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




                 EXAMINING RECENT SUPREME COURT CASES 
                          IN THE PATENT ARENA

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



                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                            
                     COURTS, INTELLECTUAL PROPERTY,
                     
                            AND THE INTERNET

                                 OF THE

                       COMMITTEE ON THE JUDICIARY
                       
                        HOUSE OF REPRESENTATIVES

                    ONE HUNDRED FOURTEENTH CONGRESS

                             FIRST SESSION

                               __________

                           FEBRUARY 12, 2015

                               __________

                            Serial No. 114-2

                               __________

         Printed for the use of the Committee on the Judiciary


      Available via the World Wide Web: http://judiciary.house.gov
      
      
  
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                       COMMITTEE ON THE JUDICIARY

                   BOB GOODLATTE, Virginia, Chairman
F. JAMES SENSENBRENNER, Jr.,         JOHN CONYERS, Jr., Michigan
    Wisconsin                        JERROLD NADLER, New York
LAMAR S. SMITH, Texas                ZOE LOFGREN, California
STEVE CHABOT, Ohio                   SHEILA JACKSON LEE, Texas
DARRELL E. ISSA, California          STEVE COHEN, Tennessee
J. RANDY FORBES, Virginia            HENRY C. ``HANK'' JOHNSON, Jr.,
STEVE KING, Iowa                       Georgia
TRENT FRANKS, Arizona                PEDRO R. PIERLUISI, Puerto Rico
LOUIE GOHMERT, Texas                 JUDY CHU, California
JIM JORDAN, Ohio                     TED DEUTCH, Florida
TED POE, Texas                       LUIS V. GUTIERREZ, Illinois
JASON CHAFFETZ, Utah                 KAREN BASS, California
TOM MARINO, Pennsylvania             CEDRIC RICHMOND, Louisiana
TREY GOWDY, South Carolina           SUZAN DelBENE, Washington
RAUUL LABRADOR, Idaho                HAKEEM JEFFRIES, New York
BLAKE FARENTHOLD, Texas              DAVID N. CICILLINE, Rhode Island
DOUG COLLINS, Georgia                SCOTT PETERS, California
RON DeSANTIS, Florida
MIMI WALTERS, California
KEN BUCK, Colorado
JOHN RATCLIFFE, Texas
DAVE TROTT, Michigan
MIKE BISHOP, Michigan

           Shelley Husband, Chief of Staff & General Counsel
        Perry Apelbaum, Minority Staff Director & Chief Counsel
                                 ------                                

    Subcommittee on Courts, Intellectual Property, and the Internet

                 DARRELL E. ISSA, California, Chairman

                  DOUG COLLINS, Georgia, Vice-Chairman

F. JAMES SENSENBRENNER, Jr.,         JERROLD NADLER, New York
Wisconsin                            JUDY CHU, California
LAMAR S. SMITH, Texas                TED DEUTCH, Florida
STEVE CHABOT, Ohio                   KAREN BASS, California
J. RANDY FORBES, Virginia            CEDRIC RICHMOND, Louisiana
TRENT FRANKS, Arizona                SUZAN DelBENE, Washington
JIM JORDAN, Ohio                     HAKEEM JEFFRIES, New York
TED POE, Texas                       DAVID N. CICILLINE, Rhode Island
JASON CHAFFETZ, Utah                 SCOTT PETERS, California
TOM MARINO, Pennsylvania             ZOE LOFGREN, California
BLAKE FARENTHOLD, Texas              STEVE COHEN, Tennessee
RON DeSANTIS, Florida                HENRY C. ``HANK'' JOHNSON, Jr.,
MIMI WALTERS, California               Georgia

                       Joe Keeley, Chief Counsel

                    Heather Sawyer, Minority Counsel
                    
                    
                            C O N T E N T S

                              ----------                              

                           FEBRUARY 12, 2015

                                                                   Page

                           OPENING STATEMENTS

The Honorable Darrell E. Issa, a Representative in Congress from 
  the State of California, and Chairman, Subcommittee on Courts, 
  Intellectual Property, and the Internet........................     1
The Honorable Jerrold Nadler, a Representative in Congress from 
  the State of New York, and Ranking Member, Subcommittee on 
  Courts, Intellectual Property, and the Internet................     3
The Honorable Bob Goodlatte, a Representative in Congress from 
  the State of Virginia, and Chairman, Committee on the Judiciary     4
The Honorable John Conyers, Jr., a Representative in Congress 
  from the State of Michigan, and Ranking Member, Committee on 
  the Judiciary..................................................     6

                               WITNESSES

Herbert C. Wamsley, Executive Director, Intellectual Property 
  Owners Association, Washington, DC
  Oral Testimony.................................................     8
  Prepared Statement.............................................    10
Krish Gupta, Senior Vice President and Deputy General Counsel, 
  EMC Corporation, Hopkinton, MA
  Oral Testimony.................................................    25
  Prepared Statement.............................................    27
Andrew J. Pincus, Partner, Mayer Brown LLP, Washington, DC
  Oral Testimony.................................................    40
  Prepared Statement.............................................    42
Robert P. Taylor, Counsel, National Venture Capital Association, 
  Washington, DC
  Oral Testimony.................................................    52
  Prepared Statement.............................................    54

          LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING

Material submitted by the Honorable Blake Farenthold, a 
  Representative in Congress from the State of Texas, and Member, 
  Subcommittee on Courts, Intellectual Property, and the Internet    72
Material submitted by the Honorable Darrell E. Issa, a 
  Representative in Congress from the State of California, and 
  Chairman, Subcommittee on Courts, Intellectual Property, and 
  the Internet...................................................    85

                                APPENDIX
               Material Submitted for the Hearing Record

Prepared Statement of United Patent Reform.......................   114
Prepared Statement of Charles Duan, Director, Patent Reform 
  Project, Public Knowledge......................................   124
Article entitled ``Patent troll targets crowdfunding startups--
  Innovation Act could stop that''...............................   140
Letter from Michael Beckerman, President & CEO, the Internet 
  Association....................................................   143
Prepared Statement of David French, Senior Vice President, 
  Government Relations, the National Retail Federation (NRF).....   146
Letter from Bobby Franklin, President & CEO, the National Venture 
  Capital Association............................................   151
Prepared Statement of the American Bankers Association, the 
  American Insurance Association, the Clearing House Payments 
  Company L.L.C., The Credit Union National Association, the 
  Financial Services Roundtable, the Independent Community 
  Bankers of America, the National Association of Federal Credit 
  Unions, and the National Association of Mutual Insurance 
  Companies......................................................   154

 
        EXAMINING RECENT SUPREME COURT CASES IN THE PATENT ARENA

                              ----------                              


                      THURSDAY, FEBRUARY 12, 2015

                        House of Representatives

            Subcommittee on Courts, Intellectual Property, 
                            and the Internet

                       Committee on the Judiciary

                            Washington, DC.

