enacted legislation,
    and a handful of State attorneys general have brought cases
    under their consumer protection laws.
        As we will discuss today, it may be that State efforts to
    curb patent abuses are on uncertain legal footing due to
    preemption of the First Amendment doctrines that were developed
    by the Federal courts. These doctrines are designed to protect
    the fair assertion of patent rights, and any legislation this
    subcommittee produces must allow legitimate assertions. It is
    my intention that this committee can work with companies who
    own large patent holdings to address this issue. As many
    companies have seen, illegitimate claims could ultimately
    undercut the value of legitimate patents. To help us strike the
    proper balance, we will hear from experts in the field as well
    as representatives from both abusive demand letter victims and
    a large patent holder. We hope this information--this will
    inform the direction of whatever legislation this subcommittee
    ultimately produces. I hope that we may use last year's draft,
    the Targeting Rogue and Opaque Letters Act, as a place to begin
    the discussion. One area where we will need to focus on is how
    the bad faith standard in that legislation would work with the
    required disclosures in the Act. Further, how those required
    disclosures fit with the prohibited bad acts included in the
    draft legislation, and I hope that is an area we can examine
    closely. The subcommittee is eager to work with the panelists
    before us and others to address this problem.
        I thank the witnesses for their testimonies, and I
    certainly look forward to the discussion today.
        [The prepared statement of Mr. Burgess follows:]

                 Prepared statement of Hon. Michael C. Burgess

        I want to welcome everyone to our hearing to provide an
    update on patent demand letter practices and solutions.
    Unfortunately, abusive patent demand letters are not a new
    problem, and they are not new to this committee. Patent trolls
    continue to send demand letters in bulk to induce victims to
    pay unjustified license fees rather than fight back.
        Last year, this subcommittee held an oversight hearing, a
    legislative hearing, and eventually produced and marked up
    draft legislation targeting bad-faith demand letters. As this
    committee learned through its process, the act of defining a
    ``troll'' is a difficult task. In protecting companies from
    trolls, legislation must also not prevent legitimate patent
    holders from protecting their rights from being infringed by
    other actors. But a task that is difficult is not a task that
    is impossible. I have a sincere belief that the realm of patent
    demand letters, like so many other areas under the jurisdiction
    of this committee, can result in bipartisan agreement and
    legislation.
        Thus, in a new year, in a new Congress, we renew the effort
    to forge ahead to achieve such a goal. We again take aim to
    solve a small piece of the patent world that has caused some of
    the greatest consternation--patent trolls. I sincerely believe
    that a targeted solution to this problem is the best one, and
    hope that our hearing today will restart the conversations on
    how to best to stop patent trolls yet allow legitimate patent
    holders to proceed.
        The truth is that the destructive business model of the
    trolls has largely skated just beyond the reach of law-and as a
    result, it still pays to be a patent troll. And because Federal
    law has been slow to keep up with the evolving world of patent
    trolls--even in a subject area where Federal jurisdiction is
    clearly delineated in the Constitution's Article I enumerated
    powers of Congress--the States have felt an obligation to begin
    looking at ways to protect their constituent companies.
        Protection of intellectual property rights is a Federal
    issue. Indeed, Article I, Section 8, clause 8 clearly envisions
    Congress as having both the power and the duty to ``promote the
    Progress of Science and useful Arts, by securing for limited
    Times to Authors and Inventors the exclusive Right to their
    respective Writings and Discoveries.'' It would appear from the
    stories we have all heard of patent trolls that the protection
    of these rights is being abused. This committee wishes to
    change that equation.
        I am especially concerned about the effects these fraud
    schemes have on small businesses. When a business receives a
    demand letter--especially one that is intentionally vague or
    misleading--many small business owners lack the tools necessary
    to distinguish a bogus assertion from a legitimate infringement
    claim. However, the U.S. Patent and Trade Office lists three
    Web sites--Stand Up To the Demand, ThatPatentTool, and Trolling
    Effects--as resources companies can use to protect themselves.
        There is work going on beyond this subcommittee to address
    some of these issues. For example, a number of Web sites have
    popped up for demand letter recipients to verify the legitimacy
    of infringement claims against them. Eighteen States have also
    enacted legislation and a handful of State attorneys general
    have brought cases under their consumer protection laws. As we
    will discuss today, however, it may be that State efforts to
    curb patent abuses are on uncertain legal footing due to
    preemption and First Amendment doctrines developed in Federal
    courts.
        These doctrines are designed to protect the fair assertion
    of patent rights, and any legislation this subcommittee
    produces must allow legitimate assertions. It is my intent that
    this committee can work with companies who own large patent
    holdings to address this issue. As many companies have seen,
    illegitimate claims could ultimately undercut the value of
    legitimate patents.
        To help us strike the proper balance, we will hear from
    experts in the field as well as representatives from both
    abusive demand letter victims and a large patent holder. We
    hope this will inform the direction of whatever legislation
    this subcommittee ultimately produces. I hope that we may use
    last year's draft, the Targeting Rogue and Opaque Letters--or
    ``TROL''--Act, as a place to begin these discussions.
        One area we will need to focus on is how the ``bad faith''
    standard in that legislation would work with the required
    disclosures in the Act. Further, how those required disclosures
    fit with the prohibited bad acts included in the draft
    legislation is also an area I hope people will look at closely.
        This subcommittee is eager to work with the panelists
    before us and others to address this problem. I thank the
    witnesses for their testimonies and I look forward to our
    discussion today.

        Mr. Burgess. And the Chair now recognizes the subcommittee
    ranking member, Ms. Schakowsky, from Illinois for 5 minutes for
    the purpose of an opening statement.

           OPENING STATEMENT OF HON. JANICE D. SCHAKOWSKY, A
         REPRESENTATIVE IN CONGRESS FROM THE STATE OF ILLINOIS

        Ms. Schakowsky. Thank you, Mr. Chairman. And much of what I
    will say will echo the things that you have said. The--along
    the lines of the problems of patent trolls. I see the rise of
    these entities as a serious threat to consumers and businesses
    all across the country, and I want to explore whether we can
    strengthen existing protections against them as well.
        Patent assertion entities typically purchase patents and
    then assert that those patents have been infringed, sending
    vague and threatening letters to hundreds or even thousands of
    end users, typically, small businesses or entrepreneurs. Those
    businesses are told that they can pay the patent troll to
    continue using the technology. And considering the cost and
    resources needed to vet and fight a patent infringement claim,
    although the chairman did point out some resources that are
    available, many small businesses do choose to settle the claim
    by paying the troll. Others investigate and fight the claims,
    draining precious resources and stunting the growth of their
    businesses.
        It costs patent trolls virtually nothing to send patent
    demand letters, but they have cost American businesses tens of
    billions of dollars in recent years. At best, patent trolls are
    misleading, and at worst, they are extortionists.
        This is fundamentally a fairness issue. As the subcommittee
    charged with protecting consumers and promoting fair business
    practices, we must work to reduce frivolous patent claims. I am
    glad that the FTC is using its existing authority to order
    injunctions on patent assertion entities that are determined to
    engage in unfair deceptive acts or practices. I believe that if
    we legislate on this issue, we should include new authority for
    the FTC to collect civil penalties for those abuses.
        While we should also make sure that important consumer and
    business protections are guaranteed and enforced at the State
    level, including Illinois, remain in place. Federal legislation
    could also ensure the transparency and baseline standards are
    required for patent demand letters.
        There are many ideas about how to increase transparency,
    including proposals to require information in patent demand
    letters, about the patent-alleged infringement that--the patent
    that is allegedly infringed, and the technology used that
    allegedly infringes on the patent.
        As we consider acting on this issue, we must also recognize
    that many patent infringement claims are reasonable efforts, as
    the chairman mentioned, reasonable efforts to protect
    intellectual property. We also need to be careful to make sure
    that universities, research institutions, and others that
    develop and hold patents, but may not develop products for
    sale, are not unfairly labeled as patent trolls. We should not
    undermine the ability of innovators to develop and defend their
    patents.
        I look forward to hearing the ideas of the panel about how
    we could move forward with legislation, and how it should be
    structured to make sure that patent demand letters are more
    fair and transparent moving forward.
        And I thank you again, Mr. Chairman, for holding this
    hearing. I yield back.
        Mr. Burgess. The gentlelady yields back.
        This is the point where the Chair would normally recognize
    the chair of the full committee, but seeing that--and I do want
    to explain to our witnesses, there is a concurrent subcommittee
    hearing downstairs, and we may well see Members come in and out
    today, and it is not a sign of disrespect, it is a sign of
    there is just a lot of work to be done this morning.
        Mr. Mullin, would you seek time for an opening statement?
        Mr. Mullin. No, thank you.
        Mr. Burgess. Gentleman does not seek time.
        Chair recognizes the ranking member of the full committee,
    Mr. Pallone, for purposes of an opening statement, 5 minutes.

    OPENING STATEMENT OF HON. FRANK PALLONE, JR., A REPRESENTATIVE
                IN CONGRESS FROM THE STATE OF NEW JERSEY

        Mr. Pallone. Thank you, Mr. Chairman.
        The patent system plays a crucial role in promoting
    innovation. It provides an incentive to inventors to make
    costly and time-consuming investments in research and
    development of new inventions. At the same time, the system
    requires that the inventions be disclosed so that others can
    build upon the inventions. Unfortunately, there are a number of
    problems with the patent system, and reforms are needed.
        I have long pushed to reduce the backlog of patent
    applications at the Patent and Trade Office, but we also need
    to work to address the concerns that some applications are
    being approved for inventions that are not truly new or non-
    obvious. In addition, the patent litigation system must be
    streamlined.
        While most patent-related issues are under the purview of
    the Judiciary Committee, and I look forward to its action on
    patent system reform, the Energy and Commerce Committee is
    responsible for efforts to curb fraud. And one part of the
    patent litigation area in need of attention is the rise of so-
    called patent trolls, and the sometimes fraudulent demand
    letters they send to small businesses. This trolling activity
    is a problem. Patent trolls do not invent, make or sell
    anything. Instead, they buy up large numbers of patents, often
    of suspect validity, and then send demand letters or bring law
    suits using the complexity of the patent system and the high
    cost of litigation as leverage to force licensing fees or
    settlements. It is not fair to the targets of these predatory
    tactics, nor does it serve the interests of true innovators.
        And efforts to combat abusive demand letters have already
    begun. Some State attorneys general have taken legal action to
    protect their citizens from unfair and deceptive demand
    letters. In addition, 18 States have already enacted
    legislation to tackle this abusive activity. Furthermore, the
    FTC brought an administrative complaint against MPH
    Technologies, a well-known patent troll. That case was recently
    settled through a consent order that prohibits MPHJ from making
    deceptive statements in its demand letters.
        Last Congress, this committee held three hearings, and the
    subcommittee marked up a bill which I believe included
    problematic language. Among other things, it created a
    knowledge standard, one not typically needed to prove fraud,
    and it preempted stronger State laws. I am happy that this
    issue is being given a fresh review this Congress in an effort
    to get the language right and work in a bipartisan fashion. If
    we as a Congress choose to legislate in this area, we need to
    make sure that we are furthering the interests of the consumer,
    end users and small businesses, while protecting the vitality
    of the patent system.
        So today's hearing presents an opportunity to hear from
    witnesses about how big is the problem of fraudulent demand
    letters, and whether there is an appropriate legislative fix.
    And I look forward to hearing the witnesses' thoughts on this
    issue, and their ideas for possible solutions.
        I yield back.
        Mr. Burgess. The gentleman yields back.
        This concludes opening statements.
        We want to welcome all of our witnesses, and thank you for
    agreeing to testify before the subcommittee today. Our witness
    panel for today's hearing will include Ms. Laurie Self, the
    Vice President and Counsel of Government Relations, will be
    testifying on behalf of Qualcomm; Mr. Vince Malta, Liaison for
    Law Policy at the National Association of Realtors; Mr. Paul
    Gugliuzza, close enough, Associate Professor at Boston
    University School of Law; and Ms. Vera Ranieri, Staff Attorney
    for the Electronic Frontier Foundation. We welcome you all to
    the committee.
        And, Ms. Self, we will start with you. You are recognized 5
    minutes for the purpose of an opening statement.

