[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]
H.R. ___, THE TARGETING ROGUE AND OPAQUE LETTERS ACT
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON COMMERCE, MANUFACTURING, AND TRADE
OF THE
COMMITTEE ON ENERGY AND COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED FOURTEENTH CONGRESS
FIRST SESSION
__________
APRIL 16, 2015
__________
Serial No. 114-32
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Printed for the use of the Committee on Energy and Commerce
energycommerce.house.gov
______
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COMMITTEE ON ENERGY AND COMMERCE
FRED UPTON, Michigan
Chairman
JOE BARTON, Texas FRANK PALLONE, Jr., New Jersey
Chairman Emeritus Ranking Member
ED WHITFIELD, Kentucky BOBBY L. RUSH, Illinois
JOHN SHIMKUS, Illinois ANNA G. ESHOO, California
JOSEPH R. PITTS, Pennsylvania ELIOT L. ENGEL, New York
GREG WALDEN, Oregon GENE GREEN, Texas
TIM MURPHY, Pennsylvania DIANA DeGETTE, Colorado
MICHAEL C. BURGESS, Texas LOIS CAPPS, California
MARSHA BLACKBURN, Tennessee MICHAEL F. DOYLE, Pennsylvania
Vice Chairman JANICE D. SCHAKOWSKY, Illinois
STEVE SCALISE, Louisiana G.K. BUTTERFIELD, North Carolina
ROBERT E. LATTA, Ohio DORIS O. MATSUI, California
CATHY McMORRIS RODGERS, Washington KATHY CASTOR, Florida
GREGG HARPER, Mississippi JOHN P. SARBANES, Maryland
LEONARD LANCE, New Jersey JERRY McNERNEY, California
BRETT GUTHRIE, Kentucky PETER WELCH, Vermont
PETE OLSON, Texas BEN RAY LUJAN, New Mexico
DAVID B. McKINLEY, West Virginia PAUL TONKO, New York
MIKE POMPEO, Kansas JOHN A. YARMUTH, Kentucky
ADAM KINZINGER, Illinois YVETTE D. CLARKE, New York
H. MORGAN GRIFFITH, Virginia DAVID LOEBSACK, Iowa
GUS M. BILIRAKIS, Florida KURT SCHRADER, Oregon
BILL JOHNSON, Ohio JOSEPH P. KENNEDY, III,
BILLY LONG, Missouri Massachusetts
RENEE L. ELLMERS, North Carolina TONY CARDENAS, California
LARRY BUCSHON, Indiana
BILL FLORES, Texas
SUSAN W. BROOKS, Indiana
MARKWAYNE MULLIN, Oklahoma
RICHARD HUDSON, North Carolina
CHRIS COLLINS, New York
KEVIN CRAMER, North Dakota
_____
Subcommittee on Commerce, Manufacturing, and Trade
MICHAEL C. BURGESS, Texas
Chairman
JANICE D. SCHAKOWSKY, Illinois
LEONARD LANCE, New Jersey Ranking Member
Vice Chairman YVETTE D. CLARKE, New York
MARSHA BLACKBURN, Tennessee JOSEPH P. KENNEDY, III,
GREGG HARPER, Mississippi Massachusetts
BRETT GUTHRIE, Kentucky TONY CARDENAS, California
PETE OLSON, Texas BOBBY L. RUSH, Illinois
MIKE POMPEO, Kansas G.K. BUTTERFIELD, North Carolina
ADAM KINZINGER, Illinois PETER WELCH, Vermont
GUS M. BILIRAKIS, Florida FRANK PALLONE, Jr., New Jersey (ex
SUSAN W. BROOKS, Indiana officio)
MARKWAYNE MULLIN, Oklahoma
FRED UPTON, Michigan (ex officio)
(ii)
C O N T E N T S
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Page
Hon. Michael C. Burgess, a Representative in Congress from the
State of Texas, opening statement.............................. 1
Prepared statement........................................... 2
Hon. Frank Pallone, Jr., a Representative in Congress from the
State of New Jersey, opening statement......................... 3
Prepared statement........................................... 4
Hon. Janice D. Schakowsky, a Representative in Congress from the
State of Illinois, prepared statement.......................... 75
Witnesses
David W. Long, Partner, Kelley Drye & Warren, LLP, on Behalf of
Innovation Alliance............................................ 5
Prepared statement........................................... 8
Gregory Dolin, Associate Professor of Law, University of
Baltimore School of Law........................................ 20
Prepared statement........................................... 22
Diane Lettelleir, Senior Managing Counsel, Litigation, J.C.
Penney Company, Inc., on Behalf of United for Patent Reform.... 27
Prepared statement........................................... 29
Charles Duan, Director, Patent Reform Project, Public Knowledge.. 39
Prepared statement........................................... 41
Submitted Material
Discussion draft, H.R. ___, the Targeting Rogue and Opaque
Letters Act, submitted by Mr. Burgess.......................... 77
Letter of July 9, 2014, from Ellen F. Rosenblum, Attorney
General, State of Oregon, to Mr. Upton and Hon. Henry A.
Waxman, submitted by Ms. Schakowsky............................ 87
Letter of July 9, 2014, from William H. Sorrell, Attorney
General, State of Vermont, to Hon. Lee Terry and Ms.
Schakowsky, submitted by Ms. Schakowsky........................ 90
Letter of July 10, 2014, from Janet T. Mills, Attorney General,
State of Maine, to Hon. Lee Terry and Ms. Schakowsky, submitted
by Ms. Schakowsky.............................................. 94
Letter of July 18, 2014, from Roy Cooper, Attorney General, State
of North Carolina, to Mr. Upton and Mr. Waxman, submitted by
Ms. Schakowsky................................................. 95
Letter of April 16, 2015, from Paige Anderson, Director,
Government Relations, National Association of Convenience
Stores, to Mr. Burgess and Ms. Schakowsky, submitted by Mr.
Burgess........................................................ 97
Statement of American Hotel and Lodging Association, April 16,
2015, submitted by Mr. Burgess................................. 99
Letter of April 16, 2015, from American Bankers Association, et
al., to Mr. Burgess and Ms. Schakowsky, submitted by Mr.
Burgess........................................................ 101
H.R. ___, THE TARGETING ROGUE AND OPAQUE LETTERS ACT
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THURSDAY, APRIL 16, 2015
House of Representatives,
Subcommittee on Commerce, Manufacturing, and Trade,
Committee on Energy and Commerce,
Washington, DC.
The subcommittee met, pursuant to call, at 11:02 a.m., in
room 2123, Rayburn House Office Building, Hon. Michael C.
Burgess (chairman of the subcommittee) presiding.
Members present: Representatives Burgess, Lance, Guthrie,
Bilirakis, Brooks, Mullin, Schakowsky, Clarke, Kennedy,
Cardenas, and Pallone (ex officio).
Staff present: Charlotte Baker, Deputy Communications
Director; James Decker, Policy Coordinator, Commerce,
Manufacturing, and Trade; Graham Dufault, Counsel, Commerce,
Manufacturing, and Trade; Melissa Froelich, Counsel, Commerce,
Manufacturing, and Trade; Kirby Howard, Legislative Clerk; Paul
Nagle, Chief Counsel, Commerce, Manufacturing, and Trade;
Olivia Trusty, Professional Staff, Commerce, Manufacturing, and
Trade; Michelle Ash, Democratic Chief Counsel, Commerce,
Manufacturing, and Trade; Christine Berenholz, Democratic Chief
Clerk; Jeff Carroll, Democratic Staff Director; Lisa Goldman,
Democratic Counsel; Brendan Hennessey, Democratic Policy and
Research Advisor; and Ryan Skukowski, Democratic Policy
Analyst.
Mr. Burgess. The Subcommittee on Commerce, Manufacturing,
and Trade will now come to order.
The Chair will recognize himself for 5 minutes for the
purpose of an opening statement.
OPENING STATEMENT OF HON. MICHAEL C. BURGESS, A REPRESENTATIVE
IN CONGRESS FROM THE STATE OF TEXAS
I do want to welcome all to our legislative hearing to
consider the Targeting Rogue and Opaque Letters Act of 2015.
Last year, the subcommittee held a series of negotiations
resulting in the draft legislation we consider today. Although
the draft bill passed this subcommittee with bipartisan
support, there are some who believe the text could be amended
narrowly to achieve better protections for those who receive
demand letters. So today we look forward to hearing from our
panelists about how we can make some targeted changes to the
draft text to achieve this goal.
The problem of abusive demand letters has set off a surge
in State activity to address this issue. Unfortunately, many
States have unintentionally created problems for patent holders
in trying to address the harms created by bad actors. For
example, State courts should not be empowered to determine the
reasonable cost of a patent license. Nor should the definition
of a bad-faith demand letter be allowed to disregard the First
Amendment rights of patent owners.
Causes of action under State law are in trouble in the
demand letter space when they have been removed to Federal
court. Federal Circuit doctrine generally controls patent
matters. As we heard at our first demand letter hearing earlier
this year, the Federal Circuit jurisprudence preempts all but a
narrow set of cases in the demand letter context.
