[Senate Hearing 114-832]
[From the U.S. Government Publishing Office]


                                                       S. Hrg. 114-832

                THE IMPACT OF ABUSIVE PATENT LITIGATION
                   PRACTICES ON THE AMERICAN ECONOMY

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

                                HEARING

                               BEFORE THE

                       COMMITTEE ON THE JUDICIARY
                          UNITED STATES SENATE

                    ONE HUNDRED FOURTEENTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 18, 2015

                               __________

                           Serial No. J-114-8

                               __________

         Printed for the use of the Committee on the Judiciary
         
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                    U.S. GOVERNMENT PUBLISHING OFFICE                    
47-422                     WASHINGTON : 2023                    
          
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                       COMMITTEE ON THE JUDICIARY

                  CHARLES E. GRASSLEY, Iowa, Chairman
ORRIN G. HATCH, Utah                 PATRICK J. LEAHY, Vermont,       
JEFF SESSIONS, Alabama                   Ranking Member
LINDSEY O. GRAHAM, South Carolina    DIANNE FEINSTEIN, California
JOHN CORNYN, Texas                   CHARLES E. SCHUMER, New York
MICHAEL S. LEE, Utah                 RICHARD J. DURBIN, Illinois
TED CRUZ, Texas                      SHELDON WHITEHOUSE, Rhode Island
JEFF FLAKE, Arizona                  AMY KLOBUCHAR, Minnesota
DAVID VITTER, Louisiana              AL FRANKEN, Minnesota
DAVID PERDUE, Georgia                CHRISTOPHER A. COONS, Delaware
THOM TILLIS, North Carolina          RICHARD BLUMENTHAL, Connecticut
            Kolan L. Davis, Chief Counsel and Staff Director
      Kristine Lucius, Democratic Chief Counsel and Staff Director
                           
                           
                           C O N T E N T S

                              ----------                              

                       MARCH 18, 2015, 10:02 A.M.

                    STATEMENTS OF COMMITTEE MEMBERS

                                                                   Page

Grassley, Hon. Charles E., a U.S. Senator from the State of Iowa.     1
    prepared statement...........................................    48
Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont.     3
    prepared statement...........................................    51

                               WITNESSES

Witness List.....................................................    47
Anderson, Steven E., Vice President and General Counsel, Culver 
  Franchising System, Inc., Prairie du Sac, Wisconsin............    10
    prepared statement...........................................    53
Crum, Michael R., D.B.A., Vice President for Economic Development 
  and Business Engagement, Iowa State University, Ames, Iowa.....    12
    prepared statement...........................................    59
Gupta, Krish, Senior Vice President and Deputy General Counsel, 
  EMC
  Corporation, Hopkinton, Massachusetts..........................    13
    prepared statement...........................................    67
Powers, Brad, General Counsel, KINZE Manufacturing, Inc., 
  Williamsburg, Iowa.............................................     6
    prepared statement...........................................    85
Sauer, Hans, Ph.D., Deputy General Counsel for Intellectual 
  Property, Biotechnology Industry Organization, Washington, DC..     8
    prepared statement...........................................    89

                               QUESTIONS

Questions submitted to Michael R. Crum, D.B.A., by Senator Perdue   111
Questions submitted to Krish Gupta by Senator Grassley...........   112
Questions submitted to Hans Sauer, Ph.D., by Senator Perdue......   114

                                ANSWERS

Responses of Michael R. Crum, D.B.A., to questions submitted by 
  Senator Perdue.................................................   116
Responses of Krish Gupta to questions submitted by Senator 
  Grassley.......................................................   124
Responses of Hans Sauer, Ph.D., to questions submitted by Senator 
  Perdue.........................................................   134

                MISCELLANEOUS SUBMISSIONS FOR THE RECORD

Submitted by Senator Coons:
    Association of American Universities (AAU), Washington, DC, 
      statement..................................................   144
    Association of Public and Land-grant Universities (APLU), 
      Washington, DC, statement..................................   145
    Biotechnology Industry Association (BIO), Washington, DC, 
      statement..................................................   146
    Innovation Alliance, Washington, DC, statement...............   149
    Medical Device Manufacturers Association (MDMA), Washington, 
      DC, statement..............................................   147
    National Venture Capital Association (NVCA), Washington, DC, 
      statement..................................................   143
    New York Intellectual Property Law Association (NYIPLA), Fort 
      Lee, New Jersey, a paper addressing the pleading 
      requirements in patent infringement cases following 
      enactment of the Federal Judicial Conference recommendation 
      to abrogate Form 18 of Fed. R. Civ. P. 84, white paper.....   140
    Pharmaceutical Research and Manufacturers of America (PhRMA), 
      Washington, DC, statement..................................   148
Submitted by Senator Durbin:
    Taylor, Robert, Founder and Owner, RPT Legal Strategies PC, 
      San Francisco, California, statement.......................   220
Submitted by Senator Grassley:
    Ackerman, Andrew, Managing Director, DreamIt NY, et al., 
      March 17, 2015, letter.....................................   214
    American Bankers Association, Washington, DC, et al., 
      statement..................................................   201
    Asay, Clark D., Brigham Young University J. Reuben Clark Law 
      School, Provo, Utah, et al., economics and legal scholars 
      who study innovation, intellectual property law, and 
      policy, March 2, 2015, letter..............................   171
    Business Software Alliance (BSA--The Software Alliance), 
      Washington, DC, March 17, 2015, letter.....................   153
    Capital Financial Partners, West Des Moines, Iowa, March 1, 
      2015, letter...............................................   154
    Casey's General Stores, Inc., Ankeny, Iowa, March 23, 2015, 
      letter.....................................................   155
    Delta Dental of Iowa, Johnston, Iowa, March 10, 2015, letter.   156
    Draper, Mike, Founder and Owner, RAYGUN, Des Moines, Iowa, 
      letter.....................................................   200
    Duan, Charles, ``The STRONG Patents Act Is a Death Squad for 
      Innovation; Commentary,'' Roll Call, Beltway Insiders, 
      March 17, 2015, op-ed article..............................   207
    Iowa Gaming Association, West Des Moines, Iowa, et al., Iowa 
      associations, organizations, and businesses, March 13, 
      2015, letter...............................................   169
    Iowa Gaming Association, West Des Moines, Iowa, March 16, 
      2015, letter...............................................   170
    Iowa Wireless Services, LLC, Urbandale, Iowa, March 12, 2015, 
      letter.....................................................   180
    Kinzenbaw, Jon, President and Chief Executive Officer, KINZE 
      Manufacturing, Inc., Williamsburg, Iowa, ``Stop patent 
      trolls from preying on innovation,'' March 15, 2015, 
      statement..................................................   205
    Kreg Tool Company, Huxley, Iowa, March 16, 2015, letter......   181
    Kum & Go, L.C., West Des Moines, Iowa, March 13, 2015, letter   183
    Mitchell, Matthew, Independent Insurance Agent, West Des 
      Moines, Iowa, March 3, 2015, letter........................   184
    National Association of Federal Credit Unions (NAFCU), 
      Arlington, Virginia, March 17, 2015, letter................   150
    National Association of Realtors (NAR), Washington, DC, March 
      17, 2015, letter...........................................   185
    National Retail Federation (NRF), Washington, DC, statement..   187
    Nelson, Curtis R., President and Chief Executive Officer, 
      Entrepreneurial Development Center (EDC), Cedar Rapids, 
      Iowa, March 10, 2015, letter...............................   157
      article....................................................   158
      2014 stakeholder report....................................   160
    R Street Institute, Washington, DC, et al., letter to Hon. 
      Bob Goodlatte, a Representative in Congress from the State 
      of Virginia, and Hon. John Conyers, Jr., a Representative 
      in Congress from the State of Michigan, March 12, 2015.....   151
    Snively, David F., General Counsel, Monsanto Company, Creve 
      Coeur,
      Missouri, statement........................................   196
    Stretch, Colin, Vice President and General Counsel, Facebook, 
      Inc., Menlo Park, California, March 17, 2015, letter.......   166
    United for Patent Reform (UPR), March 16, 2015, letter.......   209


 
                      THE IMPACT OF ABUSIVE PATENT
                          LITIGATION PRACTICES
                        ON THE AMERICAN ECONOMY

                              ----------                              


                       WEDNESDAY, MARCH 18, 2015

                              United States Senate,
                                Committee on the Judiciary,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 10:02 a.m., in 
Room 226, Dirksen Senate Office Building, Hon. Charles E. 
Grassley, Chairman of the Committee, presiding.
    Present: Senators Grassley, Hatch, Cornyn, Lee, Flake, 
Perdue, Tillis, Leahy, Feinstein, Schumer, Durbin, Whitehouse, 
Klobuchar, Franken, Coons, and Blumenthal.