        STATEMENTS OF LAURIE SELF, VICE PRESIDENT AND COUNSEL,
    GOVERNMENT AFFAIRS, QUALCOMM; VINCE MALTA, 2015 LAW AND POLICY
     LIAISON, NATIONAL ASSOCIATION OF REALTORS; PAUL R. GUGLIUZZA,
     ASSOCIATE PROFESSOR OF LAW, BOSTON UNIVERSITY SCHOOL OF LAW;
         AND VERA RANIERI, STAFF ATTORNEY, ELECTRONIC FRONTIER
                               FOUNDATION

                        STATEMENT OF LAURIE SELF

        Ms. Self. Thank you. Chairman Burgess, Ranking Member
    Schakowsky and Members of the subcommittee, thank you for the
    opportunity to appear today to discuss patent demand letters.
    My name is Laurie Self, and I am Vice President and Counsel,
    Government Affairs for Qualcomm. Qualcomm is a member of the
    Innovation Alliance, a coalition of research and development
    focused companies that believe in the critical importance of
    maintaining a strong patent system.
        Qualcomm is a major innovator in the wireless
    communications industry, and the world's leading supplier of
    chipsets that enable 3G and 4G smartphones, tablets and other
    devices. Qualcomm's founders are the quintessential example of
    American inventors in the garage who build one of the world's
    foremost technology companies. Today, the technologies invented
    by our engineers help make nearly everything you do with your
    smartphone--help everything you do with your smartphone, from
    browsing the internet, to sharing videos, to using GPS
    navigation. We are an invention hub for the mobile age, having
    spent more than $34 billion on R and D since the company was
    founded in 1985. Through the broad licensing of our patented
    technologies, Qualcomm has helped foster a thriving mobile
    industry that accounts for more than one million jobs, and $548
    billion of U.S. gross domestic product. Qualcomm itself has
    more than 31,000 employees, the vast majority of whom are
    engineers based in the United States.
        It is worth noting that Qualcomm is not a plaintiff in any
    pending patent litigation, but we are a defendant in several
    patent infringement law suits, some of which were brought by
    so-called patent assertion entities. However, I am not here to
    criticize or defend PAEs, but instead to address what we
    believe should be the proper focus of any patent demand letter
    legislation; namely, targeting abusive demand letter activities
    without unintentionally damaging important patent rights.
        Notice letters play an important role in the patent system
    for both patent holders and accused infringers. Patent law
    encourages, and sometimes requires patent holders to take
    reasonable steps to notify others of possible infringement.
    Meaningful patent protection including the ability to provide
    notice is a key factor for companies like Qualcomm in deciding
    whether to invest in new products and technologies. Qualcomm
    appreciates the committee's interest in curtailing abusive
    demand letter activities. At the same time, we urge the
    committee to be cautious so as to not inadvertently hinder
    legitimate patent enforcement practices. A demand letter law
    that makes patent notification or enforcement too burdensome,
    too costly or too risky may deter appropriate notice activity.
    If valid patent owners are afraid to seek compensation for use
    of their inventions, the whole patent-based system of
    incentivizing innovation is undermined.
        Qualcomm supports the Demand Letter Bill that passed this
    committee in July 2014, the Targeting Rogue and Opaque Letters
    Act. The TROL Act includes several key features that are
    necessary to strike the appropriate balance. First, the bill
    clarifies rather than expands the FTC's existing authority
    under Section 5 to address abusive demand letters.
        Second, the bill is limited to situations in which the
    sender has engaged in a pattern or practice of mailing bad
    faith demand letters to consumers. The pattern or practice
    requirement appropriately targets the mass mailing of deceptive
    demand letters, and it is consistent with the FTC's Section 5
    authority. An explicit bad faith requirement is necessary to
    protect patent holders' constitutional rights. Patent property
    rights are rooted in Article I of the Constitution, and the
    First Amendment provides strong protections for patent demand
    letters. As courts across the country have recognized, pre-law
    suit communications implicate both the freedom of speech and
    the constitutional right to petition the Government. To conform
    with the constitution, legislation must avoid punishing patent
    holders for good faith conduct. By clarifying the FTC's
    enforcement authority under Section 5, the bill is limited to
    communications sent to consumers, including mom and pop
    retailers, which protects those most vulnerable to abusive
    demand letters, while reducing the risk that the FTC will be
    drawn into business-to-business disputes.
        Third, the bill clearly describes the conduct that will be
    considered unfair and deceptive, and does not impose overly
    burdensome disclosure requirements.
        Fourth, the bill preempts State demand letter laws that
    allow State attorneys general to bring enforcement actions
    under the Federal statute.
        With nearly 20 State legislatures having passed such bills
    over the past 2 years, and another dozen considering such a
    bill now, it would be extremely burdensome to subject patent
    owners to a patchwork of different demand letter requirements
    in every State. Preemption is appropriate and necessary in the
    demand letter context because unlike the TROL Act, many of
    these State demand letter laws are overly broad in scope,
    highly burdensome to patent owners, and risk penalizing
    ordinary commercial and pre-litigation communications, which
    are protected under the First Amendment.
        These four features are critical to Qualcomm's support, and
    we urge the committee to retain these requirements and
    limitations in the bill. Qualcomm looks forward to working with
    the committee in its efforts to achieve a balanced and
    narrowed-tailored bill.
        Thank you for allowing me to testify today, and I look
    forward to answering your questions.
        [The prepared statement of Ms. Self follows:]

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            Mr. Burgess. Gentlelady yields back. Thank you for your
    testimony.
        The Chair recognizes Mr. Malta 5 minutes for the purposes
    of an opening statement please.

                        STATEMENT OF VINCE MALTA

        Mr. Malta. Chairman Burgess, Ranking Member Schakowsky, and
    Members of the subcommittee, my name is Vincent Malta. I am the
    broker of record for Malta and Company in San Francisco,
    California. I serve as the 2015 National Association of
    Realtors' Liaison for Law and Policy, and I am here to testify
    on behalf of the one million members of NAR.
        I am also here representing United for Patent Reform
    Coalition, a broad and diverse group of Main Street, high tech
    and manufacturing companies that have united to urge the
    passing of strong, commonsense patent reform.
        In the real estate industry, patent trolls have targeted
    Realtor brokers, agents and multiple listing services for
    implementing simple Web site technologies. Here are 5 examples
    where patent trolls have alleged infringement. First, the Real
    Estate Alliance Ltd. Filed an infringement law suit against a
    broker and other unnamed defendants, charging that zooming in
    to locate points on a map was an infringement. The case was
    eventually dropped after 2 years.
        Second, a company called Civix-Ddi LLC charged that
    providing a searchable data base of property listings infringes
    its patents. Civix have targeted not only multiple listing
    services in the real estate industry, but Microsoft, Expedia,
    Move and other companies. NAR decided to settle this case for
    $7.5 million, fearing that the cost of letting the case go to
    trial would be exponentially more expensive.
        Third, Data Distribution Technologies charged that a number
    of real estate firms were in patent violation by providing
    updates to consumers when properties matched their search
    criteria are coming on the market. This patent is undeniably
    abstract because it describes what any real estate professional
    already does. The real estate companies had to expend time and
    money to challenge the validity of this abstract patent,
    finally settling after 2 years.
        The Austin Board of Realtors received a demand letter
    alleging patent infringement for having a drop-down menu on
    their Web site.
        And finally, NAR members received abusive demand letters
    from the MPHJ Technologies troll that notoriously sent over
    16,000 demand letters to businesses, demanding payment for
    using basic scan-to-mail technology.
        Simply put, these patent trolls make everyday business
    practices potential law suits. Patent trolls typically start by
    sending form demand letters to dozens, hundreds, or even
    thousands of businesses at a time. They claim these businesses
    are infringing on patents, but provide little to no evidence.
    Typically, the sender will list a patent number only, with no
    reference to which claim within the patent is alleged to have
    been infringed. The letters are often intentionally vague, and
    demand a licensing fee or threaten litigation. If the business
    does speak with a lawyer, they are often advised to pay the fee
    rather than risk very costly infringement law suits. This
    essentially is a junk mail approach that is clogging up our
    legal system. NAR members and other small businesses rightfully
    feel extorted by this process.
        In 2013, more than 2,600 companies were sued by patent
    trolls, representing 60 percent of all patent infringement
    cases brought that year. Small and medium-sized companies paid
    on average $1 \1/3\ million dollars to settle patent troll
    cases, and $1.7 million on average in court defense costs for
    patent troll litigation. Economists estimate that in 2011,
    patent trolls cost operating companies $80 billion in direct
    and indirect costs. That is more than the $66 billion State
    budget of Illinois, and in 2013, almost reaches the $96 billion
    State budget in Texas. This is a serious problem for the
    American business community, in particular, small businesses
    who lack the resources to fight these pointless battles. NAR's
    most recent surveys indicate that more than half of all realty
    firms have less than 25 agents.
        In the last Congress, this subcommittee passed legislation
    aimed at addressing demand letter abuse. NAR and the Coalition
    appreciated the subcommittee's work on the Targeting Rogue and
    Opaque Letters Act. As the subcommittee considers legislation
    in this Congress, we ask that you consider a few essential
    guidelines. Fundamentally, patent demand letters must be held
    to a practical standard of transparency. They must specify the
    relevant patent claim at issue, they must detail all businesses
    allegedly infringed, they must include a description of the
    patent troll's investigation of the alleged infringing
    activity, and they must disclose the real parties and interest
    to the dispute. This minimum information will help recipients
    to thoughtfully review whether infringement allegations merit
    an agreement to license.
        In conclusion, NAR and the United for Patent Reform
    Coalition urge Congress to act swiftly to enact meaningful
    demand letter reform for the good of our Nation's small
    business community, and while demand letter reform is crucial,
    as an important first step towards broader patent reform, it
    requires comprehensive and multifaceted reforms.
        Thank you for your consideration of our views.
        [The prepared statement of Mr. Malta follows:]

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        Mr. Burgess. Gentleman yields back. Chair thanks the
    gentleman for his testimony.
        Professor Gugliuzza, you are now recognized for 5 minutes
    for the purposes of an opening statement.