    The Subcommittee met, pursuant to call, at 1:03 p.m., in 
room 2141, Rayburn Office Building, the Honorable Darrell E. 
Issa (Chairman of the Subcommittee) presiding.
    Present: Representatives Issa, Goodlatte, Collins, Smith, 
Chabot, Forbes, Franks, Poe, Marino, Farenthold, Nadler, 
Conyers, Chu, Deutch, DelBene, Jeffries, Cicilline, and 
Johnson.
    Staff present: (Majority) Vishal Amin, Senior Counsel; Eric 
Bagwell, Clerk; and (Minority) Jason Everett, Counsel.
    Mr. Issa. The Committee will come to order. Today's hearing 
is on examining recent Supreme Court cases in the patent arena. 
The Subcommittee's work on intellectual property reform and the 
likely passage in this Congress of an internet--I am sorry. I 
apologize. Of a patent----
    Mr. Nadler. That was this morning.
    Mr. Issa. That was this morning. [Laughter.]
    Of a patent reform legislation package as we did in the 
last Congress in the House brings us to the importance of 
updating our awareness of recent Supreme Court cases in the 
patent arena.
    In 2011, the American Invents Act, or AIA, became the most 
substantial reform to U.S. patent law since the 1836 Patent 
Act. The AIA reestablished the U.S. patent system as a global 
standard. I was proud to be part of that effort, and I am proud 
today that we will continue our work to uphold the 
competitiveness of the American patent system.
    While the AIA rewrote the underlying patent law and 
procedures at the WTO, several items were left out of that bill 
as is often the case in any long-awaited, and large, and 
comprehensive reform. These items, coupled with the growing 
threat posed by what all will admit at times is abusive patent 
litigation, require us to continue our work to improve the 
patent system by strengthening patent quality and promoting 
smarter and less expensive, if possible, patent litigation.
    Last Congress, the Innovation Act passed this Committee by 
a vote of 33 to 5. And when it passed out of the House on a 
highly bipartisan basis, the vote was 325 to 95. I am confident 
that H.R. 9, the Innovation Act, will become law and will build 
on the work of the AIA to protect the American patent system.
    Increasingly, Americans find innovation obstructed with 
attempts to enter the markets frequently shut down by well-
funded patent trolls that often exploit loopholes in our patent 
system, bullying inventors and small business into frivolous 
lawsuits that amount to litigation extortion. Reforming the 
patent system, including costly patent litigation, is an 
economic issue, not a partisan one.
    With billions of dollars and the state of American 
competitiveness at risk, reforms are not solely the 
responsibility of one branch of government. All three branches 
must work hard to craft and implement law that promotes our 
innovative economy. And we must recognize that the work is 
being done to address abusive patent litigation in all three 
branches of government. In addition to the court decisions, 
which we for the most part on a bipartisan basis welcome, we 
will examine today how they affect the judiciary, the PTO, and 
the PTO's recently announced new patent quality initiatives, 
including additional staff to focus purely on patent quality.
    The PTO has issued updated guidance on patent eligibility 
in the wake of several related Supreme Court cases, and the PTO 
continues to operate three important post-grant proceedings, 
including AIA's Section 18 covered business method program, 
which I believe is absolutely essential to the future of patent 
quality and the effort to make sure litigation is appropriate, 
meaningful, and, in fact, done expeditiously, because 
ultimately a patent holder or a defendant who believes that 
they will be meritorious wants their day in court always at the 
fastest reasonable time.
    As the House and Senate prepare to move forward on 
meaningful patent litigation reform to complement the PTO's 
work and the Court's decisions, opponents have recycled some of 
the same tired arguments used in the lead-up to the AIA. These 
opponents claim that the courts and the judiciary have 
completely solved the problem, and congressional attempts to 
end abusive litigation practices are wholly unnecessary.
    Today's hearing will examine recent Supreme Court patent 
decisions, and we will learn about areas where progress has 
been made and areas where much more needs to be done. I am 
convinced that before we pack our bags and go home at the end 
of this session, we will, and I insist we will, have ensured 
the legislative branch of government does its part to stop 
litigation abuse from occurring in the first place. American 
innovation cannot afford to be held captive by frivolous 
litigation from weak or overly broad patents. We need to work 
together to ensure the American economy does not continue to 
suffer.
    Before I turn the microphone over to the Ranking Member, I 
must add one small personal point. When I came to this 
Committee some 14 years ago, the greatest issue we seemed to 
have in front of us was the 40 percent reversal rate of court 
decisions leading to an effectively de novo response and high 
number of appeals to the Federal circuit. The lack of 
confidence that existed then was a problem. I believe we have 
gone a long way in most districts to get it right earlier at 
the district court level.
    There is more to be done, and our efforts on a bipartisan 
basis will be to do so, to make sure that we facilitate the 
judicial branch having the tools and the skills to decide 
properly. We cannot back up work that we should do to the 
courts. The courts at the district level cannot simply pass 
onto the Fed circuit, and the Fed circuit cannot simply end up 
at the Supreme Court. That is part of our requirement, to get 
decisions made at the lowest and earliest level that could be 
counted on by the inventors.
    And with that, I recognize my colleague and Ranking Member, 
Mr. Nadler.
    Mr. Nadler. Thank you, Mr. Chairman. I want to begin by 
congratulating you on your new position as Chairman of this 
Subcommittee, and I look forward to working with you on the 
many important issues we will consider in this Congress.
    We got off to a good start by joining together as original 
co-sponsors of the Innovation Act, which Chairman Goodlatte 
introduced last week. The Innovation Act addresses a scourge of 
patent trolls which continue to burden businesses across the 
country with abusive patent litigation. Patent trolls stifle 
innovation, damage our economy, and injure legitimate 
businesses. Rather than inventing new products and technologies 
to benefit consumers and businesses, they merely invent new 
methods to drive up legal costs, which they use as a weapon to 
extort settlements from innocent defendants.
    A smartphone can contain hundreds of patents on everything 
from touch screen technology, to cameras, to GPS mapping, and 
just as the saying goes, ``There's an app for that.'' There's 
also a patent for that, and worse, we are finding that there is 
a patent troll for that, too. As a result, our successful 
American businesses are exposed to abusive litigation on the 
many patents it takes to build the tech products of today. 
Whether they spend the resources on developing new products or 
on fighting off frivolous claims depends in part on whether or 
not we are successful in passing legislation. Therefore, our 
work here is critical, not just to lawyers and inventors, but 
to all of us.
    I have heard from countless businesses calling out for 
relief from patent trolls. They tell me that it can cost 
millions of dollars just to take one case through to trial. For 
small business, it can make more sense financially to settle 
even a totally bogus case early even if they would be assured 
of winning in the end. Unfortunately, this only encourages bad 
actors to keep filing case after case and gaining settlement 
after settlement.
    While it is vital to ensure that legitimate patent holders 
are able to enforce their rights, we need to rein in those who 
seek to abuse the legal system. I supported the Innovation Act 
when it passed the House in December 2013 because I thought it 
struck a reasonable balance in addressing the patent troll 
problems without imposing too great a burden on plaintiffs. 
Since then, the Supreme Court has issued a number of patent-
related opinions on issues ranging from fee shifting to 
patentability. Our hearing today will help us examine these 
decisions to determine how the patent landscape has changed 
since the Innovation Act passed the House, and whether we need 
to make changes to account for these decisions.
    Some critics of the bill argue that in light of these 
decisions, legislation is no longer needed at all. I think that 
overstates the case considerably, but I will be interested to 
hear from the witnesses today their thoughts on how the Court's 
decisions should inform congressional action. I am most 
concerned with the two fee-shifting cases, Octane Fitness and 
Highmark, which significantly lowered the standard which must 
be met before a court will award fees to the prevailing party 
under Section 285 of the Patent Act.
    There is already evidence that courts in response to these 
decisions are awarding fees at a much higher rate, but we need 
to determine if this is a temporary phenomenon or evidence of a 
long-term trend. More to the point, have these cases curbed 
abusive litigation? Businesses have indicated to me that they 
continue to be threatened by patent trolls and that the problem 
shows no sign of abating.
    I should note that I also have longstanding concerns about 
fee-shifting provisions, and the language contained in the bill 
is at the outer edge of what I can support. Keep in mind a 
person or a business can have a legally legitimate dispute 
regarding fact and law, and yet can still ultimately lose the 
case. They should not be punished for trying to protect their 
interests in court. Furthermore, we should not want to create a 
situation in which experienced corporate defendants with 
enormous resources and expert legal talent can bully injured 
plaintiffs into unfair settlements because of the risks, 
including especially the risk of being forced to bear not only 
their own legal costs, but the defendants' legal costs as well 
associated with losing a potentially successful case.
    I would be interested to hear from the witnesses whether 
there are improvements that can be made to the fee-shifting 
provisions in the Innovation Act to deter patent trolls in 
light of the decisions by the Supreme Court. I will also want 
to hear how the Court's new standards on patentability, 
definiteness, standard of review for factual matters and claim 
construction, and induced infringement may impact future 
litigation.
    With these important questions in mind, I look forward to 
the testimony of our witnesses, and yield back the balance of 
my time.
    Mr. Issa. I thank the gentleman. It is now my pleasure to 
recognize the author of the bill and the Chairman of the full 
Committee, the gentleman from Virginia, Mr. Goodlatte, for his 
opening statement.
    Mr. Goodlatte. Thank you, Mr. Chairman. I appreciate your 
holding this hearing. Addressing abusive patent litigation, 
particularly the reforms set out in the Innovation Act, are 
critical to our Nation's future economic competitiveness. Last 
week, I, along with a large bipartisan group of members, 
reintroduced the Innovation Act. This bill was the product of 
multiple discussion drafts and hearings, passing the House last 
Congress with more votes than the landmark America Invents Act 
of 2011.
    But patent reform, just like many other issues, has its 
proponents and its critics. Those opposed to reform are 
bringing back the same refrains that were used during the lead 
up to the AIA saying that in the last year the courts and the 
judiciary have solved the problem, and that the Innovation Act 
is unnecessary. We have heard this before, and though I believe 
that the Court has taken several positive steps in the right 
direction, their decisions cannot take the place of a clear, 
updated, and modernized statute.
    In fact, many of the provisions in the Innovation Act do 
not necessarily lend themselves to being solved by case law, 
but by actual law, congressional legislation. Congress, the 
Federal courts, and the PTO must take the necessary steps to 
ensure that the patent system lives up to its constitutional 
underpinnings. And let me be clear about Congress' 
constitutional authority in this area. The Constitution grants 
Congress the power to create the Federal courts, and the 
Supreme Court has long recognized that the prescription of 
court procedure falls within the legislative function.
    I welcome today's hearing to review the recent Supreme 
Court patent cases, and as we examine those cases, we must 
remember that our patent system is a unitary one. That means 
that the rules that we lay out in statute apply to all areas of 
technology and all types of businesses, large and small, and 
generally to all users of the patent system equally.
    Thomas Jefferson could not have envisioned the innovations 
and inventions that were to unfold over the last two centuries 
and, in particular, over the last 20 years. But when he and our 
founding fathers crafted our patent system, they wrote these 
laws in a way so that they applied equally to all.
    In that spirit, as we crafted the Innovation Act, we worked 
to ensure that its many provisions generally applied fairly and 
equally to all stakeholders. That means that we view patent 
trolling as an adjective that can apply to either party in a 
case if they engage in unreasonable or abusive tactics. That is 
also why good legislative practice should caution us against 
creating excessive carve-outs to cabin in provisions of the 
bill or other parts of patent law toward certain types of 
stakeholders. And we should make sure that the ideas that we 
put forth are well supported, and not just by those who happen 
to exempt themselves from its reach. We have a unitary patent 
system for a reason, and our system works best when the rules 
of the road apply to all.
    The American patent system is designed to reward true 
invention and promote innovation. The USPTO must ensure that 
they take the task of ensuring strong patent quality seriously. 
On the patent quality front, I strongly believe that the PTO 
should not simply be in the business of granting patents and 
leaving the mess created for the courts and Congress to fix, 
but rather focus on strengthening the requirements for patent 
eligibility to reduce the overall number of weak or overly 
broad patents from entering the system. I am encouraged by the 
PTO's recent announcements in this space.
    We must also remind ourselves that reforming our patent 
system is not a right or left issue. It is an economic issue, 
one that is bipartisan, one that will be bicameral, and one 
that will be signed into law. As we take these steps toward 
eliminating the abuses of our patent system, discouraging 
frivolous patent litigation, and keeping U.S. patent laws up to 
date, we will help fuel the engine of American innovation and 
creativity, creating new jobs and growing our economy.
    Thank you, Mr. Chairman. I look forward to hearing from our 
witnesses today.
    Mr. Issa. I thank the gentleman. It is now my pleasure to 
introduce the Ranking Member of the full Committee, the 
gentleman from Michigan, Mr. Conyers.
    Mr. Conyers. Thank you, Mr. Chairman. I am glad you did not 
introduce me as the skeptical Member of the Committee, but 
there is some skepticism that still remains. But this hearing 
today provides an important opportunity to consider the impact 
of recent Supreme Court cases involving abusive patent 
litigation.
    While allegations of abuse of patent litigation fed a 
clamor for drastic legislative reform, patent litigation rates 
in 2014 have dropped to levels last seen 5 or more years ago. 
So one of the first issues that I hope we assess is the impact 
of these Supreme Court decisions and whether they effectively 
have eliminated the need for one-size-fits-all fee-shifting 
legislation.
    For example, the Court in Octane Fitness lowered the 
standard by which a court may award attorney fees under Section 
285 of the Patent Act. And in Highmark, the Supreme Court 
increased the level of deference that an appellate court must 
give to a lower court's decision in awarding attorney's fees. 
As a result of these two cases, it is now much easier for 
prevailing parties to obtain attorney fees. In fact, courts 
have granted nearly half of all motions for attorney fees filed 
in patent cases since these two cases were rendered.
    Given these developments, I believe it would be unwise for 
Congress to push additional fee-shifting legislation as the 
Federal courts assess the ramifications of these Supreme Court 
decisions. Legislative intervention at this time could create 
confusion and engender more rather than less litigation. So 
while I am not persuaded at this point in time that Congress 
must alter the current fee-shifting statute, I do encourage our 
witnesses to share their perspectives about how these two 
Supreme Court cases will affect patent litigation.
    In addition to these two cases, there have been two other 
recent Supreme Court cases that may further decrease abuse 
litigation. The Supreme Court in Alice declared that abstract 
ideas could not be patented. And in Nautilus, the Supreme Court 
set a higher standard for certainty and specificity for patent 
claims. Because the two cases will make it easier to invalidate 
many vaguely worded software patents and business method 
patents, plaintiffs with such patents will have less incentive 
to file lawsuits. Most importantly, the Patent and Trademark 
Office will be less likely to grant such patents under the new 
standards.
    So taken together, these decisions largely respond to 
concerns about how poor patent quality can lead to unnecessary 
patent litigation. And finally, it is my hope that this 
Committee will conduct further hearings that review the 
changing landscape affecting patents before we take any 
congressional action. In particular, we should examine what the 
Patent and Trademark Office, the Federal Trade Commission and 
the courts are doing to address abusive patent litigation.
    We know, for instance, the Patent Office is working on 
enhancing patent quality, and still in the process of 
implementing the American Invents Act. The Federal Trade 
Commission is in the midst of conducting a study on abusive 
patent litigation behavior. In addition, several Federal 
district courts have adopted model discovery orders or 
discovery guidelines that limit discovery in patent lawsuits. 
Following the recommendations of the Judicial Conference, the 
Supreme Court will in the near future likely approve 
eliminating Rule 84 and its Form 18, which will lead to the 
higher pleading requirements of Twombly and Iqbal.
    The Supreme Court is also expected to approve amendments to 
other rules of civil procedure that are aimed at achieving 
proportionality and discovery and early and active judicial 
case management. These revisions would apply to patent cases 
commenced on or after December 1, 2015. Cumulatively, these 
various efforts may address many of the concerns expressed 
during the debates last Congress on the need for the Innovation 
Act.
    I have long said that I am prepared to respond to the 
problem of abusive patent litigation, but we must not do so in 
a vacuum, but in an environment cognizant of other ongoing 
developments, and we cannot do so in a way that inhibits or 
discourages the creative process that has been such a critical 
part of our Nation's economic success. Thank you, Mr. Chairman.
    Mr. Issa. Thank you, Mr. Conyers. It is now my pleasure to 
introduce the distinguished panel for today's hearing. For the 
witnesses, your written statements will be entered into the 
record in their entirety. And I would ask that you summarize 
any and all portions of that or independent remarks within 
roughly the 5 minutes. You will see the guideline lights in 
front of you. Please note yellow means get ready to stop, not 
continue well into red. If you do it, it will encourage those 
here on the dais to do the same thing when questioning occurs.
    Before I introduce the witnesses formally, I would 
appreciate if all four of you would rise and take the Committee 
required oath, and please raise your right hands.
    Do you solemnly swear or affirm that the testimony you are 
about to give will be the truth, the whole truth, and nothing 
but the truth?
    [A chorus of ayes.]
    Mr. Issa. Thank you very much. Please be seated.
    Our witnesses today include Mr. Herb Wamsley, executive 
director of the Intellectual Property Owners Association, 
better known as IPO; Mr. Krish Gupta, senior vice president and 
deputy general counsel at EMC Corporation, and I might note, an 
alumni of the Digital Corporation, one that I started my life 
in electronics involved with; Mr. Andrew Pincus, partner at 
Mayer Brown and former general counsel of the Commerce 
Department in the Clinton Administration; and Mr. Robert 
Taylor, counsel to the National Venture Capital Association. 
Again, as you begin speaking, your statements in their entirety 
will be placed in the record.
    Mr. Wamsley?

     TESTIMONY OF HERBERT C. WAMSLEY, EXECUTIVE DIRECTOR, 
    INTELLECTUAL PROPERTY OWNERS ASSOCIATION, WASHINGTON, DC

    Mr. Wamsley. Thank you, Mr. Chairman and Members of the 
Subcommittee. I appreciate the opportunity to be here today to 
speak on behalf of the Intellectual Property Owners 
Association, or IPO, a diverse association whose members 
include more than 200 companies and industries ranging from 
pharmaceuticals and biotechnology to electronics and 
information technology.
    We strongly support eliminating abusive suits and 
litigation misconduct by all plaintiffs and defendants in 
patent litigation, large and small companies, independent 
inventors, universities, and others. We believe abuses can be 
eliminated without making it more difficult for patent owners 
to enforce valid patents. Now, the Supreme Court has decided 
seven cases since the House passed the Innovation Act in 
December 2013. I will comment briefly on six of those.
    In Octane Fitness, which is the most significant of the 
cases as far as the Innovation Act is concerned, the Supreme 
Court lowered the standard for finding a case exceptional for 
purposes of awarding fees to a prevailing party. Octane also 
lowered the evidentiary burden for a party to establish 
entitlement to attorney's fees. In the companion case of 
attorney fee awards, Highmark, the Court raised the standard of 
review for appeals of attorney fee awards. The net effect of 
Octane and Highmark is to make it somewhat easier for a 
prevailing party to obtain attorney fees, but IPO still 
supports legislation on attorney fees.
    The legislation should require an award of attorney fees to 
a prevailing party in every case unless the position and 
conduct of the non-prevailing party were objectively reasonable 
and substantially justified or exceptional circumstances make 
an award unjust. This presumptive fee shifting will be more 
effective than the Octane and Highmark decisions in deterring 
abusive litigation practices and will provide uniformity.
    The Octane standard of awarding fees in cases that stand 
out from others lowers the bar, but Octane is likely to be 
subject to a wide range of district court interpretations. 
Legislation can require judges to shift fees when they 
otherwise may be less inclined to do so. Fee shifting may be 
the single most effective legislative measure for discouraging 
frivolous lawsuits and frivolous defenses.
    In Alice Corporation, the Supreme Court revisited patent 
eligibility under Section 101 of the Patent Act. Unfortunately 
the test articulated by the Court in Alice is not clear. We 
believe it is too early to tell what long-term effect Alice 
will have on abusive behavior in patent litigation. Since the 
Alice decision, reports have suggested an increase in district 
court dismissals of suits on software-related and business 
method inventions.
    Alice may strengthen the hand of defendants in frivolous 
suits. Defendants may be able to get suits dismissed for lack 
of patent eligibility at an early stage before costly 
discovery. However, unless clarified, Alice may have adverse 
effects on the incentive for innovation not only in software, 
but in other industries.
    Three other cases have some effect on patent litigation. 
Nautilus adopted the new reasonable certainty standard for 
patent claims that will make it easier for a defendant to 
challenge a vague patent as indefinite. This will deter some 
frivolous charge of infringement. Teva Pharmaceuticals held at 
the Federal circuit must apply a clear error standard to review 
factual findings in support of patent claim construction. The 
Teva framework better aligns with appellate review of patent 
claim construction, and Supreme Court precedent in the Federal 
Rules probably will have no effect on abusive suits. Limelight 
Networks will foreclose some patent suits based on an 
infringement inducement theory.
    We advise the Subcommittee to continue to monitor the 
possible impact of the Supreme Court decisions as it considers 
the Innovation Act. As mentioned, we draw attention to the 
amendments to the Federal Rules of Civil Procedure. They are 
scheduled to take effect at the end of this year, which will 
heighten the pleading standards for patent infringement, and 
provide judges with some more discretion relating to discovery.
    I will close by noting that the Patent and Trademark Office 
can help deter litigation abuses by ensuring that patents that 
are granted are of the highest possible quality and define the 
scope of rights. We support the USPTO's new patent quality 
initiative. I will be happy to answer any questions.
    [The prepared statement of Mr. Wamsley follows:]
    
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                               __________
    Mr. Issa. Thank you.
    Mr. Gupta?