         OPENING STATEMENT OF HON. CHARLES E. GRASSLEY,
             A U.S. SENATOR FROM THE STATE OF IOWA

    Chairman Grassley. We're here today to discuss the topic of 
patent litigation abuse, and in particular, the destructive 
tactics of so-called ``patent trolls.'' This practice of patent 
trolling has hit businesses both big and small across all 
industries and is having a harmful effect on the economy.
    Patent litigation abuse imposes high costs on American 
businesses. It wastes resources that could instead be utilized 
for research, development, job creation and economic growth. It 
undermines the innovation and creativity that patents are 
supposed to protect.
    Patent assertion entities focus on buying and asserting 
patents rather than on developing or commercializing patented 
inventions.
    Now, I want to make clear that licensing one's patents is 
not itself a bad thing. Inventors and patent owners, including 
universities, often are not in a position to commercialize 
their patented inventions, but they certainly have the right to 
protect their intellectual property against infringers.
    Patent trolls, however, are entities that engage in abusive 
and deceptive tactics to assert poor-quality patents against 
businesses already utilizing technologies as common as wireless 
email, digital video, and internet. They use overly broad 
patents to allege infringement against companies that are 
simply engaging in normal business activities or have bought a 
technology, product or service from a vendor, many times buying 
that right off the shelf.
    They send out intentionally evasive and misleading blanket 
demand letters and employ overly aggressive litigation 
practices to extort settlements. They frequently hide behind 
patent-holding subsidiaries, affiliates, and shells of 
operating companies in order to escape scrutiny.
    Frivolous patent lawsuit filings have increased over the 
years and they rarely have merit. But the extent of the problem 
is actually much worse because most cases do not reach merit 
judgment stage. Patent trolls strategically set their royalty 
demands below litigation costs to entice companies to settle 
rather than run the risk of expensive and risky patent 
litigation.
    Many companies do not have that expertise or even the 
resources to litigate these cases. So, most of the time they 
have no choice but to submit to this patent extortion.
    This, in turn, drives up the costs many times; then those 
costs are passed on to the consumer.
    We will be hearing from three witnesses today about their 
experiences with, and the impact of, abusive patent litigation 
tactics. These witnesses represent businesses from different 
industries. Two of these companies have patent portfolios, 
while one company doesn't own patents.
    Yet, their conclusion is the same--patent troll abuse is 
counterproductive to our Nation's economic growth.
    The United States should remain at the forefront of 
technology, innovation, creativity. Patents and the U.S. patent 
system are a significant component of the American tradition of 
opportunity, invention and innovation. But we should not allow 
bad actors to bring the entire system down.
    I have heard many Iowans express concerns about this 
problem and the need for Congress to take action. One example 
is a letter I just received coming from industry groups, 
representing a diverse mix of Iowa businesses, letters from the 
Iowa Gaming Association, the Iowa Bankers, Homebuilders of 
Iowa, Restaurant Association, Retail Federation, Communications 
Alliance, Grocery Industry Association, Lodging Association, 
Iowa Credit Union League and Iowa Realtors Association.
    They urge Congress to address these abuses, stressing 
that--and I have a long quote--``meaningful reforms that make 
it difficult for patent trolls to continue their destructive 
business models by improving patent quality, streamlining 
litigation, enhancing discovery protections and pleading 
requirements, as well as increasing transparency will 
drastically reduce costs for Iowa businesses and 
entreprenuers,'' end of quote.
    I would put these letters and several others, without 
objection, in the record.
    [The information appears as submissions for the record.]
    Chairman Grassley. In the last Congress, the House passed 
an overwhelming vote on the Innovation Act, which the White 
House supported. And although we started working on a product 
here in the Senate Judiciary Committee, we were not able to 
proceed last year.
    Almost everyone agrees this is a problem and a drag on our 
economy, but there are those concerned that certain proposals 
could undermine the ability of legitimate patent holders to 
enforce patent rights.
    They maintain that recent Supreme Court decisions on 
pleading standards, fee shifting, and patent quality, as well 
as actions by the Federal Trade Commission and the U.S. Patent 
and Trademark Office have largely taken care of all these 
issues, and comprehensive legislation, then, is unnecessary.
    We will be hearing from representatives of two different 
stakeholder communities that believe certain proposals under 
consideration by Congress will harm legitimate patent holders.
    I do not dispute that we should preserve patent rights and 
valid patent enforcement rules. We do need to strike the right 
balance, but Congress should act decisively if we want to 
alleviate the problems that are harming businesses both big and 
small. This will strengthen our patent system, benefit 
inventors, businesses and consumers. So, here we are, back at 
it again in this Congress.
    Chairman Goodlatte of the House has reintroduced the 
Innovation Act. It has 9 Republican and 11 Democratic 
cosponsors. I look forward to working with Ranking Member 
Leahy, Senators Cornyn and Schumer, as well as with any other 
Judiciary Committee colleagues that want my attention on this 
issue, on passing meaningful legislation that will provide a 
strong deterrent to those who prey on innocent businesses.
    I thank my witnesses who are here today to provide us with 
their valuable insights on patent litigation abuse and how they 
think Congress should address the issue.
    [The prepared statement of Chairman Grassley appears as a 
submission for the record.]
    Chairman Grassley. Now it is my privilege to turn our 
attention to the Ranking Member, former Chairman of the 
Committee, Pat Leahy.

          OPENING STATEMENT OF HON. PATRICK J. LEAHY,
            A U.S. SENATOR FROM THE STATE OF VERMONT

    Senator Leahy. Thank you very much, Mr. Chairman.
    I am glad we are having this hearing and you have got an 
impressive group here.
    It goes without saying that our patent system fuels our 
Nation's greatest innovations. It is one of the reasons I have 
worked so hard over the years to finally be able to pass the 
Leahy-Smith bill, one of the great bipartisan efforts of both 
the Senate and the House.
    But we have seen some bad actors who have used the patent 
system in ways that detract from its purpose.
    I am home several times a month and I talk to small 
businesses in Vermont who tell me they have been threatened 
with patent suits simply for using office equipment that they 
purchased off the shelf and it is a case of, do we fight it or 
we just pay a nuisance settlement. But the nuisance settlements 
are sometimes 3 months' to 4 months' profits.
    Website owners have faced costly litigation for using basic 
software in e-commerce. So, what happens, instead of using 
patents to drive new creation, bad actors have held up Main 
Street businesses and innovative companies to extort financial 
settlements.
    Last Congress, the Senate Judiciary Committee dedicated 
months of work to develop a bipartisan solution to such 
behavior. We wanted to promote transparency that holds the bad 
actors accountable. We wanted to curb misleading demand 
letters. We wanted to protect customers who are targeted simply 
for using a product when the manufacturer itself should defend 
the suit.
    We also considered measures relating to patent litigation 
to address concerns. It is usually difficult to defend against 
frivolous patent suits, the extreme cost of discovery and the 
fact that today a patent holder can file a lawsuit with only 
minimal information. So, a defendant cannot even assess whether 
they are liable.
    Many have raised concerns that, if taken too far, 
litigation reforms like those in the House-passed Innovation 
Act would harm legitimate patent holders when they enforce 
their rights in court.
    I agree we must find a balance. Everybody knows the story 
of the man who developed a windshield wiper delay and had to 
fight for it until he was actually on his death bed before he 
was finally given the rights and the royalties for that, I 
think it amounted to just $.02 or $.03 a windshield wiper.
    Now, the Committee was not able to complete its work, but 
we made significant progress and I hope we can build on that. I 
think we can look at what we did with the Leahy-Smith act. We 
did that because Senators and stakeholders, Senators of both 
parties, House Members of both parties, and stakeholders joined 
together to find solutions.
    Abusive practices by bad actors are a discredit to our 
strong patent system. It is in no one's interest they continue.
    So, the real world accounts we have heard from the New 
England Federal Credit Union, the Printing Industries of 
America, some of the businesses who will testify today 
illustrate the impact of abusive practices.
    Mr. Chairman, I will put my whole statement in the record, 
but I think this is--Senator Cornyn and I worked on--I want 
Senator Cornyn to know I am talking about him.
    Chairman Grassley. Senator Cornyn.
    Senator Leahy. Senator Cornyn and I worked on--I was 
complimenting you, I was complimenting you. There will probably 
be a recall petition in Texas for you now because--.
    Senator Cornyn. You have my full attention.
    Senator Leahy. But Senator Cornyn and I worked hard on 
this--a number of us did.
    I think we can find--and it is not going to be easy--we can 
find a solution, but the stakeholders themselves are going to 
have to work. Nobody is going to get everything they want, but 
we can get a better situation than what we have today.
    Thank you, Mr. Chairman.
    [The prepared statement of Senator Leahy appears as a 
submission for the record.]
    Chairman Grassley. Thank you.
    To accomplish something in the Senate, we have to have 
bipartisan support and I think the fact that the leadership of 
Senator Schumer----
    Senator Schumer. Thank you for mentioning me.
    Senator Leahy. I was about to mention you next, but I was 
trying to be bipartisan, because, I mean, everybody hears about 
you every single day, every single hour.
    [Laughter.]
    Senator Leahy. If I had half the fame the Senator from New 
York has.
    Chairman Grassley. You see what happens when you say one 
word, ``Schumer.''
    [Laughter.]
    Chairman Grassley. Anyway, Senator Schumer and Senator 
Leahy do not always agree with Senator Cornyn and me and 
Senator Lee, but there is a good-faith effort to work on 
legislation that can be bipartisan. Senator Coons is involved 
in it, as well, because he has a bill of his own in, and maybe 
there are other bills in, as well.
    Now, I would like to introduce the panel. We start with 
Brad Powers, general counsel, KINZE Manufacturing, 
Williamsburg, Iowa, and that is a leading manufacturer of 
agricultural machinery in the United States. KINZE happens to 
be quite a success story.
    Jon Kinzenbaw, where the word KINZE comes from, started the 
company in 1956 with a few dollars in his pocket, a small bank 
loan and a knack for fixing farm machinery. Since then, Mr. 
Kinzenbaw has been named inventor of 19 patents for KINZE and 
the company itself owns many others. Today KINZE employs nearly 
1,000 people in Iowa.
    Prior to joining KINZE, Mr. Powers worked on IP litigation, 
licensing and portfolio management at the law firm of McKee, 
Voorhees and Sease. I understand your family is with you and I 
welcome them, assuming they get here.
    I would like to introduce everybody before you testify.
    We have Hans Sauer, deputy general counsel for intellectual 
property of the Biotechnology Industry Organization, a trade 
association representing over 1,100 biotechnology companies and 
research institutions. At BIO, Mr. Sauer advises boards of 
directors and various departments on patent and other IP 
matters. He has 20 years' professional in-house experience in 
that industry.
    Steven Anderson is vice president and general counsel for 
Culver's Franchising System located in Prairie du Sac, 
Wisconsin, famous for its butter burgers and frozen custard. 
But I can suggest to you that I like the pork tenderloin 
better. Culver's has 538 restaurants, 22 of them in States--
including over 30 locations in my home State of Iowa, and 
employs 20,000 people. Mr. Anderson at Culver's is responsible 
for overseeing all legal matters involving the corporation, 
including its intellectual property. Prior to Culver's, Mr. 
Anderson worked as a lawyer at Murphy Desmond.
    Then, Dr. Michael Crum, vice president for--I did not mean 
to skip you. We will get to you in just a minute.
    Dr. Crum, vice president for economic development and 
business engagement at Iowa State University. Dr. Crum has been 
a faculty member, College of Business, ISU, since 1980. He led 
the initiative to create the Office of Economic Development and 
Industry Relations, which helps organizations connect with 
research, technical, and business expertise of the university.
    I suppose I have got to mention that you know Iowa State is 
in the big dance.
    Senator Leahy. Is that right?
    Chairman Grassley. Yes, that is right. And also the 
University of Northern Iowa and also the University of Iowa. 
So, let us get them all in.
    We have Krish Gupta, senior vice president and deputy 
general counsel at EMC Corporation, located in Hopkinton, 
Massachusetts. EMC is the world's leading developer and 
provider of information infrastructure technology.
    Mr. Gupta has 20 years' experience working in patent law. 
At EMC, he has worldwide responsibility for intellectual 
property law and technology licensing matters.
    He oversees EMC's IT portfolio of over 5,100 U.S. patents, 
a portfolio that has earned that company recognition by the 
Wall Street Journal as the eighth most innovative IT company.
    Mr. Powers, would you start out, please?

