[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
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Printed for the use of the Committee on Energy and Commerce
energycommerce.house.gov
_________
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COMMITTEE ON ENERGY AND COMMERCE
FRED UPTON, Michigan
Chairman
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
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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:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
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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