When Nebraska attempted to enjoin MPHJ Technology
Investments from victimizing Nebraska businesses and residents,
the case wound up in Federal court. There, it was dismissed
under the Federal court's Noerr-Pennington doctrine, among
other things.
Most of us agree that the MPHJ was indeed attempting to
trick demand letter recipients into paying undue license fees.
Federal legislation would provide State attorneys general a
remedy for those demand letter recipients who may not be
protected because State-level safeguards are negated.
These are a couple of the compelling reasons for Federal
legislation and preempting the State laws that directly deal
with demand letters. We do aim to move this bill forward, and I
believe it could become law so long as it narrowly addresses
the demand letter problem with due respect to the Constitution.
I want to thank the witnesses for being here. You will all
be introduced, but, Ms. Lettelleir, as a fellow Texan, I
particularly want to welcome you to our panel today.
[The prepared statement of Mr. Burgess follows:]
Prepared statement of Hon. Michael C. Burgess
Last year, the subcommittee held a series of negotiations
resulting in the draft legislation we consider today.
Although the draft bill passed our subcommittee with
bipartisan support, I believe the text could be amended
narrowly to achieve better protections for recipients of demand
letters.
So today we look forward to hearing from the panelists
about how we can make some targeted changes to the draft text
to achieve this goal.
The problem of abusive demand letters has set off a surge
in State activity to address the issue.
Unfortunately, many States have unintentionally created
problems for patent holders in trying to address the harms
created by bad actors.
For example, State courts should not be empowered to
determine the ``reasonable'' cost of a patent license. Nor
should the definition of a bad faith demand letter be allowed
to disregard the First Amendment rights of patent owners.
Causes of action under State law are in trouble in the
demand letter space-when they have been removed to Federal
court, Federal Circuit doctrine generally controls patent
matters. As we heard in our first demand letter hearing this
year, Federal Circuit jurisprudence preempts all but a narrow
set of cases in the demand letter context.
When Nebraska attempted to enjoin MPHJ from victimizing
Nebraska businesses and residents, the case wound up in Federal
court. There, it was dismissed under the Federal Circuit's
Noerr-Pennington doctrine, among other things.
Most of us agree that MPHJ was, indeed, attempting to trick
demand letter recipients into paying undue license fees.
Federal legislation would provide State attorneys general a
remedy for those demand letter recipients who may not be
protected because State-level safeguards are negated.
These are a couple of the compelling reasons for Federal
legislation and for preempting the State laws that directly
deal with demand letters.
We aim to move this bill forward and I believe it could
become law so long as it narrowly addresses the demand letter
problem with due respect to the Constitution.
[The discussion draft appears at the conclusion of the
hearing.]
Mr. Burgess. I would like to recognize the ranking member
of the full committee, Mr. Pallone, for 5 minutes for an
opening statement.
Sir, you are recognized.
OPENING STATEMENT OF HON. FRANK PALLONE, JR., A REPRESENTATIVE
IN CONGRESS FROM THE STATE OF NEW JERSEY
Mr. Pallone. Thank you, Mr. Chairman.
The patent system plays a crucial role in promoting
innovation by providing an incentive to inventors to make
costly and time-consuming investments in research and
development of new inventions. At the same time, the system
requires that the inventions be disclosed so that others can
build upon the inventions.
At our last hearing on this issue in February and as early
as the fall of 2013 in the Subcommittee on Oversight and
Investigations, we heard from stakeholders that some
businesses, especially small, Main Street ones like coffee
shops, Realtors, hotels, restaurants, and retailers, have been
receiving abusive patent demand letters. Efforts to combat
abusive demand letters have already begun, and some State
attorney generals have taken legal action to protect their
citizens from unfair and deceptive demand letters. In addition,
20 States have already enacted legislation to tackle this
abusive activity.
Furthermore, the FTC brought an administrative complaint
against MPHJ Technologies, a well-known patent troll. That case
was recently settled through a consent order that prohibits
MPHJ from making deceptive statements in its demand letters.
The question before us is simple: Are those current efforts
enough to combat the problem, or should Congress legislate in
this area? Legislative solutions to address these vague,
threatening, unsubstantiated, and often inaccurate letters have
received bipartisan support, so I have hope that we can find a
solution that all Members are able to support.
Last Congress, this committee held three hearings, and the
subcommittee marked up a bill. And while I support efforts to
find a tailored relief for our constituents receiving these
abusive letters, we should not undermine the great work already
occurring. For example, I will support efforts to ensure that
States and the FTC continue to be able to enforce against
fraudulent actors and are able to collect civil penalties from
wrongdoers.
The States and the FTC are experts in consumer protection.
These are not complicated patent law cases, as some suggest,
but, instead, garden-variety fraud and deception cases. States
may be particularly well suited to handle these issues because
they best understand the circumstances of their residents.
However, I cannot support the bill before us today. It
includes problematic language that does not move us forward.
Among other things, it created a knowledge standard, one not
typically needed to prove fraud, and it preempts stronger State
laws.
As I said yesterday in the context of data security and
breach notification, if we as a Congress choose to legislate,
we need to make sure that we are furthering the interests of
consumers. As I also mentioned yesterday, if Congress seeks to
preempt specific State laws, especially on issues in which the
States have been leaders fighting unfair and deceptive acts,
such as false and misleading demand letters, the Federal effort
should be at least as strong as those State laws.
The goal of this legislation might be well intentioned, but
the drafting is flawed. I am happy that this issue is going
through regular order anew this Congress, and I urge my
Republican colleagues to work with us in a bipartisan fashion
to get the language right.
And thank you, Mr. Chairman. I yield back.
[The prepared statement of Mr. Pallone follows:]
Prepared statement of Hon. Frank Pallone, Jr.
Mr. Chairman, the patent system plays a crucial role in
promoting innovation by providing an incentive to inventors to
make costly and time-consuming investments in research and
development of new inventions. At the same time, the system
requires that the inventions be disclosed so that others can
build upon the inventions.
At our last hearing on this issue in February, and as early
as the fall of 2013 in the Subcommittee on Oversight and
Investigations, we heard from stakeholders that some
businesses, especially small, main street ones like coffee
shops, realtors, hotels, restaurants and retailers, have been
receiving abusive patent demand letters.
Efforts to combat abusive demand letters have already
begun. Some State attorneys general have taken legal action to
protect their citizens from unfair and deceptive demand
letters. In addition, 20 States have already enacted
legislation to tackle this abusive activity.
Furthermore, the FTC brought an administrative complaint
against MPHJ Technologies, a well-known patent troll. That case
was recently settled through a consent order that prohibits
MPHJ from making deceptive statements in its demand letters.
The question before us is simple; are those current efforts
enough to combat the problem or should Congress legislate in
this area? Legislative solutions to address these vague,
threatening, unsubstantiated, and often, inaccurate letters
have received bipartisan support, so I have hope that we can
find a solution that all members are able to support.
Last Congress, this committee held three hearings, and the
subcommittee marked up a bill. While I will support efforts to
find tailored relief for our constituents receiving these
abusive letters, we should not undermine the great work already
occurring.
For example, I will support efforts to ensure that States
and the Federal Trade Commission (FTC) continue to be able to
enforce against fraudulent actors and are able to collect civil
penalties from wrongdoers. The States and the FTC are experts
in consumer protection. These are not complicated patent law
cases as some suggest, but instead garden variety fraud and
deception cases. States may be particularly well-suited to
handle these issues because they best understand the
circumstances of their residents.
However, I cannot support the bill before us today. It
includes problematic language that does not move us forward.
Among other things, it created a knowledge standard, one not
typically needed to prove fraud, and it pre-empts stronger
State laws.
As I said yesterday in the context of data security and
breach notification, if we as a Congress choose to legislate,
we need to make sure that we are furthering the interests of
consumers. As I also mentioned yesterday, if Congress seeks to
pre-empt specific State laws -especially on issues on which the
States have been leaders fighting unfair and deceptive acts,
such as false and misleading demand letters, the Federal effort
should be at least as strong as those State laws.
The goal of this legislation might be well-intentioned, but
the drafting is seriously flawed. I am happy that this issue is
going through regular order anew this Congress and I urge my
Republican colleagues to work with me in a bipartisan fashion
to get the language right. Thank you.
Mr. Burgess. The Chair thanks the gentleman. The gentleman
yields back.
Let me just ask on the Republican side, is there any member
who seeks time for an opening statement?
Seeing no request for time, I would ask the ranking member
of the full committee, is there any member on the Democratic
side who seeks time for an opening statement?
Mr. Pallone. No.
Mr. Burgess. Very well. Seeing none, that concludes time
for the opening statements.
Again, I want to welcome all of our witnesses and thank all
of you for agreeing to testify before the committee today.
Our witness panel for today's hearing will include Mr.