           STATEMENT OF BRAD POWERS, GENERAL COUNSEL,
         KINZE MANUFACTURING, INC., WILLIAMSBURG, IOWA

    Mr. Powers. Thank you, Chairman. Chairman Grassley, Ranking 
Member Leahy, and Members of the Judiciary Committee, I am Brad 
Powers, general counsel of KINZE Manufacturing. On behalf of 
Jon and Marcia Kinzenbaw, KINZE Manufacturing, we are honored 
to have the opportunity to present testimony today about the 
profound negative impacts of abusive patent assertions on our 
company, innovation, and our economy.
    KINZE Manufacturing is a leading manufacturer of planters 
in the United States. But it did not start that way. In 1956, 
Jon Kinzenbaw was 21 years old. With $5 in his pocket, a small 
bank loan and a gift for fixing farm equipment, he opened a 
one-man welding shop in Victor, Iowa.
    Jon has been named the inventor for 19 patents and our 
company holds many more. Jon's first patented invention was a 
plow that the farmer could adjust from the comfort of his 
tractor. Shortly thereafter, Jon invented a single-axle grain 
cart. Probably most notable was the rear-folding planter that 
Jon invented in 1975.
    After that, the company grew quickly. KINZE today impacts 
Iowa factory workers, as well as farmers and small business 
owners throughout the country. KINZE is still privately held by 
the Kinzenbaw family and has employed up to 1,000 people in the 
State of Iowa, manufacturing high-quality agricultural 
equipment, providing farmers with the tools they need to help 
feed the world.
    Our products are distributed through a network of 
independently owned dealers located in agricultural States 
throughout the country.
    Now, KINZE is built on innovation and relies upon a strong 
and healthy patent system to continue to deliver that 
innovation to our farmers. KINZE has asserted its patents 
against our competitors. We have defended ourselves from 
allegations by competitors and we have taken three patent cases 
to trial.
    Litigation is a part of the process and when that 
litigation is with merit, we accept this. Unfortunately, patent 
assertion entities take unfair advantage of the patent system 
and today threaten its health.
    In 2012, KINZE experienced the impact of a patent assertion 
entity firsthand when Clear With Computers sued KINZE, alleging 
infringement of two of its patents.
    Now, unlike KINZE, Clear With Computers does not employ any 
factory workers, it does not help American farmers, and it 
makes no products. What it does do is it makes lawsuits. It has 
filed over 60 patent cases since 2008.
    Clear With Computers argued that KINZE's website violated 
the company's patents for an electronic proposal preparation 
system and an electronic proposal preparation system for 
selling computer equipment and copy machines.
    In short, the complaint alleged that KINZE infringed these 
patents by allowing users to search for products and filter 
search results. This suit cost us many hours of time and 
significant legal fees before we were ultimately able to 
resolve the dispute.
    Now, that experience has had a lasting impact on KINZE. 
Farmers rely on access to the latest technology to help them 
get more out of every acre while reducing their costs and 
protecting their soil. But KINZE's contract negotiations with 
suppliers and service providers now routinely include 
discussions of allocations of liability in the event of patent 
assertion.
    These additional negotiations require resources and delay 
research, development and production of new products, slowing 
farmers' access to key technology. We are spending more time 
and effort developing contracts and have less time and effort 
to spend on developing the new inventions that will make 
farming more productive and efficient.
    This allocation of IT liability also limits KINZE's ability 
to work with small companies. Smaller companies, because of 
their limited resources, are hesitant to provide 
indemnification for IT liability.
    As a result, many smaller companies must decide whether to 
sign an agreement and accept the risk of defending baseless 
suits or not accept the work at all.
    Now, in the beginning, patent assertion entities seemed to 
focus on web-based software. This is what KINZE saw with Clear 
With Computers. But unfortunately, the problem seems to be 
spreading beyond this limited domain.
    By way of example, companies like Cisco Systems have seen 
this type of issue in areas such as electronic equipment. Now, 
as you can imagine, the planters used today have come a long 
way since Jon's first folding planter back in 1975. New 
technology lets farmers precisely target inputs, such as 
fertilizer and insecticide, reducing their costs and also 
benefiting our environment. This technology includes high-tech 
electronics, GPS location, and cutting-edge software.
    As this technology moves to the field, it is no stretch of 
the imagination to believe the assertion entities will follow. 
The patent system, which was designed to foster innovation and 
bring the fruits of American creativity to everyone, has been 
thrown off balance by a few bad actors taking advantage of the 
high cost and uncertainty of litigation. Congress must step in 
to restore this balance and KINZE is ready and eager to be part 
of that effort.
    Thank you, once again, for giving the Kinzenbaws and KINZE 
the opportunity to talk on this critical issue. As you consider 
the legislation to address the very real threat posed by these 
patent assertion entities, we strongly encourage you to consult 
representatives from all industries, including agricultural 
manufacturing.
    Improving our patent system is a vital and ongoing process 
and we thank you for your commitment to seeking the right 
balance between providing incentives for innovation and 
protecting American businesses from the high cost of 
illegitimate patent litigation.
    Thank you.
    [The prepared statement of Mr. Powers appears as a 
submission for the record.]
    Chairman Grassley. Thank you, Mr. Powers.
    Mr. Sauer?

  STATEMENT OF HANS SAUER, PH.D., DEPUTY GENERAL COUNSEL FOR 
  INTELLECTUAL PROPERTY, BIOTECHNOLOGY INDUSTRY ORGANIZATION, 
                         WASHINGTON, DC

    Mr. Sauer. Chairman Grassley, Ranking Member Leahy, and 
Members of the Committee, thank you, again, for the opportunity 
to testify here today. I am deputy general counsel for 
intellectual property at the Biotechnology Industry 
Organization, on whose behalf I testify today.
    In my previous experience before BIO, I worked in a number 
of drug development programs at several biotech companies over 
the course of 20 years, first as a scientist and later as a 
patent lawyer. As is common in the biotech industry, the 
companies where I worked are now gone and the stroke and 
Parkinson's disease drug programs on which I worked failed 
after tens of millions of dollars of investment.
    The majority of today's biotech companies face serious 
similar odds. Approximately 80 percent of BIO's member 
companies are small and have yet to bring a product to the 
market, and thus their research and development work is funded 
through massive private sector high-risk investment which, on 
average, amounts to more than $2 billion, fully capitalized, 
for a new biotech medicine. This investment must be sustained 
over many years, sometimes decades.
    Without strong, predictable and enforceable patents, 
rational investors would stop investing in these possible new 
therapies and take their money elsewhere. Patents are thus 
critical to the biotech business model, not to use them for 
litigation, but to secure the partnerships and investment which 
our companies need to develop new therapies, new crops, and new 
biofuels.
    As Congress considers legislation to curb misuses of the 
patent system, it must ensure that innovative companies remain 
able to protect their own businesses against patent 
infringement by others. And in scrutinizing dubious practices 
by some patent holders, Congress should not overlook abuses by 
others who seek to undermine the patent system for similarly 
illegitimate reasons.
    Unfortunately, misuse of the patent system against patent 
holders or licensees is also a real and growing problem. In 
particular, the PTO's inter partes review, IPR system, of 
administrative patent challenges is undermining the value of 
predictability of patent rights and long-held, investment-
backed expectations. This is because this new system stacks the 
deck against patent owners in ways Congress did not intend, 
leading to patent invalidation rates far exceeding those seen 
in district court litigation involving similar types of patents 
and similar grounds for challenges. These disproportionate kill 
rates invite unintended abuses and predatory practices.
    For example, questionable entities are approaching biotech 
companies with threats of dragging their key patents into IPR 
proceedings in the patent office unless substantial payments 
are made. And recently, The New York Times reported on an 
investment scheme in which a hedge fund first takes a short 
position in the stock offer by a pharmaceutical company and 
then files an IPR challenge against that company's key patents 
to drive down the company's stock.
    Biotech companies are vulnerable to such manipulation 
because they tend to be small, derive most of their revenue 
from only one or two products, and have just a handful of very 
valuable patents protecting these products.
    The first company to be targeted by this hedge fund 
strategy was a small biotech company whose main product is an 
innovative treatment that helps patients with multiple 
sclerosis walk better. On the day that the IPR challenge was 
filed, this company lost more than $150 million of market 
capitalization during the course of a single afternoon.
    Such cynical strategies not only damage the value of 
companies working on cures, but hurt those who are eagerly 
waiting for such cures.
    To prevent such abuse, Senators Coons, Durbin and Hirono 
have introduced S. 632, the STRONG Patents Act, which BIO 
supports, as a complement to other ongoing legislative 
considerations.
    BIO encourages this Committee to develop a legislative 
package that will curb abusive patent practices, including the 
abuse of the IPR system, and to do so through a balanced and 
targeted approach.
    We believe consensus can be achieved on a big range of 
issues, such as enhancing transparency of patent ownership and 
enforcement, curtailing unfair practices in the sending of 
demand letters, addressing how patents can be enforced against 
blameless end users and consumers of infringing products that 
were sold by others, and making the IPR system a more balanced 
one.
    We remain concerned, however, that proposals for more 
systemic patent litigation changes presently sometimes lack 
this requisite balance.
    Concepts such as enhanced pleading requirements, mandatory 
stays of merits discovery, and joinder of third parties for the 
purpose of collecting attorney fee awards are one-sided and go 
too far in restricting the ability of patent owners to enforce 
the patents.
    The reintroduction of the Innovation Act in the House of 
Representatives relies on a dramatically shifted landscape, 
this debate over the right balance. Court decisions, conference 
changes in the judicial conference, PTO actions, and 
legislative and enforcement activities over the past few years 
have changed the dynamics and the result has been a substantial 
decline in such suits since this Committee last considered 
broad patent litigation reforms.
    These changes reinforce the need to ensure that any 
additional changes do not swing the pendulum too far. We are 
optimistic that targeted and balanced solutions that address 
the practices of entities who unfairly enforce and who unfairly 
attack patents can be achieved.
    Thank you for your attention and this opportunity. I look 
forward to answering your questions.
    [The prepared statement of Mr. Sauer appears as a 
submission for the record.]
    Chairman Grassley. Thank you, Mr. Sauer.
    Mr. Anderson?