                     STATEMENT OF PAUL R. GUGLIUZZA

        Mr. Gugliuzza. Chairman Burgess, Ranking Member Schakowsky,
    Members of the subcommittee, thank you for inviting me to
    testify. My name is Paul Gugliuzza, and I am an associate
    professor of law at Boston University School of Law.
        My research focuses on patent law and patent litigation.
    Most relevant to this hearing, I have spent the past 2 years
    studying the issue of patent demand letters, focusing in
    particular on efforts by both State governments and the Federal
    Government to address the problem of unfair and deceptive
    conduct in patent enforcement.
        To briefly summarize my conclusions, a small number of
    patent holders, often called bottom feeder patent trolls, have
    been abusing the patent system. These patent holders blanket
    the country with thousands of letters demanding that the
    recipients purchase a license for a few thousand dollars, or
    else face an infringement suit. The letters are usually sent to
    small businesses, nonprofits that do not have the resources to
    defend against claims of patent infringement. And the letters
    often contain false or misleading statements, calculated to
    scare the recipient into purchasing a license without
    investigating the merits of the allegations.
        In response to this troubling behavior, legislatures in 18
    States have adopted statutes that, generally speaking, outlawed
    bad faith assertions of patent infringement. These statutes,
    however, may be unconstitutional. The U.S. Court of Common
    Pleas Appeals for the Federal Circuit, which hears all appeals
    in patent cases nationwide, has held that patent holders are
    immune from civil claims challenging their acts of enforcement
    unless the patent holder knew that its infringement allegations
    were objectively baseless. This rule could provide patent
    holders with nearly absolutely immunity from liability under
    the new statutes. In fact, the rules already immunize two
    notorious trolls; Innovatio IP Ventures and MPHJ Technology
    Investments, from legal challenges to their enforcement
    campaigns under State consumer protection laws.
        Although the Federal circuit has sometimes called this
    immunity rule a matter of the Federal Patent Acts' preemption
    of State law, this rule could also limit the ability of the
    Federal Government to regulate patent enforcement behavior.
    This is because the Federal circuit's decisions are not
    grounded in the Constitution's Supremacy Clause, which is the
    usual source of preemption doctrine, but in the First Amendment
    right to petition the Government. Unlike the Supremacy Clause,
    the First Amendment limits the power of the Federal Government,
    not just State governments. Accordingly, patent holders may
    also be able to invoke this immunity to thwart Federal
    initiatives to fight patent trolls, including any legislation
    this committee might consider.
        To be clear, no court has yet addressed the
    constitutionality of the new State statutes. Moreover, as I
    discuss in more detail in my written statement, there is a
    strong argument that the Federal circuit's immunity doctrine is
    wrong as a matter of law, policy and historical practice. So it
    is entirely possible that the Federal circuit can revise its
    immunity doctrine to accommodate greater regulation of patent
    enforcement conduct. Indeed, the Federal circuit keeps close
    watch when Congress is considering amending patent law, and in
    the past decade, the court has repeatedly revised its case law
    to align with proposed legislation.
        This hearing provides a welcome occasion to discuss the
    innovative steps that State governments have taken to combat
    unfair and deceptive patent enforcement. Any bill advanced by
    this committee should, in my view, capitalize on the respective
    strengths of State governments and the Federal Government in
    this area. The strengths of State governments include, first,
    the quantity of law enforcement resources that could be
    provided by dozens of States attorneys general offices
    cooperating to fight abusive patent enforcement. And second,
    the accessibility of State governments to the small businesses,
    nonprofits and local governments most likely to be targeted by
    deceptive campaigns of patent enforcement. By contrast, Federal
    legislation on patent demand letters would provide the benefits
    of legal uniformity and predictability for patent holders about
    whether or not their enforcement actions are legal. In
    addition, as I explained in my written testimony, Federal
    legislation could clarify difficult jurisdictional issues that
    currently arise in cases challenging the lawfulness of patent
    enforcement conduct.
        If this committee determines that Federal legislation is
    warranted, that legislation should, in my view, specifically
    condemn bad faith assertions of patent infringement. Until the
    Federal circuit adopted its objective baselessness requirement,
    courts had applied a bad faith standard for nearly a century,
    striking an appropriate balance between the goals of punishing
    extortionate schemes of patent enforcement, and respecting
    patent holders' rights to make legitimate allegations of
    infringement.
        Thank you again for inviting me to testify, and I would be
    pleased to answer any questions the committee might have for
    me.
        [The prepared statement of Mr. Gugliuzza follows:]

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        Mr. Burgess. Gentleman yields back. The Chair thanks the
    gentleman for his testimony.
        Ms. Ranieri, you are recognized for 5 minutes for the
    purposes of an opening statement.

                       STATEMENT OF VERA RANIERI

        Ms. Ranieri. Mr. Chairman, Ranking Member Schakowsky, and
    Members of the subcommittee, thank you for the opportunity to
    be here today.
        For those of you who aren't familiar with my organization,
    the Electronic Frontier Foundation, or EFF, we are a nonprofit
    organization dedicated to protecting consumer interests,
    innovation and free expression in the digital world. As part of
    that work, we regularly advocate for reform of the patent
    system in courts, Congress, and at the Patent and Trademark
    Office. EFF is greatly encouraged by Congress' interest in the
    important issue of deceptive and abuse patent rule demand
    letters, and its impact on consumers and small businesses.
        EFF is one of the few nonprofit legal services
    organizations that small businesses and innovators can turn to
    in order to get help when faced with a patent troll demand
    letter. Unfortunately, we cannot help everyone, and more
    importantly, because of a lack of meaningful, manageable legal
    options, we are too often unable to help push back against
    those who use deceptive patent demand letters in order to
    extract money from their victims.
        The problem of abusive patent rule demand letters is a
    result of a perfect storm of circumstances. Patent owners
    sending these letters use vague and overbroad patents that
    likely never should have issued, in order to confuse and
    obfuscate. Patent owners rely on the eye-popping cost of
    litigation in order to intimidate, and patent owners take
    advantage of their victims' relative lack of experience with
    technology and the legal system to ensure improper claims of
    infringement go unchallenged. For example, in 2011, a company
    known as Eclipse IP sent demand letters to various retailers
    alleging infringement of patents on tracking packages through
    the use of UPS tracking. Eclipse demanded licenses in the
    hundreds of thousands of dollars. Seeing their customers being
    targeted, UPS filed a declaratory judgment of non-infringement
    and invalidity, but before the court could address whether
    Eclipse's claims of infringement had merit, Eclipse filed what
    is known as a covenant not to sue. In doing so, Eclipse ensured
    that its patent rights would not actually be litigated, that
    is, they did everything in their power to stop the court from
    deciding the merits of its claims. Eclipse apparently merely
    wanted to extract settlements from its victims, despite
    assertions in its demand letter that it would engage in
    litigation if its licensing demands were not met. Since 2011,
    Eclipse has sued over 100 companies and presumably sent letters
    to countless others.
        Letters and actions like Eclipse's are all too common.
    Other letters employ tactics such as not mentioning licenses
    that likely exhaust patent rights, or use complex and vague
    nonsense terms from the patent in order to make infringement
    claims that would never have been apparent to someone reading
    the patent. Dealing with even the most frivolous of letters
    takes time and money away from what small businesses should be
    doing, which is growing their business and creating jobs.
        I could tell many more stories, but most demand letters
    never see the light of day. Recipients of letters from patent
    trolls are often afraid of speaking out, and no wonder, by
    speaking out, they worry they would become an even bigger
    target and subject to even larger demands they cannot afford.
    Patent trolls use this fact to hide their practices from
    scrutiny and from lawmakers and the public.
        Deceptive and unfair patent troll demand letters must be
    addressed, but it is important to address them in a way that
    makes sense. Specifically, Congress should not limit the
    ability of State attorneys general to protect their citizens,
    whether that be through State laws addressing abusive demand
    letters, or through their own little FTC acts. State AGs are
    often the closest to the problem, and in the best position to
    address deceptive practices targeted at their citizens. Second,
    Congress should allow for flexibility in the law. Overly rigid
    rules regarding what constitutes bad faith will allow patent
    trolls to comply with the letter of the law but not the spirit.
    As a lawyer, I can assure you that we are enterprising people.
    If there is a loophole to be found, we will find it.
    Flexibility is key to ensuring patent trolls don't find new
    ways to deceive their targets.
        Finally, in order to protect technology end users such as
    retailers and tracking--such as retailers implementing tracking
    technology, or the coffee shop offering Wi-Fi, Congress should
    mandate disclosure requirements. Through these disclosure
    requirements, Congress can better understand the scope of the
    problem, and agencies such as the PTO, the FTC, and nonprofit
    organizations such as EFF, can better target those practices
    and those patents that are being abused.
        Addressing the deceptive patent troll demand letter problem
    is an important piece of broader patent reform. In tandem with
    other measures, we can limit the ability of patent holders to
    use patents that never should have been issued, to extort
    undeserved money from those who just want to pursue their
    livelihoods.
        Thank you, and I look forward to your questions.
        [The prepared statement of Ms. Ranieri follows:]

