[Senate Hearing 114-603]
[From the U.S. Government Publishing Office]







                                                        S. Hrg. 114-603

                 AN EXAMINATION OF CHANGES TO THE U.S.
                 PATENT SYSTEM AND IMPACTS ON AMERICA'S
                            SMALL BUSINESSES

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

                                HEARING

                               BEFORE THE

                      COMMITTEE ON SMALL BUSINESS
                          AND ENTREPRENEURSHIP
                          UNITED STATES SENATE

                    ONE HUNDRED FOURTEENTH CONGRESS

                             SECOND SESSION

                               __________

                           FEBRUARY 25, 2016

                               __________

    Printed for the Committee on Small Business and Entrepreneurship



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            COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP

                    ONE HUNDRED FOURTEENTH CONGRESS

                              ----------                              
                   DAVID VITTER, Louisiana, Chairman
             JEANNE SHAHEEN, New Hampshire, Ranking Member
JAMES E. RISCH, Idaho                MARIA CANTWELL, Washington
MARCO RUBIO, Florida                 BENJAMIN L. CARDIN, Maryland
RAND PAUL, Kentucky                  HEIDI HEITKAMP, North Dakota
TIM SCOTT, South Carolina            EDWARD J. MARKEY, Massachusetts
DEB FISCHER, Nebraska                CORY A. BOOKER, New Jersey
CORY GARDNER, Colorado               CHRISTOPHER A. COONS, Delaware
JONI ERNST, Iowa                     MAZIE K. HIRONO, Hawaii
KELLY AYOTTE, New Hampshire          GARY C. PETERS, Michigan
MICHAEL B. ENZI, Wyoming
                  Zak Baig, Republican Staff Director
               Robert Diznoff, Democratic Staff Director
               
               
               
               
               
               
               
               
               
               
               
               
               
               
               
               
               
               
                            C O N T E N T S

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                           Opening Statements

                                                                   Page

Vitter, Hon. David, Chairman, and a U.S. Senator from Louisiana..     1
Shaheen, Hon. Jeanne, a U.S. Senator from New Hampshire..........     3

                               Witnesses

Stoll, Robert, Former Commission of Patents, U.S. Patent and 
  Trademark Office, Partner and Co-chair of the Intellectual 
  Property Practice Group, Drinker Biddle & Reath, Washington, DC     7
O'Shaughnessy, Brian P., Chairman-elect, Licensing Executives 
  Society (USA and Canada), Inc., Attorney At Law & Shareholder, 
  RatnerPrestia, Washington, DC..................................    13
Veloso, Neil, Executive Director, Technology Transfer, Johns 
  Hopkins Technology Ventures, Baltimore, MD.....................    25

          Alphabetical Listing and Appendix Material Submitted

O'Shaughnessy, Brian P.
    Testimony....................................................    13
    Prepared statement...........................................    15
    Responses to Questions Submitted by Ranking Member Shaheen 
      and Senator Enzi...........................................    52
Shaheen, Hon. Jeanne
    Testimony....................................................     3
    Prepared statement...........................................     5
Stoll, Robert
    Testimony....................................................     7
    Prepared statement...........................................    10
    Responses to Questions Submitted by Ranking Member Shaheen...    48
Veloso, Neil
    Testimony....................................................    25
    Prepared statement...........................................    27
Vitter, Hon. David
    Opening statement............................................     1

 
                 AN EXAMINATION OF CHANGES TO THE U.S.
                       PATENT SYSTEM AND IMPACTS
                     ON AMERICA'S SMALL BUSINESSES

                              ----------                              


                      THURSDAY, FEBRUARY 25, 2016

                      United States Senate,
                        Committee on Small Business
                                      and Entrepreneurship,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 10:01 a.m., in 
Room 428A, Russell Senate Office Building, Hon. David Vitter, 
Chairman of the Committee, presiding.
    Present: Senators Vitter, Risch, Fischer, Gardner, Ernst, 
Ayotte, Shaheen, Cantwell, Coons, Hirono, and Peters.

 OPENING STATEMENT OF HON. DAVID VITTER, CHAIRMAN, AND A U.S. 
                     SENATOR FROM LOUISIANA

    Chairman Vitter. Good morning, everyone, and welcome, and 
thanks to our witnesses in particular for taking the time to be 
here today for this important topic. We look forward to your 
testimony.
    Our conversation today will focus on whether the patent 
litigation abuse problem demands a major rewrite of our patent 
laws or if the changes taking place are having the desired 
effects, specifically with regard to small businesses. The 
closer the issue is examined, the more it becomes apparent to 
me that small business, entrepreneurs, and universities are at 
the heart of innovation in this country and protecting them 
with a strong patent system certainly is important, including 
to this Small Business Committee.
    The U.S. patent system is really unique and it fuels our 
economy. On the whole, it is far more prosperous and successful 
than those of other countries. And small businesses provide 55 
percent of all jobs and 66 percent of all net new jobs since 
the 1970s. They also hold 16.5 times more patents per employee 
than large firms. In the last 20 years, U.S. university 
licensing activity has specifically contributed $181 billion to 
the U.S. GDP, and so all those numbers speak for themselves.
    Now, unfortunately, the rise of so-called patent trolls, 
who acquire a patent solely for the purpose of making money 
through royalty demands or lawsuits, have had a detrimental 
effect on businesses, innovators, and universities alike. So, 
reform there is needed. However, before Congress jumps to 
overhaul the entire system, the extent and scope of necessary 
reform, I think, really needs to be clarified.
    So, today, we are here to revisit the question, how do we 
address patent reform while protecting innovation and not 
impose negative consequences on small businesses and 
entrepreneurs.
    The first step is to examine exactly how recent changes, 
court decisions, and other judicial conference changes have 
impacted the situation, including our small businesses and 
universities. Since Congress has last thoroughly considered 
these issues and drafted legislation to address patent law, 
there have been several major judicial and administrative 
developments. As a result, patent lawsuit filings have already 
dropped dramatically, 40 percent, from September 2013 to 2014. 
But, that is still not good enough. Frivolous litigation is 
never a good thing and these patent trolls need to be stopped. 
The very threat of litigation from abusive patent trolls 
diverts resources away from legitimate business activity.
    The second step in addressing the faults in our current 
patent is to take a look at the potential impacts of current 
proposed changes. As Chair of this committee, I made it a 
priority to open the lines of communication with small 
businesses and universities to find out what specifically they 
need in terms of reform so they can stop worrying about 
potential litigation or changing rules and get back to 
innovative.
    When I first took over this committee, one of my top 
priorities was to ensure that small business voices would be 
heard in Congress, including on patent reform. That is why in 
March of last year, I held the first Small Business Committee 
hearing on patent reform, the first since 1961, when, actually, 
one of my predecessors in this seat from Louisiana, Senator 
Russell Long, held a hearing on a related topic on patent 
issues. At the hearing I called last year, 54 years since that 
previous one, we heard from advocates of both sides of the 
issues regarding specifics of legislation, and it was clearly 
established that a balanced approach is the only solution that 
would sustain and support America's innovative culture.
    In the 11 months since that hearing, a considerable number 
of changes have gone into effect and even more have been 
proposed that would change the way small businesses engage in 
the patent system. This committee has heard from folks across 
the country who are being forced to divert critical resources 
to defend themselves against vague claims of patent 
infringement, and many of them go bankrupt in the process. 
These patent trolls are creating a substantial drain on the 
core of our economy, and this specific problem requires a 
specific solution, including one that is delicate enough to 
avoid disrupting the system as a whole.
    Now, unfortunately, when dealing with bad actors, there is 
rarely a one-shot solution. That is why it is not surprising to 
see folks who support a comprehensive approach attempt to 
inflate the perceived notion of litigation abuse by including 
innocent, well-intended business lawsuits with those of trolls. 
It is essential to remember that many legitimate owners of 
intellectual property do not manufacture anything, but 
nonetheless have legitimate claims of patent infringement 
against other parties. A comprehensive overhaul of our patent 
system would fail our innovators and allow large companies to 
strong-arm smaller organizations, ultimately leading to a less 
prosperous and successful system.
    It is no secret that the ever-changing federal rule book is 
one of the greatest obstacles for business growth and 
innovation. Since the passage of the America Invents Act, 
several reports have come out saying that the onslaught of 
ongoing changes is making it more difficult for small 
businesses to protect their patents. We have also witnessed 
increasing abuse of new mechanisms that were aimed to aid in 
the fight against the so-called trolls. There is evidence that 
certain hedge fund managers are intentionally shorting stocks 
and then challenging a company's patent at the Patent Trial and 
Appeal Board.
    Since our last meeting on this issue, new reports have 
shown how the value of patents has dropped at a staggering rate 
in the past four years, with some reports showing a decrease by 
as much as 80 percent. The key, I think, is to strike a balance 
between combating frivolous lawsuit claims from trolls and 
maintaining a level playing field between small business 
inventors and large companies.
    In an effort to support a targeted approach that takes into 
account the ongoing changes to the patent system and patent 
troll lawsuits, I have cosponsored Senator Coons' legislation, 
the Strong Patents Act of 2015, which also has the support of 
our fellow committee member Senator Hirono as well as Senators 
Cotton and Durbin.
    Patent reform is a key issue this year and I certainly look 
forward to continuing to fight overly broad efforts to fix the 
system and to discussing and developing effective balanced 
solutions.
    Thanks again for being here, and now I will turn to our 
Ranking Member, Senator Shaheen.