  TESTIMONY OF KRISH GUPTA, SENIOR VICE PRESIDENT AND DEPUTY 
        GENERAL COUNSEL, EMC CORPORATION, HOPKINTON, MA

    Mr. Gupta. Chairman Issa, Ranking Member Nadler, and 
Members of the Subcommittee, I am honored to testify today on 
the critical need for patent litigation reform.
    EMC is a global leader in cloud computing. EMC and its 
affiliates hold more than 5,100 issued U.S. patents, and our 
portfolio is regularly recognized as one of the best in the 
information technology business. We support a strong patent 
system that protects and promotes innovation and one that 
cannot be exploited by abusive litigation tactics.
    Since 2005, EMC has been sued by patent entities more than 
35 times and has never been found to have infringed. Yet, 
defending those suits has been extremely expensive, costing $10 
million in 2014 alone. And this does not include the 
substantial disruption to our business resulting from these 
frivolous lawsuits.
    EMC is not alone in this regard. In 2014, more than 5,000 
new patent lawsuits were filed. That is nearly twice as many as 
were filed only 4 years earlier when Congress passed the AIA. 
Most impartial observers agree abusive patent litigation harms 
innovation in all industries.
    Some have suggested that recent decisions by the Supreme 
Court either reduce or negate the need for Congress to act. As 
a practitioner who spends most of his time on patent litigation 
matters, I disagree. Only Congress can comprehensively restore 
balance in the patent system. Let me walk through the Court's 
decisions that are most relevant to the issue of patent 
litigation reform, although I do not believe they offer an 
adequate solution.
    In Highmark and Octane, the Court addressed the award of 
attorney's fees under Section 285 of the Patent Act, which 
currently limits the assessment of fees to exceptional cases. 
They loosened the standard by which courts evaluate what 
qualifies as an exceptional case while granting greater 
discretion to district courts to make this determination.
    Highmark and Octane have had no meaningful impact. In the 9 
months since these decisions, motions for fees have been 
granted in whole or in part only 4 percent more often than they 
were in the 2 years before these cases. Thus, fee shifting is 
still the exception rather than the rule. The Innovation Act 
would level the playing field by requiring that fees be awarded 
to the prevailing party unless the losing party's position is 
substantially justified or special circumstances make an award 
unjust. This provision will discourage the filing of frivolous 
suits and the use and abusive litigation tactics by imposing 
financial accountability in the patent system.
    Next, I would like to turn to the Supreme Court's decisions 
in Iqbal and Twombly. In these cases, the Court addressed the 
level of specificity required in a complaint to include enough 
facts to plausibly suggest that the plaintiff is entitled to 
relief. With the Judicial Conference recently recommending the 
elimination of Form 18 for patent pleadings, it is expected 
that the Iqbal and Twombly standards will apply to all patent 
pleadings as well.
    However, these cases do not set forth bright line rules 
necessary for patent cases and are bound to lead to variable 
outcomes. Many courts will undoubtedly continue to permit vague 
pleadings. The Innovation Act recognizes the need to provide 
uniform and clear pleading standards. This imposes no new 
burden on good faith plaintiffs who will have already conducted 
proper due diligence, but it will deter bad faith plaintiffs 
and will reduce costs for defendants by requiring the 
allegations to be made clear at the outset.
    On discovery, there have been no Supreme Court developments 
regarding abusive tactics. We support provisions included in 
the Innovation Act that limit discovery before the Court issues 
its claim construction ruling. This would ensure that discovery 
is focused on claim construction issues that actually matter. 
By requiring the requesting party to cover the cost of 
unnecessary discovery, the Innovation Act will limit the extent 
to which discovery costs can be used as a bargaining chip to 
extort a settlement.
    These three areas--fee shifting, pleading specificity, and 
discovery--require legislative intervention. The courts cannot 
bring about the comprehensive and prompt solution that Congress 
can structure while promoting consistency and predictability. 
The rampant proliferation of abusive patent litigation is a 
problem causing billions of dollars of costs that cry out for a 
legislative solution. We urge you to swiftly pass this 
legislation, and we stand prepared to help you in any way we 
can to bring a bill to the President's desk in short order.
    Thank you, and I look forward to your questions.
    [The prepared statement of Mr. Gupta follows:]
    
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                               __________
    Mr. Issa. Thank you. Mr. Pincus?
    I would advise all of you that we will get through your 
statements, and once the vote is called at approximately 2:00, 
we will operate for 10 additional minutes and then anticipate a 
break for roughly two votes. So you will all be getting about a 
30-minute break in about 30 minutes.
    Mr. Pincus?

            TESTIMONY OF ANDREW J. PINCUS, PARTNER, 
                MAYER BROWN LLP, WASHINGTON, DC

    Mr. Pincus. Thank you, Mr. Chairman, Ranking Member Nadler, 
and Members of the Subcommittee. It is an honor to appear 
before you to discuss the Supreme Court's recent patent 
decisions, and, in particular, the impact of those decisions on 
the very serious problem of abusive patent litigation that this 
Committee in the House sought to address in the last Congress 
through passage of the Innovation Act.
    The Supreme Court, of course, does not have free-floating 
policy authority to address concerns about patent litigation. 
Its responsibility is to interpret the statutory text when an 
issue is brought before it. So some of the Court's recent 
decisions have overturned Federal court rulings that promoted 
abusive litigation, but other of the Court's recent decisions 
are likely to have the opposite effect and actually increase 
the cost and complexity of patent cases. And as to some 
decisions, we actually do not yet know what the outcome will 
be.
    For example, the Court's decision last year in the Nautilus 
case rejected a Federal circuit rule that had all but 
eliminated the patent max definiteness requirement, and the 
Supreme Court instead made clear that a claim is invalid if it 
fails to inform with reasonable certainty those skilled in the 
art about the scope of the invention. Reaffirming the 
definiteness requirement will help weed out some unjustified 
patents.
    But in the Teva Pharmaceutical case, the Court's decision 
is likely to increase patent litigation costs and complexity. 
As the Committee knows, the key initial first step in patent 
litigation is construing the patent claim, and in doing that 
the Court can consider the language of the claims, the 
specifications, the prosecution record, as well as extrinsic 
evidence, including expert testimony. Claim construction is a 
task for the judge, and it takes place following a so-called 
Markman hearing at which the parties present all of the 
relevant evidence.
    The Federal circuit had held that it reviewed all aspects 
of claim construction de novo, including the district court's 
determinations regarding extrinsic evidence, such as expert 
testimony. In Teva, the Supreme Court reversed and said that 
those factual determinations are subject to a clearly erroneous 
standard of review. Previously, introduction of expert 
testimony in the course of a Markman hearing while it occurred 
was rare, but Teva may be viewed by some district courts and 
some parties as an implicit endorsement of reliance upon expert 
testimony and other extrinsic evidence. And district courts may 
want to ground their decisions on those bases in order to limit 
the possibilities of reversal on appeal. So that may mean much 
more discovery and expert testimony at the beginning of the 
case, which, of course, is going to make these cases even more 
complicated and even more costly than they already are.
    The Alice case, as Mr. Wamsley said, involves the question 
of patentable subject matter. The Court had before it a patent 
claim that was troubling that basically said take this 
fundamental economic principle, do it on a computer, that is 
patentable. And the Court said, no, something significantly 
more is required, and the lower courts are now trying to flesh 
out what that ``significantly more'' is. Obviously there is a 
concern that that test not swallow up legitimate patent claims 
and not swallow up the other tests in the Patent Act that limit 
patentable. And we are going to have to see how that all plays 
out.
    Most troubling, I think, from the perspective of reducing 
litigation abuse were the Court's decisions in the two 
attorney's fees cases, Octane and Highmark. They together give 
district courts more discretion, but the Supreme Court 
reaffirmed that the exceptional test, which is the language 
used in the current version of Section 285, which means that 
fee shifting is an option in only a small minority of cases 
because the case has to be exceptional, which by definition is 
going to be a very small group of cases.
    So a defendant deciding whether to settle or fight a claim 
that the defendant views as abusive cannot count on the 
availability of fee shifting to offset the plaintiff's ability 
to inflict significant litigation costs through the litigation 
of the case. So the critical question I think is, how does that 
rational defendant view the ability to recovery attorney's fees 
if it decides to fight? And where the test is exceptional, that 
rational defendant has to say my ability to recover attorney's 
fees is going to be quite low. That is why a change along the 
lines of the Innovation Act really is essential.
    So that ruling confirms the reality that the text of the 
Patent Act does not authorize the Supreme Court to address the 
principle factor producing abusive lawsuits, which is the 
ability of plaintiffs to inflict these huge asymmetric 
litigation costs on defendants while paying little themselves. 
That is what allows the coercion of unjustified settlements, 
and that is what congressional action is needed to address.
    Thank you. I look forward to answering your questions.
    [The prepared statement of Mr. Pincus follows:]
    
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                  __________
    Mr. Issa. Thank you.
    Mr. Taylor? I think we cannot quite hear you yet.

   TESTIMONY OF ROBERT P. TAYLOR, COUNSEL, NATIONAL VENTURE 
              CAPITAL ASSOCIATION, WASHINGTON, DC

    Mr. Taylor. I am Robert Taylor appearing for the National 
Venture Capital Association. NVCA represents approximately 400 
venture capital firms that collectively account for the vast 
bulk of all venture capital invested in this country.
    Let me stress three basic points. First, strong protection 
of intellectual property allows entrepreneurs and investors to 
assume the risks necessary to commercialize breakthrough 
technologies. Despite the fact that a few companies may not 
rely on patent protection, for the great majority of startups, 
patents are essential to their existence and survival.
    Second, although people are justifiably offended by abuses 
of the legal system, it is important to ensure that efforts to 
correct that problem do not cause more damage to innovation 
than does the problem itself. NVCA strongly urges Congress to 
direct its efforts at improper behavior, not at the patent 
system. Innovation requires a healthy patent system, including 
the ability of innovators to enforce their patents without 
undue risk and expense.
    Third, recent activity at the Supreme Court, the Federal 
Trade Commission, the Judicial Conference, and the Patent 
Office pursuant to the AIA has changed the patent landscape in 
important ways that already address most of the problems to 
which H.R. 9 is directed. As a result of these changes, new 
patent case filings dropped 18 percent between 2013 and 2014, 
and the full effect of those developments has yet to be felt.
    Let me expand a little. For decades innovative new 
companies have been the most important source of job growth in 
this country. Creating a new company requires entrepreneurs 
willing to forego job security to pursue a vision for a better 
future. It requires investors willing to share that vision and 
to dedicate time and money to make it a reality. The process is 
fraught with considerable risk.
    Several years ago I represented a small company that 
pioneered a revolutionary advance in minimally invasive 
surgery, surely the type of innovation we should encourage. As 
soon as that company showed its products to surgeons, however, 
large companies that sold surgical equipment began to copy the 
design, modify their own tools, and bundle their sales in ways 
that foreclosed my client from the market. The company spent 
nearly 5 years in scorched earth patent litigation with 
corporate giants to enforce its patents and stay in business, 
but ultimately it prevailed.
    For the vast majority of innovative startups like that 
client, patents are the only way to ensure a return on 
investments sufficient to justify the risks involved. This 
group includes companies developing digital technologies that 
employ innovative hardware and software, energy companies, 
communication technologies, new polymers and metallurgical 
products, information technologies, medical devices, biologics, 
and pharmaceuticals.
    My second point. H.R. 9 will make patent litigation more 
cumbersome, more expensive, and more risky for litigants on 
both sides. Importantly, this will impact smaller companies 
much more than their larger and better-funded competitors, 
irrespective of which side each is on. And for innovators, the 
ability to enforce patents at reasonable cost and risk is an 
essential part of the patent right. Patents that companies 
cannot afford to enforce become nothing but wall decorations, 
and when incumbents perceive that a new entrant is unable to or 
unwilling to enforce its patents, the temptation to copy 
becomes irresistible. For venture capital firms themselves, the 
transparency and joinder provisions of H.R. 9 present serious 
problems.
    My third point. My written testimony describes a number of 
actions by courts and Federal agencies that are creating a sea 
change in patent law that is already responding to much of what 
H.R. 9 targets. A series of Supreme Court decisions alone has 
made it much easier for companies to defend against meritless 
patent cases, including the ones that others have already 
referred to. Other changes are equally significant. The 
abolition of Form 18 is going to bring patent pleading in line 
with other Federal litigation. The FTC has taken on the 
challenge of abusive demand letters, and the AIA is having a 
major impact.
    My closing point. The entrepreneurial drive to pursue new 
visions has been a bedrock feature of American culture for 
decades and has largely been responsible for our remarkable 
success as a Nation. The patent system is essential to protect 
the innovative spirit that pervades our national character. It 
would be tragic if this Congress, in the misguided belief that 
H.R. 9 will promote innovation, made it more risky and 
expensive for our most promising companies to protect 
themselves and their technology.
    Thank you.
    [The prepared statement of Mr. Taylor follows:]
    