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        Mr. Burgess. Gentlelady yields back. The Chair thanks the
    gentlelady and all the witnesses for their testimony this
    morning. Very informative, very helpful. Professor, I am now
    reminded why I didn't go to law school. But complex discussion,
    and certainly the issues you bring before us are of importance.
        Chair now moves to the questioning part of the hearing. I
    want to recognize myself 5 minutes for questions.
        Also, just an observation. When this issue came up in
    previous Congress, when Chairman Terry was in charge of the
    subcommittee, I think it actually to the--before the Rules
    Committee, and we had a Member who appeared before the Rules
    Committee and said he was conflicted because some days he was
    asserting he was a patent troll, other days he was not, and
    defending a patent. So it did underscore for me how there could
    be actually people on both sides of the issue.
        But let me just ask this question to start off for the
    entire panel. I would like to get everyone's thoughts on this.
    And, Ms. Self, we will start with you and then move down the
    panel. How does the--has the concept of bad faith been applied
    in patent law, and how should it apply to the demand letter
    context?
        Ms. Self. I think the concept of bad faith is critical in
    the patent demand letter context because it prevents the use of
    antitrust or Section 5 enforcement authority in a manner that
    would violate the patent owner's constitutional rights, and as
    has been said, those rights include First Amendment rights of
    free speech, rights to petition, but also the right to
    communicate about your patent is fundamental to your ability to
    enforce your patent.
        If you think about how patent owners sort of alert the
    world to the fact that they have a patented invention, and this
    has been true from the first, you know, the first days of our
    patent system, you make a public disclosure of the patent
    application as kind of a quid pro quo, if you will, for the
    right to enforce your patent, but your ability to enforce your
    patent is dependent on communication. If you are stifled in
    your ability to communicate about your patent, to make good
    faith communications about your patent, then effectively your
    patent is not enforceable.
        So bad faith is really critical to delineate the kind of
    conduct that would be appropriate for FTC enforcement. And I
    think it is also important to send a signal to State
    enforcement authorities that legitimate patent demand
    correspondence should not be the subject of State enforcement
    activity or Federal enforcement activity.
        So bad faith is really the cornerstone, if you will, in our
    ability to strike that right balance between protecting the
    interests of recipients who may be receiving these deceptive
    communications, but also supporting the vast majority of
    legitimate communications that are really fundamental to our
    innovation economy.
        Mr. Burgess. I might come back to you because you brought
    up the issue of pattern of practice, but I want to go down the
    panel for just a moment.
        Mr. Malta, the concept of bad faith?
        Mr. Malta. Chairman Burgess, I am a Realtor and my members
    sell the American dreams. And entrepreneurs in the coalition
    are hard-working business people that are trying to provide
    services to Americans every day.
        The concept of bad faith is a legal one, and that involves
    an attorney, and that involves time and money, and I can give
    you examples of what our members have gone through just on its
    face. This is not about stifling innovation, this is about
    stopping deceptive practices. So when I hear bad faith it means
    that my members will have to go to an attorney, seek counsel. I
    have many small business members as well as in the coalition.
    So that does not resolve the issue, especially for the small
    business people of America.
        Mr. Burgess. And, Professor, defining bad faith?
        Mr. Gugliuzza. Yes, fortunately, there is a lot of judicial
    case law applying in bad faith standard. At the time the
    Federal circuit was created, which is back in 1982, the lower
    Federal courts for nearly a century had been addressing this
    question of when may a patent holder be liable for its
    enforcement conduct, and they had enjoined patent holders from
    making infringement allegations in bad faith. But the Federal
    circuit has largely ignored that long line of decisions,
    instead demanding that anybody who challenges patent
    enforcement conduct prove that the infringement allegations
    were objectively baseless.
        Historically, you know, the courts treated bad faith as
    sort of a flexible standard that had both subjective and
    objective components. So under the standard, courts--you would
    see courts enjoining or punishment enforcement campaigns, for
    example, where the patent holder threatened a large number of
    accused infringers, or threatened law suits but failed to
    actually ever file them. But at the same time, I think these
    cases where enforcement conduct was punished were usually
    egregious and they often involved claims that were objectively
    weak on the merits. And so I think a good faith standard,
    particularly when it is grounded in that pre-Federal circuit
    case law, would protect patent holders' ability to provide
    legitimate notice of their patent rights, but also offer the
    Government some leeway to punish the most deceptive and
    problematic behavior.
        Mr. Burgess. And, Ms. Ranieri, on the concept of bad faith?
        Ms. Ranieri. The Electronic Frontier Foundation, as a
    digital civil rights and civil liberties organization, is a
    strong believer in the First Amendment. At the same time, I
    would like to echo what Professor Gugliuzza, apologies, said,
    that I believe the Federal circuit has narrowly ruled in a way
    that is inconsistent with precedent and the law, and I believe
    its ruling about what constitutes bad faith is overly narrow.
        There is room within the Constitution to regulate bad faith
    behavior, as well as respecting First Amendment rights. I would
    echo Professor Gugliuzza's statements that the courts are very
    good at determining what bad faith is, and I think we should
    leave it to them and also to agencies who are used to seeing
    bad faith behavior to figure out what exactly the contours of
    that is.
        Mr. Burgess. My time has expired. I thank the panelists for
    their responses.
        Recognize Ms. Schakowsky 5 minutes for questions please.
        Ms. Schakowsky. Thank you, Mr. Chairman.
        So States have, up until now, been leaders in the effort to
    combat abusive patent trolls. Currently 18 States including
    mine, Illinois, have enacted legislation regulating patent
    demand letters, and some State attorneys general have initiated
    legal action against patent trolls under their consumer
    protection authority. Under both the new patent demand letter
    laws and general State consumer protection laws, many State
    attorneys general have certain remedies available to them,
    including equitable relief, civil penalties and attorneys fee.
        The TROL Act that passed out of the subcommittee last
    Congress included a provision that would preempt the State laws
    that regulate patent demand letters.
        So first, Ms. Ranieri, you testified that Federal
    legislation, in fact, should not preempt State laws that
    address issues those States have encountered with patent
    trolls. So why is it important do you think that we not preempt
    State laws?
        Ms. Ranieri. Thank you. That is a good question. One of the
    most important reasons that this Government should not preempt
    State patent troll demand letter laws is that people who
    receive these letters often don't know who to turn to, and the
    first person they often turn to are the State AGs and the State
    agencies. And they are often the first line of defense for
    people to protect themselves. The State AGs have the most
    experience with what their citizens are receiving, and they are
    in the best position to see new developments in the patent
    troll demand letters, and to see the new deceptive practices as
    they arise, and legislate against that type of activity.
        Ms. Schakowsky. So have we seen any instances where there
    has been any problem with the fact that State attorneys general
    have been exercising that authority?
        Ms. Ranieri. None that I am aware of.
        Ms. Schakowsky. OK. Professor, let us establish how your
    name is actually pronounced. Say it again.
        Mr. Gugliuzza. Good, because I was about to apologize to
    the committee because I feel like this issue has sort of taken
    over the entire hearing.
        Ms. Schakowsky. No, I think we should apologize. Go ahead.
        Mr. Gugliuzza. It is Gugliuzza.
        Ms. Schakowsky. OK, Gugliuzza. OK.
        Mr. Gugliuzza. Very good.
        Ms. Schakowsky. The benefit of preemption would be to
    provide a uniform legal standard. In your testimony though you
    raised the question of whether uniformity is, in fact, an
    important enough policy goal that it should outweigh the
    benefits of State laws on demand letters. I am wondering if you
    could expand on the benefits--also expand on the benefits of
    not preempting State laws.
        Mr. Gugliuzza. Sure. You know, one of the benefits, as Ms.
    Ranieri mentioned, obviously, is the enforcement capabilities
    of dozens of States attorneys general offices might bring to
    the table. The other is the accessibility of the State
    governments or some of these small organizations that might be
    targeted. And then third, you know, I think the--in terms of
    forming the substance of a law, I think, you know, what we can
    see from some of these States' statutes are maybe some examples
    that might be informative to Congress if you were to choose to
    decide to legislate federally. So allowing these ideas to
    percolate among the State legislatures allow the States to try
    to figure out, you know, how do we draw the line from the--
    between the bad actors and the patent holders who are asserting
    their rights legitimately. I think the State legislation can
    shed a lot of light on those questions.
        Ms. Schakowsky. Thank you.
        Ms. Ranieri, in addition to the issue of preemption, you
    testified that Congress should not prohibit or discourage
    enforcement of the FTC Act by States. Can you expand on why
    State enforcement in this instance is so critical?
        Ms. Ranieri. I think it is for the similar reasons that I
    just mentioned, and also that Professor Gugliuzza also
    mentioned. State AGs have resources that the FTC might not
    have. The FTC might only have the ability to go after the worst
    actors, but that doesn't mean that there are others that are
    abusing the system. And State AGs provide a secondary line of
    defense in order to go after those who are targeting particular
    citizens in those States.
        Ms. Schakowsky. And last to you as well. The last Congress
    TROL Act limited the remedies available to State attorneys
    general to an injunction and compensatory damages on behalf of
    recipients who suffered actual harm. Would the limitation of
    remedies discourage States from enforcing patent demand
    legislation?
        Ms. Ranieri. It may, and I think that is a definite concern
    that this committee should have. Importantly, this sort of
    regulating unfair and deceptive practices is usually considered
    to be an equitable sort of action. Courts are very good at
    fashioning under-equitable remedies; the type of remedy that is
    appropriate given the circumstance. And it may, if absent, more
    punitive consequences to patent hold demand letters, they may
    just shift their activities, seeing no actual consequence to
    their bad activities.
        Ms. Schakowsky. Thank you. Clearly, this will be an issue
    that we will want to discuss further among our members, so I
    thank you.
        And I yield back.
        Mr. Burgess. Chair thanks the gentlelady. The gentlelady
    yields back.
        The Chair would like to recognize the attendance of a
    Member who is not a member of the subcommittee, but Mr. Tom
    Massie from Kentucky, from the Bluegrass State, and a noted and
    world-famous inventor. We welcome your presence here today.
    Thank you.
        The Chair would now recognize Mr. Mullin from Oklahoma for
    5 minutes for questions, please.
        Mr. Mullin. Thank you, Mr. Chairman. And just so I don't
    mess up your last name, Paul came and introduced himself to me
    earlier. He is from the great State of Oklahoma, went to Bishop
    Kelley in Tulsa, Oklahoma, and I guess your parents still live
    in Bixby?
        Mr. Gugliuzza. That is correct.
        Mr. Mullin. And so it is always good to see a friendly face
    in town.
        My first question would be for Mr. Malta. We just heard the
    conversation about our attorney generals, and so I am going to
    kind of stay on that focus. My own State of Oklahoma has laws
    specifically against abuse of patent demand letters. I want to
    make sure that my constituents are also protected from these
    type of letters, and if our committee drafts legislation
    prohibiting these types of letters, should attorney generals be
    able to enforce those laws?
        Mr. Malta. Our members believe that, yes, that they should,
    and that there--that we are more concerned about the outcome as
    to the protections because our members are in all 50 States. So
    if you are arguing preemption, et cetera, that at least there
    be some immediate baseline standard that is created, and that
    if States want to come and they want to make laws that are even
    more restrictive, by all means, go ahead, but we want something
    done in the very near term that affects our members in all 50
    States.
        Mr. Mullin. My next question is for Ms. Self. What if
    Qualcomm was hit from a law suit, let us say, from Oklahoma's
    attorney general then Vermont's attorney general, then say
    Illinois' attorney general, should a company be exposed to
    liability from every State enforcement agency? If not, why not?
        Ms. Self. Thank you for that question. Sorry, thank you for