  STATEMENT OF STEVEN E. ANDERSON, VICE PRESIDENT AND GENERAL 
   COUNSEL, CULVER FRANCHISING SYSTEM, INC., PRAIRIE DU SAC, 
                           WISCONSIN

    Mr. Anderson. Chairman Grassley, Ranking Member Leahy, and 
Members of the Judiciary Committee, I am Steve Anderson, vice 
president and general counsel of Culver Franchising System, 
Inc.
    Thank you for the opportunity to testify about the impact 
of abusive patent litigation practices on Culver's restaurants. 
Culver's has been a family business from the very beginning, 
opening its first restaurant in Sauk City, Wisconsin, in 1984, 
offering cooked-to-order butter burger hamburgers, with fresh 
frozen custard, that remain the hallmark to this day.
    We currently have 538 restaurants, all but seven of which 
are franchised, serving our customers in 22 States, and those 
restaurants employ more than 20,000 people. We are experts in 
delivering great food with warm hospitality to guests. We are 
not experts in the fields of technology or patent law.
    Restaurants in the U.S. account for an estimated $709 
billion in annual sales and serve 130 million hungry customers 
every day. Restaurants create meals and restaurants create 
jobs. However, most restaurants are small businesses, like our 
franchisees, and operate on very thin margins. We simply cannot 
afford to litigate patent infringement lawsuits and we lack the 
technical expertise to evaluate the merits of technology patent 
claims. This makes restaurants prime targets for patent trolls.
    In the past few years, Culver's has been the recipient of 
two demand letters and one lawsuit from patent trolls. Each 
entity claimed to own the rights to basic technology used by 
many restaurants. In the lawsuit, it was a nutritional 
calculator on our website and in one demand letter it was the 
use of shortened lengths and time content in text messages. The 
third instance, another demand letter, I cannot address since 
the resolution of this demand included a confidentiality 
agreement that forbids further public discussion.
    As general counsel for Culver's, there is nothing that I 
dread more than receiving a patent demand letter. They are 
broadly drafted form letters that offer nothing on the validity 
of the patent, exactly what the alleged violation may be, and 
whether or not we were actually infringing upon that patent. 
These trolls are happy to tell us that we are welcome to test 
their claims in litigation, knowing that a trial is cost 
prohibitive, with typical attorney's fees of well over $1 
million, and too much of a burden for our business to 
undertake.
    These trolls strategically offer an alternative of the 
licensing fee that is a mere $250,000 to $500,000. This demand 
amount has nothing to do with the value of the technology, but 
is instead offered as a less-expensive alternative to 
litigating. And although we do not know if the patent is valid, 
let alone whether we were indeed infringing upon it, this form 
of extortion is very effective and, in most cases, the 
recipient of this type of demand letter pays the demand.
    Moreover, the money we spend dealing with these demands has 
to come from somewhere. We must divert it from other places in 
our business that might be productive and profitable and 
instead use it to placate trolls.
    Patent trolls strategically target their demands against 
the end user, who is a customer of the technology and has 
limited knowledge of the technology or patents around it, 
rather than the producers and sellers of the technology. We 
cannot insure against such claims and we cannot rely on 
technology providers to indemnify us for the cost of these 
risks.
    As a result, we have resorted to avoiding the use of 
technology wherever possible or only purchasing from large 
enough companies to protect us against patent claims.
    Other small businesses suffer as we are not buying the 
services from them because we cannot afford to risk another 
patent demand letter.
    When Culver's receives a troll demand letter, we have lost, 
because by simply receiving that letter, it will cost us a 
minimum of $100,000 in legal fees and licensing payments. I 
know this from my own experiences, as well as from speaking to 
many other companies.
    I urge you to consider every useful change that could 
increase transparency and shift the economic incentives away 
from trolls making baseless claims. In particular, we at 
Culver's urge you to consider three improvements.
    First, we believe that increased demand letter transparency 
would be very effective. Second, clear and complete pleading 
standards for suits that are filed would have a positive effect 
in the same way that the transparent demand letters would. 
Third, it is crucial that the suits against the customer are 
stayed while suits against the manufacturer proceed.
    With these changes, patent assertion entities would be 
required to be more open and target the appropriate parties 
first, which would put everybody on the same level playing 
field in terms of information and resources.
    Thank you, once again. We urge Congress to pass meaningful 
reforms so that Culver's and other restaurants can spend more 
funds on jobs and services that benefit the American economy 
and less on payments to patent trolls.
    [The prepared statement of Mr. Anderson appears as a 
submission for the record.]
    Chairman Grassley. Thank you, Mr. Anderson.
    Dr. Crum?

   STATEMENT OF MICHAEL R. CRUM, D.B.A., VICE PRESIDENT FOR 
   ECONOMIC DEVELOPMENT AND BUSINESS ENGAGEMENT, IOWA STATE 
                     UNIVERSITY, AMES, IOWA

    Dr. Crum. Thank you, Chairman Grassley, Ranking Member 
Leahy, and Members of the Judiciary Committee, for this 
opportunity to testify on such an important topic.
    I am Mike Crum and I serve as vice president for economic 
development and business engagement at Iowa State University.
    On behalf of Iowa State, I am pleased to offer this 
testimony, which is endorsed by the six major higher education 
associations and councils that collectively represent the 
majority of our Nation's research universities.
    Universities depend on the U.S. patent system to protect 
the legitimate intellectual property rights of individual 
university inventors and large companies alike. Patents provide 
universities with the means to ensure that the many discoveries 
resulting from our research are transferred to the private 
sector where those discoveries can be turned into innovative 
products and processes that power our economy, create jobs, and 
improve our quality of life.
    At my home institution of Iowa State University, technology 
transfer has led to numerous and diverse technologies that have 
had a major impact locally, nationally, and globally.
    A few of the more prominent examples include a critical 
algorithm for the fax machine, the vaccine for the PED virus 
that has really threatened our State's hog industry, the 
patented lead-free solder that has been licensed by some 60 
companies globally, with roughly 70 percent of the electronics 
worldwide containing this solder, and hybrid corn which just 
this year was named by the Association of University Technology 
Managers as one of the 40 most important inventions by a 
university.
    Iowa State pulls in over $300 million annually in external 
funding to support the research that is conducted by our 
students and faculty. University economic development units 
provide business and technical assistance to more than 4,000 
Iowa companies each year. One of our centers alone generated an 
impact totaling over $1.7 billion, with more than 25,000 jobs 
added or retained over the last 5 years.
    Between 2010 and 2014, the three State of Iowa regent 
universities, the University of Northern Iowa, Iowa State and 
University of Iowa, demonstrated that they do more than just 
being good at basketball, as the Chairman noted.
    During that 5-year period, we generated more than 1,000 
invention disclosures, 767 patent applications, and we were 
responsible for the execution of 472 licenses and options, 
including 183 to companies in Iowa.
    Additionally, our faculty and students launched 190 start-
ups supported by over $24 million in outside funding.
    The ability of our university's technology transfer 
operations to achieve the types and magnitudes of societal 
benefits that I just described is critically dependent on a 
strong patent system. Without robust patent protections, 
licensees and venture capitalists will not take on the 
significant risks associated with investing in and developing 
our inventions. Strong patents are particularly essential for 
the small, often undercapitalized start-up companies built upon 
university discoveries.
    Indeed, patents are often the most critical assets of these 
start-ups and small businesses. To be able to gain a foothold 
in often well-developed markets, such companies must be able to 
assert their patent rights effectively.
    It is also crucially important for universities and their 
licensees to be protected from potentially crippling abusive 
patent litigation practices. We recognize that abuse of patent 
litigation practices are a corrosive assault on the Nation's 
patent system and must be forcefully countered.
    We also believe strongly, however, that any changes to the 
patent system should be scrutinized carefully for their 
unintended and undesirable consequences.
    Many of the proposed changes do have an adverse impact on 
the ability of patent holders to protect their intellectual 
property rights. For instance, mandatory fee shifting and 
involuntary joinders are especially troubling to the university 
community. These provisions would make the legitimate defense 
of patent rights excessively expensive and risky. They would 
impede the ability of universities to forge mutually beneficial 
agreements with potential licensees and venture capitalists.
    Proposals for heightened pleading, discovery limitations 
and increased disclosure would also, in our opinion, do more 
harm than good. Heightened pleading would add unnecessarily to 
the burden of filing infringement cases. Discovery limitations 
would preclude cases where broader discovery would lead to more 
efficient resolution of those cases, and new disclosure 
requirements would require information that could violate 
confidentiality agreements, thereby chilling venture capital 
investments.
    In closing, universities recognize that abusive patent 
practices are real and they are harmful. We contend that an 
approach involving carefully targeted legislation developed in 
the context of the changing landscape created by recent 
judicial and administrative actions can effectively combat 
abusive patent practices while maintaining the capacity of our 
robust patent system.
    Again, we appreciate this opportunity today to present our 
perspective and we sincerely want to continue to work with the 
Committee and Congress in constructing legislation that 
supports the innovation and economic competitiveness for the 
benefit of the Nation and its citizens.
    Thank you.
    [The prepared statement of Dr. Crum appears as a submission 
for the record.]
    Chairman Grassley. Thank you, Dr. Crum.
    Mr. Gupta?

  STATEMENT OF KRISH GUPTA, SENIOR VICE PRESIDENT AND DEPUTY 
           GENERAL COUNSEL, EMC CORPORATION, HOPKIN-
                       TON, MASSACHUSETTS