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                __________
    
    Mr. Issa. Thank you. I will now recognize myself for a 5-
minute round of questioning. Mr. Taylor, what was the name of 
the company that spent 5 years trying to defend its right, 
ultimately prevailed?
    Mr. Taylor. I was not involved for the full 5 years. The 
company was Applied Medical Systems.
    Mr. Issa. They have my sympathies because, in fact, the 
clod slow difficult system to enforce your patents is exactly 
what this bill is intending to fix.
    Mr. Gupta, in the case of a major part of this legislation, 
the heightened pleading was followed by the early Markman in 
order to discover what the patent is and provide both sides a 
good faith understanding of what the patent really means and 
how it might apply to the product in question. Does that, in 
your opinion, and I will go to each of you, get you to many 
resolutions, some unclogging of the system, and ultimately an 
opportunity for people who in good faith want to end up with an 
ultimate outcome, to get there at lower cost?
    Mr. Gupta. Thank you, Mr. Chairman. Yes, I agree----
    Mr. Issa. I love it when someone says ``yes'' first. 
Please.
    Mr. Gupta. The Innovation Act, in my mind, has balanced 
provisions that are designed to make the litigation process 
much more efficient than it is today. We are in court today in 
a Markman hearing. The plaintiff asserted eight patents against 
us, accusing two major product lines. The complaint did not 
identify any of the hundreds of claims involved in the patents, 
did not identify any model numbers. 3 months later, they added 
three additional patents to bring it up 11 patents, another 
product, no model numbers. 8 months into the litigation, they 
gave us some claim charts and some claims. 12 months into the 
litigation, they attempted to add even more claims that were 
not announced previously and new products, and the Markman was 
about a month after. They attempted to add new claims again.
    So it is an extremely cumbersome process for defendants 
when plaintiffs do not identify exactly what product, what 
claims, and how the infringement is being argued. And, more 
importantly, the imbalances in discovery are so severe that 
defendants often are left with two choices: one, either get 
extorted or settle, or take it all the way to the end, spend 
millions, and still not really win because they are out of 
pocket several hundred million dollars.
    Mr. Issa. And I appreciate that, and I want to go to Mr. 
Wamsley, too. But in a nutshell, having practiced as a patent 
holder and a defendant as a manufacturer, the one thing I know 
that I hope I get a yes from all of you on is, in a perfect 
world the pleadings tell what the infringement is if it is 
available to be defined. And if it is not available to be 
defined, at least sufficient for why you believe in good faith 
that there is a patent infringement, and an early Markman with 
discovery related to that.
    Is that not the goal of everyone who has a valid patent 
that they truly believe has been infringed, or a defendant who 
truly believes they do not fall within the proper meaning of 
the patent? Is there anyone that disagrees with that?
    Mr. Taylor. May I just address that, Mr. Chairman?
    Mr. Issa. As long as you are brief because I did describe 
your opening statement in my opening statement.
    Mr. Taylor. Okay. Yes, I think in an ideal world you would 
like the pleadings to disclose as much as possible. It is often 
the case, however, and this is not just true of patent 
litigation, it is true of virtually all litigation. The 
plaintiff at the outset of a trial or outside of a case does 
not know all the facts it needs to put together a full trial 
brief.
    Mr. Issa. Okay. Well, let me follow up on that because I 
think that is extremely important having been the plaintiff. If 
you do not know there is patent infringement, then where do you 
get the right to go on a fishing expedition to see if you can 
find one?
    Mr. Taylor. No lawyer today in light of----
    Mr. Issa. That was a question that requires an answer 
related to if, and I will go to Mr. Pincus because I have not 
gone to him yet. If you do not know there is patent 
infringement, what in any part of the law allows you to begin 
having Mr. Gupta's company spend money because you want to go 
on a fishing expedition because your patent on a swimming pool 
might apply to an array of disk drives?
    Mr. Taylor. I do not think--oh, I am sorry.
    Mr. Pincus. I think that is exactly right, Mr. Chairman. I 
think you certainly should know which claims of your patents 
are infringed and what the infringing articles are, and I think 
that is the critical issue.
    Mr. Issa. And should you not know your accuser's true 
identity, particularly if you are being sued by a shell 
corporation? That is my closing question because I know Mr. 
Taylor objected to that.
    Mr. Pincus. I think you should know that as well, and I 
think that is why regardless of Iqbal and Twombly, the 
Innovation Act's specific requirements are so appropriate 
because if I were a patent plaintiff, I would not want to wait 
for 5 years for Iqbal and Twombly's application to patent 
infringement cases to be----
    Mr. Issa. Thank you. Mr. Wamsley, very quickly because my 
time has expired, if you have something to add.
    Mr. Wamsley. Well, Mr. Chairman, I agree with your 
description of how it should work in a perfect world, and we 
support heightened pleading standards in principle. When we 
looked at this in the last Congress, we did it through a 
recommendation to amend Form 18 to specifically require 
identification of one or more claims, and explain how the 
latest infringing instrumentality infringed those claims. Now 
the Judicial Conference has gone to the Twombly/Iqbal standard, 
that may produce the same result, but we do not know yet.
    Mr. Issa. I look forward to finding out. Mr. Nadler is 
recognized for his questions.
    Mr. Nadler. Thank you. I would like to ask Mr. Taylor to 
comment on the question that you did not get a chance to answer 
from the Chairman. I never liked the Iqbal or Twombly 
decisions, and I, in fact, introduced legislation to overturn 
them, which unfortunately has never passed because if you have 
a good reason to believe it is a general tort, the defendant is 
more likely to have the specific knowledge of the evidence.
    But, Mr. Taylor, in patent, is that applicable? Should you 
not know if your patent is being infringed or how it is being 
infringed? Should you not be able to describe the provision of 
patent that is being infringed?
    Mr. Taylor. Congressman, at least in the courts I have been 
practicing in for most of the last 35 years, lawyers before 
they will file a complaint are subject to Rule 11, which 
requires that you have a reasonable basis for believing that 
the factual allegations in the complaint are true. And I do not 
know any responsible lawyer that will file a case simply hoping 
that they can prove infringement. We go to great lengths 
sometimes----
    Mr. Nadler. So then Iqbal is okay.
    Mr. Taylor. I did not hear you.
    Mr. Nadler. So then Iqbal is correct.
    Mr. Taylor. Iqbal, it does not authorize people to make 
factual assertions in complaints for which the lawyers don't 
have some factual or some reasonable basis for believing them 
to be true. That is Rule 11 of the Federal Rules, and it is a 
seriously applied rule.
    Mr. Nadler. But in a patent, is it not generally the case 
that if you are filing a patent infringement claim, you should 
have probably more specific knowledge in some tort case or 
whatever about what in your patent is being infringed 
allegedly?
    Mr. Taylor. That is generally the case, and most 
responsible plaintiffs will take an accused's product and they 
will have it reversed engineered or they will analyze it. They 
will make every effort to determine whether the elements of a 
claim in the patent are all present, and in the process it is a 
little more difficult sometimes to find out.
    Mr. Nadler. Thank you. Mr. Wamsley, in light of Octane 
Fitness and Highmark, do you believe we still need legislation 
on these subjects? And if so, why?
    Mr. Wamsley. Yes, Mr. Nadler, we believe that legislation 
is still needed----
    Mr. Nadler. Because?
    Mr. Wamsley [continuing]. While Octane and Highmark are a 
step forward, the tests set forth by the Supreme Court in 
Octane that attorney's fees could be awarded in cases that 
stand out, it is broadly worded language.
    Mr. Nadler. Too vague?
    Mr. Wamsley. And we believe there is a spectrum of 
interpretations of that by the district court, and it is better 
to nail a brighter line in legislation.
    Mr. Nadler. Thank you. Mr. Taylor, could you comment on the 
same question?
    Mr. Taylor. I think that what we ought to do is wait for a 
while to see how the lower courts are going to apply the 
Highmark and Octane cases. I am not sure I agree that it is 
better to have a presumptive shifting of fees and for the 
following reason. At least from the perspective of the venture 
capital world, a small company that has been sued by a larger 
competitor is looking at two kinds of liability, liability for 
the infringement, and if you tack on attorney's fees as a 
presumption, that simply increases the ante. It raises the 
bogey, and that works distinctly to the advantage of larger 
companies to the detriment of smaller companies.
    Mr. Nadler. And, Mr. Taylor, you say that the lower courts 
appear to be reading Alice to hold that subject matter 
eligibility can be decided in early stage of litigation without 
the need for costly discovery or claim correction. Mr. Taylor 
said that.
    Mr. Taylor. Yes, sir.
    Mr. Nadler. And that would seem to imply that we do not 
need legislation on that point.
    Mr. Taylor. I certainly would suggest that we wait to see 
what the implications of Alice----
    Mr. Nadler. And who would disagree with that on that point 
and why, of the other witnesses? Mr. Wamsley?
    Mr. Wamsley. Well, Mr. Nadler, I would say that we may need 
legislation on Alice.
    Mr. Nadler. We do not know yet.
    Mr. Wamsley. But on clarifying Alice, the U.S. Patent and 
Trademark Office is now going through a public procedure to 
clarify.
    Mr. Nadler. Thank you. Last question because my time is 
running out. Mr. Taylor, you said in your testimony that 
legislation should focus on specific behavior, not on the 
procedural aspects of enforcing patents. How would you 
accomplish this? What would you do?
    Mr. Taylor. Well, the specific behavior, what we are trying 
to deal with here is what people consider to be abusive 
behavior by litigants. The courts already have a vast amount of 
power to deal with abusive behavior. And currently, I think the 
National Venture Capital Association would say that little is 
needed in connection with this, although, as noted in our 
statement, we do support the TROL Act, enactment of the act 
that would increase the power of the Federal Trade Commission 
to deal with abusive and deceptive demand letters.
    Mr. Nadler. Thank you. My time has expired.
    Mr. Issa. I thank the gentleman. We now go to the Chairman 
of the full Committee, the author of the bill, the gentleman 
from Virginia, Mr. Goodlatte.
    Mr. Goodlatte. Thank you, Mr. Chairman. Mr. Taylor, on that 
last point, that is exactly what we are doing. I mean, we are 
providing for fee shifting, but in very precise circumstances, 
only when there is no reasonable basis in law or fact for 
asserting the claim, whether it is by a plaintiff or a 
defendant. When you translate that to the small startups that 
your companies invest in, they already are facing that right 
now. And when they get that claim, they are facing a 
multimillion dollar bill to defend their claim right now, or to 
assert it if they feel that some company, a bigger one, is 
going to do that, with no prospect--no prospect whatsoever--for 
recovery of that large loss.
    So many of them choose to simply not fight it, and that is 
a reason why they are less successful in getting off the 
ground. So this predatory environment that they operate in is 
made, I think, worse by the fact that they have no prospect of 
anybody determining whether predatory actions took place in the 
first place, so I do not follow your reasoning there at all. I 
think this will be a big help, and many startups have told me 
just that, that it will be a big help to stop these kinds of 
predatory actions taking place against them.
    Mr. Taylor. Some of the lawyers who represent non-
practicing entity plaintiffs have told me that fee shifting is 
not going to affect their behavior at all.
    Mr. Goodlatte. Well, that does not explain why they are 
working very hard against this bill, I can tell you that.
    Mr. Taylor. In my view, having been on both sides of lots 
of patent cases, I see the presumptive shifting of fees as an 
argument that allows the plaintiff to say to the defendant you 
owe me $100,000----
    Mr. Goodlatte. It is not presumptive shifting of fees. 
There is no presumptive shifting of fees in this law. It is 
only a shifting of fees when the Court finds that there was no 
reasonable basis in law or in fact for that to take place. So 
this constant assertion that there is going to be rampant fee 
shifting in patent cases after the passage of this law is 
incorrect.
    What will happen, though, is there will be much greater 
certainty about when that fee shifting would take place. So you 
and your clients will be able to determine whether or not they 
have a good patent defense or a good claim to assert against 
somebody else and know much more likely than they do now what 
is going to happen because of the discovery process, the 
requirements when you file the case. And I think also 
importantly to know under what circumstances they should assert 
a defense and when they should not, because if they are not 
being reasonable, then darn right, they should not assert the 
defense. But if they are, this creates greater certainty than 
this morass of lawsuits.
    So let me just say, and the elephant in the room here is 
that it is generally very rare for the Supreme Court to take up 
patent cases. But with all the recent Supreme Court decisions, 
it really looks like the Court has taken the Federal circuit to 
task. No judge wants to be reversed on appeal, especially not 
an appeal court judge that sits on a court with exclusive 
jurisdiction.
    I will start with you, Mr. Wamsley. Do you think that the 
Federal circuit is getting the message, or do you foresee that 
the Supreme Court is having to just keep taking up more cases? 
Is this the new normal for the patent world, and is it good for 
the patent world to rely upon and wait on the next Supreme 
Court decision rather than to have some statutory certainty 
that is carefully negotiated, and takes into account all of 
these cases that have come down the line, but does not wait on 
that next decision around the corner, says here based upon 
experience and based upon what we have seen is some certainty 
in the law?
    Mr. Wamsley. Well, Mr. Goodlatte, I would say the Federal 
circuits are certainly reading the Supreme Court decisions, and 
I believe recent decisions in some of the cases following 
Alice, for example, show that although there is still some 
inconsistency. And Alice is a case where the Supreme Court may 
have to come back to it again.
    On fee shifting, I think the Federal circuit will follow. 
There was a case argued last week, according to the IP press, 
at the Federal circuit where, according to press accounts 
anyway, it sounded like the Federal circuit was inclined toward 
fee shifting.
    Mr. Goodlatte. Mr. Gupta?
    Mr. Gupta. Thank you, Mr. Chairman. In certain areas, the 
Supreme Court cannot provide the sort of consistent balanced 
solution that Congress can. And as I pointed out, for example, 
in the area of abusive discovery, there is no Court guidance 
and there are no Court decisions to help us. And in the area of 
pleading specificity, which is really important, you know, 
reliance on Iqbal and Twombly is not going to solve the problem 
because Iqbal and Twombly do not provide the kind of bright 
lines that we need in a specialized area like patent 
litigation.
    Mr. Goodlatte. Mr. Pincus?
    Mr. Wamsley. Mr. Chairman, could I just----
    Mr. Goodlatte. I am already 30 seconds over. It is going to 
be up to that Chairman.
    Mr. Wamsley. Could I just complete my last response?
    Mr. Issa. If the Chairman would like to let you have time, 