OPENING STATEMENT OF HON. JEANNE SHAHEEN, RANKING MEMBER, AND A 
                U.S. SENATOR FROM NEW HAMPSHIRE

    Senator Shaheen. Well, thank you very much, Mr. Chairman, 
and thank you to all of our witnesses who are here today.
    As I think we would all agree, small businesses really are 
the drivers of economic growth, especially when it comes to 
technological innovation that keeps this country competitive. 
And small firms employ nearly 40 percent of America's 
scientists and engineers and they produce nearly 16 times more 
patents than large businesses, which is really an astounding 
statistic. They also produce patents that are of higher quality 
and more than twice as likely to be cited in technical 
literature. So, I think we would all agree that America's 
entrepreneurs have a very big stake in our patent system.
    Since the passage of the America Invents Act in 2011, 
efforts have been underway to reform procedures at the U.S. 
Patent and Trademark Office, and in today's hearing, we are 
going to examine legislative efforts to further reform the 
patent process. This process is ongoing and I am hopeful that 
we will be able to come to some consensus that will address 
concerns that we have heard from small businesses as well as 
abuses that affect small businesses while they are trying to 
protect their innovators.
    I believe that--and I will make an editorial comment here--
I believe that one of the best ways for us to support small 
business innovation is through reauthorizing and making 
permanent the SBIR and STTR programs, and I very much 
appreciate the opportunity to work with Chairman Vitter on this 
issue and the fact that we have already had a hearing to look 
at reauthorization.
    I am going to abbreviate my remarks this morning and submit 
my full statement for the record, but I want to close again by 
thanking each of our witnesses and apologizing for the fact 
that I am going to have to leave early to attend another 
hearing. So, thank you all very much.
    [The prepared statement of Senator Shaheen follows:]
    
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    Chairman Vitter. Thank you, Senator.
    And now, as we normally do, we would invite any other 
opening remarks for the record so we can go directly to our 
witnesses, and we should also have plenty of time for questions 
and comments after our witnesses' testimony. Let me introduce 
all of them and then we will hear from them in turn.
    Robert Stoll is a partner at Drinker Biddle. He serves on 
the firm's patent team and is Co-Chair of the Intellectual 
Property Practice Group. He formerly served as the Commissioner 
for Patents at the U.S. Patent and Trademark Office, where he 
was instrumental in the passage of the America Invents Act and 
lauded for his efforts to reduce patent pendency and improve 
patent quality.
    Brian O'Shaughnessy is an attorney and head of the Life 
Sciences Practice Group at the multinational intellectual 
property firm RatnerPrestia, P.C. He is a registered patent 
attorney with 30 years of experience in intellectual property 
law and represents clients in disputed matters in U.S. Federal 
Courts, the U.S. International Trade Commission, and in post-
grant proceedings before the U.S. Patent and Trademark Office.
    And Neil Veloso is the Executive Director of Technology 
Transfer for Johns Hopkins Technology Ventures, the 
commercialization arm of the university. He leads a team that 
works closely with researchers, physicians, and other inventors 
to evaluate and protect intellectual property developed at the 
university.
    Welcome to you all. Thanks to you all for being here. And 
we will start with Mr. Stoll.

      STATEMENT OF ROBERT L. STOLL, PARTNER AND CO-CHAIR, 
    INTELLECTUAL PROPERTY GROUP, DRINKER BIDDLE AND REATH, 
WASHINGTON, DC, AND FORMER COMMISSIONER OF PATENTS, U.S. PATENT 
                      AND TRADEMARK OFFICE

    Mr. Stoll. Chairman Vitter, Ranking Member Shaheen, and 
Members of the Committee on Small Business and 
Entrepreneurship, it is my great pleasure to testify before you 
today on issues related to our nation's patent system, which 
fuels America's innovative spirit and serves as a major driver 
of job creation and economic growth.
    I am currently a partner and Co-Chair of the Intellectual 
Property Group at Drinker Biddle and Reath, having retired from 
my position as Commissioner for Patents at the United States 
Patent and Trademark Office in December of 2011. I spent 29 
years at the U.S. PTO, rising from a patent examiner to head 
the office that handles U.S. legislation and international 
intellectual property issues for the administration before 
becoming Commissioner for Patents.
    I share your passion for helping ensure that small and 
independent inventors can benefit from the fruits of their 
labor and their creative talents. Small businesses and 
independent inventors are critical to revolutionary advancement 
of American technology. They file over 20 percent of the 
applications at the U.S. PTO and their patents are more likely 
to encompass breakthrough inventions rather than incremental 
change, as they have the incentive and the flexibility to take 
risks that might be unacceptable for larger established 
enterprises.
    Small businesses and independent inventors are the 
incubators of novel ideas and the source of inventive products 
that they develop or which they license or sell to others. Many 
large successful companies throughout our history have started 
from meager beginnings. Hewlett-Packard began in a garage, 
where its first product, an audio oscillator, was built. That 
garage was used for many years as a research lab and is now a 
private museum known as the birthplace of Silicon Valley.
    Patents are a critical tool for small businesses to elbow 
their way into the market. Anyone who has ever watched ``Shark 
Tank'' is aware that one of the first questions an investor 
asks is whether the inventor has patent protection. A well 
functioning patent system is of particular importance to the 
small businesses, which to succeed often need both venture 
capital and the means to protect an innovative market niche.
    Mr. Chairman, I applaud your leadership in introducing with 
Senator Baldwin the Grace Period Restoration Act of 2015, a 
bipartisan bill to protect American inventors and university 
researchers. By restoring a more workable grace period, S. 926 
will permit small inventors to obtain rights in the United 
States if they fill shortly after a disclosure, and if other 
countries model this, it can become part of our international 
system.
    In both the Senate and the House, other work aimed at 
making the U.S. patent system fairer and more efficient for all 
stakeholders continues. Members of the House Judiciary 
Committee, led by Chairman Goodlatte and Ranking Member 
Conyers, have considered the Innovation Act and the Innovation 
Protection Act, a measure that would preserve the resources 
that the U.S. PTO needs to fulfill its mission.
    At the same time, Chairman Grassley, Ranking Member Leahy, 
and other Members of the Senate Judiciary have been working on 
the bipartisan Patent Act. And Senator Coons has proposed 
changes to the post-grant procedures at the U.S. PTO in the 
STRONG Act.
    In parallel to the legislative debate, the courts have 
considered cases raising some of the very same issues Congress 
is examining. Octane Fitness and Highmark were both handed down 
by the Supreme Court last year and loosened the ``objectively 
baseless'' standard to deal with harassing lawsuits to permit 
judges to award attorneys' fees more liberally if, in their 
judgment, the suit was frivolous. The Supreme Court is also 
poised to hear cases contemplated by other legislative 
proposals on the Hill. For example, Cuozzo addresses the 
standard of claim construction at the U.S. PTO and the 
reviewability of the institution of an inter partes review 
procedure. This case and other patent cases have recently been 
granted cert.
    At the end of 2015, the courts instituted rules that 
require more detailed pleadings and the U.S. PTO has taken more 
quality initiatives to blunt the problems of having 
improvidently granted patents used to harass small businesses.
    Other Supreme Court decisions are further shaping the 
patent landscape. Some have argued that the Court's decision 
impacting subject matter eligibility in Myriad, Mayo, and Alice 
have presented challenges for lower courts and for patent 
holders. The Court intended these decisions to be narrowly 
construed, but we are currently seeing about 70 percent of the 
patent claims challenged under the subject matter eligibility 
statute invalidated, with even higher percentages invalidated 
in the U.S. PTO post-grant procedures.
    The effects of these decisions as they are being applied by 
the lower courts are limiting the availability of patents in 
core technologies--areas of computer implemented programs, 
diagnostic methods, and personalized medicine--and thereby 
limiting the ability of innovators to provide value to 
customers, build their businesses, and grow. These cutting-edge 
fields are the very technologies in which the United States 
leads the world.
    The Supreme Court will have several opportunities to 
clarify the impact of their decisions as more cases having real 
world impacts work their way through the system. It is 
important for America that we get this right.
    As a result of the recent patent subject matter eligibility 
cases in the U.S., if a claim is drawn to a law of nature, a 
natural phenomenon, or an abstract idea, it is not patentable 
subject matter if elements of the claim do not, quote, ``add 
substantially more.'' In Europe, the claims must have a 
technical character. And in China, claims must have a technical 
feature distinctive from the prior arts. So, these countries 
have broader subject matter eligibilities than we currently do.
    As changes occur through the courts and the administration 
action, we can now take time to study the development of case 
law and rules and analyze how they are affecting the system. 
Much work has already gone into exploring legislative solution 
and the Members of the Senate and House are to be commended for 
their efforts. Hearings like this one provide the opportunity 
to collect more information and will lead to legislation that 
will further improve the patent system and lead to more job 
creation and economic growth.
    Thank you very much.
    [The prepared statement of Mr. Stoll follows:]
    