    Mr. Gupta. Chairman Grassley, Ranking Member Leahy, and 
Members of the Committee, I am Krish Gupta, senior vice 
president and deputy general counsel for EMC Corporation. I am 
honored to testify today on the critical need for patent 
litigation reform.
    EMC is a global leader in cloud computing and has a keen 
interest in a strong and balanced patent system that protects 
and promotes innovation and one that cannot be exploited by 
abusive litigation tactics.
    We look to the U.S. patent system to protect our 
innovations and the jobs that result from them. EMC and its 
affiliates hold more than 9,000 issued U.S. patents and patent 
applications.
    At EMC, I have worldwide responsibility for IP law, 
including patent litigation. In my 20 years in this field, I 
have witnessed firsthand how our patent system has undergone 
transformation, but not always for the better.
    Abusive patent litigation has swept our country, diverting 
billions of dollars from economic growth and innovation to 
battling frivolous suits filed by abusive litigants.
    Since 2005, EMC has been sued by patent assertion entities, 
or PAEs, more than 35 times and has never been found to have 
infringed. A typical PAE suit involves a shell company with 
secret backers created solely to file suits. The complaint is 
often vague and provides little information about the specific 
infringement allegations.
    Shortly thereafter, PAEs try to pressure us into settlement 
by demanding thousands of documents and emails during 
discovery, most of which are irrelevant to the suit and costly 
to produce.
    As a matter of principle, we do not settle frivolous suits. 
Yet, defending those suits has been extremely expensive, 
costing over $10 million in 2014 alone, and this does not 
include the substantial disruption to our business, requiring 
our employees to shift their attention from designing new 
products and growing the business to sitting in depositions or 
going to court. And EMC is not alone in this regard.
    Most impartial observers agree abusive patent litigation 
harms innovation and the economy as a whole. In 2014, more than 
5,000 new patent lawsuits were filed, the third highest count 
ever.
    Some have suggested that recent Supreme Court decisions and 
administrative processes at the PTO either reduce or negate the 
need for Congress to act.
    As a practitioner who spends most of his time on patent 
litigation matters, I disagree. Only Congress can 
comprehensively address abusive patent litigation practices.
    In Highmark and Octane, the Supreme Court loosened the 
standard by which district courts have valued what qualifies as 
an exceptional case for the award of attorney's fees while 
granting them greater discretion to make this determination. 
However, Highmark and Octane have had no meaningful impact.
    In the first 9 months since these decisions, motions for 
fees have been granted only 4 percent more often than they were 
in the 2 years before these cases and at least one highly 
experienced and respected judge with a large patent caseload 
has stated that he does not see Octane changing what he would 
have determined was appropriate for an award of attorney's 
fees.
    We, therefore, support legislation that includes a balanced 
fee-shifting provision with meaningful fee recovery. These 
provisions would discourage the filing of frivolous suits and 
the use of abusive litigation tactics by imposing financial 
accountability.
    In Iqbal and Twombly, the Supreme Court addressed the level 
of specificity required in a complaint. With the Judicial 
Conference recommending the elimination of Form 18, it is 
expected that Iqbal and Twombly will apply to patent pleadings, 
as well. However, these cases do not set forth bright-line 
rules for patent litigation, which is a specialized area of the 
law.
    Without clear standards in patent cases, many courts will 
undoubtedly continue to allow vague pleadings. Furthermore, 
uniform and clear pleading standards would impose no new burden 
on good-faith plaintiffs who will have already conducted proper 
due diligence.
    We also support legislation that would reasonably limit 
discovery before claim construction to ensure that it is 
focused on issues that actually matter. Further, requiring the 
requesting party to cover the cost of unnecessary discovery 
would limit the extent to which it can be used as a bargaining 
chip to extort a settlement.
    These three areas, fee shifting with accountability, 
pleading specificity and discovery, require legislative 
intervention. The Judiciary cannot bring about the prompt 
solution that Congress can structure to ensure consistency and 
predictability.
    EMC believes legislation must be enacted to restore 
accountability and balance back into the world's premier patent 
system and to alleviate the unfair burdens that PAEs are able 
to put on hardworking companies that are the lifeblood of our 
economy.
    Thank you and I look forward to your questions.
    [The prepared statement of Mr. Gupta appears as a 
submission for the record.]
    Chairman Grassley. Thank you, Mr. Gupta.
    We will have 5-minute rounds for questions. I would like to 
first start with you, Mr. Gupta and Mr. Powers. I will not 
repeat the number of patents that you have said your company 
has.
    You have just heard two of the witnesses express concerns 
about legislative proposals to strengthen pleading, discovery 
and allow for more fee shifting.
    Do you believe that these provisions will diminish the 
value of patents and harm the ability of patent holders to 
enforce their patent rights and get investment backing and are 
these concerns justified?
    I will start with you, Mr. Gupta.
    Mr. Gupta. Thank you for the question, Senator. No, I do 
not believe that these concerns are justified. Patent holders 
who bring meritorious actions should not be concerned with 
these provisions. The real effect will be felt by those shell 
companies who buy patents with secret backers and file vague 
complaints and then attempt to use the unbalanced and 
asymmetric discovery burdens to extort settlements.
    Pleading specificity, for an example, can only help focus a 
case early on and with, at least, some clear understanding of 
what is being accused of infringement and why. In fact, I think 
specific pleadings will actually help plaintiffs in that we 
will eliminate a lot of motion practice in terms of specificity 
of complaints as to whether they satisfy Iqbal and Twombly.
    In discovery, I believe that focused discovery helps both 
plaintiffs and defendants. Defendants also, if they--if there 
are some well-heeled defendants who might try to bury 
plaintiffs with unnecessary and burdensome discovery, some sort 
of rational discovery, phased discovery proposition is 
beneficial to both. And the proposals that I have seen also 
include judicial flexibility, so the judges have discretion.
    And last, without some financial accountability, where the 
risk is not entirely shifted onto defendants, we cannot target 
or reduce the abuses that we feel in the system and we need 
accountability in the form of fee shifting for the prevailing 
party, with an ability to collect those fees.
    Chairman Grassley. For your answer, Mr. Powers, do not be 
repetitive of him, but anything you want to add.
    Mr. Powers. Thank you, Chairman Grassley. No, it would not 
impact our ability to assert our patents and we largely echo 
what Mr. Gupta with EMC said.
    What I would add is that having done these types of 
investigations myself both in my capacity at KINZE and as a 
patent litigator, this is just part of your normal homework. If 
you are filing a patent lawsuit, you should have done 
everything you can to obtain the accused infringing product, 
look at it, develop the claim charts and figure out what really 
is the case.
    So, this should be Patents 101.
    Chairman Grassley. For Mr. Gupta, critics of patent reform 
argue that recent Supreme Court decisions on pleadings of 
patent fee awards and patent quality have substantially reduced 
the need for congressional action on abusive patents.
    Do you believe the Supreme Court decisions are adequate in 
terms of deterring abusive and deceptive patent litigation 
tactics?
    Mr. Gupta. I do not. But I do believe that these Supreme 
Court decisions have helped clarify certain areas of patent 
law. None of these decisions go to the core issues of patent 
litigation abuse. None of these decisions require disclosure of 
claims that are being asserted, what products are being accused 
of infringement.
    They do not require that the theory of infringement be 
explained in any way to the defendant. There is nothing in 
these decisions that reduces the burden and expense of 
discovery. And these decisions do not make fee shifting the 
default and certainly there is no mechanism provided by these 
decisions to ensure that fees can be collected.
    Chairman Grassley. And then my last question will have to 
be for Mr. Anderson and Mr. Powers. I would like to explore in 
more detail the cost of patent troll abuse.
    Can you provide some perspective as to the amount of 
resources your companies have had to devote to fighting off 
frivolous patent infringement? Has it changed the way you do 
business? Has there been an impact on the innovative research 
or development or expansion? Is there a downstream impact, 
particularly, obviously, on consumers?
    Start with you, Mr. Anderson and probably ask for short 
answers because my time is about up. Go ahead.
    Mr. Anderson. In terms of the financial impact, we spend 
hundreds of thousands of dollars and for us that is a big 
number. I am hearing some big numbers at the table here, but 
for us that is a large number.
    But what is more troubling is the fact that it really 
affects the way in which we do business.
    Our business as a franchiser is there to support the 
franchisees, drive business to their businesses and help them 
succeed.
    We are shying away from technology because we cannot afford 
to play in that world. So, we are not engaging in the 
technology that our guests want, our franchisees want. When we 
do look at technology, we are only looking at that from larger 
companies.
    We would love to give the business to the small 
entrepreneur, but those small entrepreneurs cannot fight the 
fight. So, we really have backed off the technology and when we 
do, it has gone to the larger provider.
    Chairman Grassley. Mr. Powers?
    Mr. Powers. Thank you, Chairman. With KINZE, there has been 
a financial cost, but probably the more disturbing cost is, 
like Mr. Anderson said, the cost on small businesses, their 
inability to go ahead and play in the big space and be able to 
bring their technology to market through manufacturers like 
KINZE.
    As a result, the small business suffers, the farmers 
suffer, and ultimately we all suffer.
    Thank you.
    Chairman Grassley. Now, I go to Senator Leahy and then 
after Senator Leahy will be Senator Hatch. I am going to step 
out just for a minute.
    Senator Leahy. Thank you, Mr. Chairman.
    Mr. Anderson, listening to what you are saying, you sound 
almost exactly like what I have heard from a lot of businesses 
and people in my own State of Vermont, people's opinion I 
respect greatly.
    There is one bipartisan solution that Senator Lee and I 
worked on and that made clear that it is a deceptive trade 
practice to send misleading demand letters.
    We have also authored a customer stay provision. It helps 
customers who are targeted simply for using a product they 
purchased off the shelf. And we got broad bipartisan consensus, 
Senator Lee and I did, for those two provisions.
    I think they are essential components of a comprehensive 
patent troll bill.
    Would these solutions be important in what work you do, the 
customer stay provision and the deceptive trade practice 
provision?
    Mr. Anderson. Absolutely. They would be a step in the right 
direction.
    Senator Leahy. Mr. Powers, I was looking over--preparing 
for this. There is a KINZE tractor dealership in St. Albans, 
Vermont. That is up in the northwest corner of our State. It is 
a heavy agriculture area. But I also know that they are 
susceptible to being targeted by patent trolls.
    Do you agree with Mr. Anderson that the provisions, just to 
begin with, there will be other provisions, of course, but the 
ones that Senator Lee and I worked on, would be helpful?
    Mr. Powers. Thank you for the question, Senator. KINZE 
believes that all measures taken to help stop trolls are good 
and we welcome them.
    Specifically regarding the customer stay provision, I 
believe is what you asked.
    Senator Leahy. Yes.
    Mr. Powers. We also support the customer stay provision.
    Senator Leahy. Thank you. I am thinking of the restaurants 
and all. We have not just franchises, but small operations, 
coffee shops, sandwich stores, and one of the things to get 
people in is to provide Wi-Fi and stuff like that, and then 
suddenly they get a demand letter, well, there is this 
component of it, they get a demand letter. And the question is 
do they just turn it off or pay the demand letter?
    I think some of the people making these demands do not 
realize you are dealing with individuals--not huge 
corporations, you are dealing with individuals who work every 
day to try to make a living.
    Mr. Sauer, you raised concerns about abuses of the post-
grant review programs that were in the America Invents Act. 
Those were created to improve patent quality.
    I am troubled by some of the behavior you have described, 
and I was reading your testimony earlier. But we have to have 
AIA programs as a strong tool for patents to be reviewed by 
experts.
    What do you see as most important of the things you 
suggested? And can you reassure us it would not undermine the 
efficacy of the AIA programs?
    Mr. Sauer. Yes, Senator. Thank you for that question. The 
AIA programs, as you rightly point out, were intended as a tool 