David W. Long, a partner at Kelley Drye & Warren, testifying on
behalf of the Innovation Alliance; Mr. Gregory Dolin, associate
professor of law and co-director of the Center for Medicine and
Law at the Baltimore University School of Law; Ms. Diane
Lettelleir, senior managing counsel, litigation, J.C. Penney
Corporation, testifying on behalf of United for Patent Reform;
and Mr. Charles Duan, director of the Patent Reform Project for
Public Knowledge.
Our first witness today will be Mr. David Long.
Sir, you are recognized for 5 minutes for a summarization
of your testimony. And thank you for being here. You are
recognized.
STATEMENTS OF DAVID W. LONG, PARTNER, KELLEY DRYE & WARREN,
LLP, ON BEHALF OF INNOVATION ALLIANCE; GREGORY DOLIN, ASSOCIATE
PROFESSOR OF LAW, UNIVERSITY OF BALTIMORE SCHOOL OF LAW; DIANE
LETTELLEIR, SENIOR MANAGING COUNSEL, LITIGATION, J.C. PENNEY
COMPANY, INC., ON BEHALF OF UNITED FOR PATENT REFORM; AND
CHARLES DUAN, DIRECTOR, PATENT REFORM PROJECT, PUBLIC KNOWLEDGE
STATEMENT OF DAVID W. LONG
Mr. Long. Thank you, Chairman Burgess. I am David Long, a
patent attorney at the Kelley Drye & Warren law firm.
I am here today on behalf of Innovation Alliance to discuss
patent demand letters. Innovation Alliance is a coalition of
research-and-development-focused companies that believe in a
strong patent system in which innovative businesses can thrive.
Innovation Alliance supports the draft legislation we are
discussing today and encourages its introduction as a balanced
approach to address the vast majority of abusive patent
behavior that has garnered so much attention.
Now, the resultant negative views of patent law from such
negative attention is unfortunate and unwarranted. I love
innovation, and I am very proud of our U.S. patent system that
has fueled it. Before entering the legal profession, I earned a
master's degree in electrical engineering and worked about 5
years in industry. In fact, I was a rocket scientist.
I have practiced U.S. Patent law for about 20 years now. I
started as a law clerk at the U.S. Court of Appeals for the
Federal Circuit in 1995 and have since focused on patent
counseling and representation before courts and the U.S. Patent
and Trademark Office. I am very active in national and
international patent law organizations, and I have seen
firsthand that the U.S. patent system is the greatest known
system for innovation.
Now, consider the telecommunications industry in which my
practice is focused. Not too long ago, a so-called mobile phone
was actually a suitcase-size device lugged around by the
privileged elite. Today, everyday people everywhere carry
mobile phones in their pockets, and they do many remarkable
things with them. And patents fueled that innovation every step
of the way.
So the patent system certainly is not broken, as some have
suggested, but, like all thriving systems, it must be tweaked
from time to time, and that is why we are here today.
So a fundamental goal of the U.S. patent system is to
encourage patent owners to provide notice of their patent
rights to potential infringers. That way, they can determine
whether to stop the alleged infringement, negotiate a license,
design around the patent, or otherwise take some appropriate
action.
By and large, the bulk of business-to-business patent
notice letters, or what the draft legislation calls patent
demand letters, are legitimate efforts to give notice and to
start a dialogue that allows the parties to negotiate and reach
a reasonable business solution.
What brings us here today is concern about deceptive demand
letters. These generally arise from a few opportunistic bad
actors with certain business models, what some call patent
assertion entities, who mass-mail demand letters to small
businesses that are not familiar with patents or the underlying
technology, and, therefore, they maybe vulnerable to deceptive
demand letters.
Businesses typically turn to in-house or outside counsel to
address the specific legal issues that arise as a normal part
of their business. For example, they turn to employment lawyers
who address human resources issues, they turn to transactional
lawyers who address commercial contract issues. Technology-
oriented businesses routinely turn to patent counsel to address
patent demand letters that arise as a normal part of their
business. But certain small businesses outside the technology
sector may not have such patent counsel or experience, and,
therefore, they may be vulnerable to deceptive demand letters.
So the draft legislation we are discussing today is a
properly balanced and measured response to this patent demand
letter concern.
First, the draft legislation properly is directed to
entities that have a pattern and practice of sending deceptive
demand letters, what some have called a smash-and-grab
practice, where, at the nominal cost of a stack of form
letters, envelopes, and postage stamps, deceptive demand
letters are mass-mailed in hopes of getting a large return in
the aggregate from many small nuisance settlements paid by
vulnerable targets. That smash-and-grab model simply does not
work if sending one or just a few demand letters, so a pattern
and practice of deceptive demand letters is where the problem
lies.
Second, the draft legislation properly focuses on bad-faith
demand letters. This avoids the act being used as a gotcha
against otherwise good corporate citizens whose demand letters
technically may have fallen short of the act's requirement but
there is no harm and no harm intended.
Moreover, the Constitution requires a showing of bad faith
when it comes to Government action against patent demand
letters. This protects a patent owner's First Amendment right
to petition the Government for redress of grievances. And there
is universal agreement among the courts that this First
Amendment protection includes patent demand letters.
Third, the draft legislation properly preempts State laws,
while allowing State attorney generals to protect their
constituents from deceptive demand letters by invoking this
act.
The key to our U.S. Patent system's success is that our
Constitution specifically entrusts Congress with the power to
promote the progress of science and useful arts through uniform
patent rights. The Federal Government has the experience and
the authority needed to address patent right concerns
holistically and uniformly in order to maintain a balanced and
thriving patent system.
Thank you, and I look forward to answering your questions.
[The prepared statement of Mr. Long follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Burgess. The Chair thanks the gentleman. The gentleman
yields back.
The Chair recognizes Mr. Gregory Dolin for 5 minutes for
the purpose of an opening statement, sir.
STATEMENT OF GREGORY DOLIN
Mr. Dolin. Thank you, Mr. Chairman.
Chairman Burgess, Ranking Member Pallone, members of the
subcommittee, thank you for this opportunity to speak with you
today about the draft bill prohibiting false statements and
mandating disclosures in demand letters.
My name is Gregory Dolin. I would like to note that I am
speaking in my personal capacity as a law professor at the
University of Baltimore School of Law and not on behalf of my
employer or any other organization that I am affiliated with.
This draft bill is directed at bad actors who engage in
bad-faith communications in asserting patents against alleged
infringers. These communications are known as demand letters.
At the outset, let me state that this bill is an admirable
attempt to address bad behavior by some patent owners who abuse
the civil litigation system. Furthermore, the bill is a
significant improvement over previous attempts to address this
problem.
Specifically, the bill commendably preempts State-based
legislation that is purportedly aimed at the same problem but,
in reality, starts to undermine the uniformity of our Nation's
patent laws. An owner of the Federal property right should be
able to enforce it on equal terms in every part of the country.
The bill is also praiseworthy for its attempts to provide a
flexible standard against which to judge the patentee's bad
faith.
Nonetheless, the bill continues to have significant
problems. In an attempt to address bad-faith communications by
bad actors, the bill mandates specific disclosures in all
demand letters sent by all patent owners. This approach may end
up discouraging all such communications by legitimate and
illegitimate claimants alike. Unfortunately, as a result, the
draft bill is likely to have significant but unintended
negative consequences of increasing the amount of overall cost
of litigation.
My testimony will focus on two provisions of the draft bill
which I believe may undermine legitimate patentees' rights to
enforce their patents while encouraging more unnecessary
litigation.
First, the significant legal penalties proposed in this
bill may discourage patentees from sending demand letters. This
would actually be an unfortunate outcome. A demand letter
serves the function of informing the recipient that it is
infringing on property rights secured under Federal law.
At the same time, demand letters are not a legal
prerequisite for filing a patent infringement lawsuit. Instead,
a demand letter allows the patentee and the accused infringer
to begin the process of privately evaluating the legal claims
and, if warranted, entering into a settlement agreement.
Our justice system has long preferred out-of-court
settlements, where the parties can strike an agreement making
both of them better off, to costly judicial interventions which
result in a clear winner and a clear loser. Our markets also
prefer private resolutions of legal claims, as evidenced by
stock price fluctuations whenever a significant lawsuit is
filed against a company.
Without the ability to begin the process of private
resolution through sending of demand letters, patentees are
likely to resort to lawsuit filings as their initial, as
opposed to final, attempt to resolve patent disputes.
Under the current law, legal filings, such as complaints,
answers, and motions, are immune from imposition of liability.
Thus, under the present bill, a patentee may be more at risk
for sending a demand letter than he would be for filing a civil
action.
Faced with this choice, a reasonable actor would always
prefer a lawsuit to a demand letter. In other words, a
reasonable actor would act completely contrary to the societal
preference for private resolution of legal disputes. Not only
will this place additional burdens on our already overworked
judges, but it will ultimately increase costs for both
patentees and accused infringers and, therefore, consumers.
Second, the provisions of this bill seem to paradoxically
require more disclosures from a patentee who sends a demand
letter than from one who files a civil action seeking to
enforce his patent rights in court.