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    Chairman Vitter. Thank you very much.
    And now we will turn to Mr. O'Shaughnessy.

   STATEMENT OF BRIAN P. O'SHAUGHNESSY, ATTORNEY AT LAW AND 
SHAREHOLDER, RATNERPRESTIA, WASHINGTON, DC, AND CHAIRMAN-ELECT, 
      LICENSING EXECUTIVES SOCIETY (USA AND CANADA), INC.

    Mr. O'Shaughnessy. Thank you. Chairman Vitter, Ranking 
Member Shaheen, and committee Members, I am grateful for the 
opportunity to be here today and to offer these remarks.
    My name is Brian O'Shaughnessy and I am Chairman-Elect of 
the Licensing Executives Society, USA and Canada. LES is a 
nonprofit, nonpartisan professional society devoted to bringing 
the fruits of innovation to market. The Society recognizes the 
important role that effective intellectual property regimes 
play in growing economies and improving the human condition. We 
applaud the important work of this committee in the IP arena.
    I have been practicing intellectual property law as a 
registered patent attorney for 30 years. I am here today to 
discuss the profound effects of recent changes on our patent 
system, particularly on small business.
    Our patent system is the great equalizer. Properly 
balanced, it enables the nimble innovator, regardless of size 
or resources, to disrupt markets and bring forth new ideas and 
products, and we the public benefit both from the disclosure of 
those ideas and the products they produce.
    Patent rights are, first and foremost, property rights. 
Those who would deprive inventors of their property right 
derogate principles upon which this country was built. The 
spirit of invention is intrinsically American and is seen in 
how we reward it. The patent system safeguards the labor and 
the investment of the industrious.
    The patent right plays a vital role in specialization. By 
turning inventions into tradable assets, inventors are free to 
do what they do best. They can license their invention to 
others for manufacturing and distribution and they can go back 
to the lab and do more inventing.
    Today, however, innovators face many challenges. With the 
global economic downturn, the birthrate of U.S. start-ups is 
below the death rate for the first time in 40 years. Economic 
uncertainty is especially harmful to small businesses. But, 
economic cycles, admittedly, are beyond our control. So, we 
must address those challenges that are not.
    The America Invents Act, though well intentioned, has been 
catastrophic for entrepreneurial innovators. The AIA is eroding 
confidence in patents and reducing their commercial value. 
Accused infringers are turning to new procedures at the PTO 
which are invalidating patents at an alarming rate. These 
proceedings offer an enormous advantage for the market-dominant 
player. It gets the PTO to reopen prosecution of a patent and 
then it plays out the clock with serial proceedings, both in 
the PTO and then back in the courts, to bleed the patentee dry. 
The little guy does not stand a chance.
    With the AIA, patent enforcement is down and patent 
valuations are near 20-year lows. As a result, investment in 
technology-oriented businesses, both new and old, is down. 
Equally of concern, businesses of all sizes are turning to 
trade secret protection. This deprives the public of the 
benefit of disclosure of inventions that comes with a patent 
and it drives innovation underground. If inventors do not file 
for patents, the common store of knowledge suffers.
    As the knowledge-based economy grows in importance, we 
should be striving for increased, not decreased, reliance on 
the patent system. This can only be achieved by sustaining 
patents as a durable, meaningful, and transparent property 
right.
    But now, pending legislation could strike a further blow to 
American innovation. Both S. 1137 and H.R. 9 purportedly 
address abusive practices in patent litigation. However, both 
impose burdens on patentees that do not exist for other 
property owners. Small businesses are especially dependent on 
their IP assets and, thus, are especially vulnerable to these 
burdens.
    These bills are untimely and unnecessary. The problems 
exploited in patent litigation abuse have recently been 
addressed. Patent pleading requirements are now consistent with 
other civil cases and the scope of discovery has been 
restricted. Moreover, the Supreme Court has made it easier to 
get attorney fees for bad faith patent enforcement. As 
expected, the incidence of fee awards has increased and even 
the most pro-patent courts are granting substantial awards for 
bad faith patent enforcement and abusive litigation is on the 
decline.
    Admittedly, even with these constructive improvements, 
abuses will remain. And, so, LES is spearheading a standards 
initiative, bringing together the IP community, licensors and 
licensees, as well as financiers, consultants, valuation 
experts, and any other interested parties to create an open and 
transparent system of standards of best practices and ethical 
behavior for IP transactions. Courts will now have an effective 
tool for assessing abusive behavior. LES believes that industry 
self-regulation is preferable to the blunt instrument of 
legislation.
    I thank you for the opportunity to be here today and I look 
forward to your questions.
    [The prepared statement of Mr. O'Shaughnessy follows:]
    
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    Chairman Vitter. Thank you very much.
    And now, we will turn to Mr. Veloso.

   STATEMENT OF NEIL VELOSO, EXECUTIVE DIRECTOR, TECHNOLOGY 
   TRANSFER, JOHNS HOPKINS TECHNOLOGY VENTURES, BALTIMORE, MD

    Mr. Veloso. Chairman Vitter, Ranking Member Shaheen, 
Members of the Senate committee, thank you for this opportunity 
to testify on this important topic.
    My name is Neil Veloso. I am Executive Director of Johns 
Hopkins Technology Ventures and we are the technology transfer, 
business development, and new company formation arm of the 
university.
    Ever since the passage of the Bayh-Dole Act in 1980, 
patenting and technology transfer has joined teaching and 
publication as another means by which knowledge at the 
university can be brought out to the public. Innovation, 
research, and discovery are the life blood of my institution, 
Johns Hopkins, and it is interwoven in the fabric of the 
university. This is manifested in the work of Johns Hopkins 
Technology Ventures. Last year, we have seen 500 invention 
disclosures from our faculty, students, and staff. We executed 
171 license agreements with established companies, but also 
with new companies, as well.
    As part of that, Tech Ventures started over 16 new start-up 
companies around Hopkins Technology, and this is in line with 
the effect that universities and their research have had in the 
formation of start-ups. In fiscal year 2014, there were 853 new 
start-up companies that were based on university technology.
    Our commitment to technology transfer involves not only a 
focus on licensing, but also on the incubation, formation, and 
developments of start-up companies, as well. Recently, our 
start-up companies have had good response from the market. 
Within the past five years, Johns Hopkins start-up companies 
have raised over a quarter-billion dollars in follow-on 
financing.
    For Johns Hopkins, its licensees and start-up companies, a 
well functioning, robust patent system is a key to our 
innovation ecosystem. As the university makes decisions on 
patenting, we need to balance the costs and time commitment 
involved in obtaining those patents and pursuing those 
applications versus spending those resources on new inventions 
that may come in.
    In that respect, a patent system that is efficient and cost 
effective for patent seekers like Johns Hopkins makes our 
group, Technology Ventures, more efficient for our inventors, 
as well.
    After that licensing transaction takes place, Johns Hopkins 
uses its patents to grant rights to its licensees. As I said, 
these can involve start-up companies. We grant them the right 
to make, have made, use, or sell products based around Hopkins 
technology. We grant them the ability to sub-license that 
technology to others. And, also, we grant them the ability to 
pursue infringers.
    Now, in that light, the work of this committee as it 
examines changes to the patent system will have effects not 
only to the university, but to its start-up companies, as well.
    From the viewpoint of a start-up company with a fixed 
budget, with a strict mandate, and with a very daunting task of 
taking early stage technology out to the market, having an 
efficient patent system, something that can protect their 
rights and allow them to stay within their goals and within 
their budget, going and make them more successful.
    In closing, I would say that an approach improving targeted 
legislation developed in the context of the changing landscape 
created by judicial and administrative actions can most 
effectively combat abusive patent practices and maintain the 
capacity of our vigorous patent system.
    Thank you very much.
    [The prepared statement of Mr. Veloso follows:]
    