I would ask additional time.
    Mr. Goodlatte. We will hear from Mr. Pincus and then we can 
go back.
    Mr. Wamsley. I would just like to say that no matter how 
strong the Federal circuit supports fee shifting, we think 
legislation is still needed because the way the statute is 
worded right now, only Congress can strike the balance that you 
want.
    Mr. Goodlatte. Thank you. Mr. Pincus?
    Mr. Pincus. Well, the Federal circuit had a bad year. There 
were six cases, and it did not get a single vote, so it was 
sort of 0 and 54 and a bad year for the Federal circuit, and I 
think that was a message that the Supreme Court was trying to 
send. But I think the problem is that the Supreme Court cannot 
rewrite the fee-shifting law to make the standard less mushy 
and clearer along the lines of what you were saying in terms of 
people's ability to anticipate how it will be applied and take 
that into account into their decisions. And that is something 
that only Congress can do.
    The same with pleadings. Iqbal and Twombly can apply, and 
maybe in 10 years we will know how it applies to patent 
infringement actions. But there are some pretty clear rules 
that Congress could specify right now that would be great for 
both plaintiffs and defendants so they would know what is 
needed to get into court, and that would be that.
    Mr. Issa. Thank you. We now recognize the Ranking Member 
for up to 7 minutes depending upon how fast he wants to run to 
the vote. I would advise all Members this will be the last 
question before we recess for the vote.
    Mr. Conyers. Thank you so much. Let me ask, Mr. Taylor, 
with your background, counsel in venture capital firms who 
invest in patent owning businesses, how would the pending 
legislation impact the decisions venture capitalists make in 
investing?
    Mr. Taylor. One of the provisions that we are most 
concerned about is the so-called joinder provisions, which are 
not clearly written, and read as if a venture capital firm that 
owns a majority share in a patent plaintiff would be on the 
hook for attorney's fees in the event a court were deciding to 
award that. Most venture capital investments are made, and that 
is the end of the money until they decide to make a new one, 
and to impose on the investors a responsibility for the actions 
of some of their companies. Piercing the corporate veil, as it 
were, is something that is going to have a serious deterrent 
effect on venture capital investment.
    Mr. Conyers. How would this impact small investments and 
startups?
    Mr. Taylor. Well, almost all venture capital investment is 
in entrepreneurial companies, innovative companies that are in 
either startup mode or not very far along from that.
    Mr. Conyers. All right. And my last question is to Mr. 
Wamsley. How has fee diversion impacted on USPTO's effort to 
ensure high quality patent examination?
    Mr. Wamsley. There has been a serious adverse effect from 
fee diversion over the years. Going back over a period of 
years, more than $1 billion has been diverted to unrelated 
government programs or sequestered, and studies have shown that 
this is a principle reason for the backlog of cases to be 
examined. And we believe that more resources are also needed to 
improve quality, and so we would urge Congress when it has an 
opportunity to revisit the issue of guaranteeing secure funding 
for the PTO.
    Mr. Conyers. Do the other three witnesses generally agree 
with that response?
    Mr. Pincus. That diversion is a bad thing, absolutely.
    Mr. Gupta. Yes.
    Mr. Conyers. Thank you, Mr. Chairman.
    Mr. Issa. Thank you. I would advise all Members of the 
Subcommittee that we will return immediately after this series 
of two votes. So the first two Members back will begin the 
process. We stand in recess.
    [Recess.]
    Mr. Issa. Could I ask you all to please take your seats? We 
are going to start again in a moment. The Committee will come 
to order. Is the gentleman from Texas prepared?
    Mr. Farenthold. I am always prepared.
    Mr. Issa. The gentleman is recognized.
    Mr. Farenthold. Thank you very much, Mr. Chairman. Mr. 
Gupta, I would like to touch briefly on a related issue, namely 
the rise of patent litigation before the ITC. I think it is 
important we do something about the rising tide of litigation 
in the Federal judiciary and the fact that we are moving over 
into concurrent tracks with litigation in the ITC. We have got 
to keep in mind that any reforms we do with respect to what 
happens in the judiciary may also roll over into the ITC.
    My fear is that the trolls will use the ITC to pressure 
litigants to settle rather than face the cost of defending in 
that venue. We have already seen patent assertion entities 
starting to play the same game in the ITC that we are seeing in 
the Court, bringing suit against the customers or technology 
companies. To that end, I would like to ask you, is it your 
understanding that PAEs have additional leverage at the ITC and 
are actually in a better position to make settlements than in 
Federal courts?
    Mr. Gupta. Thank you, Congressman, for that question. It is 
concerning to us that the ITC is being used by patent assertion 
entities to essentially have dual litigation at times. The ITC 
is best able to deal with foreign knockoffs that come into our 
country, but to have an American entity litigate against 
another American company, particularly when the accusation is 
probably directed to some small component that might have in 
the supply chain originated outside the country appears to be 
not the most efficient use of the ITC. And I agree, and I share 
your concern.
    Mr. Farenthold. Thank you very much. Let us kind of shift 
to a different topic. In your written testimony you talk about 
the Teva Pharmaceuticals case and the potential of providing 
unscrupulous patentees with an incentive to pick the district 
court most favorable to them. Knowing their claim 
interpretation will be insulated from de novo review in the 
Federal circuit. I am wondering what you think about the impact 
of striking the broadest reasonable interpretation standard 
will be on current litigation environments in light of that 
decision.
    I am especially interested given the decision in, what is 
it, the Cuozzo Speed Technologies this week holding that 
applying the broadest reasonable interpretation standard 
reduces the possibility that after a patent is granted, claims 
may be interpreted as giving broader coverage than justified.
    Mr. Gupta. We believe that the BRI standard is appropriate 
for IPRs and reviews post-grant. We have had several patents of 
ours challenged through the IPR proceedings, and we have 
challenged others as well. And we think that the Patent Office 
should be allowed to use the broadest reasonable interpretation 
standard when it looks at those patent claims.
    Mr. Farenthold. All right, thank you. Mr. Taylor, I believe 
in response to Mr. Nadler's question, I think you referred to 
``good plaintiffs,'' and I think that is not what we are after 
in this. I think our concerns are the bad actors who are using 
the expensive litigation to force settlements in questionable 
claims and the like. So I have no problem with, I guess, the 
term ``good plaintiffs'' with good cases coming, and I think we 
are drafting that such that we are going to preserve that. It 
is the bad actors we are going to get after.
    But I am also a little interested, you know, based on your 
testimony, it kind of seems like it may be a little bit in 
conflict with NVCA's membership. There is a survey I think that 
said by and large they are harmed by patent trolls and 
supportive of reform. Why are you generally opposed to this 
litigation if some of your members or the majority of your 
members are having a problem?
    Mr. Taylor. The only study I have seen is one that sampled 
a very small section of venture capital firms, and certainly 
does not represent the center of gravity of the NVCA. I have 
been working with the NVCA board now for almost a year on this 
issue, and trying to help people understand what the statute 
would say and how it would affect their businesses. And the 
positions that I am setting forth here today are the positions 
of the National Venture Capital Association.
    Mr. Farenthold. Thank you very much. And with the 
Chairman's permission and the consent of the Committee, I have 
a letter from Engine Advocacy titled, ``Startup Investors 
Nationwide Support Broad Patent Reform,'' that I would like 
entered into the record.
    Mr. Issa. Without objection, so ordered.
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    Mr. Farenthold. And I timed that almost perfectly. I will 
yield back----
    Mr. Issa. Would the gentleman yield?
    Mr. Farenthold. I will.
    Mr. Issa. Mr. Taylor, would you provide transparency as to 
your members' statuses because it really is now a question of, 
you said you have been trying to convince your board to support 
opposition to the legislation. Do we have transparency for the 
400 companies that are involved in yours to figure out how many 
of them support your position in light of the fact that it does 
appear as though there may be some doubt as to whether there is 
a formal process on a board and transparency?
    Mr. Taylor. It is a large organization, and I am not 
certain how much of it is public. I have been dealing basically 
with the staff and with the board of directors, so I am not 
sure I can answer the question.
    Mr. Issa. Okay. I will take that as a no. [Laughter.]
    With that, we go to the gentlelady from California, Ms. 
Chu.
    Ms. Chu. Mr. Gupta, we have been talking quite a bit about 
the fee-shifting cases of the Octane and Highmark cases. You 
argue that these cases did not go far enough in deterring the 
filing of frivolous patent cases that companies both large and 
small have faced. You provide some statistics that can be 
helpful to us in evaluating how we should legislate in this 
area.
    Why do you think that the rate of fully-granted motions 
increased shortly after the first 3 months of the Court 
decisions and then slowed in the last 3 months? Do you think 
this trend will continue?
    Mr. Gupta. Thank you, Congresswoman. You know, we have only 
had 9 months of data since Highmark and Octane, so it is hard 
to really speculate as to why it has been trending down. But 
the point I want to make is that Highmark and Octane, based on 
the data that we have right now, have not really had a 
meaningful impact. And I really believe that to get abusive 
litigation to slow down the abusive tactics, the plan or the 
proposal that is in the Innovation Act is a thoughtful 
bipartisan approach that I think will make a serious, you know, 
or have a serious impact on bad actors in court.
    Ms. Chu. And can you tell us about the type of cases in 
which the defendant is being awarded fees since Octane and 
Highmark? Do they appear to be troll type suits, or is there no 
real pattern?
    Mr. Gupta. I do not know that I can generalize. We have a 
couple of motions pending ourselves where we have asked the 
court to grant us our fees, and we are waiting to see how the 
court will act, but I do not have a general sense. I think 
based on the data we have seen that the numbers generally seem 
to be evenly split between defendants and plaintiffs in terms 
of fee recovery, but not necessarily whether it is a NPE 
litigation or not.
    Ms. Chu. And also in the Nautilus decision, the Supreme 
Court addressed how definite or clear a patent must be. The 
Court established a new test which requires that the patent 
provide reasonable certainty of what it covers. You have stated 
that it would be easier for a defendant to challenge the 
validity of a vague patent given the decision. Could you 
explain why it would be easier for the defendant and what long-
term effects do you think the decision will have on abusive 
patent litigation?
    Mr. Gupta. Certainly. We often find that patentees will 
attempt to really stretch the meaning or the meets and bounds 
of a patent in litigation downstream. Sometimes a patent 10, 12 
years old, covering technology that was dated, they will 
attempt to stretch it to cover new developments in technology. 
And we think that this decision in Nautilus will allow us as 
defendants to be able to argue that Section 112 requirements 
were not met by the patentee, particularly in light of claim 
construction orders.
    If the judge grants a claim construction order that is 
really broad and the plaintiff pushes for that broad 
construction, I think it will be easier for defendants 
downstream to then show that that claim construction is simply 
not supported by what is in the specification, but it is too 
early to tell. We also have one motion pending before a 
district court arguing that certain claims are invalid in light 
of Nautilus, but we do not have a ruling yet.
    Ms. Chu. Okay. Mr. Pincus, what do these Supreme Court 
cases not address? And by that I mean what are the provisions 
in the Innovation Act that are still necessary despite the 
court decisions?
    Mr. Pincus. Well, they obviously do not address at all 
pleadings. The patent specific decisions. Obviously the changes 
that will be made in the Federal Rules striking Rule 84 and the 
forms will have some effect on pleading, but the Supreme Court 
has not addressed it. And as I said earlier, I think the 
Congress has an opportunity to put specified clear rules of the 
road for pleading rather than leave it to the courts to flesh 
out what Iqbal and Twombly mean in the pleading context, which 
will take a few years and could leave people uncertain about 
what the rules are. So pleading is one area.
    Discovery is another area not addressed at all. The 
asymmetrical discovery costs which really are one of the 
critical drivers of the litigation, nothing done there. And 
with respect to the attorney's fees, although Highmark and 
Octane do address the issue, the problem is that because the 
current language of the statute is what it is, the Court could 
not interpret that language to provide the kind of guidance 
that is really necessary so that somebody making the decision, 
do I fight this case because I have a reasonable chance to get 
my fees back, or should I settle because I cannot be sure, and 
so fighting it will end up costing me more. The current statute 
does not do that.
    The other problem with the current statute and the Court's 
decision in Highmark with respect to deference is at least when 
we are concerned about abuse by plaintiffs, plaintiffs pick the 
forum. And if a district judge indicates or members of a 
district court indicate that they are going to be tough on fees 
under a murky standard, it is pretty easy for the plaintiff to 
say, well, I am going to go somewhere else where this murky 
standard is getting a better interpretation. If Congress makes 
the rules of the road clearer, that kind of disparity is much 
less likely to develop.
    Ms. Chu. Thank you. I yield back.
    Mr. Issa. I thank the gentlelady. We will now go to the 
gentleman from Georgia's 9th District, Mr. Collins.
    Mr. Collins. Thank you, Mr. Chairman, and I am pleased to 
be starting back here. I am pleased to be on this Committee 
with you and also the Chairman as Vice-Chair of this Committee 
because this is very important to me. It is something I worked 
hard in my first term, and look forward to working even more so 
in our second term. As we look forward to working with this 
Committee on intellectual property, obviously patents are a 
vital part of the system. So I want to thank the Chairman 
Goodlatte for holding this hearing and reintroducing the 
Innovation Act.
    It is important for Congress to look for ways to eliminate 
frivolous and abusive litigation. We need to unclog the system 
to ensure that true innovators are given fair opportunity to 
enforce their patent rights, a right that our founders 
explicitly provided for in the Constitution. Last year, I had 
some serious concerns with the direction of some patent reform 
proposals, especially those that attempted to expand and extend 
the CBM program.
    These types of proposals are unsettling because they 
discriminate against a particular type of technology rather 
than focus on the real problem, the bad behavior that occurs 
all too often during patent litigation. So I am grateful to the 
Chairman that the CBM issue is not a part of the Innovation 
Act. Having it in would certainly undermine my ability to 
support the bill in Committee and on the House floor. Now we 
can focus on moving forward legislation that eliminates and 