    that question. And before I respond to that specific question,
    let me just say something about the preemption issue and the
    way the TROL Act was structured last year, at least. It did
    permit State attorneys general to bring enforcement actions
    under the Federal framework that was set out in the statute,
    and it would have, to your question, allowed more than one
    State attorney general to bring an action, assuming that the
    Federal Trade Commission had not already brought an action. And
    we thought that that was a balanced approach to the problem.
    The challenge that we are seeing at the State level with nearly
    20 laws that have passed, and another dozen or so that are
    pending, is that you are seeing a patchwork, if you will, of
    demand letter laws that all include different standards,
    different penalties. Some are very broad in scope. They don't
    clearly delineate the kind of activity that would fall within
    the demand letter. Sixteen out of eighteen would include a
    private cause of action. And, you know, to the point that was
    made about enterprising lawyers, I think it is inevitable that
    you will see a cottage industry evolve around harassing
    inventors under these laws. So the preemption language of the
    bill is really critical to make sure that you have a nationwide
    uniform framework that provides consumers, recipients with the
    guidance they need to understand what is deceptive behavior.
    And again, I think the bill does a good job of delineating what
    is deceptive statements in the context of a demand letter, as
    well as required disclosures, but it also puts the millions of
    small inventors in this country on notice as to what is
    appropriate or inappropriate.
        And so as we think about traditional State enforcement
    under unfair trade practices laws, we have to keep in mind that
    these are communications involving patent rights. These are
    rights that are rooted in the Constitution, they are dependent
    on the ability of the patent owner to exercise their First
    Amendment rights. And so this is really a very different
    dynamic than the normal activities that State enforcement
    authorities focus on.
        So we think the approach of the TROL Act is really the
    right approach, and it protects all interests in a balanced
    way.
        Mr. Mullin. Thank you. And I will try to be quick on this
    last question for Mr. Malta. The Realtors that you represent
    are exactly the type of small businesses that are near and dear
    to my heart. Could you please tell us specifically the type of
    information that needs to be included in a demand letter that
    would allow businesses that receive them to understand what
    they are accused of, and to what extent they need to take legal
    action on?
        Mr. Malta. OK, thank you. Yes, in creating greater
    transparency, 4 items, OK. First one, specify the relevant
    patent claim that is at issue. Very basic. Secondly, detail how
    a business has allegedly infringed the patent. Thirdly, include
    a description of the patent troll's investigation of the
    alleged infringing activity. And fourth, disclose the real
    parties in interest to the dispute, as many of these letters
    come from attorneys and they don't state who the party in
    interest is that is trying to enforce the claim, or enforce
    their patent.
        Mr. Mullin. Thank you.
        I yield back.
        Mr. Burgess. Chair thanks the gentleman. Gentleman yields
    back.
        The Chair now recognizes the gentlelady from--Ms. Clarke
    from New York for 5 minutes for questions please.
        Ms. Clarke. I thank you, Mr. Chairman. And I would like to
    thank our witnesses for their testimony this morning.
        In addition to serving on the Energy and Commerce
    Committee, I also serve on the Small Business Committee in our
    House, and our small business community lists fear of patent
    litigation as one of the biggest issues they face. So I am
    pleased that we are taking up this issue today.
        Frequently, patent trolls target end users of patented
    technology, such as small, local businesses who have simply
    purchased or use off-the-shelf products like a wireless router
    or scanner. These small businesses often lack expertise in
    patent law, and have few resources. When faced with the cost of
    defending even perfectly reasonable behavior, they find it is
    cheaper just to make a payment to settle the case.
        Ms. Ranieri, to what extent do patent trolls target the
    little guy, small businesses, startup, and mom and pop
    establishments, and what are some examples of everyday products
    that patent trolls are now claiming infringe their intellectual
    property?
        Ms. Ranieri. Thank you. The extent of the problem isn't
    known, but I can tell you as a legal services lawyer, I receive
    about one call a week. And to be clear, these are the people
    that have managed to find us. There are so many more people out
    there that don't realize that they should be contacting people
    like--or--and organizations like EFF. So unfortunately, the
    full scope of the problem isn't clear, but to be clear, it is a
    problem.
        The type of activity that we have seen is, for example, one
    of the patent trolls that we are looking at right now has
    accused people of using maps as infringing their intellectual
    property. This patent troll has gotten licenses, it appears,
    from litigations that they filed and settled, which usually, in
    patent litigation that means a settlement has occurred, has
    gotten licenses from everybody down the spectrum from handset
    carriers to the cell phone companies, to the makers of
    applications, and now they are targeting even smaller parties
    in the play--in the space. We believe that these patent rights
    have been fully exhausted, but because of the cost of
    litigation, the cost of figuring out whether those patent
    rights have been exhausted, these trolls can continue to be
    able to assert patent infringement with essentially impunity.
        So the problem is large, and we believe it requires action,
    and we also believe that it needs the disclosure requirements
    so we can understand the true scope of its effect on our
    innovation economy.
        Ms. Clarke. Let me ask you then, what options do small
    businesses or startup companies currently have when they
    receive a vague threatening demand letter, and do patent
    holders, other than trolls, routinely target end users? Could
    there be legitimate reasons to send demand letters to end
    users?
        Ms. Ranieri. The large number of letters that we have seen
    targeted at end users are from patent trolls. I have yet to see
    letters that don't come from patent trolls. They may exist, but
    I have not yet seen one. And, sorry----
        Ms. Clarke. What options.
        Ms. Ranieri. What options. Unfortunately, there aren't many
    right now. The cost of litigation for a small business of under
    $10 million in revenue, the cost of litigation through trial is
    over $1 million. When that means that employees might have to
    be laid off, and research and development can't happen, this is
    the cost to the patent troll--or to the alleged infringer,
    sorry. And unfortunately, as a lawyer, what ends up happening
    is that if someone comes to us, oftentimes we can only advise
    them to settle because it just is not possible, given the
    current available options, to actually fight back and show that
    they aren't violating anyone's rights.
        Ms. Clarke. Can you take a moment and sort of speak to the
    cost of patent litigation, and the feasibility of a small
    business mounting an adequate defense?
        Ms. Ranieri. Sure. So on a whole to our economy, it is
    estimated to cost in the billions of dollars, and those are
    often tangible costs. And intangible costs are things such as
    time----
        Ms. Clarke. Um-hum.
        Ms. Ranieri [continuing]. And stress, taken away--or--and
    taking people away from growing their business. The options
    that are currently available to those receiving demand letters,
    those who are end users who are implementing technology made by
    others, if they have connections with the companies that make
    these products that are accused of infringement, sometimes they
    can get help through the companies. That--I--like in the
    example that I mentioned before, UPS stepped up to protect its
    customers, and that was a great thing for UPS to do.
    Unfortunately, for many of these companies, they don't have the
    connections to do that. They don't have the resources and the
    knowledge to know that that is something that they should try
    to do. And oftentimes, there are no other viable options.
        Even filing an inter partes review at the Patent Office,
    which we commend these new procedures and we encourage them,
    even to get in the door, not even lawyer fees, which, as a
    lawyer, and I am sure many of you are lawyers----
        Ms. Clarke. Um-hum.
        Ms. Ranieri [continuing]. We know are extremely expensive,
    filing an inter partes review is over $20,000. That is the
    salary of a worker, that is money that could go in towards
    building a business. Many businesses just simply do not have
    this money.
        Ms. Clarke. I thank you. And I yield back. Thank you, Mr.
    Chairman.
        Mr. Burgess. The gentlelady yields back. The Chair thanks
    the gentlelady.
        The Chair recognizes the gentleman from Florida, Mr.
    Bilirakis, 5 minutes for questions please.
        Mr. Bilirakis. Thank you, Mr. Chairman. I appreciate it so
    very much, and I thank the panel for their testimony.
        Patent demand letters reform is an important part of
    curbing abusive practices that hurt legitimate businesses, as
    you know. However, I am concerned that overly broad definitions
    of patent assertion entities in other provisions that have been
    proposed, such as fee shifting and joinder, will limit our
    Nation's research universities, and their ability to have
    patented research discoveries transferred to start up receiving
    venture funding that can develop and commercialize these early
    discoveries.
        The University of South Florida, just outside of my
    district in Tampa, Florida, is a world leader in university-
    based patents, licenses and startup companies, and is a major
    regional economic hub and job creator in our area.
        Again, Ms. Ranieri and Professor Gugliuzza, excuse me if I
    mispronounce, what do you believe is the appropriate balance to
    ensure that the technology transfer process thrives, while
    simultaneously implementing the real reform targeted at bad
    actors with no intention to commercialize innovations?
        Mr. Gugliuzza. Thanks. I think a lot can be done by sort of
    looking at--as I was talking about the history--a long history
    of courts prohibiting bad faith assertions of patent
    infringement. A lot can be looked at by looking at some of the
    examples that courts have condemned in the past. They look
    extraordinarily similar to what we see these bottom-feeding
    patent trolls doing today; sending out massive amounts of
    demand letters, targeting the customers of the firms that
    actually manufacture the allegedly infringing technology,
    making claims that they couldn't--making claims that they could
    not have possibly investigated the merits of.
        So, you know, I think if you look back at those types of
    cases, you actually can see there is a very clear line between,
    you know, what is really abuse--so abusive as to be considered
    in bad faith, and the efforts of, say, an operating entity or
    legitimate efforts by a company to try to license their patents
    or resolve a dispute before it goes to court. Those lines have
    been drawn by courts for over 100 years, and I think they are
    lines the courts can continue to draw.
        Mr. Bilirakis. Thank you.
        Ms. Ranieri. I would agree with Professor Gugliuzza, and I
    understand your question to be how do we allow for legitimate
    letters and still legislate against the bad faith letters. And
    I think what is important to know is that those who are sending
    legitimate letters, they include the patent numbers in their
    letters where possible. They will include why they believe
    someone is infringing, and they will include information so as
    to allow the parties to really understand the scope of the
    claims, and why there is a claim of infringement or why the
    patent is not invalid. This is the activity that patent--bad
    faith patent demand letters don't include. And so I would agree
    with Professor Gugliuzza that there is a long line of cases
    that see this distinction and make the distinction, and I don't
    think legitimate patent holders should be concerned about any
    legislation against bad faith letters.
        Mr. Bilirakis. Thank you. Anyone else on the panel like to
    respond to that question? OK, thank you. I will move on if that
    is OK.
        Ms. Ranieri and Professor Gugliuzza, what factors do you
    believe should be prioritized when determining standards for
    demanding--demand letters that would address the abusive patent
    troll practices, while still preserving the legitimate patent
    holder's ability to negotiate license agreements with potential
    infringers?
        Mr. Gugliuzza. Just very briefly, a couple of factors that
    I think we have talked about so far. One is to the number of
    letters that have been sent out, right? If a patent holder is
    sending one letter to one specific company, well, it seems
    fairly likely that that letter is based on some sort of
    investigation that gives the patent holder a good faith belief
    that that recipient is infringing. When you send out, as MPHJ
    did, 16,000 letters to users of common office scanners, it is
    extremely unlikely that MPHJ has actually investigated the
    allegedly infringing conduct.
        So the number of the letters can be a nice source of
    indication of whether the investigation has happened, and also
    the specificity with which the letters both describe the patent
    claims, and also the allegedly infringing technology.
        Mr. Bilirakis. Thank you.
        Ms. Ranieri. I hesitate to give a complete list of factors,
    and the reason is this. Oftentimes what we see as--when letters
    are shown to us is that it is not one statement in isolation