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    Chairman Vitter. Great. Thank you all very, very much for 
being here, for your testimony.
    Now, we will open it up for questions. I will start and we 
will proceed to our other Members here.
    Mr. Stoll, you mentioned near the beginning of your 
testimony the great classic American success story of Hewlett-
Packard starting in a garage, which was obviously decades ago. 
Do you think that sort of birth of enormous technology and not 
only a company, but eventually a whole new sector of our 
economy, is harder or easier to happen today as compared to 
when it happened decades ago?
    Mr. Stoll. I believe it is probably a little harder today 
than it was then, but I still think it is very possible. I 
think that you cannot bat down the entrepreneurial personality 
of the inventor. I think they will continue to invent. They 
will continue to try. I do think that it is harder for them to 
enforce their patents and to elbow their way into an already 
existing area. So, I think it is harder, but I still think it 
is something that we must advocate for, because it is the 
driver of job creation and economic growth in the United 
States. It is the next Facebook, the next Microsoft, the cure 
for cancer.
    Chairman Vitter. Right.
    Mr. Stoll. So, we must support them.
    Chairman Vitter. Right. Well, I certainly agree with that, 
and I certainly agree with your confidence in the spirit of the 
inventor and the entrepreneur. Unfortunately, given a lot of 
factors, I think it is much harder these days, not just a 
little bit.
    Do the other two witnesses have any gut reaction to that 
question?
    Mr. O'Shaughnessy. Yes, if I may. I tend to agree with you, 
Chairman. I think that the problems that exist today are multi-
variant. There are many different angles that are creating 
problems, not the least of which is global competition and, of 
course, the global economic downturn. So, as I commented, I 
think that we need to provide every opportunity that we can to 
the small developer, small innovator who needs every chance to 
get ahead. The system right now really is tilted toward the 
well entrenched. I think we need to reverse that. We need to 
give the small entrepreneur an opportunity to get ahead, and we 
can do that effectively with the right patent policy. But that 
is going to require some adjustment.
    I think that the trade secrets protection bill is a very 
good bill. I think it is a good step in the right direction. It 
is an important part of any IP portfolio. But, it will not do 
everything that is needed.
    Chairman Vitter. Okay. Mr. Veloso.
    Mr. Veloso. Yes. For the inventor at a university, doing 
work in a lab, who creates these discoveries for a university 
technology transfer office for a licensee at a start-up 
company, you know, patent litigation, patent enforcement is 
maybe down on the list in terms of their goals. Really, it is 
really prefaced on the idea of getting that technology out 
there from the lab to the marketplace. So, having an efficient 
system, removing roadblocks, these hurdles, I think, can make 
it more efficient for that transfer of discovery to take place.
    Chairman Vitter. And again, over time, now compared to 
decades ago, the Hewlett-Packard story, do you think it is 
easier or harder or the same to do that?
    Mr. Veloso. I think with things like IPRs, the rise of 
these patent trolls, it has become more difficult. However, 
given the increasing prominence, staffing, professionalism of 
university tech transfer offices, you know, awareness of this 
type of transaction, there are more mechanisms in place to ease 
that transfer of technology. But, definitely, the issues that 
are being raised here can stop that momentum.
    Chairman Vitter. I guess what I am getting at is my 
perception of the long-term trend is a trend in favor over 
several decades of the big guys, a trend against the small 
start-up innovator, entrepreneur. Do you agree that that is the 
long-term trend we have seen in the last several decades or 
not?
    Mr. O'Shaughnessy. I would invite your attention to the 
Founding Fathers and their approach. When the U.S. patent 
system was first envisioned, it was unlike any other patent 
system in the world. It was deliberately structured to give the 
exclusive right to inventors, not to corporations, not to 
members at court. It was different from the British system. It 
was dedicated specifically to promoting the progress of the 
useful arts. The initial fee structure was very deliberately 
set at a very, very low rate, because the Founding Fathers 
understood that it was important for innovation to take hold 
and for America to become an important player on the world 
industrial stage. And they recognized that this could only be 
done by promoting the progress of the useful arts by promoting 
innovation.
    And I think we have gotten away from that. The system as it 
exists today really does favor the well entrenched, the people 
who already have a market advantage. What we need to be doing 
is giving a market advantage to the young, nimble innovator who 
is just starting up, trying to get into the marketplace, trying 
to deal with situations where the economy is very tight, the 
investment opportunities are very limited. But if you do not 
have investment opportunities in today's world, you are just 
not going to succeed. You are not going to manage to get over 
the valley of death, as it is referred to.
    And, so, the patent system is the only resource that they 
have to produce something that can be seen as a tradable asset, 
something that they can show to investors and say, I have 
something. And even if my company fails, I have got something 
that can be sold later on down the pike to somebody else. So, 
this asset will endure, even though my company fails. That has 
tremendous value to investors.
    Chairman Vitter. Let me ask one more related question, then 
I will go to my colleagues. Considering this long-term trend, 
do each of you think passing something broad, very 
comprehensive, quote-unquote, ``broad based,'' like the Patent 
Act, would reverse that trend or continue or accelerate it?
    Mr. Stoll. I think it is just necessary in the climate that 
it be a large package, and that is because, first of all, we 
have got constituency groups supporting different pieces of it 
and each of them wants something included in this package. I 
think we need to recognize that. And I also think that the 
provisions relate to each other. What we are trying to do is to 
create an operable system with less problems for the small and 
medium-sized inventor, so that we need to take a look at 
different aspects of the system and make sure they work 
harmoniously together to advocate for just those types of 
people.
    For those two reasons, I do think a package is necessary, 
but I also think we need to look very carefully and very finely 
at the provisions to make sure we are not harming people that 
we are intending to hurt by unintended consequences.
    Chairman Vitter. Well, let me be clear. I am not talking 
about any package. I am talking about the general model of 
patent----
    Mr. Stoll. And I am talking the same, yeah, a large 
package.
    Chairman Vitter. Mr. O'Shaughnessy and Mr. Veloso.
    Mr. O'Shaughnessy. I must respectfully disagree. I think 
that the STRONG Patents Act, for example, is the proper 
approach at this time. The changes that we have seen through 
the AIA have been enormous. We are still very much in the dark 
as to what the AIA is going to do to our patent system. We 
probably will not know that really well for at least five to 
ten years. To now implement an even further and equally broad 
approach of legislative change, I think, would be an enormous 
mistake.
    What we should be doing right now is very, very carefully 
focused, tailored legislation that perturbs the system to only 
the most modest levels at this point in time, because 
investment requires certainty, requires predictability. And 
right now, we have, bless us, very little predictability in the 
patent system.
    Chairman Vitter. Mr. Veloso.
    Mr. Veloso. I agree. Targeted legislation really done after 
close examination would be the best way to go. Speaking from 
the aperture of a university patent holder licensor, or from a 
small company or start-up licensee, a broad overhaul would have 
these unintended consequences that could adversely affect their 
ability to carry out their mission and do their business.
    Chairman Vitter. Okay. Thank you.
    Senator Hirono.
    Senator Hirono. Thank you very much, Mr. Chairman, and I 
thank the panelists for your testimony.
    I was a member of the U.S. House when we were debating AIA 
and I had serious concerns then about the impact of AIA, 
particularly on small inventors, and I was one of the handful 
of House Members who voted against that bill.
    I have continuing concerns about the changes that we are 
contemplating to patent law because I do think that, as Mr. 
Stoll has said, we have to get this right, and this is a very 
specialized area of the law. This is why we have lawyers who 
totally specialize on patent law. I do not happen to be one of 
them, but I certainly listen to the concerns that have been 
expressed, not only by the three of you as to what we are doing 
with patent legislation, but with many others. So, I share your 
concerns about getting this right.
    Mr. Veloso, representing the university research community, 
one of the suggestions made as we were dealing with the patent 
bill when I used to serve on the Judiciary Committee was, well, 
why do we not just carve out the university research community 
from having to live with some of the contemplated changes. 
Would you support the legislation if the university research 
community was left alone?