stops bad actors and improves our patent system.
    But also before we start, this is my question. It was on 
something, Mr. Taylor, that you brought up, and I believe if we 
have it. Okay, if you would look at the screen. In your 
testimony, after your testimony I took your testimony and I 
went to your website, which is now on the screen. And on the 
first page under ``research'' tab, there was a study listed by 
Robin Feldman, and I am going to read just a few lines before 
turning to my questions. In the paper it said, ``A study 
conducted on the topic of patent demands against venture back 
startups. The study was conducted through the members of the 
National Venture Capital Association.''
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    It said, and quoting from this report, it says, ``74 
percent of venture capitalists and 58 percent of startup 
companies report that patent demand had a significant impact on 
a company.'' The next one it said, ``According to the vast 
majority of both venture capitalists and startup companies, the 
cost of preparing for and defending against patent demands 
exceeded $50,000 per company with a number of companies 
reporting costs in the millions of dollars.''
    When asked whether they see patent assertion as a positive 
for startups in the startup community, 72 percent of venture 
capitalists disagree. We might have an insight into why you are 
having trouble getting people to disagree with this bill.
    Mr. Gupta, thank you. I appreciated listening to your 
testimony. I have heard from some groups that the Innovation 
Act will actually devalue property rights by diminishing the 
ability for parties to license their patents and defend them in 
court. How would you respond to that claim?
    Mr. Gupta. I completely disagree with that 
characterization. The Patent Act was designed to promote 
innovation and to promote art and sciences, and the true value 
of a patent really goes to the claims and the invention that 
those claims describe. I think a reformed system makes patents 
stronger. It provides companies like us, who rely on our R&D 
investment to protect our innovations, to know that we can 
actually enforce our patents in a meaningful way and protect 
the investments we have made.
    The suggestion or the logic that somehow a patent is 
devalued if a patent holder cannot plead imprecisely and bury 
the other side with discovery requests, and do so with impunity 
knowing that at the end of the day they have no downside and 
they can walk away if they are not able to extort settlements 
from people, is just flawed.
    Mr. Collins. And I think the thing that I have mentioned so 
many times in this Committee, and I think proposing this whole 
issue of patent, copyright, and others, that really strong 
protections, they actually increase and encourage innovation, 
and do not detract from it, whether it be venture capital or 
anything else. You want to invest in something that you know 
that you are at least protected to the extent you can be in a 
free market from an abusive system like we have now.
    Mr. Pincus, I really like your expertise in this 
intellectual property area, and I think it is not only 
important we improve our patent system, but we also improve 
other aspects of the country's intellectual property policy. I 
am particularly interested to make sure that America still 
contains the highest standards really in the world. All too 
often we see our trade secrets stolen out of our factories here 
in the United States and then end up on a plane to a foreign 
competitor. I also want to improve the system to protect 
America's inventors, which is why I supported the Committee's 
trade secret legislation last year.
    Can you talk about the intersection of patents and trade 
secrets? I am also interested in your perspective on any 
current improvements that we could make to our current trade 
secrets policy.
    Mr. Pincus. Yes, thank you, Congressman. As you know, 
sometimes for various reasons companies have very important, 
and significant, and valuable intellectual property that they 
either do not want to patent or cannot patent, but is valuable 
and is confidential to them. And the question is how does the 
law protect that? Trade secret law has traditionally been the 
means of doing that, and as you know, trade secret law has 
traditionally been the domain of the States. But I think 
increasingly we have realized that in the global environment in 
which we find ourselves now, that there are holes in that 
protection, and something at the Federal level that puts forth 
clear rules of the road is really essential to ensuring that 
American companies can protect those trade secrets effectively.
    Mr. Collins. I appreciate it. You will be hearing more from 
me on that in the weeks coming. Mr. Chairman, I yield back and 
appreciate that time.
    Mr. Issa. We now go to the gentlelady from Washington One, 
someone who is familiar with intellectual property, Ms. 
DelBene.
    Ms. DelBene. Thank you, Mr. Chairman, and thanks to all of 
our witnesses for taking the time to be with us today.
    I know there has been a lot of close attention paid to the 
Supreme Court cases on Section 101, and, Mr. Wamsley, in your 
testimony, you stated that the lack of clarity in the Alice 
case makes it more difficult for innovators to determine when 
it is appropriate to invest in patent protection and cast a 
shadow of uncertainty on all patents, even good ones. And so, I 
wondered if you would elaborate a little bit more on that 
statement and what your concerns are with respect to the Alice 
case.
    Mr. Wamsley. Thank you for the question, Congresswoman. 
Yes, we feel there is a great uncertainty caused by Alice 
currently, and the Alice case concerned a computer-related 
invention. But recently the Federal circuit extended the 
abstract idea test in a case involving the University of Utah 
even to a biosciences invention.
    So I think right now with the level of uncertainty we have, 
people who are making R&D decisions in companies, at least 
computer implemented inventions, pharmaceuticals, cases that 
involve processes of all kinds, are wondering whether they are 
in the patent eligible area, even if they have what they think 
is a practical application for what might involve abstract 
process. So we think there is an urgent need to clarify this. 
Now, there was an earlier question about whether we need 
legislation. I would not urge legislation tomorrow, but if the 
courts are unsuccessful in clarifying this, I think that 
ultimately Congress needs to look at the adverse effect on the 
incentives for R&D.
    Ms. DelBene. Thank you.
    Mr. Taylor. Could I offer just a footnote to that? It is 
important to remember that one of the purposes of the patent 
system is to encourage disclosure of inventions. And to the 
extent people conduct research and develop technology that they 
are not confident they can patent, or in the case of what we 
have been talking about this afternoon, not confident that they 
can reasonably enforce their patents, the tendency will be to 
protect it by trade secrets. And it is my strong sense right 
now, given some of these cases from the Supreme Court and given 
the pendency of this legislation, that companies are making 
that decision and opting to go the trade secret route for more 
of their technology that they used to try patenting.
    Ms. DelBene. Thank you. Many supporters of the Innovation 
Act have complained that they are being sued by shell companies 
with few assets to pay attorney's fees even if they are 
awarded. And according to the American Intellectual Property 
Law Association, the average cost of defending a patent suit 
with a million to $25 million, at risk is about $2.5 million, 
and the cost of defending patent suits with more than $25 
million, at risk is over $5 million. And we know that there has 
been targeting obviously of startups that are particularly 
vulnerable.
    So I guess I will ask you, Mr. Gupta, what do you see as 
the best way to deal with abusive litigation by shell companies 
in particular when they have a lot to gain and not a lot to 
lose under the current system? And do you think the Innovation 
Act will address that issue?
    Mr. Gupta. Thank you for the question, Congresswoman. I 
think the Innovation Act has a provision that requires people 
who have a financial interest in the litigation be joined. I 
think it is an important requirement. We are often sued by 
shell companies who are very thinly capitalized, and so even if 
you get an award, they are judgment proof essentially.
    And by the way, my company, EMC, is a member of the 
National Venture Capital Association. We have a venture arm. We 
invest several hundred million dollars in venture funding. We 
are not concerned that as a VC that one of the companies we are 
investing is somehow going to be joined in a patent suit 
because we do not invest in companies whose primary business is 
to sue people with their patents.
    And in the past 15 years, we have acquired 96 companies and 
spent $18-plus billion in acquisitions, primarily of venture-
backed companies. And I can assure you that when I talk to the 
CEOs and the entrepreneurs who started these companies, they 
are very concerned about abusive patent litigation, and they 
are very concerned about how much of their funding they are 
having to spend on defending these demands versus hiring an 
engineer developing the technology that they want to perfect.
    And so, I really think, you know, requiring joinder of 
folks who are funding the abusive practices is a very important 
step, and I believe that this bill has the right types of 
provisions for that.
    Ms. DelBene. Thank you. Thanks. I yield back, Mr. Chairman.
    Mr. Issa. Thank you. Anecdotally, Mr. Gupta, I would assume 
that you are not in support of your association's position here 
today.
    Mr. Gupta. Absolutely not.
    Mr. Issa. Just checking. The gentleman from Virginia, Mr. 
Forbes.
    Mr. Forbes. Thank you, Mr. Chairman, and, gentlemen, thank 
you so much for taking the time to share your expertise with us 
today. I apologize that some of us have had to be in and out 
for votes. So it is not my desire to reopen a line of 
questioning that perhaps has been asked and answered, but I do 
want to make sure I am getting clarity.
    And, Mr. Taylor, in response to what I heard the Chairman 
ask you, as I read your written statement and heard your oral 
presentation today, you accentuated the fact that you had 400 
members, I believe, in your association. But it would not be 
fair to conclude that your position today represents the 
position of those 400 members. Would that be fair to say?
    Mr. Taylor. I think it is fair to say that the position we 
have tried to develop represents the center of gravity of that 
organization. I cannot tell you that all----
    Mr. Forbes. Let's look at the center of gravity then, is 
Cisco one of your members?
    Mr. Taylor. Say again?
    Mr. Forbes. Is Cisco one of your members?
    Mr. Taylor. Of the National Venture Capital Association? I 
do not know.
    Mr. Forbes. They are I think. And do know their position on 
this?
    Mr. Taylor. I do.
    Mr. Forbes. And they are for the Innovation Act, are they 
not?
    Mr. Taylor. They are.
    Mr. Forbes. How about Google? Are they one of your members?
    Mr. Taylor. I do not know the answer to that.
    Mr. Forbes. Do you know their position on this act?
    Mr. Taylor. I do.
    Mr. Forbes. And they are for the act, are they not?
    Mr. Taylor. Correct.
    Mr. Forbes. Dell, do you know whether they are one of your 
members?
    Mr. Taylor. I do not know.
    Mr. Forbes. And do you know their position on the act?
    Mr. Taylor. I am not sure I do.
    Mr. Forbes. EMC, you look down the panel. You know their 
position. Are they one of your members?
    Mr. Taylor. Yes.
    Mr. Forbes. Are they one of your members?
    Mr. Taylor. According to Mr. Gupta they are, and I have 
nothing to refute that.
    Mr. Forbes. Okay. Intel, are they one of your members?
    Mr. Taylor. I do not know, but I think they are.
    Mr. Forbes. Do you know their position?
    Mr. Taylor. I assume they are in favor of this bill.
    Mr. Forbes. Micron, are they one of your members?
    Mr. Taylor. I do not know.
    Mr. Forbes. Do you know their position?
    Mr. Taylor. No.
    Mr. Forbes. Motorola, are they one of your members?
    Mr. Taylor. The piece that is owned by Google. I do not 
know the----
    Mr. Forbes. Do you know their position?
    Mr. Taylor. I do not.
    Mr. Forbes. How about Salesforce, are they one of your 
members?
    Mr. Taylor. I do not know.
    Mr. Forbes. Verizon?
    Mr. Taylor. I do not know the answer to that either.
    Mr. Forbes. So then basically you are not sure which of 
your members are for the Innovation Act or against the 
Innovation Act as you testified today. Fair assumption?
    Mr. Taylor. That is fair except that I would say that all 
of the companies you identified are very large corporations. 
And the concern I have expressed is that for small innovative 
companies, and they were once small innovative companies I 
might add.
    Mr. Forbes. And I think that would be fair, but I think it 
would be also fair to say that there is a large segment of your 
members that would be against your position today. Is that fair 
to say?
    Mr. Taylor. Let me say this a different way. The members of 
NVCA that I have talked to have often not known enough about 
this legislation----
    Mr. Forbes. So all these large companies you either have 
not talked to them or you feel that they just are not well-
informed enough to have an informed opinion on whether they 
support the Innovation Act or not.
    Mr. Taylor. I have had no reason to talk to the large 
companies. Their position has been clear since before I took 
this----
    Mr. Forbes. Thank you. Mr. Gupta, can you help me with 
this? We have heard from stakeholders that the discovery 
proposals would actually make litigation longer and more 
expensive. As a litigator and practitioner who spends much of 
your time in court, do you agree with this statement? And if 
so, why or why not?
    Mr. Gupta. Thank you for the question, Congressman. I do 
not agree with that. I think if we streamline discovery to 
focus discovery early on to claim construction and Markman 
issues, and expedite Markman hearings and defer non-Markman 
related discovery to later, we will end up streamlining and 
speeding up the process immensely. We will de-clutter our 
courts to give them more time to handle substantive motions.
    We will end up saving a lot of time, and mindless 
discovery, and expert reports for both plaintiffs and 
defendants, and bring a lot more focus to the litigation 
process, and make it a whole lot more efficient.
    Mr. Forbes. And just a follow-up question, Mr. Gupta. We 
have heard claims that the number of cases are on the decline 
with estimates as much as a 40 percent drop, negating the need 
for Congress to act. Can you just respond to those numbers?
    Mr. Gupta. The fact of the matter is we still had over 
5,000 patent cases filed, and I believe that is twice as many 
since the AIA was enacted, on an annual basis, and that is a 
lot of patent litigation.
    Mr. Forbes. Thank you all so much for being here. Mr. 
Chairman, I yield back.
    Mr. Issa. Would the gentleman yield his remaining time?
    Mr. Forbes. I would be glad to yield to the Chairman.
    Mr. Issa. So if can characterize, Mr. Taylor, what I think 
your testimony is, small companies within your group that you 
are not naming here today oppose the act based on your 
explaining it to them, and large companies, some of which have 
been named and more will be placed in the record, support the 
act, but because they are large, they do not count. You are 
still speaking on behalf of the venture capital firm that you 
head. Is that correct? Or venture capital association you head?
    Mr. Taylor. I have not heard any dissent from members of 
the National Venture Capital Association with respect to the 
positions, and they have been widely publicized within the 
organization.
    Mr. Issa. Okay. Then I ask unanimous consent that the 
members of the NVCA from the website be placed in the record, a 
partial list including Seagate, IBM, Johnson and Johnson, KPG, 
Morgan Stanley, Nike, DuPont, General Motors, Google, SoftBank, 
the owners of Sprint, EMC, of course, Delphi, Dell Corporation, 
USAA, the large fraternal association of former military 
personnel, Tyco, Verizon, et cetera.
    Without objection, so ordered.
    [The information referred to follows:]
    