for patent quality enhancement and as a faster and more 
affordable alternative to district court litigation.
    So, as such, these proceedings were created as something 
that the Patent Office had never done before. Before, they had 
always examined patents and now they are adjudicating disputes 
where two parties come in, present their case, and the 
administrative patent judges, just like judges in district 
court, are supposed to decide who is right and who is wrong.
    And because it is such a trial-like proceeding, we feel 
strongly that these trials in the Patent Office should have 
some of the same procedural protections and have the same legal 
standards that otherwise apply in district court.
    So, for example, our particular concerns relate to the way 
patent claims are interpreted in these proceedings, that patent 
claims should be interpreted the same way whether it is in 
district court or in the Patent Office.
    The ability to amend claims, which was granted by the AIA, 
should be more meaningful, and the Patent Office, just as a 
matter of course, does not allow them really. In two and a half 
thousand proceedings that have been requested, the Patent 
Office permitted amendments maybe three times.
    So, there are a couple of ways in which we think these 
proceedings could be calibrated for some of the protections 
that are available in district court, because they are like 
litigation, and that will encourage much more confidence in 
these proceedings.
    Senator Leahy. Thank you.
    Mr. Gupta, do you agree?
    Mr. Gupta. I believe that the IPR proceedings and the post-
grant proceedings in general have been very successful. We have 
filed 19 IPR petitions ourselves and seven of our patents have 
been challenged using these petitions, and we think that this 
mechanism has been a very successful mechanism.
    People have questioned the high success rate, but what is 
not typically apparent is that a petitioner makes a very 
careful decision before they choose to file an IPR petition 
because of the collateral estoppel effect. And unless there is 
slam-dunk prior art, people usually do not file petitions.
    And it is no surprise that with that strength of prior art, 
when it goes before the board, that the success rate is high.
    Senator Leahy. Thank you very much. Thank you, Mr. 
Chairman.
    Chairman Grassley. Thank you, Senator Leahy.
    Senator Hatch.
    Senator Hatch. Thank you, Mr. Chairman.
    I believe everyone here agrees it is way past time to do 
something about patent trolls and to combat them. Last 
Congress, we began the legislative process to fix this mess and 
I am optimistic that we will pass patent troll legislation this 
year.
    I have been talking about the problem of patent trolls 
since 2005 when Senator Leahy and I first began work on the now 
America Invents Act.
    Patent trolls are an unnecessary drain on our economy and 
our Nation's innovation. An effective legislative approach will 
include many elements, but in my mind, two are absolutely 
essential.
    First, mandatory fee shifting is the best way to discourage 
patent litigation and abusive cases which should never have 
been brought, or defended in the first instance. Fee shifting 
should not be left primarily to the judge's discretion.
    Second, any viable legislation must ensure that those who 
successfully defend against abusive patent litigation and are 
awarded fees actually will get paid.
    There must be a mechanism to ensure the recovery of fees 
will be possible even against judgment-proof shell corporations 
or companies.
    Mr. Chairman, whatever we do, it must work and we must not 
support a bill that fails to provide an effective deterrent 
against patent trolls at all stages of the litigation.
    Now, let me just ask you, Mr. Gupta, a question. Do you 
agree the Supreme Court's decision in Highmark and Octane 
Fitness did nothing to ensure the recovery of fee awards from 
insolvent shell corporations?
    Mr. Gupta. Yes, Senator. Thank you for the question. I do 
agree. Highmark and Octane provide no remedy in terms of 
recovery of fees.
    Senator Hatch. When I introduced the Patent Litigation 
Integrity Act in October 2013, the general counsel of your 
company wrote to me and said, quote, ``By requiring a party to 
demonstrate that they or a third party have the ability to pay 
potential fees or explain why they wouldn't, a bonding or 
similar accountability provision ensures that the fee-shifting 
provision has the intended effect of curbing frivolous and 
baseless patent litigation,'' unquote.
    Now, I am sure you agree with me that we need to curb 
frivolous and baseless patent litigation, but do you also agree 
with me that having an effective recovery-of-award mechanism is 
critical to achieving this goal?
    Mr. Gupta. Yes, Senator. I absolutely agree with that. And 
I think it is necessary because, as we found out, these shell 
companies are very creative about how they game the system and 
we absolutely need a recovery mechanism to ensure that when 
fees are shifted they can be recovered.
    Senator Hatch. Yes. They sue and then run.
    Mr. Gupta. Yes.
    Senator Hatch. And leave you holding the bag after 
countless expenses.
    I am concerned about patent quality. I want to ensure that 
the U.S. Patent and Trademark Office issues the highest quality 
patents possible. Now, do you believe that allowing the USPTO 
to apply the broadest reasonable interpretation to patent 
claims allows them the greatest ability to get rid of bad 
patents?
    Mr. Gupta. I do agree with that, Senator. And the standard 
was recently reviewed by the Federal circuit in Kaz USA and the 
Federal circuit agreed that that was the proper standard. It is 
the standard that the Patent Office has been using for hundreds 
of years. That has been used for re-examinations and reissues 
and is indeed the standard that ought to be applied.
    And this is the agency that we think has the highest 
competence when it comes to granting of patents. If they want 
to revisit or reexamine their work, it is only fair that they 
be able to do it with the same standard that they used in the 
first place.
    Senator Hatch. Thank you, sir.
    Now, Mr. Sauer, you said there has been significant 
judicial developments in fee shifting that will impact fee 
awards. Yet Judge Rodney Gilstrap of the Eastern District of 
Texas, the judge who oversees the most patent cases in the 
country, said last week that the Supreme Court's ruling in 
Octane Fitness would not significantly alter the standard he 
uses for deciding whether to grant fees under Section 285 of 
the Patent Act.
    Why should we expect significant changes in the application 
of Section 285 when the judge who oversees the most patent 
cases in the country has said that Octane Fitness will not 
change the calculus for him or his colleagues?
    Mr. Sauer. Senator, yes. Far be it for me to comment on 
Judge Gilstrap's pronouncement. What we are aware of is, and it 
is very early in the process, right? So preliminary numbers did 
show that there was, after the Octane Fitness case, an uptick 
both in motions that were brought for key fee recovery and for 
the months following what seemed like an increased grant rate, 
actually, a significantly higher grant rate of these motions.
    Whether or not that is currently tapering off, I think, is 
subject to debate. Everybody in the community is closely 
watching this. So, whether or not it will lead to more fee 
awards I think is a little bit up in the air, but we do see a 
leveling off, I think at this point that should, at least be 
taken into account by this Committee.
    These cases are widely viewed as very significant and I am 
kind of surprised that now that they have been done and decided 
after so much briefing, their significance is being downplayed 
by those who ask for more mandatory fee shifting and less 
judicial discretion.
    Senator Hatch. The Chairman has allowed me to ask one 
further question, Mr. Sauer. You mentioned in your written 
testimony that the joinder provision in the House's Innovation 
Act would create additional encumbrances for patent-owning 
innovators. How would it do this?
    Mr. Sauer. We are very concerned about the joinder 
provisions. Senator, yes, it would create encumbrances as 
introduced in the House in the sense that that provision works 
by first sending out notices, menacing notices, if you will, at 
least, so they will be perceived by those business partners of 
the patentee who could potentially be put on the hook after the 
litigation is over for their fee award.
    So, that is a big concern that is of particular concern to 
biotech because we work in an ecosystem of licensors, 
licensees, small businesses, universities. There is a lot of 
concern about provisions that work after the fact, if you will, 
but that are premised on notice that is being sent out at the 
beginning of the lawsuit.
    People are very worried about interference with ongoing 
business relationships that will come from that. And if the 
target is to target shell companies, we do not think everybody 
should be put through the process.
    Senator Hatch. Thank you. Thank you, Mr. Chairman.
    Chairman Grassley. Senator Feinstein.
    Senator Feinstein. Thank you very much, Mr. Chairman.
    Mr. Anderson, I thought, well stated the problem with 
demand letters. Mr. Anderson, I just quickly want to read your 
written statement: ``These types of settlement demands can be 
crippling to small business, but the attorney's fees required 
to fight the lawsuit might be 10 times as much. So, in most 
cases, defendants will choose to settle regardless of the 
extent of their use or the merits of the patent claim.''
    That is a bingo moment. I found that out firsthand with the 
ADA--the Disabilities Act, the Americans with Disabilities.
    I am in Riverside County and I talked to a group of the 
Chamber of Commerce, which is a lot of small businesses and 
many minority businesses, and a group came up to me and said 
there were these attorneys that sent them demand letters if 
their ``No Parking'' sign was in the wrong place, if a trash 
barrel obstructed part of an entry, whatever it was, and it 
said that for $10,000, we will not sue.
    A lot of them were struggling to pay that. Well, we took a 
good look at it and the result was that the State legislature 
passed a bill, Senate Bill 1186, Governor Brown signed it, and 
essentially it required demand letters to contain specificity 
as to the wrong alleged.
    It prohibited such letters from containing a request to 
demand money or an offer or agreement to accept money, and, 
third, prohibiting such letters from stating any specific 
potential monetary liability.
    Do you believe something like that should be in a Federal 
law?
    Mr. Anderson. Thank you, Senator. I certainly do, and we 
have had similar experiences to what you expressed and the 
first demand letter that we received we brought to our ad 
agency, who is responsible for the technology.
    The demand letter was written so broadly that they did not 
know what to do with it and the quote was, ``This is an 
amazingly broad letter and we have no idea what they are 
asserting.''
    So, it is a problem and it needs to be fixed.
    Senator Feinstein. Thank you.
    Does any witness disagree with Mr. Anderson's statement?
    [No response.]
    Senator Feinstein. There being none, for the record. So, I 
thank you. I would like to move on.
    I am sympathetic to the plight of businesses who suffer 
from abusive discovery requests from patent trolls and 
recognize that this often creates a one-sided situation and a 
pressure to settle a case.
    As we all know, sometimes discovery is necessary in a 
legitimate lawsuit. But, does any witness disagree that 
discovery can be needed for a purpose, such as establishing 
that the court has jurisdiction over the case and the parties? 
Does anyone disagree with that?
    [No response.]
    Senator Feinstein. Good. How would witnesses, you, propose 
to structure appropriate discovery limitations that make sure 
the need for legitimate actors to enforce lawful patents is 
protected? Who would like to begin?
    Mr. Gupta?
    Mr. Gupta. Thank you, Senator, for that question. Clearly, 
in patent litigation there is a sequence to how certain things 
happen.
    A very important aspect of patent litigation is the Markman 
hearing. And in a Markman hearing, a plaintiff and the 
defendant will submit their proposals around what an invention 
actually means and the judge will construe those claims.
    What that does is early on you get to focus the case, if 
the Markman is done early. So, the plaintiffs know what claims 
they want to proceed with. The defendants then know what type 
of prior art they need to look for, and often the defendants 
also then know and the plaintiffs know what products can 
potentially be accused of infringement.
    Focusing discovery, for example, in a way, before Markman, 
to eliminate any unnecessary and burdensome discovery on things 
such as sales to customers or licensing agreements with 
customers or the number of customers, documents and product 
specifications for pretty much every product that a particular 
company can offer.
    It is wasteful and can be addressed in ways by phasing 
discovery and also by shifting some of the discovery burden so 
that core discovery can be paid for by the party that is 
required to respond, but non-core discovery is paid by the 
party requesting such discovery.
    Senator Feinstein. That is actually very helpful.
    Does anyone have a comment to make on that? Mr. Sauer, you 
raised your hand.
    Mr. Sauer. Thank you, Senator. Yes. I actually agree with a 
lot of what Mr. Gupta says. Our concern really is that the 
bill, at least the one that we see introduced in the House, 
H.R. 9, does not do that.
    The bill, H.R. 9, would require in some way to 
prospectively limit discovery to only what is necessary for 