    Mr. Veloso. Senator, I am unfamiliar with that particular 
carve-out for universities. Certainly, as Johns Hopkins is one 
of the largest----
    Senator Hirono. Well, it was contemplated. You know, as we 
try to garner support for various pieces of legislation, people 
who come forward and express concerns about the provisions of 
the legislation, sometimes it will be suggested, well, we will 
just take care of you folks by leaving you alone, and it was 
certainly discussed that we should hold harmless, basically, 
the university community, and whether or not that actually made 
it as a change to the legislation.
    But, a contemplated process or a strategy of that sort, 
would you support, in light of our concerns about supporting 
innovation in our country?
    Mr. Veloso. I think holding university patent holders on 
the same level as any other patent holder, be it the individual 
inventor or a large corporation, is a fair thing to do. You 
know, should any changes be proposed, particularly as it would 
affect a university, I think it is worth further examination.
    Senator Hirono. Does anybody else want to comment about 
various carve-outs?
    Mr. Stoll. I am against carve-outs because I do not think 
they are good for the system. I think what we need to do is to 
look at provisions and make sure they are good for everyone. I 
think that is a very strong concern.
    I am--I have even got questions with respect to focusing on 
trolls. I do not know who a troll is anymore. Is it an 
operating company that does not use a series of patents and 
does not--developing them? Is it, you know, is it a university, 
as it is sometimes called? So, I think what we need to do is to 
look to get rid of parts of the system that are problematic, 
but problematic for anyone. I do not--I think we need to look 
at it in a comprehensive manner.
    Senator Hirono. Do you wish to comment, Mr. O'Shaughnessy?
    Mr. O'Shaughnessy. I absolutely agree. LES has a great many 
university members and I think most of them would agree with me 
that no man is an island and no member of the IP community is 
an island. We cannot divorce one sector of that community from 
the other. And, I certainly agree with Mr. Stoll that the 
system has to work for everybody equally. The moment we indulge 
in carve-outs, then we get into a great deal of difficulty and 
gamesmanship involving definitions and what constitutes a 
university or an institute of higher education or a troll or 
what have you. I just do not think that is a healthy way to go.
    Senator Hirono. So, I recognize that other countries have 
patent laws, China, there were other countries cited. So, do 
they look at what we are doing with our patent laws, and does 
it have--if we make certain changes to our patent laws that 
could disadvantage innovation in our country, is that something 
that countries such as China and Japan or any other countries, 
is that what they--do they look at what we are doing and does 
it--do we also have to pay attention to what the effect of 
changes we make to our patent laws would have on an 
international global marketplace?
    Mr. Stoll.
    Mr. Stoll. Absolutely, they look to what we do, and we need 
to be very careful what we do, because they will do it in a 
manner that advantages their own domestic folks and harm 
American industry. So, whenever we take action, they do not 
necessarily take the exact same action, but they are looking 
very closely at what we are doing and they are looking at how 
they could still meet their treaty obligations under TRIPS, but 
try to do it in a manner that advantages the domestic industry 
over United States industries.
    Senator Hirono. And the other two. You do not have to. I am 
already finished with my time, but would you agree with that 
concern, the two of you?
    Mr. O'Shaughnessy. Yes, absolutely.
    Senator Hirono. Thank you.
    Mr. Veloso. I agree, as well.
    Senator Hirono. Thank you, Mr. Chairman.
    Chairman Vitter. Thank you.
    Senator Gardner.
    Senator Gardner. Thank you, Mr. Chairman, for holding this 
hearing today, and thank you to the witnesses for joining us, 
as well, and sharing your expertise.
    Colorado, since the recession, just ended 71 percent growth 
in employment in Colorado. Our growth rate has been--excuse me, 
unemployment and our growth rate since the recession. About 25 
percent of Coloradans who are employed own their own business 
in Colorado, and if you look at the number of start-ups in the 
last three years or so, about 17 percent of employees in 
Colorado are in a start-up business that has only been around 
for three years or less. So, it is a very innovative state and 
we are excited about the new Patent Office that has opened up 
in Denver. Obviously, with the great research universities that 
we have, start-up culture that we have in Colorado, it is an 
ideal place to have a conversation about what we can be doing 
even better in terms of patent, patent protections, and the 
innovative economy that we want to drive to in the next 
incoming decade.
    But, I want to start with Mr. O'Shaughnessy talking a 
little bit about some of the challenges we see in current 
patent issues, talking specifically a little bit about venue 
when it comes to patents. I would just love to get your advice 
and your take on this.
    Five dozen Colorado businesses have been sued in the 
Eastern District of Texas, a single district that is now home 
to 44 percent of all patent lawsuits in this country. And, so, 
my question is, why are small businesses in Colorado and across 
the country being sued in Texas over these patent issues?
    Mr. O'Shaughnessy. Well, unfortunately, I think, it is the 
nature of our system that district courts have a certain amount 
of latitude in terms of how cases are decided, and as it turns 
out, the Eastern District of Texas seems to be a particularly 
pro-patent court that those who are engaging in patent abuse 
find to be a favorable venue. The venue provisions of our 
federal law and our patent law, in particular, give a fair bit 
of discretion to the patentee. There has been some proposals to 
change that, as well, and I think that might be a targeted 
approach that might be worthwhile.
    But, you know, I think that the changes that are taking 
place in precedent, in particular, and by that I am referring 
to the changes in the ability to get attorney fee awards, has 
changed the attitude even in the Eastern District of Texas. 
Judge Gilstrap has just recently made an enormous award and 
with a single swipe of his pen dispensed with 160 patent cases. 
And, obviously, that was an abusive litigation situation. Judge 
Gilstrap, I think, did the right thing. He identified abusive 
behavior. He assessed the individuals in front of him, the 
parties, assessed the merits of the case, and he awarded 
attorneys' fees. I think that that is the track that we are on. 
We are moving in the right direction.
    Senator Gardner. In 2015, we saw, and perhaps you discussed 
this earlier, the greatest number of patent disputes in 
history. Nearly two-thirds of patent litigation last year came 
from non-practicing entities more commonly referred to as 
trolls. According to research, over half of the victims of 
frivolous lawsuits made less than $10 million in annual 
revenue. What can or should we do to protect small businesses 
in Colorado and elsewhere from unnecessary costly lawsuits?
    Mr. O'Shaughnessy. Well, I think that we should let the 
precedent take hold. We should let judges do what judges do 
best, and that is assess the behavior of the people in front of 
them. Now, the numbers that you are citing, I think, are 
largely attributable to the changes of the AIA, which require 
patent assertion entities, or trolls, or whatever you choose to 
call them, to bring lawsuits only against a single party. What 
used to be a single lawsuit which might have involved 10 or 15 
or 20 defendants, now they have to bring 10 or 15 or 20 
different lawsuits. So, that has increased the number of 
lawsuits dramatically.
    So, I think that there is a little bit of misperception 
when we cite mere numbers of lawsuits. What I think we really 
need to look at is what is going on with innovation and whether 
or not our patent system is actually furthering innovation and 
meaningful patents are getting to the courthouse and getting 
decided.
    Senator Gardner. Mr. Stoll, Mr. Veloso, on either of those 
questions, would you like to comment?
    Mr. Stoll. Yes. I believe that the Patent and Trademark 
Office does a great job, but I think they need full access to 
their funds and more training and more time for the examiners 
to do a better job on the applications coming out the door. If 
the quality of the patent is improved and if there are well-
bounded and clear claims, then there is a legitimate case when 
you are bringing it against someone else. So, I think that 
improving and providing for the Patent and Trademark Office, 
which is trying to do a great job, will reduce the number of 
frivolous cases.
    And I agree with Mr. O'Shaughnessy that frivolous cases 
should be penalized and attorneys fees, and I think there are 
many other little pieces that can be added to the system that 
improve the life of the small inventor.
    Senator Gardner. Mr. Veloso, I have run out of time, so, 
Mr. Chairman, is it okay if he----
    Chairman Vitter. Sure. Go ahead.
    Mr. Veloso. I agree. Frivolous lawsuits really take away 
from the mission of these small start-up companies with very 
fixed budgets and a strict goal.
    Senator Gardner. Thank you, Mr. Chairman.
    Chairman Vitter. Thank you.
    Senator Coons.
    Senator Coons. Thank you, Chairman Vitter, for convening 
yet another vital and important hearing of this Small Business 
Committee, as you said in your introduction, the first in 
decades to--the one you convened last year was the first in a 