The Federal rules of civil procedure require a plaintiff to
do nothing more than to provide a, quote, ``short and plain
statement of the claim,'' end quote. This requirement is
satisfied by identifying the patent which the plaintiff alleges
the defendant infringes and the allegedly infringing product.
The rules, unlike this present bill, do not require a patentee
to identify a specific claim that is infringed or to describe
in detail how the product infringes the identified patent and
the patent's claim. These additional burdens on the patentees
will again drive them away from demand letters and toward
litigation.
In conclusion, safeguarding the patent system from abuses
by bad actors is an important and laudable goal. Abuses in the
system undermine the efficient operation of our patent laws
and, with them, the growth of the innovation economy.
However, in drafting solutions to an admittedly real and
serious problems, Congress must be careful to ensure that its
cure is not worse than the disease. Congress should heed the
lessons of past patent reforms, which have often created as
many problems as they have solved, and avoid repeating this
mistake.
Whatever route Congress chooses to take, it should ensure
that it does not undermine legitimate patentees' ability to
enforce their patents, less it undermine the necessary
incentives for innovation and economic growth.
I thank you, and I look forward to your questions.
[The prepared statement of Mr. Dolin follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Lance [presiding]. Thank you very much, Mr. Dolin.
The committee is going to adjourn. We have just had a call
for votes on the floor, and we will return after our votes.
We apologize. I consider this a personal plot against me. I
have been in the Chair for 2 minutes, and now votes have been
called. But we look forward to the testimony of the two
remaining witnesses and for questions from the committee
members following that, and we will return as quickly as
possible upon completion of votes on the floor.
And so the committee stands in adjournment--recess, recess.
And I would imagine, perhaps, 30 minutes or 35 minutes. Thank
you very much.
[Recess.]
Mr. Burgess [presiding]. The subcommittee will come back to
order.
I believe, when we adjourned, we were to receive the
testimony of Ms. Lettelleir.
You are recognized for 5 minutes for a summarization of
your testimony, please.
STATEMENT OF DIANE LETTELLEIR
Ms. Lettelleir. Chairman Burgess, Ranking Member
Schakowsky, and members of the Energy and Commerce Subcommittee
on Commerce, Manufacturing, and Trade, I am Diane Lettelleir,
senior managing counsel of litigation at J.C. Penney.
J.C. Penney is a 113-year-old company headquartered in
Plano, Texas. Today, J.C. Penney has over 1,000 stores in 49
States and Puerto Rico and employs more than 116,000 associates
nationwide.
I am testifying on behalf of United for Patent Reform,
which is a diverse group of businesses that includes retailers,
grocers, convenience stores, auto companies, auto dealers,
trucking companies, hoteliers, realtors, homebuilders, and
technology companies and many other Main Street businesses.
Patent trolls have a significant impact on Main Street
business. Since 2012, patent trolls have sued more Main Street
companies than even technology companies, which means each year
Main Street businesses are spending millions of dollars and
thousands of employee man-hours fighting patent trolls. It
should not be lost that the same money could have been used to
expand their business, hire new workers, or invest in new
technologies.
The trolls target Main Street businesses because they often
lack the legal and technical expertise and the money required
to fight complex patent infringement claims. Patent trolls take
advantage of these weaknesses and strategically offer
settlements at a level set below the cost of litigation. The
settlements offered are not based on the value of the claimed
invention but, rather, on the cost of defense.
This results in a particularly malicious form of blackmail.
The Main Street company must pay the unjustified settlement or
take its chances in litigation, where the best-case scenario is
spending potentially millions of dollars simply to prove that
they had done nothing wrong.
This is compounded by the fact that demand letters are
often vague, misleading, and deceptive. The demand letters
usually fail to include basic facts that any business would
need in order to make informed decisions or even an explanation
of what the defendant makes or does that allegedlyinfringes.
The recipient of such a letter has no way of determining their
potential liability or making an informed decision about the
best way to respond.
This harmful and deceptive practice needs to be stopped.
That is why members of the United for Patent Reform appreciate
your leadership and the subcommittee's work on strengthening
enforcement. Although we have some concerns about certain
details of the proposed legislation, we urge the subcommittee
to continue its important work.
I will briefly touch on important changes we would like to
see. A more detailed description is included in my written
testimony.
First, we seek the removal of a requirement of a pattern or
practice of sending demand letters. The ``pattern or practice''
language creates unnecessary ambiguity about the number of
letters that must be sent.
Second, the definition of ``bad faith'' should be removed.
The focus should be on the effect on the target companies that
receive these demand letters, rather than proof of the
knowledge of the sender. Recipients of demand letters can be
harmed by misrepresentations or omissions regardless of whether
the party making them acknowledges that they are false or
misleading.
We also seek the removal of a separate bad-faith
requirement from the listed factors. In the original text,
certain factors also required establishing bad faith as a
separate showing. Requiring that bad faith be demonstrated to
establish a violation, however, could nullify the act's
provisions.
We also propose a few changes in the structure of the
factors, which is set forth in more detail in my written
testimony.
In addition, we suggest adding a sub-part that, in effect,
requires the sender to identify the claims of the patent
alleged to be infringed by the recipient. Failure to include
such information in a demand letter is evidence that the
assertion is objectively baseless and, thus, made in bad faith.
Finally, we request the removal of the affirmative defense.
The affirmative defense would create a loophole that avoids
application of the act even if the sender was found to have
acted in bad faith. Instead of an affirmative good-faith
defense, we support a list of factors relevant to showing that
a sender has not acted in bad faith.
We remain committed to working diligently with the
committee to develop demand letter legislation that will
protect our member businesses from patent trolls while not
compromising the rights of legitimate patent holders and that
the designated enforcer will support.
Thank for the opportunity to testify, and I welcome your
questions.
[The prepared statement of Ms. Lettelleir follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Burgess. The gentlelady yields back. The Chair thanks
the gentlelady.
Mr. Duan, you are recognized for 5 minutes for
summarization of your testimony, please.
STATEMENT OF CHARLES DUAN
Mr. Duan. Thank you.
Chairman Burgess, Ranking Member Schakowsky, and members of
the subcommittee, thank you for inviting me to testify today.
My name is Charles Duan, and I am the director of the Patent
Reform Project at Public Knowledge. We are a nonprofit
organization that works at the intersection of technology and
consumer policy. I previously worked as a software developer
and also as a patent attorney.
I would like to start today by talking about an event from
1976, a hearing held in this very building. The hearing
featured a witness who literally wore a mask as he testified
about abuses in the debt collection industry. The practices he
described were frightening: calling debtors every 5 minutes,
intimidating children, pretending to be attorneys, and
threatening lawsuits. These aggressive tactics ultimately led
Congress in 1977 to pass the Fair Debt Collection Practices
Act, one of the strongest Federal consumer protection laws on
the books today.
These strong-arm tactics are at work again, now in the
service of abusive patent demand letters. This committee has
already held three hearings over the last 2 years where
witnesses recounted the threats, misrepresentations, and
deceptive practices used by unscrupulous asserters of patent
rights. The situations are highly analogous. The bad debt
collectors of the 1970s are the bad patent royalty collectors
of today.
I would thus commend and thank the subcommittee for taking
on this issue that affects most directly the smallest American
businesses and the smallest American consumers, the ones most
in need of protection. The members of the subcommittee have
worked hard, with the aim of crafting a patent demand letter
bill that will best protect consumers.
But while the subcommittee has made great strides toward
that goal, the current draft bill doesn't adequately protect
the consumer interests. In particular, we provide the following
four recommendations to improve the bill.
First, the preemption of existing State laws will
undesirably weaken, rather than strengthen, consumer
protection. Right now, there are 20 State laws which provide
the citizens of those States with protections against abusive
demand letter practices. Some of these State laws provide
protections beyond what the current TROL Act contemplates. That
means that residents of those States would actually lose
protections from abusive demand letters, the opposite result
from what this bill intends to accomplish.
And it is not just existing State protections that stand to
be lost by preemption. The States have historically served as
laboratories of policy experimentation, developing new and
innovative solutions to a changing landscape of problems,
creating a marketplace of ideas from which Congress may draw.
Preemption could cut that off, and that is not what we want.
The TROL Act should be a floor, not a ceiling, for consumer
protection, allowing States to solve the problems of the future
with new laws of the future.
Second, the affirmative defense provision is simply too
broad. Read literally, it immunizes any demand letter sender
who issues a few legitimate letters that comply with the bill.
Clever schemers could easily use this by sending a mix of
legitimate and abusive letters or sending letters with
deceptions different from the ones in the bill, thus harming
consumers while still following the letter of the law. The
affirmative defense should be removed or tightened to avoid
these sorts of loopholes.
Third, the bill identifies 17 specific acts that could be
considered unfair or deceptive practices, but demand letters
can be unfair or deceptive in far more than 17 ways. The State
laws alone identify several others, and who knows what other
deceptions will be invented in the future. So the bill should
include a catchall provision to protect consumers from bad
practices beyond the 17 listed in the bill.