    that is a problem, it is the totality of the letter that makes
    clear that the patent holder has not done an investigation, is
    trying to extract money. For example, references to the extreme
    cost of litigation, and I have seen letters with actual links
    to tables showing the recipient how much money they can
    receive.
        Litigation does cost a lot of money, that is true, but it
    is the fact that they put these statements in there, along with
    a--other vaguely threatening language that together be--makes
    us recognize a bad faith letter. So I hesitate to say these
    certain things make a bad faith letter, it is oftentimes when
    we see it all together that we can tell that this is not being
    set--sent for legitimate purposes.
        Mr. Bilirakis. Thank you very much.
        I yield back, Mr. Chairman. Appreciate that.
        Mr. Burgess. Chair thanks the gentleman. Gentleman yields
    back.
        The Chair recognizes the gentleman from Massachusetts, Mr.
    Kennedy, 5 minutes for questions please.
        Mr. Kennedy. Thank you, Mr. Chairman. I want to thank the
    witnesses for testifying today and for your attention to an
    important topic.
        Professor Gugliuzza, thanks for bringing the Boston weather
    with you. I wish you would have left it at home, but
    nevertheless, appreciate it.
        I want to flush out a little bit of a conversation we have
    had in the--before as well. My First Amendment law, while being
    a lawyer, is perhaps a little shaky. So there has been, I think
    some testimony that has touched already on the Noerr-Pennington
    doctrine, which touches on immunity of parties who are
    petitioning the Government for certain types of liability.
    Generally speaking, it is my understanding that this doctrine
    began in an antitrust base, but it has been steadily expanded
    over the course of case law throughout the years.
        So, Professor, starring with you, with regard to the Noerr-
    Pennington doctrine, I think that there are two open areas
    here, right? One is, does it apply to patent demand letters,
    and does it apply in the consumer protection context? And I was
    hoping you can just start with those--kind of that basic
    framework.
        Mr. Gugliuzza. I have some comments that hopefully are sort
    of somewhat responsive to it. So the Noerr-Pennington doctrine,
    you are correct, that it was initially developed by the Supreme
    Court as an interpretation of the Sherman Act, in light of the
    First Amendment, right? So what happens in these cases was,
    defendants to law suits would turn around and sue the original
    plaintiffs and say, you know, you are a plaintiff, you have
    sued me and, you know, you have your--you have market power,
    your are a monopolist and, therefore, your law suit against me
    is anticompetitive and violates the Sherman Act. And what the
    court said was, well, you know, under the Sherman Act,
    litigation activity is actually not antitrust--illegal under
    the antitrust laws, the reason being twofold. One, the Sherman
    Act was intended to regulate business activity, not litigation
    activity. And two, to make unlawful the conduct of filing a law
    suit would potentially violate the First Amendment right to
    petition the Government. Right?
        The issue--the main issue that I see in applying that line
    of cases to these patent demand letters is that a patent demand
    letter between two private companies is just not a petition to
    the Government, it is a private communication among two private
    parties. So I think that is one main problem with extending,
    you know, main problem of constitutional law with extending
    First Amendment petition clause protection to these letters.
        Mr. Kennedy. And so given that is the case though, but you
    are asking the--it is between two companies, but you are asking
    the Government to enforce a patent--a protection action, right,
    that patent----
        Mr. Gugliuzza. Yes.
        Mr. Kennedy [continuing]. In that context?
        Mr. Gugliuzza. But the law can, you know, there are lots of
    consumer protection laws that are similar, that I think were
    similar to what this committee is considering. The example that
    I like to invoke is the Fair Debt Collection Practices Act.
        Mr. Kennedy. Um-hum.
        Mr. Gugliuzza. Right? When an attorney, acting as an
    attorney, sends a letter that is an act of debt collection, it
    may even be the filing of a law suit, right, those actions
    under the Fair Debt Collection Practices Act aren't subject to
    Noerr-Pennington immunity. Courts have largely--have upheld the
    fair--the constitutionality of the Fair Debt Collection
    Practices Act. So I think, you know, a similar statute that
    condemns patent enforcement activity, much like debt collection
    activity, should be on the same solid constitutional footing.
        Mr. Kennedy. And then, Ms. Ranieri, could you just give a
    little bit--you were talking about the totality of the
    circumstances of the letters and such a moment ago, but in your
    review of the legal literature, do you believe that the general
    content of demand letters is protected speech?
        Ms. Ranieri. So as I mentioned, EFF is a digital civil
    rights and civil liberties organization, and the First
    Amendment is very important to us. At the same time, I don't
    believe that the Noerr-Pennington doctrine extends as far as
    the Federal circuit would have it, and in fact, this recent
    Supreme Court decisions just won last year, the legal
    underpinnings of the Federal circuit's decision applying the
    Noerr-Pennington doctrine to the demand letters was recently
    questioned in another case on a related issue, and I believe
    there is room within the First Amendment, respecting First
    Amendment rights, to allow for regulation of demand letters.
        To be clear, what we think the First Amendment does is it
    makes sure that legitimate patent holders can enforce--can send
    demand letters, but what it doesn't protect is bad faith
    assertions, false statements, that are within the demand
    letter.
        Mr. Kennedy. And you think that the--you think that case
    law or legislation can be developed that is going to be
    sufficiently narrowly tailored that will provide for a
    definition of good faith that the courts would uphold?
        Ms. Ranieri. I think what actually could happen is that
    Congress could leave open the definition of bad faith, and
    courts themselves will narrowly tailor it to make sure that it
    is consistent with the First Amendment.
        Mr. Kennedy. Professor?
        Mr. Gugliuzza. I agree, and I think it is very possible
    that the courts, especially seeing the interest from Congress
    on this particular issue, would be very--would try very hard to
    interpret any legislation consistent with the First Amendment.
        Mr. Kennedy. Thank you both. Thank you all.
        Yield back.
        Mr. Burgess. Chair thanks the gentleman.
        Chair now recognizes the gentleman from Texas, Mr. Olson, 5
    minutes for questions please.
        Mr. Olson. I thank the Chair. And welcome to our witnesses.
    Ms. Self, Mr. Malta, Ms. Ranieri, and certainly no disrespect,
    but can I call you Professor G? Is that OK, because----
        Mr. Gugliuzza. You may.
        Mr. Olson [continuing]. If I try pronouncing it with my
    thick Texas tongue, I am going to be exposing myself to a
    lawsuit for cruel and unusual punishment. All people here
    watching on TV, so Professor G is OK? Great.
        My first question for all the panelists, and starting off
    with you, Professor G, as you know, there are 18 States right
    now that have State laws that fight abusive patent letter
    demands. The lovely State of Texas is one of the 32 that
    doesn't have those such laws, but they are being authored right
    now and this issue is on the table. And so they are in session
    for 140 days every 2 years, so it is a brief window of time
    here. So put your cowboy hat on and come to Texas. How would
    you best like me to advise the people there what should they
    do, what should they not do if Texas steps out and does--some
    laws fighting abuse patent demand letters? Yes.
        Mr. Gugliuzza. So, you know, I think the concerns we have
    been talking about about, you know, the difficulty and sort of
    fragmentation of different States have different legal
    standards for demand letters is certainly a valid one,
    particularly for large, innovative firms. I think one thing
    that your State might consider is looking to the Vermont
    statute as an example. It has been sort of the most influential
    of the statutes. It has been adopted by 13 other States. It
    sets out very simply that it is unlawful to make a bad faith
    assertion of patent infringement, and it sets out some factors
    under which courts may determine whether an assertion is in bad
    faith or is not. And so I think if Texas were to do that, it
    would be joining a fairly large cohort of other States that
    have adopted similar legislation.
        Mr. Olson. OK. Thank you.
        Ms. Self. Can I----
        Mr. Olson. Ms. Self, can you comment? Anything you can
    advise our legislature?
        Ms. Self. Yes, and in fact, just so you know, we have
    actually been in conversation with the State legislatures in
    Texas to talk about this very issue.
        Mr. Olson. Expected. You guys are great. That was expected.
        Ms. Self. Let me just say that--so we do think, again, sort
    of following the model of the TROL Act, that there is, you
    know, a version of State legislation that would appropriately
    balance the interests of potential recipients of these letters
    and the very large number of small patent holders that could
    potentially get, you know, unintentionally get caught up in
    legislation of this type. I think the challenge with the--with
    some of these State demand letter bills that we have seen, as I
    said previously, over breadth in terms of capturing activity
    that could just be normal commercial communications, and I
    should say that I, with all due respect, disagree with the
    Professor's analysis of Noerr-Pennington. I think there is a
    lot of scholarship and case law that affirms that the First
    Amendment does extend to pre-litigation communications,
    particularly when you are talking about the enforcement of a
    property right. But again, the private cause of action that is
    included in the Vermont statute, and several other statutes, is
    really troubling. And so one of the pieces of advice that we
    have extended to folks in Texas is do not include a private
    cause of action. You are going to create far more problems than
    you can--are trying to solve by subjecting small inventors to
    harassment. And again, as with the structure of the TROL Act,
    to clearly delineate activity that is objectively deceptive;
    trying to enforce a patent that has expired, claiming you are
    the owner of a patent when you are not, and limiting
    affirmative disclosures to the kind of information that small
    inventors can reasonably disclose, because it is important to
    keep in mind that the vast majority of inventors in this
    country are also small businesses----
        Mr. Olson. Yes.
        Ms. Self [continuing]. And they may not have all of the
    information that they need to know whether, in fact,
    infringement is occurring, or the nature of that infringement,
    particularly when you are talking about negotiations or
    discussions with much larger product manufacturers.
        So finding a balance that protects both the interests of
    small patent owners as well as small business owners, small end
    users, I should say, is really--should really be the goal in
    any State. And again, just to reiterate my previous context--
    contents--or comments, rather, sorry, we believe that the
    structure of the TROL Act is that right balance, and again, it
    would permit State attorneys general, in Texas and other
    States, to enforce against deceptive activity under that
    framework.
        Mr. Olson. Thank you. And, Mr. Malta, no intention to put
    you between two different people on different sides of the
    issue, but you are right there, my friend. How about your
    comments? What can I take back home?
        Mr. Malta. Comments are, get it done.
        Mr. Olson. Well, that is easy----
        Mr. Malta. And if you get it done in the State of Texas,
    then perhaps that will provide the patchwork that will force
    the Federal Government to finally step in and say we need to
    make sense of this so that people can work under a set of
    rules, and we can get back to business in some of these areas.
    So----
        Mr. Olson. OK. And, Ms. Ranieri, your comments on Texas?
    Get 'er done, is that--do you echo those comments?
        Ms. Ranieri. I would agree, and I would also like to add
    that, although we are in the patent context, and Ms. Self
    raised the issue of it might be difficult for patent owners to
    be able to comply with a patchwork of laws. To be clear, States
    have long had different laws when it comes to consumer
    protection, and companies have had no problems with complying
    with all those laws. And we don't think that the patent context
    needs to change--or--that, and companies still can comply with
    all the laws. We think if some--if a patent owner wants to
    purposefully avail himself of sending a letter to a State, they
    can comply with the laws, and look up the laws and make sure
    that their letter is appropriate.
        Mr. Olson. I am out of time. Thank you.
        Yield back.
        Mr. Burgess. Gentleman yields back. Chair thanks the
    gentleman.
        Chair recognizes the gentleman from California, Mr.
    Cardenas, for 5 minutes for purposes of questions please.
        Mr. Cardenas. Thank you very much, Mr. Chairman. And I
    appreciate this opportunity to discuss this important issue
    that really is hampering our economic ability throughout the
    country. One of the things that the United States has been
    recognized for, and we should be very proud of, is we are the
    innovative capital of the world, but when we have people who
    take opportunity to try to thwart that, that is something that,
    to me, strikes at the core of our ability to continue to be an
    economic driver, not only for ourselves as a country but for
    the world.