half-century to tackle this important issue of the impact of 
intellectual property and, in particular, patents on small 
business. I thought it was the best, and, sadly, also the only 
balanced hearing on the question of patents, patent reform, and 
small business that we had last year, and I am grateful that 
you continue your energy and engagement. We have a fantastic 
panel today, so forgive me for a moment if I comment on the 
range of things you have already touched on.
    Mr. O'Shaughnessy, you commented on how the patent system 
is the great equalizer, but it only remains the great equalizer 
if it is strong, if it is possible for this constitutionally 
created property right to be asserted successfully by those who 
are legitimate inventors and entrepreneurs. And, as I think we 
all know, patents strike a delicate balance between 
incentivizing innovation and promoting collaboration. Several 
of you spoke about the transition to trade secrets away from 
patents because of some of the, I think, very disturbing trends 
in PTR IPR.
    Some in Congress have come to the conclusion that a 
particular aspect of our current patent system, abusive demand 
letters, that does need curbing, demands a fundamental overhaul 
of the entire system, and I think, as you know, through the 
Strong Patents Act, which Chairman Vitter and I have 
cosponsored and which I am very grateful for the persistent 
support and advocacy of Senator Hirono, proposes a different 
path forward, one that is more balanced.
    It ensures that we streamline pleading requirements, which 
is a progress that has already been made, that empowers the FTC 
to go after those who send deceptive demand letters and tackle 
some of the abuses of the post-grant system at the PTO. As was 
commented before by Mr. Stoll, when a hedge fund can erase 
millions of dollars in investor capital by simply filing a 
post-grant challenge solely for the purpose of profiting from 
shorting the stock, it is time for Congress to act.
    My bill would also end fee diversion from the Patent and 
Trademark Office, something I have passionately advocated for 
for many years.
    My home State of Delaware has a long history of paving the 
way for inventors to transform ideas into patents and then into 
practice, and from garage tinkerers to major multi-national 
companies, we have to have a system that is just the sort of 
great equalizer about which you have spoken.
    So, I look forward to continuing to work with my colleagues 
on a bipartisan basis to enact meaningful and targeted reforms 
to our patent system that will retain its strength and 
greatness without destroying some of its most fundamental 
provisions.
    So, let me just ask three questions, if I might. Mr. Stoll, 
in your testimony, you note the strikingly high percentage of 
claims that are now being invalidated in front of the PTO in 
post-grant procedures. Can you explain to the committee why 
this is particularly problematic to small businesses.
    And then, second, I am going to ask Mr. O'Shaughnessy, if 
you might, to also comment on how the dangers of overly broad 
patent reform affect start-ups and small businesses at a higher 
rate and how these post-grant review processes at the PTAB, at 
the Patent Trial and Appeal Board, also really are posing a 
significant threat to small and start-up businesses?
    Mr. Stoll.
    Mr. Stoll. Yes. I do believe that there needs to be some 
sort of reform, whether that be legislative or initiated at the 
Patent and Trademark Office, because a disproportionate number 
of patents coming out of the Patent Office are being 
invalidated at the PTAB. So, I think that there are some 
significant problems for patent holders and it does seem to be 
tilted against them. And maybe we need to rightsize this ship a 
little bit.
    The PTO has the capability of allowing for more liberal 
amendment of the patent when it is before them again to be able 
to avoid some problems that were unforseen at that time. I 
think that is something that the PTO can do right now and 
should be doing right now.
    I think there are many other provisions that need to be 
looked at very carefully to make sure that the impact is such 
that we level the playing field again. It seems to--I mean, 
there have been judges--Judge Rader called it the killing 
fields of patents at the PTAB. I think it is getting better. I 
think they are looking at their procedure. I think they were 
very concerned with the statutory obligation to conclude the 
system within one year, with an unusual extension of six months 
in unusual cases. But I think they are now looking at the 
different pieces of it and trying to be fairer and I think 
things are moving in the right direction.
    Senator Coons. I have limited time. If I could just ask Mr. 
O'Shaughnessy and Mr. Veloso to focus on the question of the 
potential danger to universities and tech transfer, to small 
businesses and start-ups, of over-broad patent reform as 
proposed by litigation that is currently in front--excuse me, 
legislation that is currently in front of the Senate and House.
    Mr. O'Shaughnessy. Well, I would certainly agree with Mr. 
Stoll. I think the Patent Office does a very good job. I think 
the IPR process is being implemented in a way that is 
counterproductive for small companies now. One of their 
principal assets is their intellectual property portfolio. Even 
though it is duly issued by the Patent Office, it has that 
stamp of approval, the Patent Office is presumed to have done 
its job, now a third party can come along, throw that patent 
back into an IPR proceeding. It goes back to the same standard 
of review that it got before it was even issued and the patent 
owner now has to fight that battle and then go back to court, 
if necessary, and it bleeds the patentee.
    Senator Coons. Can I focus you on the risks to small 
businesses of over-broad patent reform legislation?
    Mr. Veloso.
    Mr. Veloso. Sure. You know, for universities and even 
start-up companies, especially start-up companies, you simply 
do not have the resources, extensive litigation budgets, 
expertise, personnel to combat these effects of over-broad 
patent reform. Things like fee shifting, joinder, you know, 
that would be just areas of which, at least from the 
universities' perspective, we are not equipped to handle.
    Senator Coons. Mr. Chairman, I see I am over time, but if 
you will just allow me one quick comment.
    Chairman Vitter. Sure.
    Senator Coons. This was an amazing panel. There are many 
Senators who are quite busy with other hearings, as you saw me 
run out and run back. Your testimony about how changes are 
occurring at the Supreme Court, in filing standards, in the 
practice at PTO, in the management of cases by lower courts, 
all suggest, you unanimously testified, that we should not rush 
forward with over-broad patent reform. I think that is a very 
important point. I appreciate your making that before this 
committee today.
    Thank you, Mr. Chairman.
    Chairman Vitter. Thank you.
    And next is Senator Ayotte.
    Senator Ayotte. Thank you, Chairman.
    I wanted to follow up on the questions that Senator Coons 
had asked. In New Hampshire, we are very proud to be home of a 
great inventor, Dean Kamen, who not only invented the Segway, 
but the infusion pump and many other products that he is 
working on that are incredible, life saving, and 
transformative. And, you know, he and I have had a lot of 
discussions about the pending legislation around here, and what 
I worry about, when you talk about the implications of over-
broad patent reform, one of the things that distinguishes us 
from other countries is really our strong patent system. This 
is why this is the place for innovators and inventors like Dean 
Kamen.
    And, so, not only the cost, as you think about the cost on 
a university, I mean, the university is actually a larger 
institution. Johns Hopkins is a larger institution that can 
defend against litigation. You have said, well, we cannot 
defend against it because we do not have all these resources if 
you cannot--if your patent is challenged and it is an over-
broad ability to challenge it.
    So, how about somebody like Dean, because, you know, Dean 
is obviously quite an individual now who started first robotics 
and--but when he started out, he was just like so many 
brilliant people in our country with a great idea that, 
obviously, was able to seek a patent for it and then many other 
patents after that. So, what happens to that brilliant American 
idea if we think about that and they are not a part of a big 
entity? Help us understand the implications of over-broad 
patent reform to that and to the innovators of the world and to 
the innovators in America.
    Mr. Veloso. Yes, definitely. You know, to the extent that a 
university faces these challenges and a small start-up would be 
effective, as well, definitely, the individual inventor, the 
Dean Kamens or even those, you know, tinkering in their garage 
right now, you know, simply would not have the resources, 
expertise, capability to face that. To the extent that these 
challenges could discourage further innovation, that would be a 
very bad thing.
    Senator Ayotte. And also, as you think about it, does it 
not advantage the bigger entities? So, could it not force 
people like Dean to have to go to a bigger entity, who actually 
may not have the same interest for some competitive reason to 
develop new products or life saving products? So, in some ways, 
do we not end up with more of a sort of benefiting the big 
entities versus the little guys in all of this if we are over-
broad in what we do? Does anyone want to comment on that?
    Mr. O'Shaughnessy. Yes, absolutely. I think, once again, we 
are talking of a property right. Property rights often endure 
over generations. If property rights are not predictable, 