Fourth, the bill only prohibits a, quote, ``pattern or
practice'' of sending improper demand letters in, quote, ``bad
faith.'' These two extra requirements only make it harder for
enforcement officials to protect consumers. The requirements
are meant to protect legitimate patent asserters who make
innocent mistakes, but that would be better done with something
like the bona fide mistake provision in the FDCPA, not by these
two requirements.
We ask the subcommittee to incorporate these suggestions
into the draft bill, and we continue to support the
subcommittee's efforts here. Certainly, the TROL Act is no
substitute for broader patent reform, such as H.R. 9. No demand
letter can block and stop abusive litigation. Still, the demand
letter piece of the patent reform puzzle is critical, as it
affects the smallest businesses and the weakest consumers, ones
that this subcommittee should be proud to protect.
Thank you again for inviting me to testify. I look forward
to your questions.
[The prepared statement of Mr. Duan follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Burgess. The gentleman yields back. The Chair thanks
the gentleman.
I think that concludes all of our witness statements, and
we will move into the Q&A part of the hearing. And I will
recognize myself for 5 minutes for questions.
And I want to ask a question of the entire panel, and I
would like for each of you to answer.
It seems like over the past year we have heard a lot of
different stories about various patent assertion entities that
have targeted a wide variety of industries. Would each of you
describe the trajectory of this problem? And then, in
particular, I am interested in your opinion, is the problem
getting worse or getting better?
Mr. Long, let's start with you.
Mr. Long. Thank you, Chairman Burgess.
I think the trajectory is actually going down. When you
look at--some of the biggest concerns was this MPHJ, or what
some people called the patent scanner troll. And the FTC
stepped in in that case, and they entered a consent order. I
believe that was finalized just a few months ago.
You look at the Innovatio case; it has been a poster child
for patent abuse, so to speak. It concerned someone sending
letters to mom-and-pop coffee shops, to hotels about their
WiFi. And we see that case was handled, and very appropriately,
by Judge Holderman in the Northern District of Illinois, and it
actually has reached, I think, a settlement on all those
issues.
So I think, as the public becomes more informed of what is
going on, given all the resources that we have on the Internet
and even at the Patent Office to investigate someone you
receive a letter from, I think things are going much better.
Mr. Burgess. Thank you.
Mr. Dolin, your comments on the trajectory of the problem?
Better or worse?
Mr. Dolin. Thank you, Mr. Chairman.
I would like to answer your question by pointing out that
one person's patent troll is another person's innovator.
Certainly, I am not here to dispute that there are bad
actors in the system, just like there are bad actors in any
system, just like there are bad actors in medical malpractice
litigation or any other civil litigation. So I certainly agree
that there are actors who deform the system, and those should
be dealt with.
But nonpracticing entities and patent distortion entities
include our universities, who develop cutting-edge
technologies. They include companies that allow people to
invest money in innovation and essentially provide funds to
small inventors.
So, on one hand, certainly there are these mom-and-pop
shops that are faced with bad-faith demand letters, and those
should be protected. But let's not forget that on the other
side there are equally small mom-and-pop-shop innovators who
come up with new research and technology that ultimately is
used to develop new cell phones, new medications, new machinery
that actually makes our lives so much better.
So I think the problem is there, but the problem is I don't
think as bad as has been portrayed. And I think that problems,
just like many problems, have--that coin has two sides.
Mr. Burgess. Thank you.
Ms. Lettelleir?
Ms. Lettelleir. Thank you, Chairman.
We see a continued and steady stream of demand letters
being received by the members of United for Patent Reform. I
can speak from personal experience that at J.C. Penney, for
example, we have received three in just the last 45 days, one
of which was not even more than 200 words in length.
So it is a continual problem that our membership is facing.
And I think it is important to note that the United for Patent
Reform includes in its members companies like Oracle, like
Bell, Samsung, huge owners of patent rights who are very
interested in preserving the right to innovate and the right to
protect those innovations, and yet they support the changes we
are suggesting to this legislation. And that is because they
are also targeted by demand letters; they see their customers
targeted by demand letters. It is really only an issue of scale
in terms of how much is demanded in these letters.
And while it is a huge problem for the smaller members of
our constituency in United for Patent Reform, those small
members are customers of our larger members. And, also, J.C.
Penney is a consumer, for example, of small innovative
businesses. When a small innovator receives a demand letter, I
have to be concerned, as counsel for a major company that is
considering using or adopting their innovation. The very fact
that they have already been targeted by one or more trolls
interferes in our ability to adopt their innovation, because it
is now no longer a small transaction for J.C. Penney. We may be
looking at a $100,000 contract with a small company to adopt
their technology, but, suddenly, by adopting that technology,
J.C. Penney is added to the target list of the trolls, and now
I am looking at legal bills of $2 million and $3 million to
defend against the troll.
Mr. Burgess. Thank you.
Mr. Duan, do you have an observation? Getting better or
getting worse?
Mr. Duan. Yes, you know, I think I will make just a couple
quick points.
The first point is, you know, I think that we have seen
some data that shows that patent litigation continues to rise.
There was a brief downtick, but, you know, that has not proved
to be a long-term thing.
The second thing I would point out is we should be worried
about the future. Right? You know, a lot of the patents that we
are talking about are related to, like, old software
technologies on very broad concepts. But, you know, my
organization works on a lot of future technologies. We are
doing this great event on 3D printing in the next few weeks,
which I would encourage you all to attend.
But one of the things that I worry about whenever I see
some of these new technologies is, are we just opening up a
door to the next wave of patent trolls? Are we just opening up
the door to a whole range of patents on 3D printing that will
ultimately stifle a growing industry?
And so, you know, I think that the work that the
subcommittee is doing in trying to deal with this problem
initially will not only fix a problem that is current but will
also fix problems that will come down the road as new
technologies arise. So I think that is a important thing to
remember.
Mr. Burgess. The Chair thanks the gentleman, all members of
the panel.
Ms. Schakowsky, 5 minutes for your questions, please.
Ms. Schakowsky. Thank you.
Let me just say a few things, and then, Mr. Duan, I have
some questions for you.
Section 2(b) of the draft bill contains an affirmative
defense that statements, representations, or omissions are not
made in bad faith if the sender can prove that they were
mistakes made in good faith.
The draft bill text states that good faith made be
demonstrated by, quote, ``evidence that the sender, in the
usual course of business, sends written communications that do
not violate the provisions of this act.'' But it also says that
good faith may be demonstrated by, quote, ``other evidence.''
So, Mr. Duan, just to be clear, could this affirmative
defense provision permit a bad actor to avoid liability simply
because he did not have a history of sending deceptive letters,
even though those other letters in consideration were not
patent assertion letters?
Mr. Duan. Yes, I think that, you know, you are hitting the
nail exactly on the head. The problem with the affirmative
defense provision is that it provides just so many
opportunities for finding loopholes to allow for somebody to
send out abusive demand letters that just happen to comply with
the particular provisions or that manage to convince a court
that they comply with the specific provision of the law, even
though they actually are abusing consumers.
The two examples that I provided in my testimony were,
first of all, you know, somebody could send out a number of
legitimate letters possibly to just their friends and then send
out abusive letters and thereby be able to show that they had a
pattern or practice of sending out reasonable letters.
Similarly, you know----
Ms. Schakowsky. So these letters don't have to have
anything to do with patents?
Mr. Duan. It doesn't----
Ms. Schakowsky. The friendly letters.
Mr. Duan. Yes. I mean, it doesn't seem like the provision
would require that.
And, similarly, the provision only requires that, in order
to take advantage of the provision, one only has to send
letters that comply with the specific requirements of the law.
And the specific requirements of the law are those 17
requirements that I laid out. It says nothing about whether or
not those letters are abusive or misleading or deceptive in any
other way.
And, you know, the State laws that I have looked through
extensively give numerous other examples of ways in which
demand letters could be misleading or deceptive. You know, they
could demand an amount that is far beyond the reasonable
licensing arrangement for the patents. North Carolina has a
very interesting provision relating to threatening an
injunction against someone when have you no right to obtain an
injunction.
There are lots of different ways that a letter could be
abusive that fall outside of the scope of what this bill
provides, and that affirmative defense would effectively
immunize those actions.
Ms. Schakowsky. So do you agree that section 2(b), then, is
not nearly specific enough?
Mr. Duan. Yes.
Ms. Schakowsky. In your written testimony, you suggest
borrowing language from the Fair Debt Collection Practices Act,
which you used as a first example, which allows debt collectors
to avoid liability if they can prove the violation was a bona
fide mistake.
Can you explain why you think this language is better than
the affirmative defense currently in the draft bill?
Mr. Duan. Well, I think that the idea behind the bona fide
mistake is that it actually captures the thing that we are try
to protect.
We are trying to protect the small inventor who, you know,
maybe for some reason or other accidentally doesn't comply with
the law because, you know, they misread it or they failed to
include a certain piece of information. And, you know, I don't
think that that sort of activity should be punished, as long as
the person is reasonable about it, attempts to fix the problem,
attempts to fix the problem within a reasonable amount of time.
You know, that is not the kind of thing that we want to be
punishing.