claim construction at a time when the parties do not know what 
is going to be necessary for claim construction.
    Senator Feinstein. You like what Mr. Gupta said.
    Mr. Sauer. I like what Mr. Gupta said, that there should be 
a nationally uniform process indeed for the development of 
information on both sides of the case to make clear what the 
party's theory of the case is, what evidence backs up the 
party's theory of the case, and that should lead to a Markman 
hearing.
    I encourage the Committee to look through local patent 
rules that are in use in a number of district courts that are 
actually able to get to this claim construction hearing with a 
bilateral process where parties disclose to each other the 
information that backs up their contentions and get to a 
Markman hearing with 9 to 12 months uniformly in this court.
    I think that would really help and it would curb the 
unfocused discovery that is a problem in a number of district 
courts.
    Senator Feinstein. Does anybody disagree with what Mr. 
Gupta or Mr. Sauer have just said?
    [No response.]
    Senator Feinstein. Good. I will move on to universities. In 
the last patent bill----
    Chairman Grassley. This will have to be the last question.
    Senator Feinstein. I will be fast. Thank you, Mr. Chairman.
    The problem always comes in patent revision between 
universities and small inventors being on one side and the 
others--the bio, pharma, tech on the other side. It is very 
hard for me.
    I come from a State with a very large and well-known public 
university system. It leads universities nationwide in the 
number of patents each year and a substantial part of its 
revenue is derived from patents. And we graduate thousands of 
engineers every year.
    How would you prevent that from happening? And what is the 
importance of strong patent protection for universities and 
small inventors? Mr. Crum?
    Dr. Crum. Yes. I am not sure I have an answer for that. 
That is part of the balance that needs to be struck.
    Senator Feinstein. Right.
    Dr. Crum. And as I hear the conversation around the table, 
as we talk to small companies that are licensing our 
technology, just the uncertainty, the risk that they may incur 
in the loser paying, for example, even if they are convinced 
that they have a strong case, one loss like that can be 
devastating to them financially and we are just concerned that 
it may curb and present a significant barrier to their access 
to judicial review of those.
    Senator Feinstein. I think my time is up. Thank you very 
much.
    Chairman Grassley. I have been kind of liberal on the time. 
I think we are going to have to stick to 5 minutes, if it does 
not irritate anybody. Otherwise, we will not get done today.
    Senator Cornyn.
    Senator Cornyn. Thank you, Mr. Chairman. I never thought of 
you as liberal.
    [Laughter.]
    Senator Cornyn. But thank you for your generosity. Thank 
you for having this hearing. This is an important part of the 
table setting, I think, for consideration of patent reform 
legislation.
    We got close last year, but it did not happen. So, I am 
optimistic that we will be able to make progress this year and 
if there is one word that I guess I have heard all of you use, 
it is balance.
    We need to recognize there are certainly legitimate rights 
that should be litigated and decided in court, but on the other 
hand, there is also legal extortion, shaking down people who 
cannot defend themselves and using that money then to file 
other frivolous litigation.
    Last Congress, I introduced the Patent Abuse Reduction Act, 
which has several core components, many of which you have 
talked about already. It requires plaintiffs to plead the 
substance of their claim; puts lawsuit beneficiaries on the 
hook for abusive patent litigation from which they profit; and 
brings fairness to the discovery process; and, finally, shifts 
responsibility for litigation abuse to the abuser.
    I personally am of the view that unless we have an adequate 
fee-shifting mechanism in the legislation, it is not worth 
doing. So, I feel very strongly about that.
    Mr. Sauer, I think you mentioned some concern about the 
fee-shifting provision. Perhaps you are referring to the House 
legislation which has a presumption, and I wonder if you would 
have any kinder remarks to make about a system that was not 
presumptive.
    Mr. Sauer. I believe I would. And so, to clarify for the 
Committee, our concern, as it was expressed by our smaller 
members, because we also have larger members who are more 
accepting of a fee-shifting provision, our concern was that the 
House bill would establish what, in the view of our smaller 
members, would be a true loser pays system, where under the 
normal American system, ordinarily each pays their own and it 
is up to the winner to explain why the loser should have to 
pay.
    The House bill would flip that burden and the burden would 
be on the loser to explain why they should not have to pay.
    As we see it, your bill, Senator Cornyn, especially after 
it went through negotiations in this Committee with staff 
during the last Congress, that work product we understand was 
trending away from these concerns that we have expressed in our 
testimony and we would be interested to see how it develops 
further, if we had had an opportunity. Maybe we will have one 
to take it back up.
    Senator Cornyn. Well, that remains a work in progress here 
on this Committee and we are working closely with the Chairman 
and the Ranking Member and Senator Schumer, in particular, but 
really all Members of the Committee, to try to address that.
    I know there have been some--we have not talked very much 
about the importance of a pleading requirement. Mr. Gupta, 
maybe you can address this. The legislation that we have filed 
requires that the claimant or the plaintiff actually explain in 
the lawsuit what their patent is and how it got infringed.
    Do you think that is an unreasonable thing to ask and what 
is the problem of the status quo?
    Mr. Gupta. Thank you, Senator. I certainly do not think 
that is a problem. In fact, in meritorious actions that are 
initiated by patent holders, there is enough diligence that is 
done prior to the action being filed where that information 
should be available to the patent holder in the first place.
    Businesses, lawyers, reputable businesses, they go through 
a review process before any patent action is filed to ensure 
that they have complied with the Rule 11 obligations, their 
obligations to ensure that they are not asserting frivolous 
claims.
    And so requiring a basic amount of information about the 
claims that are allegedly infringed, how the infringement 
occurs and the claims that are being asserted is a very low 
burden on good faith plaintiffs.
    Senator Cornyn. Thank you. I was struck--and this was 
something Mr. Sauer said about the post-grant review process, 
but a case in particular where a hedge fund shorted that 
company's stock before filing a claim.
    I guess if the claim is successful, then the patent should 
have never been issued. Then they would be vindicated. But I 
just wonder if the same potential for abuse exists in the 
litigation context. I would imagine it does.
    So, what would happen, for example, Mr. Powers, to your 
company if a hedge fund decided to file a patent infringement 
lawsuit and then shorted your stock? How would you see that and 
what would that do to your ability to function?
    Mr. Powers. Thank you for the question, Senator. Being a 
privately held company, that is not a concern that we have to 
deal with.
    Senator Cornyn. Okay. Let me ask Mr. Anderson. You are a 
publicly held company, are you not, sir?
    Mr. Anderson. No, we are not. We are private.
    Senator Cornyn. Well, imagine, with me.
    [Laughter.]
    Senator Cornyn. Imagine, Mr. Anderson, you are a publicly 
held company and a hedge fund shorts your stock and then 
generates a patent infringement lawsuit against you. What would 
go through your mind? What sort of pressures would that bring 
to bear on a publicly held company to settle that lawsuit even 
though it was a frivolous lawsuit? I realize it is a 
hypothetical.
    Mr. Anderson. I cannot really answer that, Senator.
    Senator Cornyn. I imagine it would be pretty devastating.
    Mr. Sauer?
    Mr. Sauer. A very quick observation. Yes. So, I think 
settlement pressures can be terrible, I think, especially for 
smaller businesses.
    The reason why I believe the stock markets might react 
differently is that know statistically when patents are 
challenged in district courts on the same grounds that are 
available in the Patent Office IPR proceeding, they go down 
approximately 45 percent of the time in district court. That is 
the invalidation rate for these reasons: patent and written 
publication to have prior art.
    In IPR proceedings, the patents go down approximately 80 
percent of the time or only 20 percent come out. So, we believe 
that the markets react probably more strongly to IPR 
proceedings because they just see these statistics with higher 
kill rates than what is available in the district courts, and 
it is great for people who bet against patents when they have a 
proceeding like that where the statistics bear that out.
    Senator Cornyn. Mr. Chairman, thank you for your generosity 
in terms of the time. I would just say, I think we need to also 
recognize that when frivolous patent litigation is filed, it 
exacts a cost not just on the company, the defendant, and 
extracts perhaps a nuisance settlement, it also can have a 
dramatic impact on the shareholders of that publicly held 
company and basically constitute legal extortion and, of 
course, have much broader impact on the people who own the 
shares in that company.
    Thank you.
    Chairman Grassley. Now, Senator Schumer.
    I am going to ask Senator Lee if he will Chair while I take 
a couple appointments in my office.
    Senator Schumer.
    Senator Schumer. Thank you, Mr. Chairman.
    First, I would like to congratulate Mr. Anderson on his 
public offering. I hope your stock does very well.
    [Laughter.]
    Senator Schumer. I want to thank Senator Cornyn for working 
closely with me in trying to come up with a bipartisan 
solution, and Senators Grassley and Leahy for helping us put 
that all together. We are feeling pretty good about it.
    And it is not the first time that we are coming together to 
discuss the problem of patent trolls. I am sure it will not be 
the last.
    Last spring, as you know, our Committee spent several 
months in heated and bipartisan negotiations. But our goal 
remains the same and that would help us club the trolls once 
and for all without harming legitimate inventors and innovators 
who rely on a robust patent system.
    Although the deal was elusive at the time, I am confident 
that with renewed bipartisan effort and energy, we will get 
this done in Congress. The witnesses before us advocating for 
reform represent an important cross section of the economy. We 
have a large tech company, a family farm manufacturer, a small 
business restaurant franchise company.
    But I want to spend a moment focusing on those who have 
really animated my personal interest in this debate, the small 
technology start-ups that are energizing the New York economy 
every day.
    Mr. Gupta talks a little about this in his testimony. He 
notes that patent trolls are a problem for large companies, but 
they are a larger problem for start-ups who will lose investors 
and easily be driven out of business by patent trolls.
    I have heard about this. Good companies, they come in, they 
get extorted, they say we are going to file a lawsuit against 
you unless you give us half a million dollars, and they do not 
have it. And this is the lifeblood of America, these new 
companies.
    So, I feel so strongly about this--not just from a New York 
point of view, but from a national point of view.
    A letter our Committee received from 140 venture 
capitalists who invest in technology companies backs this up. 
Engine Advocacy has pointed out 82 percent of troll activity 
targets small and medium businesses; 55 percent of troll suits 
are filed against start-ups with revenues of less than $10 
million because they know those people cannot afford a long, 
lengthy lawsuit, which the Patent Office now--the patent law 
now not only sanctions, but blesses.
    The trolls are smart. They know these small companies 
cannot afford to litigate even if they are in the right, so 
they are more likely to settle. It is those start-ups that are 
in the front of my mind throughout this debate and will 
continue to be my lodestar.
    A patent reform bill needs to meaningfully address the 
needs of these start-ups to earn my vote. In many ways, patent 
troll legislation, as all of us on this Committee have learned, 
is like a Rubik's Cube. You need to turn and twist all the 
parts properly so we are really fixing the problem, but also 
protecting those who are not part of the problem, who are 
represented by two witnesses here today.
    It is very hard to do. That is why it has taken a long 
time. It is not ideological as much as it is trying to solve 
the problem without creating negatives that might outweigh the 
benefit of solving the problem.
    Well, the good news is, I think we are in a good place. 
Senator Cornyn and I worked out agreements. Senator Leahy asked 
me to get involved, which I did, I was happy to do. And I 
believe that the compromise Senator Cornyn and I came up with 
remains a positive framework for bipartisan cooperation.
    In fact, I see patent reform as a little oasis of 
bipartisan cooperation in what many of us worry is a desert of 
partisanship these days. So, I want to continue to work with 
Senator Cornyn, Chairman Grassley, Ranking Member Leahy, on 
putting together a package that is fair and meaningful and 
protects patent holders while eliminating the leverage that bad 
actors currently exercise in the patent system.