reliable, and durable, then investors will not invest and the 
little guys have a very difficult time weaving their way 
through a minefield that is constantly changing. And, so, I 
think predictability is the key here, and when we change the 
system and then a couple of years later change the system 
again, we are making it very, very difficult for the small 
entrepreneur to figure out how to get ahead.
    Mr. Stoll. I do not necessarily think that this is a big 
entity versus small entity type of thing. I really believe that 
the larger companies recognize that the independent inventors 
are more flexible and more willing to take risks and can 
develop really breakthrough technology. And I think that they 
want them to continue to do that so that they can either 
license or buy it or--so, I think that everyone is interested 
in making sure that we do not have overly broad patent 
protection, I mean, patent problems. And, I think, Dean himself 
is pretty large at this point with his many different----
    Senator Ayotte. Well, he has gotten large----
    Mr. Stoll. Yes, he has.
    Senator Ayotte [continuing]. But had he not had the 
opportunity to start out with who he was, I mean, he is the 
American dream, right?
    Mr. Stoll. Yes.
    Senator Ayotte. He is the guy who starts out in his garage 
and now he is big, for sure. But, you know, he feels very 
passionate about making sure that the next and current 
generation of Dean Kamens and those who are the dreamers and 
the inventors have their property rights protected so that they 
can have opportunity to thrive.
    As I think about this, though, as we look at some of the 
things that are being floated around here, is there not a much 
more narrow way to get at these issues, you know, the bogus 
litigation issues that actually impact all, that concern all of 
us, you know, patent trolls, and it seems to me--do you all 
think that there is a much narrower way for us to get at that 
than some of the proposals that are out there right now?
    Mr. O'Shaughnessy. Well, yes. I think, as I said, the 
STRONG Patents Act, I think, is a very good start. If we are 
going to go anywhere with legislation right now, that is the 
place to go. It has got very narrow provisions that are focused 
at the actual problems that are being exploited by those who 
abuse the patent litigation system. And it has been, as far as 
I understand it, has been compiled and drafted with input from 
the user community, and I think it is a good, prudent, narrow, 
tailored way to go. But, the broad overreaching approach at 
this time, where there is so much uncertainty in the patent 
world, is not a prudent way to proceed.
    Senator Ayotte. Well, I want to thank all of you for being 
here. I appreciate it, and I thank the Chairman for having this 
hearing.
    Chairman Vitter. Thank you.
    And next is Senator Cantwell.
    Senator Cantwell. Thank you, Mr. Chairman, and thank you 
for having this important hearing, and thank you to our 
witnesses.
    I think somebody might have touched on this earlier, about 
resources, but I just want to clarify. We still take money out 
of the Patent Offices, right, for other aspects of the budget?
    Mr. Stoll. It is looking that way. The money is 
appropriated back to the Patent and Trademark Office. All the 
funds do come from user fees.
    Senator Cantwell. But they are not all used by the Patent 
Office----
    Mr. Stoll. I am very--well, there is a revolving fund at 
the moment, but I am very concerned that the PTO have access to 
all of its fees all of the time. And, you know, there are no 
assurances in the future----
    Senator Cantwell. Yes.
    Mr. Stoll [continuing]. That they will be getting all of 
their fees.
    Senator Cantwell. Hear, hear. Hear, hear. We live in an 
information age. This is about the age of creativity. This is 
about how fast we can move. And if we cannot move because we do 
not have the legal side down, then we are going to constrain 
ourselves. So, it is time to make sure the Patent Office keeps 
its fees. Okay.
    Second, the America Invests Act. I was not a supporter for 
a couple of different reasons. I am not a first to file person. 
I am--first of all, I want the money to stay in the Patent 
Office. I want people who are the inventors of patents to have 
good legal frameworks behind it. I do not want big corporations 
coming in and having a more predominant foot approach to 
stepping on the small inventors. What problems have we seen or 
challenges have we seen since the implementation of the America 
Invests Act?
    Mr. O'Shaughnessy. Well, not to be glib, but one of the 
things I observe about the America Invents Act is that in an 
attempt to harmonize with the rest of the world, which is the 
first to file system, whereas we were the first to invent 
system, we went to a system that nobody else in the world has 
ever used in history, and much of the uncertainty that derives 
of the AIA is the attempt to make that system work, both in 
terms of harmony with other systems and with the legacy of our 
old system.
    And, so, now we are struggling with implementing the AIA, 
with new standards, new principles, new philosophies of 
intellectual property law that never existed anywhere else. It 
is going to take a long time. So, let us not perturb the system 
further.
    Senator Cantwell. Well, could we do something to alleviate 
that? I mean, I applaud the Chairman for having this hearing, 
because much of this discussion has taken place, say, for 
example, in the Judiciary Committee, which I think has been a 
little more captured by the larger business interests than the 
small business inventor side of the equation. So, are there 
things that we could do to help in streamlining this 
particularly?
    Mr. Stoll. I would agree with Mr. O'Shaughnessy. We are not 
currently a first to file system. It is basically a first to 
file or disclose system. So, I think what we need--and then 
there is a question, is, how close the disclosure has to be to 
the end patent claim that you have not even written at the time 
you are disclosing.
    So, I think what we need to do is take a look at those 
provisions and see if we cannot find a mechanism to make the 
university folks happy with collaborating again and disclosing 
again, and I think that is something that they would greatly 
appreciate.
    Senator Cantwell. Yes, Mr. Veloso.
    Mr. Veloso. We definitely see that from the university 
perspective. It is at this juncture where the need to publish 
for the university comes in contact with this desire to file 
patents. To the extent that the two begin to become in conflict 
with one another, I think that is where this sort of 
reconciliation from first to file and first to invent needs to 
be addressed.
    Senator Cantwell. And how would you do that?
    Mr. Veloso. I do not know right at this time.
    Senator Cantwell. Mr. O'Shaughnessy, do you have any 
thoughts on that?
    Mr. O'Shaughnessy. Well, unfortunately, I think the die is 
cast.
    Senator Cantwell. I do not--I do not know that it is. I 
think this panel is illuminating, just in the question--as I 
said, the Chair had this hearing, which I think is very 
important. I think the side of the story that did not get told 
is the side of the small inventor, and I think a lot of my 
colleagues rushed to assume that when you are talking about 
technology, that if it is an Oracle or someone else that--and I 
mean the company--says, you know, or an IBM or something, that 
that is the understanding of technology on Capitol Hill. It is 
not. Technology is not owned by them, and, in fact, oftentimes 
they are the very people who want to hold down or take 
advantage of the small inventor because they think it is 
annoying to pay them a royalty.
    Well, we had a very delicate balance and we have upset that 
balance, and we have done so at the precipice of this 
information age, where we want a thousand flowers to bloom. So, 
I just hope that we will not think of it as the die is cast, 
but, like, be vigilant, as the Chairman is, about this issue of 
small business impact on patents so that we can get it right, 
because we do not want to discourage innovation. We want to 
encourage it. We want people to have access to capital. We want 
their patents protected. We want this to move forward. And we 
want you to have the money to run the Patent Office.
    Thank you, Mr. Chairman.
    Chairman Vitter. Thank you.
    We have some time, so I am going to have another round, at 
least for myself, with a question and comment, and then I will 
invite any others who would like to participate.
    One of the most frightening statistics and facts I have 
seen in all this discussion is the significant decline in the 
value of patents, and that has got to mean something, and that 
has got to mean something bad that is related to what we are 
talking about. There is some dispute about what that decline 
is. How significant is that decline, number one? Number two, 
what is going on?
    Mr. Stoll. Well, at least one of the issues relates to the 
narrowing--the recent narrowing by the Supreme Court on patent 
subject matter eligibility, which would affect personalized 
methods, diagnostics, and software, the ability to patent and 
protect computer implemented programs. So, what we are seeing, 
many of these inventions are developed by small and independent 
inventors, but there is no certainty with respect to whether or 
not they are going to be able to protect those claims and they 
are having trouble attracting entrepreneurial investors to 
develop the product because those investors are not certain 
that they are going to--that those inventors are going to have 
valid patents. So, it is really causing a significant problem 
in these, particularly the emerging technology areas, where we, 
as the United States, are really doing phenomenal things.