But what we don't want is a provision that, in order to
keep that sort of case out of the courts, also keeps a whole
bunch of other cases out of the courts, cases that ought to be
there, cases that ought to be unfair and deceptive practices.
And, you know, I think that the caselaw that I have seen on
the FDCPA indicates that that provision has worked well in that
context, and I think it can work well here.
Ms. Schakowsky. Thank you.
And I yield back.
Mr. Burgess. The gentlelady yields back. The Chair thanks
the gentlelady.
The Chair recognizes the vice chair of the subcommittee,
Mr. Lance, for 5 minutes for your questions, please.
Mr. Lance. Thank you, Mr. Chairman.
Mr. Long, I would like to get your thoughts on one possible
alteration of the draft legislation. As you know, the draft
bill prohibits patent owners from omitting certain information
if the omission were made in bad faith. This bad-faith
provision protects patent owners from an FTC enforcement action
when their omission was a mistake.
Critics of the text have said that it would be difficult
for the FTC to enforce the provisions because it would be hard
to prove bad faith.
What if we made some changes to the bill to lower the FTC's
enforcement burden with respect to required disclosures? For
example, could the enforcement bar be lowered in cases where a
patent owner refuses to provide information a second time after
the demand letter recipient requests that information?
Mr. Long. Thank you, Congressman Lance.
So I am looking at that provision. I recall reviewing
information from the FTC staff last year, and, when they talked
about this provision, about an issue of did you omit some
detail that the act had asked for, it is my understanding they
thought that omitting that information, actually, in the normal
course, wouldn't be harmful and wouldn't do any arm.
And so their concern was actually, well, if omitting it
doesn't do any harm and you require a bad-faith omission, what
good does that provision do? And it is because of the concern
that omitting that information may not necessarily harm
somebody that you have that extra protection for the bad faith
if something was omitted.
I think, otherwise, when we talk about changing the burden
if there is a second request, it is so circumstance-driven what
that second request might be. I certainly don't think you would
want a bright-line rule in that regard.
Often, the patent portfolios are at issue when you are
talking about businesses sending letters to other businesses.
They may have been very innovative in the particular space that
their patents cover and have a lot of patents, so it may be
that the second response may not be some of the requested
information. It might be more, let's figure out the most
efficient way to see what information we need to do this, to
reach a reasonable business decision.
Thank you.
Mr. Lance. Thank you.
Would anyone else on the panel like to comment?
Ms. Lettelleir?
Ms. Lettelleir. Yes, I am not sure I totally understand
what is being proposed, but I think one of the things you have
to keep in mind is much of what occurs with respect to these
demand letters occurs under a veil of secrecy.
What will happen typically is, after you receive the first
demand letter, then when you request additional information,
you will receive a typical response along the lines of, ``We
would be happy to share more information with you just as soon
as you sign a nondisclosure agreement.'' And that nondisclosure
agreement is typically very far-reaching and prohibits you from
discussing anything that is discussed with the patent troll
with any third party, even your vendors, perhaps.
And so I think that runs into some problems, because I can
see a response being, ``Well, we offered more information. We
just asked them to sign a nondisclosure agreement, and they
refused, so that is why we didn't provide the information in
response to the second request.'' And I am not sure how the
rubric that you are proposing would fit within the realities of
what is happening with the patent trolls and their requirements
for nondisclosure agreements.
Mr. Lance. Thank you.
Mr. Dolin?
Mr. Dolin. If I may----
Mr. Lance. Absolutely.
Mr. Dolin. Thank you, Congressman.
I think I disagree with, sort of, the concern that was just
raised, in part because nondisclosure agreements or filing
under seal is so common in civil litigation. And so, again, to
the extent that the patentee will have to jump through more
hoops while sending a demand letter which ultimately serves to
amicably resolve any legal disputes--now, again, I want to
emphasize that there are sometimes these bad actors who don't
have any legal basis for their claims and they are simply
acting as extortion artists.
But, plenty of times, these patentees have valid patents,
and they seek to resolve their legal disputes without resorting
to courts. And requiring them to provide more information under
broader requirements than they would have to comply with in
civil litigation seems to me to be somewhat counterproductive.
It seems me to push those patentees towards the route of
litigation, which is ultimately a defeat for consumers, defeat
for patentees, and defeat at the end of the day for people who
have to defend against these patents, because, as was
mentioned, that would cost a couple of million dollars as
opposed to settling it amicably.
Mr. Lance. Thank you.
Mr. Duan?
Mr. Duan. I will just add a couple of words.
You know, I think that, certainly, if somebody accidently
omits some information that is required and is requested to
provide it and they provide it, you know, I think that is what
ordinarily happens in any sort of situation, not just the
patent demand letter situation. If somebody makes a small
technical error, then, you know, they fix it.
I think the more important point, though, is that, you
know, these aren't terribly hard requirements to comply with.
They are fairly simple pieces of information that are being
requested. They are information that ought to be in the hands
of the asserter of the patent if they are to make a legitimate
assertion in the first place.
So it should be a fairly simple thing to comply with, and,
you know, if they happen to do it in two letters because of an
unintentional omission, you know, I think that is reasonable.
Mr. Lance. Thank you very much.
And, Mr. Chairman, I yield back 19 seconds.
Mr. Burgess. The gentleman yields back. The Chair thanks
the gentleman.
The Chair recognizes the gentlelady from New York, Ms.
Clarke, for 5 minutes for your questions, please.
Ms. Clarke. I thank you, Mr. Chairman. And I thank our
ranking member. I thank our panelists for sharing the
information with us today.
In addition to preempting more consumer-protective State
laws, the draft bill contains a $5 million cap on civil
penalties that can be collected by State attorneys general for
section 2 violations.
Mr. Duan, let's imagine a recipient of an abusive demand
letter suffers damages in excess of $5 million. In this case,
what good is the cap on civil penalties?
Mr. Duan. It certainly is problematic, and I thank you for
the question.
You know, I think that the problem is that it is very hard
to tell right now what the problems of the future will look
like. It is entirely possible that, you know, someone will come
up with some sort of very expensive type of demand. And, as a
result, I think that, you know, tying the hands the State
attorneys general through the civil cap penalty or through some
of the other sorts of means that are in this bill would be
substantially problematic to full enforcement.
Now, I know that the FTC has enforcement capabilities, as
well. But the FTC is a single agency, and, you know, it only
has so much capacity. So we need to rely on other parties to
fully enforce these sorts of issues, particularly when it comes
to some of the smaller patent assertion entities, you know, who
possibly will fly under the radar of Federal authorities.
As a result, I think that we want to avoid tying the hands
of State attorneys general in being able to protect the
consumers in the individual States. You know, consumer
protection has been long the province of the States, and I
don't see why that should be any different here.
Ms. Clarke. On the note of the FTC, it is a relatively
small agency and has limited resources, so State enforcement is
crucial and complementary to the FTC's efforts to protect
consumers.
Under its current budget, how large of a role do you think
the Commission could reasonably play in combating abusive
demand letters?
Mr. Duan. So I personally don't know the budget of the FTC.
I unfortunately did not read that----
Ms. Clarke. OK.
Mr. Duan [continuing]. In the many volumes of texts that I
have read in preparation for this hearing.
Ms. Clarke. Sure. Sure.
Mr. Duan. But what I will point out is, you know, the FTC
should be applauded for their settlement with MPHJ. They spent
a lot of time working on that, and I think it was an important
settlement. But that is one settlement in however many years
they have been looking at this. That, I think, is indicative of
what their resources are capable of.
And I think the fact that MPHJ is probably the biggest and
most notorious of the patent trolls out there really shows that
that is what the FTC is going to be able to look at. They are
not going to be able to go after, you know, the smaller patent
troll who goes after restaurants or who goes after, you know,
retail shops. They are going to look for the bigger ones.
And that is why I think we need to have State attorneys
general who are able to, you know, be on the ground, take care
of the individual problems that are harming the consumers of
their respective States.
Ms. Clarke. So, much of the enforcement action against the
senders of abusive demand letters has occurred at the State
level. How important is it to preserve the ability of State
attorneys general to continue their enforcement efforts?
Mr. Duan. Well, I think that, you know, the past
enforcement actions are indicative of how much they really care
about this issue. You know, we have had the Vermont's State
attorney general testify, I think, before this committee. I
think we have had the attorney general from Nebraska also
testify on this issue. Both of them have indicated that they
are very, very interested and very, very concerned for their
consumers. And, you know, I think that that level of enthusiasm
to protect the consumer interest demonstrates that they are a
valuable resource in dealing with this consumer protection
problem.
Ms. Clarke. The remedies available to State attorneys
general under this bill are more limited. How would that effect
the continued enforcement by State attorneys general?
Mr. Duan. Well, you know, again, I think that anytime that
you are tying the hands of State attorneys general, it makes it
much more difficult for them to be able to protect their
consumers. You know, if they start having to prove additional
factors, such as, you know, the bad faith or a pattern or
practice, you know, I think that will make them less inclined
to deal with this issue, which would really be an unfortunate
thing for the small businesses and consumers who are receiving
these demand letters.