        Last year, I introduced a bipartisan bill to address patent
    troll abuse at the International Trade Commission. Patent
    trolls have been impacting businesses in every forum, and we
    should do everything that we can to curb their ability to
    exploit businesses of every size, small and large. Patent
    trolls' abuse of the complicated patent system can harm our
    economy, and hamper innovation by imposing huge litigation
    costs on productive companies.
        I would like to get a sense of the significance of the
    problem that we--that faces us here today. Ms. Ranieri, in your
    testimony, you quoted Seventh Circuit Judge Posner's statement,
    and I am paraphrasing, patent trolls are not trying to protect
    the market for products they want to produce, but instead, lay
    traps for producers. How does patent toll activity negatively
    affect the economy and innovation as far as you are concerned?
        Ms. Ranieri. So let me give an example. What we see in the
    Bay Area is a lot of people who are developing new
    technologies, and, for example, apps on a smartphone. These
    innovators, they want to bring a new product to the market,
    they are very excited. They come out and they bring the--bring
    it to market and hopefully it becomes successful. What then
    happens is later, they will receive a demand letter or a filing
    of a litigation claiming that they infringe on patent rights.
    These innovators have not seen these patents before. These are
    not cases of copying others' ideas, this is a
        case--these are cases of innovators who independently
    created works and brought them to market, and tried to grow
    their business, and once they become successful, become targets
    of patent trolls. And this is the cost to our economy. It is
    people who are independently creating, independently
    innovating, that then get targeted by those who have created
    nothing, and instead, wait for someone else to do the hard work
    of developing products, testing, marketing, things like that.
    And not only is the financial cost significant, the settlement
    demands are extreme, but also it takes away time and energy
    from actually growing the business. Instead, it directs it
    towards stress, gathering documents, and although this might be
    good for the lawyers, it is not good for the companies.
        Mr. Cardenas. So, for example, what you just described, I
    would imagine could, in fact, wreak havoc on a small inventor,
    a small company, maybe with 5 employees, or 10 or 20 employees,
    that that particular product is the reason for their existence
    as a company. Could that kind of activity actually bring such a
    company like that to bankruptcy or to actually fold? And when I
    say fold, that means that that 5 or 10 or 20 employees in that
    scenario now will have to go look for work elsewhere. Do--have
    you ever seen that happen?
        Ms. Ranieri. We have. Actually, there was a case very
    recently. Someone contacted us and they were being sued by a
    patent troll, and the patent was on placing photos from sports
    events online, and allowing someone to search those sports
    events for their bid number in order to order a picture. And
    there is actually a patent on that. And it was a small, four-
    person business, and he was extremely scared that he was going
    to have to lay off employees in order to fight back. He chose
    to fight back, but in doing so, he spent a significant amount
    of resources, and eventually this patent was actually
    invalidated, but the amount of money and time and stress that
    that took was significant.
        Mr. Cardenas. Upwards of how much did he spend? I mean, was
    it only $5,000, $10,000, $50,000 perhaps?
        Ms. Ranieri. So I can't--I don't know his particular case,
    but having been in private practice, the amount--what I saw
    happen in his case, I would estimate anywhere from $200,000 to
    $250,000.
        Mr. Cardenas. Exactly. That is a small business. Very few
    small businesses can part with those kinds of resources and
    stay in business, and that is at the core of what the problem
    is. The problem here is, in my opinion, we have individuals and
    law firms that are just preying on people without even any
    regard or concern for the cause and the consequence of what
    happens. And to lose in such a case, or what have you, it
    appears, in my opinion, that an organization that would bring
    that upon a small business would probably still flourish and go
    on, probably have many irons in the fire, such as the one you
    just described, but you have a small business, one after
    another, after another, who just disappear because of this
    practice that should not be allowed.
        Thank you very much, Mr. Chairman. I yield back.
        Mr. Burgess. Gentleman yield back. Chair thanks the
    gentleman very much for his questions.
        Chair recognizes the gentleman from Illinois, Mr.
    Kinzinger, 5 minutes for your questions please.
        Mr. Kinzinger. Thank you, Mr. Chairman. And again, to our
    witnesses, thank you for being here today and spending some
    time with us.
        Ms. Self, companies like Qualcomm have large patent
    portfolios because they have invested a large amount of money
    in new patents and the creation of new products. And
    presumably, many of Qualcomm's patents can be similar to
    patents held by other companies. When Qualcomm believes a
    similar company with a large patent portfolio may be infringing
    on its patents, how does Qualcomm open communications with that
    company?
        Ms. Self. Well, let me just say at the outset that, you
    know, Qualcomm, we are--we have been existence for 30 years.
    Today, we are a large mature company, as you said, with one of
    the world's largest wireless communications portfolios, but
    we--our roots were as a startup, you know, seven engineers,
    seven academics, who had what they believed was a highly
    effective solution to what was then viewed as an intractable
    problem in wireless communications. And solving that problem
    has allowed this mobile ecosystem to grow, and we would not
    have an app development community or industry without the hard
    work that engineers at Qualcomm and other inventive companies
    undertook.
        So today, our--basically, our portfolio is very well known.
    Most--if you have a smart device, a 3G, 4G device, you use
    Qualcomm technology, and you--and if you are, you know, a
    legitimate player, you come to Qualcomm and seek a license, but
    that dynamic is entirely different for small inventors in this
    country. And I just wanted to take issue with the
    characterization of inventors as creating nothing, and all the
    hard work being done by product manufacturers. Inventors in
    this county are, I think responsible for the vast majority of
    economic growth and success that we have seen over the last 200
    years, and so characterizing inventors as doing nothing simply
    because they don't----
        Mr. Kinzinger. Right, I----
        Ms. Self [continuing]. Manufacture a product really does
    disservice.
        Mr. Kinzinger. I get that, and I will let you, on somebody
    else's time, can expand on that, but my question is if you have
    a company with a large patent portfolio----
        Ms. Self. Um-hum.
        Mr. Kinzinger [continuing]. That you believe is impinging
    potentially on what you guys have, how do you open
    communications with that company?
        Ms. Self. You know, you--I mean, candidly, I am not part of
    our licensing team, but I--as a lawyer, I am assuming that you
    send a letter, you pick up the phone, you send an email
    communication, you initiate a conversation about the fact that
    you believe that the other company's products may be infringing
    or reading upon some aspect of your portfolio. So again----
        Mr. Kinzinger. But----
        Ms. Self [continuing]. It is the communication.
        Mr. Kinzinger. And, Professor, I am curious as to how
    private causes of actions have worked in the States. Have they
    been effective?
        Mr. Gugliuzza. So, no. As far as I know, there actually is
    not yet--the statutes are so new, there actually has not yet
    been a private cause of action actually asserted under any of
    the statutes. The claims that we have seen so far challenging
    these mass enforcement campaigns actually come under sort of
    preexisting general consumer protection and deceptive trade
    practices laws.
        Mr. Kinzinger. OK, all right. Another--are there other
    theories rooted in tort law that would allow businesses or
    individuals to reclaim money that they lost to a patent troll?
        Mr. Gugliuzza. Absolutely. You know, for--even--so as I
    mentioned the example of general consumer protection deceptive
    trade practices laws, there are theories of tort law available,
    tortious interference with business relationships, if a patent
    troll is targeting your customers, you might be able to assert
    that claim. You can assert claims of unfair competition under
    State common law. Under Federal law, for example, when
    Innovatio sent letters to 8,000 users of wireless internet
    routers, the manufacturer of those routers, Sysco, Netgear,
    Motorola, actually sued Innovatio under the Federal RICO
    Statute----
        Mr. Kinzinger. OK.
        Mr. Gugliuzza. Racketeer--Corrupt Organization----
        Mr. Kinzinger. And----
        Mr. Gugliuzza [continuing]. Statute. Sorry.
        Mr. Kinzinger. And I have one more question for you. In
    your testimony, you mentioned Illinois and a couple of other
    States have taken a slightly different tactic on dealing with
    patent trolls; namely, they focus on specific acts or omissions
    that violate the statute, rather than prohibiting false or bad
    faith assertion. As I am sure you are aware, the business
    community in Illinois appears to be more comfortable with this
    approach. What lessons should Congress learn from this approach
    as we try to balance going after patent trolls with protecting
    legitimate communications between businesses?
        Mr. Gugliuzza. Sure. You know, certainty is important, and
    I think that sort of purveys a lot of the discussion both in
    terms of should the Federal Government regulate this or should
    the State government regulate this, and also the question of
    what should the standard we are judging this under be. And one
    that provides certainty is important so that, you know,
    legitimate assertions of infringement are not punished, but
    deceptive assertions that intentionally target small
    businesses, as these mass enforcement campaigns do, are
    punished.
        Mr. Kinzinger. OK. Mr. Chairman, I will yield back. Thank
    you.
        Mr. Burgess. Chair thanks the gentleman.
        Chair recognizes the gentlelady from Indiana, Mrs. Brooks,
    5 minutes for your questions please.
        Mrs. Brooks. Thank you, Mr. Chair.
        Profession Gugliuzza, I am worried about the widespread
    practice of sending abusive demand letters. As we have heard,
    it is a drain on employers and a drain on jobs. And apparently,
    according to a University of California Hastings College of Law
    study, 70 percent of venture capitalists had portfolio
    companies that received patent demand letters. It is a--it does
    seem suspicious to see so many startups hit with patent claims,
    and it is troubling to think, and as we have heard, that
    startups in particular may have a good bit of their funding and
    money going into fighting patent claims right off the bat.
        Do you have any sense, or have you seen anything that talks
    about how much money and how many jobs are being impacted in
    our economy to fight off these types of abusive demand letters?
        Mr. Gugliuzza. So quantifying the effect of these demand
    letters is incredibly difficult because the persons who are
    targeted with them or the persons who purchase licenses because
    of them, are not very willing to identify themselves or
    disclose what they have done. The reason being that it just
    makes them a target for the next round of demand letters.
        Mrs. Brooks. And, Mr. Malta, do you have any sense from
    those you are representing how many job losses there have been
    among your members?
        Mr. Malta. So the job loss is direct and indirect. Direct
    when a company is put out of business, OK, and that is more
    quantifiable, but it is also indirect. We could provide an
    example such as J.C. Penney who now has a policy of no longer
    employing or hiring a startup company, in getting them the
    latest technology, out of fear of being sued because lawyers go
    where the money is. And so they will go with the startups and
    then, of course, they will go for the deep pockets in some of
    the major corporations. So that is affecting small businesses
    in a great way, when they are not being hired by larger
    businesses out of fear that they will be sued by patent trolls
    in relation to their work.
        Mrs. Brooks. Do we have any information as to how many
    companies have been put out of business? Has there been--and
    while I recognize that that could be difficult, Ms. Ranieri,
    anyone know if we have an estimates of how many companies have
    been put out of business, whether it is startup or larger?
        Ms. Ranieri. To be frank, it--we can't figure that out
    right now. Patent trolls take advantage of the fact that this
    occurs in the shadows, and that is why we at EFF think it is
    really important to have--to implement disclosure requirements
    so we can understand the true scope of the problem, and the
    effect that it is having on our economy.
        Mrs. Brooks. Thank you. And finally, Ms. Self, certainly, I
    am concerned about protection of property rights, ensuring that
    innovators have the confidence that their patent rights are
    going to be secure, and you have made a great point in your
    testimony that IP-intensive industries account for more than
    \1/3\ of U.S. GDP, and directly or indirectly support over 40
    million jobs in this country. If we do move forward, and I
    appreciate your point on the TROL Act from last Congress, but
    if we approve the legislation, what is the most important
    thing, the most important thing you think we need to focus on
    to get it right in order to protect legitimate patent holders'
    ability to communicate with potential infringers or licensees?