    So, I think that something--hopefully, the courts, the 
Supreme Court has a couple of opportunities coming up, one with 
Ariosa v. Sequenom and another with Planet Blue, to revisit 
some of these standards, and hopefully, they will recognize the 
impact on our inventors and do something that is more 
rationalized so that we are no longer the narrowest subject 
matter eligibility country in the world.
    Chairman Vitter. Anyone else?
    Mr. Veloso.
    Mr. Veloso. Yes. We have seen this devaluation of patents, 
particularly on the diagnostic side, just given the recent 
decisions that Mr. Stoll mentioned. You know, for universities, 
academic medical centers, being able to license diagnostic 
technologies to companies is a very key part of our technology 
transfer function. Now, we have seen a shift away from 
diagnostic licensing into other areas.
    Chairman Vitter. Okay.
    Mr. O'Shaughnessy.
    Mr. O'Shaughnessy. Yes. I think the--thank you, Mr. 
Chairman. The valuation problem is driven primarily by two 
things, in my view, and one is, as Mr. Stoll mentioned, the 
eligibility requirements. We have dramatically reduced our 
patent eligibility standards and the rest of the world is 
enlarging theirs. At the same time, durability and the 
sustainability, the reliability, and the enforceability of 
patents has gone down, and the ability to drag a patent out of 
the realm of issued and valid patents and bring it back into 
the Patent Office has called into question their durability and 
their enforceability. So, if we had broad legislation that made 
it much more difficult to enforce our patents, that would drive 
patent valuation down even further.
    Chairman Vitter. Okay. Let me end with a, I guess, an 
editorial comment. I am really concerned about the long-term 
trends we are seeing, and the last thing I want to do is add to 
or accelerate that. I think we need to be reversing that.
    And to me, it is part of an even broader trend in American 
society in favor of bigger and bigger and bigger--big 
government, big business, mega-banks, mega-entities, and 
against the smaller outsider innovator. To me, that is a very 
un-American trend. I think the Founders would be--and maybe 
are--rolling in their graves. And one way they actually 
expressed that very specifically is what we are talking about, 
patents. That is in the Constitution. I mean, that is a 
pretty--when you think about it, that is a very real world term 
and set of issues that was put in a very elevated document, and 
it is because it is, as Mr. O'Shaughnessy pointed out, a 
fundamental property right and very central to their notion of 
innovation and opportunity, which is ultimately freedom, 
concepts about freedom.
    So, I really hope all of us, including all of the Congress, 
does get this right and acts in a targeted way through measures 
like Senator Coons' measure, which I am a cosponsor of, to 
reverse this long-term trend, certainly not to continue or 
accelerate it.
    With that, I would be happy--Senator Hirono, if you would 
like a second round.
    Senator Hirono. Yes, I would, very briefly.
    Thank you very much for mentioning that. We are actually 
narrowing the subject matter eligibility for awarding of 
patents and at the same time contemplating legislation that 
would make it much harder to defend the patents that are 
issued. So, a lot of the eligibility, subject matter 
eligibility narrowing is happening in the courts and in the 
Patent Office itself, correct?
    Mr. O'Shaughnessy. That is right.
    Senator Hirono. Is there something that we can be looking 
at legislatively to express our concerns about this particular 
trend?
    Mr. Stoll. I think by holding hearings, just like this, to 
question the issues. I am sure that the Justices notice that 
there is an interest in the Senate and in the House on these 
issues. So, I think that that helps draw attention to it.
    I believe there are cases that are coming up through the 
court system right now that are getting ripe for the Supreme 
Court to look at this again and maybe have more of a bent 
towards the importance to our economy and job creation that 
their decisions in this particular area are affecting. And, 
maybe if they do not, at that point, we may need to be 
discussing actual legislation relating to 35 U.S.C. 101 to make 
it clear that it is the intent of the Congress that we not so 
narrow the subject matter eligibility issues.
    But, I think you are seeing stuff starting to happen in the 
courts. The Patent and Trademark Office is doing several 
iterations of their guidelines on these decisions. They are in 
and of themselves, and actually stated in the decisions, to be 
narrowly construed. The problem is that some of the lower 
courts are applying them in manners that are causing a lot of 
very important inventions not to have patent protection.
    Senator Hirono. Does anyone else want to comment briefly?
    Mr. O'Shaughnessy. It is difficult for me in the context of 
this hearing to assess whether or not legislation could solve 
the problem. I do believe that the Patent Office, for example, 
is over-interpreting the Supreme Court precedent. Justice 
Thomas in the Myriad decision bent over backwards, it seems to 
me, to say, do not over-interpret this decision. This is 
defined and limited to human DNA and whether or not unperturbed 
human DNA should be patentable. Consequently, however, I think 
the Patent Office has gone way beyond that with their 
guidelines.
    I am not sure that legislation is the way to approach it, 
but I agree with Mr. Stoll that hearings and communications 
with the PTO are a very effective and important way to proceed.
    Mr. Veloso. I agree, giving voice to the effects of that. 
You know, as I mentioned, particularly on the diagnostic side, 
we are seeing companies who are being affected because their 
core intellectual property has been devalued. We are seeing 
small--we are seeing less small start-ups in the diagnostic 
realm because of this uncertainty around the patent position. 
And, my fear would be that this would trickle down to the 
individual inventor, to the researcher, who would decide not to 
pursue an area because they just see this uncertainty ahead.
    Senator Hirono. One more question for Mr. O'Shaughnessy. 
You said that you have an LES standards initiative to bring 
together the various parties and interests. What is the time 
frame for your initiative----
    Mr. O'Shaughnessy. Well----
    Senator Hirono [continuing]. To come up with some 
suggestions? Sorry for interrupting.
    Mr. O'Shaughnessy. Thank you, Senator. The LES standards 
initiative really is still a bit in its early stages. We are 
recruiting members. We are being very diligent about trying to 
get all voices from all quarters of the IP community, as I 
said, including financiers, valuation experts, even entities 
that might be considered pure patent assertion entities. We 
feel that this has to be an open and inclusive procedure. But, 
we want to create a body of standards that are not just 
guidelines, are not just codes of conduct. These will be 
standards that organizations will agree to abide by, just as 
they do with the ISO standards that are commonly used in 
manufacturing today.
    The time line, I cannot say that we have a firm time line. 
Our objective is to start moving and drafting meaningful 
standards certainly by the end of this year.
    Senator Hirono. Thank you. Thank you, Mr. Chairman.
    Chairman Vitter. Okay. Senator Cantwell.
    Senator Cantwell. Just one question as it relates to the 
inter partes review process and biotech. Do you think we need 
to make changes there? We have had, like, 70 percent of these 
patent cases overturned, and is there something that you would 
suggest would be a better review of biotech patents?
    Mr. O'Shaughnessy. Yes. I certainly think that we need to 
change that standard to make it equivalent to what is used in 
the district courts. These are issued patents that we are 
talking about. They are entitled to a presumption of validity. 
We should assume the Patent Office has done its job. And once 
the patent issues, it is entitled to a statutory presumption of 
validity. We open up the door for somebody to drag it back into 
the Patent Office and reopen prosection. This is enormously 
unfair to every patent owner, not just the small entity, not 
just biotech. It is everybody. And, unfortunately, I think, 
because of their vulnerabilities, small businesses are 
especially susceptible to these proceedings. But, I think it 
casts a pall upon the entire system.
    Senator Cantwell. Why is this happening? I mean, obviously, 
because we have this inter partes review process and we need to 
change it, correct? Is that----
    Mr. O'Shaughnessy. That is right.
    Senator Cantwell. Thank you.
    Mr. O'Shaughnessy. It is an artifact of the AIA.
    Senator Cantwell. Thank you. Thank you, Mr. Chairman.
    Chairman Vitter. Okay. Thank you.
    Thanks to all of you very much. I think this conversation 
was really, really productive and important. Like Senator Coons 
and some others, I have been frustrated with the broader 
discussion, and we are both on the Judiciary Committee. I think 
the discussion over there has been very imbalanced, quite 
frankly, and I have been frustrated by that. I think we have 
had a very balanced discussion, including today, in Small 
Business, and we do need to get this right. This is really 
important. It is--again, I point to it being in the 
Constitution in terms of its significance and the significance 
even the Founders understood, and it is important for our 
economy and for our future. So, thank you all for being an 
important part of this discussion.
    With that, the hearing is adjourned.
    [Whereupon, at 11:20 a.m., the committee was adjourned.]

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