Ms. Clarke. Very well. I appreciate your response.
And I yield back the balance of my time, Mr. Chairman.
Mr. Burgess. The Chair recognizes the gentlelady. The
gentlelady yields back.
The Chair recognizes the gentlelady from Indiana, Ms.
Brooks, for 5 minutes for your questions, please.
Mrs. Brooks. Thank you, Mr. Chairman.
And I learned in preparation for this hearing that, in
Indiana, currently, State lawmakers are currently working on
legislation to prohibit a person from asserting a bad-faith
claim of patent infringement.
And, while the legislation is still being perfected, I
would sense that there is probably some disagreement in the
panel regarding bad faith. And I apologize that I was not here
at the beginning of the testimony and so forth but would like
to dig in a little bit with respect to bad faith. And I would
like to hear again from each of you what your views are with
respect to the use of bad faith in this legislation.
Mr. Duan, would you please share with us what your thoughts
are as to whether or not it should be included at all? I heard
from Ms. Lettelleir that she would not like it included, I
believe, and it should be removed.
And so I would like--``bad faith,'' and then I would also
like to move to a question with respect to the term ``pattern
and practice'' and what we should do with respect to that term.
Mr. Duan. Thank you. That is an excellent question.
You know, I think our position is that we think that the
bad-faith element is not required and basically only adds to
the burden of enforcement officials, who will have to somehow
prove the mental state of the person who was sending a letter
in order to prove their case.
That it is not required, you know, I think as demonstrated
by the Fair Debt Collection Practices Act. There have been a
number of challenges under Noerr-Pennington saying that, you
know, the requirements that debt collectors only call between
certain hours and include certain disclosures in their debt
collection notices, there have been challenges to that, saying
that these are unconstitutional impingements upon the right to
petition. The Sixth Circuit has in no uncertain terms said that
that is not the case.
The cases that are relied on in the patent context to
suggest that that is not the case are fairly unreliable. I
think that they have been overruled, to a certain extent, by
the Supreme Court. So, you know, I don't think that those
arguments hold up anymore.
That it is bad for the overall system, you know, I think is
demonstrated by the fact that the FTC currently doesn't require
any sort of bad faith in order obtain just injunctive relief.
And that makes sense. The idea is that, if the FTC sees
somebody who is sending out demand letters that are improper
just on the basis of the letter, they should be able to tell
them, ``Stop doing that. We can get an injunction against you
from doing that. We don't have to prove your mental faith in
order to keep you from deceiving consumers.'' So I think that
that is an important point for why it would be problematic.
Did you want me to answer the ``pattern or practice'' right
now?
Mrs. Brooks. Certainly. Go ahead.
Mr. Duan. So, you know, I think that the pattern or
practice is additionally problematic. Again, it adds to the
enforcement burden.
The real problem is that, as was discussed previously, a
lot of these demand letters go unnoticed. They fly under the
radar because they are sent privately. So, you know, if I
receive a demand letter and I go to my State attorneys general
or I go to the FTC and say, hey, you know, I need you to look
into these guys, they are going to have to find somebody else
who received a letter. And who knows where they are going to
find that, right? Because there is no registry of these
letters. They are not going to be able to identify it, so they
won't be able to bring the case.
And that is going to be a real problem for enforcement just
as a practical matter. Because of the fact that these are
private, it won't be possible all the time to find multiple
letters, and, as a result, it won't be possible to protect
consumers in the way that is necessary.
Mrs. Brooks. Who else would like to--Ms. Lettelleir? And I
would also like you to, if you could, list some of the factors
that you think should be included in order to remove
affirmative defense language from the text.
You mentioned that you thought there could be a list of
factors. So I am sorry, I jumped to a different question, but
you mentioned that you thought it could include a list of
factors to show that the sender didn't act in bad faith. And
what are some of those factors you would like included in order
to remove the affirmative defense language?
Ms. Lettelleir. I don't think we have, at this point,
proposed specific factors, but----
Mrs. Brooks. OK.
Ms. Lettelleir [continuing]. I think there is a logical way
that that could be viewed, in terms of, for example, if letters
have been sent in which they have only omitted one of the
required disclosures and they can show that they had other
letters in which that one particular one was not omitted, for
example.
And I think as a practical matter that, before a letter is
going to bubble to the surface and to the attention of the FTC
or an enforcement agency, it is going to be one of those in
which it is wholly uncompliant with the act. There are going to
be substantial issues with the letter. And I think you can
account for how close do they come, you know, and what they are
able to articulate about why it was omitted. Because, in some
instances, perhaps in their view it didn't apply for some
reason. That might be--if they can articulate a reason that a
particular disclosure they did not feel was appropriate for
that particular demand for some reason. It is hard for me to
imagine that scenario, because, you know, what is required to
be disclosed is very rudimentary, really. It is not a
burdensome thing to disclose.
So I think that there is a lot of flexibility in terms of
what those could be and are really going to be commonsense
factors about what would be omitted and why it was omitted.
Mrs. Brooks. Thank you all for sharing. My time is up.
I yield back. Thank you.
Mr. Burgess. The gentlelady yields back. The Chair thanks
the gentlelady.
The Chair recognizes the gentleman from California, Mr.
Cardenas, for 5 minutes for your questions, please.
Mr. Cardenas. Thank you very much, Mr. Chairman.
I appreciate all the witnesses being here today to help
enlighten us on what is going on out there in the real world.
I just want to point out that the targets of patent demand
letters are often small businesses and that do not necessarily
have a large legal team at their disposal, especially a legal
team equipped to handle patent matters.
As we have heard so many times from the owners of these
small businesses, the high cost of dealing with abusive patent
demand letters do significant harm to their business and their
livelihood and, in some cases, cripple that small business or
even end that small business, and there go jobs.
The targets of these unfair and deceptive demand letters
have explained that the letters they receive rarely contain
enough information for them to evaluate the allegations of
infringement or the demands for compensation without the help
of a patent lawyer. And when targets consult lawyers, the
lawyers must spend a significant amount of time, energy, and
money to conduct an investigation of the claims made in these
letters, which costs targets extraordinarily high to these
small businesses when it comes to legal fees and other matters.
The draft bill attempts to address that lack of detail in a
demand letter through section 2(a)(3), which requires certain
information be included in the demand letters.
Mr. Duan, do you think the five elements required in this
section would create enough transparency and allow the average
recipient of these misleading leaders to avoid costly patent
lawyer fees?
Mr. Duan. Thank you for the question. I think that it is an
excellent question.
I think that they are an important start. The elements that
are listed there are probably some of the most critical
elements--you know, the identification of the patents,
identification of the person who asserts the right. You know,
those are definitely the most critical pieces that would enable
somebody to, you know, look at this and really figure out what
is going on here.
I think that the requirements for explaining the basis of
the infringement allegations could be strengthened. Right now,
some of those are in there, but they do not include a
requirement, for example, for identifying particular claims.
They sometimes allow for exceptions in situations where--they
allow for certain exceptions, in which somebody might be able
to avoid having to disclose that sort of information.
Excuse me. I have a bit of a cold.
Anytime that you send out a demand letter, at least if you
are sending it legitimately--you know, I did this when I was
practicing as a patent attorney--you do the investigation. You
know what the basis is for the infringements. You have
investigated the products, you have investigated the patent,
you understand what is going on. You wouldn't send out the
letter, as a matter of legal ethics, if that weren't the case.
And that is what legitimate people do.
All that is being asked here is to put that into the record
so that the person has a fair shot at understanding what is
going on. That is what is being asked here.
Mr. Cardenas. Thank you.
The first requirement of this section is that the sender of
a patent demand letter include the identity of the person
asserting the right to license the patent to or enforce the
patent against the recipient. That language may only require
disclosure of the identity of the person sending the letters
and not, for example, the identity of the parent company.
Mr. Duan, do you think that this section needs further
clarification so that recipients and State attorneys general
and the FTC know exactly who is behind the patent demand
letter?
Mr. Duan. Certainly. I think that, you know, identification
of the real party in interest can be very important in a lot of
situations.
You know, I think that there are some examples--particular
examples aren't coming to mind, but I think there are
situations where, for example, the person who is receiving the
letter might have already taken a license, or somebody upstream
might have already taken a license, and knowing the real party
in interest could reveal that information and, you know, allow
them to simply dismiss the letter, saying, you know, I already
have a license to this.
In other cases, for example, with MPHJ, the center of the
letters uses a bunch of shell companies, which makes it hard at
the beginning to figure out that all of these demand letters
are coming from the same place. So disclosure of the real party
in interest could allow for that to happen, which would allow
for the State attorney general to identify a pattern or
practice if that element is left in.
So, you know, I think that that element is fairly critical
in a lot of situations to proper enforcement.
Mr. Cardenas. OK. Thank you.
Ms. Lettelleir--I am sorry if I butchered your name--J.C.
Penney is not a small company. Thank you so much for coming
forward and testifying today. But what elements do you think
that J.C. Penney, for example, sees in that section that could
be improved?