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    Mr. Issa. Who is next? Mr. Cicilline, thank you for coming 
back. You are now recognized.
    Mr. Cicilline. Thank you, Mr. Chairman. Thank you to the 
witnesses for this very useful hearing. And, you know, I think 
it strikes me that it matters a lot how you look at the 
implications of both these Supreme Court decisions you have 
discussed and the proposed legislation depending on whether you 
are a plaintiff or defendant, whether you are defending a 
patent or being a defendant in a patent litigation action.
    So I think the goal here, at least from my perspective, is 
to have reforms which ensure that we have a strong patent 
system, but also ensure that we make the ability to resolve 
disagreements cost-efficient, fair, quick, and that we preserve 
the ability of small entrepreneurs, particularly who have maybe 
economic imbalance of power in the system to be able to protect 
their inventions and their discoveries.
    So what I am wondering first is, should our focus be, you 
know, if the idea is how do we come to the quickest resolution 
or the quickest determination as to the validity of a claim. 
Shouldn't we direct our attention to the pleading and discovery 
phases where we can make improvements to help arrive at that 
determination in a fairer, faster, more transparent way? And I 
know the Supreme Court decisions do not focus on those, but 
does the panel think that is an area we should focus on where 
there is the greatest opportunity to eliminate the abuse that 
we are intending to eliminate?
    Mr. Taylor. Who did you want to answer that? Well, let me 
take a first stab at it.
    Mr. Cicilline. Yes, Mr. Taylor.
    Mr. Taylor. It is always the case when a lawsuit is filed 
that the defendant will sit down with the patent and ask its 
lawyers to locate whatever prior art they can. Often the 
defendant will have the better prior art and to assess the 
strength of the claims, and if the claims are really genuinely 
not valid. I have had a number of situations in bringing prior 
art to the attention of the plaintiff and the case went away. 
It is one of those issues that you should be able to resolve 
early if you can.
    One of the reasons for the AIA proceeding was to allow the 
litigants to get the validity issues out on the table. An AIA 
proceeding costs substantially less than trying to do it 
through a district judge and combative adversarial lawyers. And 
so, that is a partial answer to your question. I am not sure it 
is complete.
    Mr. Pincus. I think certainly those are two critical 
elements. I would not say they are the only ones, but I do 
think they are critical. I think at the pleading stage, I think 
everybody has agreed today that anybody filing a lawsuit should 
be able to identify the particular claims that they think are 
being infringed and the particular articles that are 
infringing. That seems pretty basic, and that is basically what 
the Innovation Act pleading provision requires.
    And I think with respect to discovery, the critical 
question is staging the discovery to fit the part of the 
proceeding. Everybody should want to have the discovery, if 
there is any relating to the Markman proceeding, before the 
Markman proceeding. That then puts pressure on the judge to 
have to decide the Markman issue right then, and then move to 
the next phase of the proceeding. You know what the patent 
means. Now, let's look at validity and infringement and get the 
relevant discovery with respect to that. So staging things in 
that way is quite sensible.
    I think the other critical ingredient is something that 
levels the economic playing field because it still will be the 
case even if you make those changes that the costs of 
litigation are going to be asymmetric as it moves forward. And 
so, the question then is how do you incentivize a defendant to 
not settle a claim that he knows is pretty much abusive at the 
beginning when the settlement offer that is being made is less 
than----
    Mr. Cicilline. Okay, I take it back. I just have a few 
minutes left, 1 minute left. I just want to ask Mr. Wamsley, 
you said we should not act on Alice, legislate right away. And 
I am wondering whether or not it might make sense for us to see 
Highmark and Octane, how they play out, whether or not the 
Court may have actually solved at least that piece of the 
problem. Does it make some sense to give these decisions some 
time to be absorbed the Court?
    And then secondly, I would just ask Mr. Taylor or any of 
the other panelists, what can we do to protect small investors 
who might be disadvantaged by some part of the Innovation Act? 
We want to deal with this issue of patent trolls in a serious 
way, but are there any suggestions you can make of things we 
should be looking at that will protect the small investors?
    Mr. Taylor. Small investors?
    Mr. Cicilline. Small entrepreneurs?
    Mr. Taylor. I think that protecting investors, it is 
terribly important to get rid of the joinder provisions that 
allows a prevailing defendant to turn to the owners of a 
company, pierce the corporate veil, and make the owners stand 
liable for attorney's fees. And the statute is capable of being 
read that way, although I think it is somewhat ambiguous. The 
concern we have is that it will be read that way. I think that 
provision is just anathema to encouraging venture capital 
investment.
    Mr. Cicilline. Thank you. I yield back, Mr. Chairman.
    Mr. Issa. Thank you. We now go to the gentleman from 
Pennsylvania, Mr. Marino.
    Mr. Marino. Thank you, Chairman. Mr. Taylor, let us talk a 
little bit about the venture capitalists. How widespread is the 
market in venture capitalism with regard to patent litigation?
    Mr. Taylor. I do not think that for most venture-backed 
companies patent litigation to date has been a significant 
problem. The ones that I am aware of and the ones that I have 
actually personally dealt with have almost all been venture-
backed companies being sued by larger competitors because they 
have got an innovative technology that the larger competitor 
sees an advantage to taking out.
    Mr. Marino. Would you agree with me that in most 
situations, those individuals investing in venture capitalists 
concerning patent litigation or any other investment pretty 
much know what is going on, what they are investing in?
    Mr. Taylor. I think as a general proposition, yes.
    Mr. Marino. Okay. And you talk about piercing the corporate 
veil, which is an interesting point. But would you agree with 
me that in order to pierce the corporate veil, the investors 
would have to know or should have known that there was 
unethical or even criminal activity taking place with the 
investors, with the principals who are running the investment?
    Mr. Taylor. State laws differ with respect to the 
requirement for piercing the corporate veil, and there are a 
number of situations in which courts have done that. But in 
general, I can tell you that most investors assume if you are 
just buying stock in a company, you are not assuming any 
responsibility for a company's liabilities.
    Mr. Marino. I know you are right. It is something that 
could rear its ugly head, but not on a regular basis or highly 
unlikely. You have to show intent on the part of the investor 
that they were condoning, or allowing, or turning a blind eye 
to what was taking place with whom they gave money to invest.
    Mr. Taylor. The way I read this legislation is that if 
someone has a financial interest, the owner of patent, and 
given the joinder rules, they are susceptible to being joined. 
That is one of the fundamental problems that surfaced when I 
first read it.
    Mr. Marino. Have you seen situations where that has 
occurred where investors were held liable because of activity 
on the part of the principles?
    Mr. Taylor. Not to date.
    Mr. Marino. Okay. Let us talk a little bit also about 
courts. I clerked a long time ago for a Federal judge at least 
in my last year in law school and then as a prosecutor, U.S. 
attorney. I am very familiar with the Federal court system both 
in the criminal and the civil side. U.S. attorneys have 
responsibilities on the civil side to resolve cases as well.
    And I found over the years and years of my experience that 
courts are just reluctant to award attorney's fees, to fee 
shift, even for egregious activity. I have been in court 
numerous times and showed clearly evidence that was purposely 
withheld or false statements were made, and the courts would 
not sanction or award fees. So what other way could this be 
handled other than re-legislating, among other things, that 
issue of awarding fees?
    Mr. Taylor. Well, the mechanisms are in place for truly 
abusive and frivolous litigation already.
    Mr. Marino. I understand that, sir. They are there. You 
studied the Federal rules. I know the State rules at least in a 
couple of States. But the courts are just not doing it.
    Mr. Taylor. I think Congress----
    Mr. Marino. Can you give an example of why they are not 
doing it?
    Mr. Taylor. Since the Octane case was decided last summer, 
there have been 49 cases in which the prevailing party sought 
fees, and in 21 of those cases the court has awarded it, which 
I think is a different equation today than existed at the 
beginning of last year. There is a quotation from Justice 
Sotomayor from a copyright case, and she lists the kind of 
activities that should give rise to a fee award, and they 
include asserting frivolous positions.
    Mr. Pincus. Congressman, can I----
    Mr. Marino. Go ahead. Yes.
    Mr. Pincus. So here is the problem. In the real world, 
there is Rule 11, but the problem is very few people ever seek 
fees because what they do in these cases is they decide it is 
cheaper to settle than fight. So the fee application never 
happens because the case is settled.
    What you want people to do is stand up and say I am going 
to fight this because I think this fee standard gives me some 
reasonable belief that if I fight, I am not going to end up a 
net economic loser. And that is the critical change that has to 
be made is to get people willing to invest the time to fight, 
which will change all of the incentives in the action. I wonder 
if I could just----
    Mr. Marino. Well, that is going to be up to the Chairman 
because my time is well over.
    Mr. Issa. If on the subject of the question you want to 
complete your answer you may, but only that, please.
    Mr. Pincus. I will be very quick, Mr. Chairman. I know Mr. 
Taylor is very worried about this interested party provision. 
But I would just urge people to read the text of the Innovation 
Act, which is quite restrictive and specifically says that just 
having an economic interest in the company is not enough to 
make you an interested party.
    Mr. Marino. I would agree with that.
    Mr. Issa. Thank you. The gentleman from Florida, a fellow 
Michigan graduate, although I was down the street. I was at 
Siena where you at the big school, University of Michigan, Ann 
Arbor.
    Mr. Deutch. I think we saw you in the stadium some Saturday 
afternoon.
    Mr. Issa. Well, that is because we did not have a football 
team. We had women's field hockey. The gentleman is recognized. 
[Laughter.]
    Mr. Deutch. Thank you, Chairman Issa and Ranking Member 
Nadler, for holding this important hearing today. There is no 
question that we have got to address the real problem of patent 
trolls and truly fix the broken patent system. Any legislation 
that moves forward from this Committee has to strongly promote, 
not stymie, American innovation and ingenuity.
    We have got to take into account the rights of inventors 
and small businesses, make it harder for patent trolls to take 
advantage of this system at the expense of legitimate 
practitioners and third parties. And if we fail to balance 
these goals, then we are going to hurt American businesses, 
weaken inventors, harm our universities, and seriously damage 
our economy.
    I am personally committed--personally committed--to 
improving our patent system. That is why I introduced the End 
Anonymous Patents Act that would help end the secret system of 
patent ownership. I strongly support many provisions in this 
bill, including the new transparency rules and many others. But 
I genuinely worry that the legislation as currently drafted 
contains language that could actually weaken a patent holder's 
willingness and ability to protect their valid patent rights.
    I am also concerned that the legislation fails to take into 
account the new and significant shift in the law that was the 
result of Supreme Court cases. That change in law and the 
change in the courthouses, Mr. Pincus, I would suggest is also 
the real world. These cases give district court judges 
significant and expansive discretion to award fees to a 
prevailing party, and they have more than ever. I trust judges 
that know the facts intimately to properly exercise such good 
discretion rather than rigid rules set by Congress that cannot 
separate the innovative inventor from the patent troll.
    And as much as I like H.R. 9, I am concerned that the loser 
pays attorney's fees provision in the bill may, in fact, deter 
patent holders from pursuing even meritorious patent 
infringement claims. I am worried that small businesses and 
independent inventors will be affected. Mr. Taylor, those are 
perhaps companies that you know best.
    So I would ask after Octane Fitness--Mr. Taylor you just 
spoke about this. Now, you pointed out that judges have awarded 
fees in patent cases far more than they have before, so here is 
the real question I have. In light of all of the steps that 
have been taken by the PTO, by Congress, and now by the Supreme 
Court, Mr. Taylor, help me understand why it is necessary to 
place additional burdens on the individual who is seeking to 
defend his or her property right.
    Mr. Taylor. I do not think you should be placing additional 
burdens on the person trying to defend his or her property, nor 
do I think we should be placing additional burdens on litigants 
who have been sued by larger competitors. Those are serious 
concerns. And I think the way you stated it, I would certainly 
subscribe to.
    Mr. Deutch. Do the Supreme Court decisions make it harder 
for patent owners to file frivolous lawsuits? Does it make them 
think more in light of the decisions that have come down in 
what we have seen in Federal court?
    Mr. Taylor. I think that the reason you have seen a drop 
off is patent owners are going back to the drawing board with 
their lawyers and seriously examining whether or not they are 