        Ms. Self. Thank you for that question. I, you know, it hard
    to point to just one piece of this bill that is, you know, the
    most important factor. It--the framework of the bill, I think,
    the four factors that I mentioned in my oral statement, the
    fact that it is limited to bad faith communications, the fact
    that it clearly delineates categories of deceptive activity as
    well as required disclosures, but in a way that is balanced and
    respectful of the rights of patent owners. The preemption
    issue, again, I think the combination of preemption with the
    authority of State attorneys general to enforce the law under
    the Federal framework. Those components, I think, are really
    critical. And I think, again, it is that framework that
    provides the balance and, you know, not just one particular
    component. So I think all of those components work together to
    provide an effective solution to what we, I think, all agree is
    a problem, but without creating unintended problems for patent
    owners because, you know, the other part of this calculus, if
    you will, is that if you make it so onerous for patent owners
    to enforce their rights, then they will become the target of
    abuse by infringers, by opportunistic lawyers who use State
    laws to harass them. So that is another important focus to keep
    in mind as we try to chart forward with the right path.
        Mrs. Brooks. Thank you. Thank you for the thoughtful
    response, and for all of your work and all of the input all of
    you are providing us. Thank you.
        I yield back.
        Mr. Burgess. Gentlelady yields back.
        Chair now recognizes the gentleman from Kentucky, Mr.
    Guthrie, 5 minutes for questions please.
        Mr. Guthrie. Thank you, Mr. Chairman. Thank the panel for
    being here.
        Sorry, I was in another hearing of this same committee, in
    another subcommittee, so I apologize that I may ask questions
    and you all sort of repeat a little bit of what Mrs. Brooks
    just asked, but I think a lot of us here are just trying to get
    our heads around this. I think when you talk about the sports--
    I can--my son played little league, because I know there are
    guys in my area go online, you can buy pictures, and I can see
    where that-- I mean, $250,000, and those stories are out there,
    they are real. And that is clear, we need to stop that. Then I
    have my friend, Thomas Massie here, who represents the northern
    part of Kentucky, District 4, 3 or--I am 2, so 4 maybe, 4, in
    Kentucky, he was an inventor. And so when we hear the story
    like you, Ms. Ranieri, and it is like, well, this is simple, we
    need to fix this, so that is obviously--obviously needs to be
    fixed. And then you hear people say, well, if people have
    patents, if they are not using them, that is a good way--like
    the manufacturer. Well, then Thomas explains in a long
    dissertation at breakfast one day about how a lot of people who
    are legitimate patent holders, who will legitimately invent,
    hold these patents because they don't have the means or the
    ability, they are trying to move forward. And so if you do this
    and this kind of--that kind of reaction to stop patent trolls
    is going to--could stop the small entrepreneurial inventor, and
    so you have unintended consequences.
        So I am--I guess what I am asking, is there any of this
    expert panel--where can we delineate between--what--you know,
    was the old Justice Potter, I know it when I see it. I can't
    really describe it, but I know it when I see it. And how do you
    delineate between what is clearly somebody out there patent
    trolling, versus, you know, somebody like Thomas who works in
    his garage and comes up with--essentially what you did, come up
    with several patents that, you know, takes him a while to find
    the resources to move forward. And so the question is the
    people just out searching, and then you have trolling, and then
    you have the people who are legitimate small folks. And that is
    what we are trying to find with the balance, because we want to
    fix the problem, but we don't want to have unintended
    consequences. So I will kind of open it up to the panel.
        Mr. Malta. Thank you. With an issue like this, there is a
    starting point, and you are here at the starting point, and
    that is to stop deceptive practices.
        Mr. Guthrie. Um-hum.
        Mr. Malta. And the way--and we are not stopping innovation.
    And so you are right, it is that balance, but let us stop
    deception. And that is why we are suggesting and recommending
    that these letters have basic information in it. And basically
    stated earlier, state the claim, who is the part at interest,
    et cetera.
        Mr. Guthrie. Um-hum.
        Mr. Malta. And that would be the start to a much greater
    reform that will probably evolve over time, that will deal with
    the balancing that needs to be done to preserve innovation.
        Mr. Gugliuzza. Yes, let me--you know, the enforcement
    efforts I think this committee should focus on are particularly
    egregious, right? They, for example, are targeting large
    numbers of end users of relatively commonplace technology,
    right? MPHJ sends 16,000 letters out alleging infringement of
    use of a common office scanner. Innovatio sends out 8,000
    letters alleging infringement because of the use of common
    wireless internet routers. That is--so these are, you know,
    egregious, they are sending out large numbers of letters
    focusing on end users, and also the claim--the patents
    themselves are sort of--you might say they are objectively
    weak. So an example of this is a troll up in the Pacific
    Northwest called Savannah IP. It sent letters to home builders
    throughout the Pacific Northwest alleging infringement of a
    patent on a ``moisture removal system'' to dry lumber during
    construction. So if you were using a fan to dry your lumber
    during construction, you may be infringing Savannah IP's
    patent.
        Mr. Guthrie. Well----
        Mr. Gugliuzza. There were real questions about whether that
    patent is valid, and those sorts of assertions are the ones----
        Mr. Guthrie. No, I agree with you 100 percent. So you walk
    out of that and you are going, boy, this is easy to get behind.
    Let us get onboard, let us move forward, I like the
    legislation. And then you a have the talk with Thomas and say,
    well, these are some of the consequences that could come from
    that, and you walk out going--I mean we are really trying to
    figure out exactly what the right thing to do is, because we
    all want to solve the problem. I think even people who you are
    probably hearing oppose the current bill will say I--I have
    heard Thomas say it, I recognize there is a problem that needs
    to be solved.
        Mr. Gugliuzza. Yes.
        Mr. Guthrie. And so what we are trying to figure out, where
    is that--I mean what--every situation you just described where
    somebody is patenting a fan, we all agree needs to be fixed.
        Mr. Gugliuzza. Yes.
        Mr. Guthrie. I think most all of us----
        Mr. Gugliuzza. I would----
        Mr. Guthrie [continuing]. Would agree.
        Mr. Gugliuzza. I would just encourage you to trust the
    courts. They know--they can tell the difference between the
    good actors and the bad actors. And----
        Mr. Guthrie. Well, the problem is a lot of people go
    through court--the problem is the expense of going to court.
        Mr. Gugliuzza. Yes.
        Mr. Guthrie. So I mean that is what we are trying to solve.
    That is one of the problems we are trying to solve is----
        Mr. Gugliuzza. Well----
        Mr. Guthrie [continuing]. That people are just paying--they
    are sending out 8,000 letters, if 1,000 people paid and not go
    to court, so just using that as a solution, that is actually
    part of the problem we are trying to solve.
        Mr. Gugliuzza. So if you have enforcement by State
    attorneys general or the Federal Government, that can help
    rectify the sort of resource imbalance that you are talking
    about, I think.
        Mr. Guthrie. Yes, but just relying on the courts is what we
    are trying to solve, the problem, the expense of that.
        Ms. Self. Can I----
        Mr. Guthrie. I think I am out of time. So I don't know if
    the chairman wants to----
        Mr. Burgess. Chair will allow both Ms. Self and Ms. Ranieri
    to respond.
        Ms. Self. Yes. I just wanted to echo part of the comments
    that the Professor made. First of all, the bad faith
    requirement, I think, is an important, you know, dividing line
    between legitimate communications and communications that are
    appropriate for FTC enforcement authority. And again, the goal,
    at least from our perspective, the goal here is not to expand
    FTC authority, it is to clarify it. But the pattern or practice
    component, I think does help, again, further delineate
    because--I have seen--we have seen at the State level
    proposals, for example, that any demand--any patent owner that
    sends 10 demand letters is, you know, automatically subject to
    enforcement. That is really not an appropriate approach.
    Pattern or practice denotes widespread communications that meet
    a standard of deception, and I agree that that standard will
    evolve through the courts. I think the TROL Act helps--is a
    starting point because it clearly identifies some areas where,
    you know, you do have clear objectively, you know, verifiable
    deception as well as some, you know, some minimal baseline
    affirmative disclosure requirements. But also the FTC authority
    has traditionally been limited to consumers, and that means
    small businesses, nonprofits, as well as individual recipients.
    I think that is another dividing line that helps with the
    problem that, I think, you have rightly laid out for us.
        If large companies are receiving demand letters, that is a
    very different dynamic than small mom and pops, and it should
    be treated differently under the law. So I think all of these
    various, what I would consider to be safeguards, if you will,
    that are set forward in the TROL Act, I think, help solve the
    problem that you have articulated.
        Mr. Burgess. Ms. Ranieri?
        Ms. Ranieri. I just wanted to add that EFF is--our
    constituency are the small innovator and inventors, and
    unfortunately, as Mr. Malta said, this is a starting point, the
    deceptive letter practices, but our position is until we get
    better patents issuing out of the patent office, and until we
    stop the flow of patents that should never be issued, we cannot
    solve this problem. And that is why broader reform is needed.
    Once patents become more--sorry, once patents that issue out of
    the patent office can actually be looked at and seen as actual
    inventions, this will make it much easier and clearer to solve
    all of these problems.
        Mr. Guthrie. I think that is the argument Thomas Massie
    made, but he made it in 30 minutes, you have made it in 1, so I
    appreciate that very much.
        Mr. Burgess. Gentleman's time has expired.
        Chair would ask of the ranking member, do you have a
    follow-up question?
        Ms. Schakowsky. I do not.
        Mr. Burgess. Ranking member has no follow-up question.
        The only thing I was going to ask in follow-up, and
    Professor and Ms. Ranieri, you all talked about flexibility,
    but then, Ms. Ranieri, you had given us an admonition
    earlieron't give us loopholes or we will drive a truck through
    them. So how do we achieve that balance between flexibility and
    loopholes?
        Ms. Ranieri. That is a good question, and I think that is
    where the courts and the attorneys general, and the FTC and
    other agencies like the FTC come into play. They can recognize
    these activities. And as I mentioned, at its base, these laws
    are meant to target unfair and deceptive trade practices, and
    these are activities that States have a lot of competency with,
    in that they see them a lot in different industries, and they
    can apply the knowledge that they have learned in those
    industries to this context.
        Patents are involved, yes, so that changes it slightly, but
    at the base, the types of deceptive and unfair practices often
    span many different industries.
        Mr. Gugliuzza. Yes, I agree. I think, you know, the--
    allowing the courts flexibility rather than sort of
    hamstringing them with a complicated statutory definition of
    bad faith, or a long list of factors of bad faith, is very
    important in allowing courts in a case-by-case basis to try to
    close those loopholes.
        Mr. Burgess. Chair thanks all of our witnesses. And seeing
    no further Members wishing to ask questions, again, thank the
    witnesses for their participation.
        Before we conclude, I would like to include the following
    documents to be submitted for the record by unanimous consent:
    A letter on behalf of the National Association of Federal
    Credit Unions, a letter on behalf of the Direct Marketing
    Association, a joint letter on behalf of the American Bankers
    Association, the American Insurance Association, the
    Clearinghouse Payments Company, Credit Unions National
    Association, Financial Services Roundtable, Independent
    Community Bankers of America, National Association of Federal
    Credit Unions, and the National Association of Mutual Insurance
    Companies. Pursuant to committee rules, I remind members that
    they have 10 business days to submit additional questions for
    the record. I ask that witnesses submit their responses within
    10 business days upon receipt of the questions.
        Voice. We also have a letter from the National Retail
    Federation.
        Mr. Burgess. My understanding is a late arrival, a letter
    from the National Retail Federation, which we will make part of
    the record. And----
        Ms. Schakowsky. Without objection.
        Mr. Burgess. Without objection, so ordered.
        [The information appears at the conclusion of the hearing.]
        Mr. Burgess. And then without objection, the subcommittee
    is adjourned. And I thank the witnesses.
        Ms. Schakowsky. Thank you.
        [Whereupon, at 11:56 a.m., the subcommittee was adjourned.]
        [Material submitted for inclusion in the record follows:]

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