Ms. Lettelleir. Well, we would like to see a specific
identification of the claim in the patent that they are
asserting as being infringed. We think that is very fundamental
to understanding what is being asserted against you and is
fundamental to any business being able to make an informed
decision about how to respond to the letter.
And to your point in terms of, you know, the need for legal
counsel--and while I am here and I work for J.C. Penney, I am
representing the United for Patent Reform that has many members
that are very small and do not have on-staff patent attorneys
at their disposal to advise them. One of the things that is
very important in terms of disclosure of the real party in
interest and the claims that are specifically being infringed
is it does help a small-business owner identify what company
they may have acquired product from that is in fact the source
of the accused infringement.
And many times it is very difficult to sift through and
understand what is even being accused. And if you don't
understand what is being accused, a business owner has no
chance of properly identifying and then communicating with the
vendor that may have sold them the product.
And we have experienced firsthand an incident where we
received a demand on a product that we acquired from Adobe,
and, once we figured it out after an extensive amount of work,
Adobe had already taken a license to those patents and had
sought to protect their customers as part of that license.
So getting to who is taking the action, who owns the
rights, and what exactly you are being accused of is key for a
small business to ever get to who is behind and who they should
be looking to for assistance.
Mr. Cardenas. Thank you.
Thank you, Mr. Chairman. Yield back.
Mr. Burgess. The gentleman's time has expired.
The Chair recognizes the gentleman from Kentucky for 5
minutes for your questions, please.
Mr. Guthrie. Thank you, Mr. Chairman.
Sorry for bouncing in and out. We have a competing hearing
going on right now in another subcommittee.
So, Mr. Long, does the legislation preserve the FTC's
section 5 authority? And could the FTC continue to bring
actions against patent trolls for deceptive demand letters
under section 5 authority if the bill were enacted?
Mr. Long. Yes. Thank you for your question. It absolutely
does. It has a provision that says, nothing within this act is
meant to keep the FTC from doing what it otherwise could do. So
that certainly is a catchall that could catch some of these
concerns people have that may not be delineated in the proposed
act.
Mr. Guthrie. Also for you, Mr. Long, could the State
attorneys general continue to bring cases under their many FTC
acts under the bill?
Mr. Long. And that is such a good question. I will have to
say that is not clear to me. I haven't looked at that issue,
and so I would have to look more to see what the State attorney
general is asked to do.
But I know that an important part of this act and an
important part of the compromise, given all the work that has
been done to get us here, is that it does, indeed, allow the
State attorney generals to use this act as a vehicle to address
the concerns of their constituents when they face these issues.
Mr. Guthrie. Could you submit an answer to that when you
have the opportunity to review it to the level--I know you said
you didn't have an opportunity to review to the level you want
to to feel comfortable, so would you submit a written answer?
Mr. Long. Yes.
Mr. Guthrie. We will make sure you get the question again.
And, also, Mr. Long, the bad-faith standard--the bill also
includes a bad-faith requirement. Why is ``bad faith''
necessary, and why is ``bad faith'' required by the First
Amendment at all?
Mr. Long. Very good questions. There are two reasons.
There is a practical reason why you want to have ``bad
faith'' in what is going on here. There is a lot of--and, by
and large, the bulk of patent demand letters are all legitimate
demand letters. You want to have ``bad faith'' because you
don't want this to be a vehicle for a gotcha. A patent owner
may have inadvertently for whatever reason sent something that
fell short of the act, but there is no harm and there is no
intent to get harm, so we want to have that ``bad faith.'' So I
think that is a good practical issue to have.
But, more importantly, and directly to your constitutional
law question, it is indeed a constitutional First Amendment
right, the right to petition the Government for redress. And
that includes, for example, cases, the right to go to the court
and not be punished because you exercised the right to do what
you should be allowed to do.
Courts have universally applied that caselaw through patent
demand letters. And so the exception, where the First Amendment
right won't protect you, is for what is called a sham
litigation, where the reason you brought the case was not
because you wanted the outcome of what the case would be, what
the royalty would be that the jury would give you, but because
of what would happen because you brought the process to begin
with.
For example, in terms of patent assertion entities, the
concern is you brought the case not because you want the
royalty that the court would give you but because you want that
expense or that process to force whoever your target is to give
you money that may not be warranted by your patent. And that
requirement, that sham litigation aspect, can apply if what has
been done has been done in bad faith. So it is an important
First Amendment protection.
Mr. Guthrie. Thank you.
And I have one more for you, Mr. Long. What information is
disclosed in professionally written demand letters? And is that
information different from what is required in the TROL Act?
And is the information requirement burdensome so as to cause an
infringed party to file a suit to avoid writing a demand
letter?
Mr. Long. A very good question.
When I look at--and we are talking particularly about the
things that are required to be disclosed--those are typical
things you will find in a typical legitimate demand letter. You
are identifying who has the right to the patent. You are
identifying what the patent is. You are identifying perhaps a
claim that you think that person may be practicing. You
identify what particular product they may be using. And you
describe in the level of detail that is needed in that first
instance, why you think they infringed. Those are typical
things that are not too onerous.
The problem comes particularly in what you would require
someone to reasonably disclose, because there are all kinds of
circumstances. For example, if you have a large portfolio of
patents, you are not going to disclose every claim in every
part of those patents that you think are infringed. It may not
be worth that. Often the parties will agree, let's select a
representative set of your patents to talk about.
And another issue is that often you may not know why they
infringe. All the information you could find seems to indicate
they may be using your invention, but the heart of their
product that you think may use your invention could be in a
microchip that you don't have access to or in source code and
you don't know how it is written. And so that provision there
varies, as far as showing and explaining why there is
infringement, varies significantly from circumstance to
circumstance.
Mr. Guthrie. Thank you, Mr. Long.
My time has expired, and I yield back.
Mr. Burgess. The gentleman's time has expired. The
gentleman yields back. The Chair thanks the gentleman.
Seeing no further questions----
Ms. Schakowsky. Mr. Chairman, can I just submit for the
record my opening statement and four letters from State
attorneys general?
Mr. Burgess. Without objection, so ordered.
[The information appears at the conclusion of the hearing.]
Mr. Burgess. If there are no further Members wishing to ask
questions, I would like to thank the witnesses and the Members
for their preparation and their participation in today's
hearing.
Before we conclude, I would like to include the following
documents to be submitted for the record by unanimous consent:
a letter from the National Association of Convenience Stores; a
statement for the record on behalf of the American Hotel and
Lodging Association; a joint letter on behalf of the American
Bankers Association, the Clearinghouse Payments Company, the
Credit Union National Association, Financial Services
Roundtable, Independent Community Bankers of America, and the
National Association of Federal Credit Unions.
[The information appears at the conclusion of the hearing.]
Mr. Burgess. Pursuant to committee rules, I remind Members
they have 10 business days to submit additional questions for
the record.
And I ask the witnesses to submit their responses within 10
business days upon receipt of the questions.
Without objection, the subcommittee is adjourned.
[Whereupon, at 1:02 p.m., the subcommittee was adjourned.]
[Material submitted for inclusion in the record follows:]
Prepared statement of Hon. Janice D. Schakowsky
Thank you, Mr. Chairman, for holding this legislative
hearing on the TROL Act.
Patent Assertion Entities, also known as patent trolls,
pose a serious threat to consumers and businesses all across
the country. They send vague and threatening letters to
businesses and end users around the country--extracting
settlements in the thousands of dollars from businesses that
can't afford to go to court.
It costs patent trolls virtually nothing to send patent
demand letters, but they have cost American businesses tens of
billions of dollars in recent years.
I am interested in finding a solution to this problem that
protects businesses and consumers against patent trolls. That
solution must also recognize the legitimate rights of patent
holders to protect their ideas and technology.
I appreciate this bill's attempt to balance those two
priorities--it is not easy work. Unfortunately, this bill
misses the mark.
This bill requires the FTC to prove ``bad faith'' of the
sender in order for patent demand letters to be considered an
unfair or deceptive act or practice. In short, this means that
the FTC has to be able to prove that the sender of a patent
demand letter knowingly made false statements or was aware that
the recipient would be deceived. That is an incredibly high
burden of proof--and its unenforceability would prevent action
against trolls.
This bill's affirmative defense clause is also a major
issue. Under this bill, the sender of patent demand letters can
avoid FTC action if they can demonstrate that they in the usual
course of business sends written communications that do not
violate this Act.'' That's crazy. What it means is that if you
communicate--as all of us do--on a regular basis without
sending patent demand letters, you can troll as much as you
like.
Not to be a broken record for those that watched the full
committee markup yesterday, but I have serious concerns about
this bill's preemption of State laws. 20 States--including my
home State of Illinois--have already enacted specific policies
to curb trolling. In many ways, these State protections exceed
those that would be guaranteed under the TROL Act. We should
not preempt State law with this bill that does nothing to
address the problem of patent trolls.
I look forward to hearing the perspectives of our witnesses
on these and other issues today, and to working to improve this
legislation before it is marked up. I yield back.
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