inviting a fee award at the end of a losing case rather than a 
settlement. But bear in mind, the bulk of these cases will 
continue to settle, and the fee award, by raising the risk to 
both sides, gives the plaintiff a very good argument to the 
defendant for why you ought to settle the case without taking 
it to trial.
    Mr. Deutch. Now, you had said in your testimony, Mr. 
Taylor, that if the Innovation Act as written were to pass, it 
would have a chilling effect on investment and patent-intensive 
companies. Can you just expand on that? And I apologize if you 
have already, but I had two other hearings.
    Mr. Taylor. Well, I think for all the reasons we have been 
talking about, I think the fee-shifting proposal is going to 
make it more difficult and certainly make it riskier. I believe 
the fee-shifting proposal is going to raise the expense. I 
think that the pleading requirements are going to raise the 
expense because what will happen as a practical matter is I 
file a complaint, and you are the defendant, and you come in 
and say, hey, look, Congress has listed 20 things here that you 
have to comply with in order to file a valid complaint.
    And I am going to say to the Judge, well, I think I have 
done them all, Your Honor. And then there is going to be a 
motion filed as to a number of those points that is going to be 
$30,000 or $40,000 per side just to resolve whether the 
complaint is any good.
    Mr. Deutch. I only have a few seconds left. Can you 
describe some of the types of companies that might be affected 
in that way?
    Mr. Taylor. Companies in the energy business who depend 
terribly on their patents, biotechnology companies, 
pharmaceutical companies, medical device companies. The medical 
device companies are particularly vulnerable because a medical 
device takes a lot of development time. It is so easily copied. 
And unlike pharmaceuticals, the FDA process for clearance of a 
medical device if you have got another device on the market is 
quite simple.
    And so, for medical device developers, unless they can 
protect their patents, they are dead in the water, and the 
larger companies are watching the marketplace. They spot the 
new technology, new trends. And it is not uncommon for medical 
devices quickly to be copied by their larger competitors.
    Mr. Deutch. Thank you, Mr. Chairman. Yield back.
    Mr. Issa. You are most welcome from one Michigan kid to 
another. Sort of Michigan.
    We now go to a man who understands State court law, Judge 
Poe.
    Mr. Poe. Thank the Chairman. Thank you all for being here. 
Yes, it is true. I did serve as a district judge in Texas for 
22 years, but it is a fact universally that most cases settle. 
Civil cases, criminal cases, big cases, little cases, traffic 
cases, most of them settle. Is that not a truism in our court 
system, State and Federal? Anyone disagree with that?
    [Nonverbal response.]
    Mr. Poe. Most cases do not go to trial. They settle 
somewhere early on. They settle on the steps of the courthouse. 
They settle when they see who the judge is. They settle 
eventually. It is a universal issue about litigation and the 
cost of litigation when someone decides to sue another one. How 
much is it going to cost and who is going to pay for that? This 
a discussion that has been going on since before any of us 
probably were lawyers.
    It seems to me that public policy, we want people to be 
able to go to court if they can if they have what they believe 
to be a legitimate case of some kind. And if they win, great. 
If they lose, there is always the theory or threat, well, I 
have lost, now I have got to pay, and I do not have the money 
to pay.
    Let us talk about this issue of patent trolls, use the 
definition, whatever you prefer. Would not what would happen 
is, and let us take the new legislation. Mandatory to the 
judges, you got to impose these fees. Patent trolls are not 
going to be paying those fees, are they? The judge finds it is 
a frivolous lawsuit. These patent troll companies, they just go 
out of business and start another business. Is that not what is 
going to happen? It is a question. If any of you want to answer 
it, it is fine.
    Mr. Taylor. I do not know exactly how that is going to play 
out. What I do think, though is that the courts have today the 
mechanisms to put in place assurances that that will not 
happen. The courts had, for example, what we may see is the 
attorney's fee issue does not have to wait until the end of the 
case. And indeed what I am told by some of my friends who are 
representing people actively today in litigation is there is 
already posturing going on among the lawyers to set up the fee 
issue at the end of a case.
    And if you are dealing with a genuinely impecunious 
plaintiff and it has no real party interest, and there are 
mechanisms already in the Federal rules for finding out who the 
party-in-interest is. And it is not very many real parties-in-
interests that are completely impecunious. The judge is in a 
position to make rules that either make them streamline the 
case to the point that it can be afforded, or make some kind of 
a presentation or representation----
    Mr. Poe. That was not my question. Is that going to be the 
end game, they are just going to re-incorporate under another 
name? Anybody else want to weigh in on this? I have one other 
question, too. Go ahead.
    Mr. Gupta. If I may, Congressman. I think the Reform Act's 
provision dealing with ensuring that people who are funding the 
enterprise and funding the entities who are acquiring patents 
just to sue people is a thoughtful solution to that issue. If 
you peel behind sort of the actors who are funding a lot of 
this, there are a lot of common players. I think I have seen 
research that said more than 60 percent of troll actions are 
really initiated, are funded by a very small group of 
companies.
    And so, I think the reason that patent lawsuits settle as 
much as they do is because patent litigation is very expensive, 
and small companies in particular. And I have data that I have 
cited from MIT and Harvard, very recent studies, saying that 
they are really impacted negatively when they have to deal with 
patent suits rather than spending their resources in creating 
technology.
    Mr. Poe. I understand. That is what some of them say, and I 
do not necessarily disagree with them. My other question is, 
having been a judge, of course, I think the trier of fact or 
the person who gets to hear the whole case is in a pretty good 
position to make some decisions about attorney's fees, if you 
will. I agree with that philosophy. Except for the statistics 
mentioned by Mr. Taylor, why have Federal judges been reluctant 
to order fees since they can already do it? They have the 
discretion. Why do they not do it?
    Mr. Taylor. Prior to the decisions of the Supreme Court in 
Octane and Highmark, there had been in place for at least a 
decade Federal circuit decisional law that made it essentially 
impossible for the prevailing party, a prevailing defendant 
particularly, to recover attorney's fees. And the message one 
gets from the two decisions written by Justice Sotomayor is 
that we, the Supreme Court, reject that approach. We think the 
district judge, as you just stated, is in a way better position 
than the Court of Appeals to decide whether or not there is a 
reason to shift fees. And we are going to entrust that issue to 
the discretion of the judge. The Federal circuit may no longer 
review it de novo. The Federal circuit is required to review 
it.
    Mr. Poe. Let me interrupt because I am out of time.
    Mr. Issa. Yes, you are.
    Mr. Poe. If the Chairman would let me ask the question?
    Mr. Issa. Without objection.
    Mr. Poe. Look, the district judge who hears the whole case 
but early reversed the decision of the district judge if there 
is an abuse of discretion as it is under some other types of 
law.
    Mr. Taylor. Correct.
    Mr. Poe. Would that be a fair analysis----
    Mr. Taylor. Yes.
    Mr. Poe [continuing]. Of something that maybe we should 
consider?
    Mr. Taylor. That is what the decision in Highmark and 
Octane specifically state.
    Mr. Poe. I understand. I yield back.
    Mr. Issa. I thank the gentleman for yielding back. I would 
remind all the witnesses that we do allow significant revise 
and extend in order to comment further on some of the specifics 
where a question could not be fully answered. So it is not full 
amicus, but we certainly would look forward to your further 
comments.
    We now go to the gentleman from Brooklyn, Mr. Jeffries.
    Mr. Jeffries. Thank you, Mr. Chair, and I thank Ranking 
Member Nadler as well, and thank the witnesses for your 
presence and your testimony here today.
    I want to explore this issue of trying to help through the 
Innovation Act startup companies, tech entrepreneurs, young 
inventors, and others, the small inventor, which is of 
particular importance to me. The Chairman noted that I am from 
Brooklyn. We have a growing technology and innovation economy 
filled with tech entrepreneur startup companies, new inventors.
    And, you know, Mr. Taylor, you seem to indicate in your 
testimony that in your view, the Innovation Act would hurt 
these entities. But in speaking to some tech entrepreneurs and 
some small startup companies, who have had experiences with 
patent trolls, one of the concerns that they face is that 
because there is such an imbalance right now, and abusive 
litigation is not being decided on the merits, which it should 
be, but is being decided on the basis of the expensive cost of 
litigating to the very end.
    Even if you believe that the case being brought is invalid, 
would not the Innovation Act in its effort to restore this 
litigation balance so that people can make decisions based on 
the merits of the claim, actually help the tech entrepreneur, 
the startup company, and the young inventor?
    Mr. Taylor. I do not believe that that would be the case, 
and the reason is that the way in which the bill is structured, 
the enhanced pleading requirement is going to raise the cost of 
getting the court even to have the initial pleadings in place. 
The fee-shifting provision is going to become an amount of 
money that the defendant has to take into account as what it is 
facing by way of risk at the end of the case. And it is going 
to create more pressure on the defendant to settle than exists 
today.
    I agree with you. Today the cost of litigation is 
prohibitive, and it is particularly prohibitive for small 
companies. But I do not think this bill gets rid of that.
    Mr. Jeffries. Now, in terms of the enhanced pleading, I 
would note that when the Private Securities Litigation Reform 
action or Act was passed, I think, in the late 1990's, which 
put in enhanced pleading as it relates to securities 
litigation, there was a view amongst many that this would hurt 
the ability of the small individual investor, the individual 
plaintiff, the type of person that I am concerned with--I was 
not in Congress at the time--to actually bring actions holding 
big companies responsible for financial impropriety. But that, 
in fact, has not been the case, notwithstanding the enhanced 
pleading. And that is in a much broader context, the securities 
litigation, than the specialized area of patent litigation.
    So on the fee-shifting point, however, I am very interested 
in because I am sensitive to the concern as it relates to 
separation of powers, one that I think the Judiciary Committee 
should take seriously, that the House of Representatives should 
take seriously, in terms of us being a co-equal branch of 
government. And at the end of the day, you know, the Supreme 
Court and the courts at the circuit level and the district 
court level should be separate and co-equal and have a capacity 
to determine how matters should proceed through the judiciary, 
though Congress has the authority to do it.
    That said, in the post-Octane environment, you made mention 
of the fact that courts now appear more willing to shift fees. 
Is that correct? So what I am trying to understand is since the 
Court said the previous standard, which I believe was 
objectively unreasonable and asserted in bad faith, was not the 
standard that should be applied in determining whether this was 
an exceptional circumstance. And that we have now got a 
standard where we have shifted the burden to say that the court 
shall award fees unless the case was reasonably justified in 
law and fact.
    It is not clear to me that there is a lot of space between 
the enhanced Supreme Court directive and the attorney's fees 
provision that is in this bill. And I would be interested in, 
you know, your observation, Mr. Pincus, and the observation of 
Mr. Taylor if time permits.
    Mr. Pincus. I think the difference is the Supreme Court's 
standard is basically sort of a Gestalt standard, right? They 
say it is exceptional and the district court can consider all 
relevant factors in deciding whether or not it is exceptional. 
And so, I think the problem is in terms of both getting some 
uniformity across district courts and also in terms of having a 
standard that people can anticipate how it might be applied in 
a particular case, that is not really a very helpful test.
    And I think the testimony that is in the Innovation Act 
focuses the district judge on some key factors. One is, as you 
say, reasonable in law and fact, and then the countervailing 
consideration about whether special circumstances, and it 
specifically says such a severe economic hardship to an 
inventor. So specifically saying if this is going to hurt a 
small inventor, do not do it, I think focus the district judge 
on the key factors in a way that the current law does not 
because it sort of says look at everything and make this 
decision.
    Mr. Jeffries. Thank you.
    Mr. Issa. Okay. Seeing no further questions for our 
witnesses, I want to thank you for your testimony here today. I 
want to thank you for your candor. And, again, to the extent 
that you want to give us additional information either to be 
placed in the record, that would have to be within 5 
legislative days. So without objection, all Members and our 
witnesses shall have 5 legislative days in which to submit 
additional written questions for the witnesses or additional 
materials for the record. Anything coming in after that will 
still be disseminated to all the Members of the Committee.
    We stand adjourned.
    [Whereupon, at 3:43 p.m., the Subcommittee was adjourned.]
    
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