    So, Mr. Gupta, you mentioned in your testimony that the 
biggest impact on patent trolls is on smaller start-up firms. 
Can you elaborate on that point? What reforms would be most 
significant in protecting those companies?
    Mr. Gupta. Thank you for the question, Senator.
    I have cited some research from reputable universities and 
the conclusion is unanimous that it impacts investment. It also 
impacts their ability to hire people on focused research and 
development and it is a big distraction for these companies.
    The biggest challenge they have is that patent litigation 
is so expensive right now--and not only that, but the risks are 
so asymmetric that defendants really do not have the ability to 
get their day in court.
    To get to trial, the data that I have cited, the average 
time to trial now is almost 3.5 years, 1,220 days.
    Senator Schumer. It is a crazy system.
    Mr. Gupta. So, most small companies do not have the 
financial wherewithal to actually get their day in court.
    Senator Schumer. So, let me, before my time expires or 
expires any longer, ask you one more question.
    You have talked about the importance of post-grant 
administrative review with the PTO. Can you explain the effect 
that the changes in the STRONG Act, which my dear colleagues 
have introduced, but I disagree with, would have on your 
ability to utilize those proceedings to weed out poor-quality 
patents?
    Mr. Gupta. A particular proposal around claim amendment is 
a reasonable proposal that I think we could work around. 
However, for example, one suggestion is that there should be a 
different panel that ought to consider the--make the 
institution decision and a different panel should look at the 
final decision or be responsible for the final decision. That 
does not seem to be a practical solution.
    In district court litigation today, for example, we do not 
say that if a judge rules on a motion to dismiss adversely, 
that we get a different judge for the rest of the trial.
    In Patent Office prosecution, we do not say, for example, 
that if a patent examiner rejects the claims of a patent in a 
first office action, that the second office action be 
considered by a different examiner.
    So, I think there are various aspects that are not 
practical. And this was a system that was designed to lead to a 
quick, efficient way to have the Patent Office, the body that 
granted the patents in the first place, simply revisit their 
work.
    So, they should have the rulemaking authority. The Federal 
circuit looked at the process and has blessed it, in my words, 
and I think it is too early to tinker with this. The Patent 
Office is actually asking for comments from practitioners, 
litigators, the public. They are expected to issue quick fixes 
in the next few months and final rules by the end of the year. 
We should let this process play out.
    Senator Schumer. Well, thank you.
    And I just want to say, Mr. Chairman, I am optimistic that 
Senators Grassley, Leahy, Cornyn, and I can come up with a 
bipartisan solution that will actually pass the Senate this 
year.
    Thank you.
    Senator Lee [presiding]. Thank you. Thanks to all of you 
for being here today. This is a very important issue.
    The way I can tell that it is an important issue has a lot 
to do with what I see at town hall meetings. This is an issue 
that just a few years ago was very rarely discussed outside of 
the sort of wonky circles that we see inside of Washington.
    But this is something that has now become important to 
people not just on K Street or on Wall Street, but on main 
streets throughout America. I hear about it routinely from 
small business owners across my State and from throughout the 
country.
    It is a subject that we need to pay more attention to and 
there is a lot of enthusiasm on this Committee for patent 
reform, which, I think, has now become indispensable for 
American businesses, large and small, who want to be able to 
operate and grow without fear of extortion from patent trolls; 
for example, unscrupulous entities who will send your small 
business a letter accusing you of infringing one of their 
asserted patents, with the Wi-Fi router you happen to use in 
your small business, perhaps allowing your customers to access 
it while in your store.
    But in this demand letter, although you are told that you 
are infringing, you are not told how you are infringing and you 
are threatened with litigation and you receive a demand for 
payment.
    Last Congress, this Committee worked hard to pass patent 
reform legislation that would crack down on abusive practices 
in patent litigation. Senator Leahy and I worked together on a 
bill called the Patent Transparency and Improvements Act that 
would have attacked the problem of demand letter abuse and 
would have protected businesses like retailers who use 
equipment manufactured by someone else from having to 
immediately defend against infringement claims.
    Meanwhile, Senators Grassley and Cornyn proposed important 
reforms to address the way patent cases are tried. Their 
reforms were designed to make the business model of these 
patent trolls unprofitable and to give parties the incentives 
to conduct efficient litigation in patent infringement cases 
and to, of course, hold them accountable when they impose 
unreasonable burdens on each other.
    I am hopeful that this year we will succeed in uniting 
these reforms and that we will finally pass legislation so 
desperately needed by American businesses, both big and small.
    Mr. Anderson, in your testimony you describe some of your 
experiences with abusive patent infringement demand letters. 
How does a business like yours decide whether or not to pay up 
on a demand letter?
    In other words, do you try to evaluate the merits of the 
infringement allegations against you or are you more likely to 
try to size up the size of the demand and weigh it against the 
inevitable cost of litigation?
    Mr. Anderson. The routine is, I try to gather--thank you, 
Senator--as much information as I can, but ultimately we end up 
in the same place. We cannot afford to litigate one of these 
cases. There is too much unknown information out there. And so 
ultimately we know that we are going to enter into a license 
agreement. The question is, can we negotiate that price down a 
little bit?
    But as I said in my earlier testimony, the price has 
nothing to do with the technology. The technology may be 
something that really does not drive business and may not be 
worth much to us, but somebody alluded to earlier that maybe 
you could just stop using the technology.
    That does not matter because you are still responsible for 
past use. So, at that point in time, the demand is not going to 
go much--down very much if you cease using that technology.
    So, it is just a question of trying to reduce my outside 
attorney's fees with the IP attorney and reduce the licensing 
fee. But that is where we end up.
    Senator Lee. If you had to identify just one reform or, 
say, one small list of two or three reforms that would help 
alleviate this problem, what would that or what would those 
reforms be?
    Mr. Anderson. Senator, it would be difficult to narrow it 
down to one or two or three. We are looking for comprehensive 
reform. The more that you can do for us, the better.
    This really is crippling to our business and it is steering 
us away from technology, which, as I said before, our customers 
want, our franchisees want, and we really would like to give 
business to the small innovator.
    Senator Lee. Would it help, separate and apart from what 
other reforms might be helpful, would it also help if Congress 
somehow channeled the FTC's enforcement activities toward going 
after demand letter abuse?
    Mr. Anderson. Certainly that would be one step that would 
be helpful.
    Senator Lee. And I assume you see a lot of demand letter 
abuse in your line of work based on your description earlier.
    Mr. Anderson. Yes, we do.
    Senator Lee. How many of those do you get in a typical 
year, if you feel comfortable sharing that?
    Mr. Anderson. Patent troll demand letters, we received two 
and we have--we are the defendant in a lawsuit. But I have 
reached out to other restaurants and retailers and this is 
common practice across the industry.
    Senator Lee. All right. I see my time has expired.
    Senator Durbin.
    Senator Durbin. Thank you, Senator Lee. And thank you to 
the panel for being here.
    The first major patent reform in the modern era was in 
1952. We waited 59 years before we tackled it again in 2011 and 
then we decided to wait 3 years to go after it again.
    I am concerned about that. Why would we return so quickly 
to something enshrined in the Constitution and critical to the 
development of the American economy? And the explanation was 
given by my colleague from New York. We are out to club the 
trolls. That is what this is all about.
    Who are these trolls? You visualize a gnomish little 
ambulance chaser threatening litigation, mischief, and 
harassment, trying to extort money when they have no legitimate 
claim.
    Well, perhaps that is what some think a troll to be. We 
asked the Government Accountability Office what percentage of 
patent litigations are filed by non-participating entities; in 
other words, companies that do not make things, companies that 
just sue people.
    Incidentally, that could be a university that came up with 
some research that led to patent which is licensed in favor, 
and they said of all the patent litigation filed, they would 
put the non-participating entities, the trolls, at a maximum of 
20 percent.
    That means out of every five lawsuits filed in patent 
litigation, the Government Accountability Office says, one out 
of five could be a troll.
    So, what we are talking about are changes that are going to 
affect 80 percent of patent litigation, which most of us 
believe is totally legitimate. It is not just about clubbing 
the trolls. We are clubbing the filers of patent litigation and 
that includes a lot more than just mischevious little gnomish 
figures.
    In fact, if you take a look at the group that opposes H.R. 
9, which is the only stated position now for reform by 
Congressman Goodlatte, listen to who is included in the 
opposition to this reform effort that we have been hearing 
about. Listen to the opponents and tell me if you think these 
are ambulance chasers.
    The Association of American Universities. Dr. Crum, that 
might include your school. The Biotechnology Industry 
Organization; the Medical Device Manufacturers Association; the 
National Venture Capital Association; PhRMA; and, a group which 
represents 200,000 American scientist and engineers. Ambulance 
chasers? I do not think so.
    The Venture Capital Association takes a look at Congressman 
Goodlatte's bill and writes us a letter. Here is what they say: 
``We're concerned that H.R. 9, if enacted as written, will have 
a chilling effect on investment in patent-intensive companies 
and will make it far more difficult, risky and expensive for 
emerging companies to enforce their patents, an essential part 
of the patent right. Further, H.R. 9 will raise the cost and 
risk of confronting smaller companies trying to defend against 
patent litigation brought by larger competitors.''
    This--as you look at this story and step back from this 
little gnomish figure, the patent troll, it starts to look a 
lot differently.
    Mr. Gupta, you spoke in your testimony about EMC spending 
$10 million in 2014 on frivolous patent litigation. What were 
the revenues of EMC in 2014?
    Mr. Gupta. $24 billion.
    Senator Durbin. So, what would $10 million--what percentage 
would $10 million in legal fees be of your $24 billion revenue?
    Mr. Gupta. And that is just outside counsel, Senator. The 
disruption to our business in terms of the number of people who 
get involved. In one particular case, we had a star engineer 
devote 10 percent of his time. We had to get 100 people 
involved in looking for documents that go back so far that we 
do not even have electronic records for them.
    Senator Durbin. The calculation, incidentally, is not four-
tenths of 1 percent of their revenues, it is four-hundredths 
percent of their revenues that were spent. It doesn't suggest 
to me that EMC is being crippled. I would say that you probably 
have nuisance lawsuits in a lot of other areas that amount to 
as much, if not more.
    But I do sympathize with, Mr. Anderson, your company and I 
do eat butter burgers; and, Mr. Powers, with your company. And 
we have got a lot of farmers in our State that use your 
company's inventions.
    And I do know that harassment does take place. That is why 
I am cosponsoring Senator Coons' bill. We want to go after the 
real abusers in this, but we do not want to put a chilling 
effect on the patent system.
    Honest to goodness, there are going to be small patent 
holders who are going to have to get up and fight the big boys 
who are abusing their patent rights. And when we start throwing 
in loser pays, most of them are going to walk away and say we 
just lost it.
    We have lost something that is a property right enshrined 
in the Constitution and something that is as critical to the 
future of the American economy as small- and medium-sized 
businesses.
    Dr. Crum, every major university in Illinois has written to 
me saying, ``Oppose this patent reform.'' Every one of them. 
Tell me why the universities are speaking out against something 
that many have characterized as just clubbing the trolls.
    Dr. Crum. Thank you, Senator. I think it would be hard to 
improve on what you just articulated. I think you really hit a 
lot of it.
    Much of our concern is for our partner companies, as we 
transfer our technologies to those who can take it to market 
and do something wonderful with it.
    And precisely as you said, the concern is for those small 
companies--though we deal with big companies, too. There are 
big, innovative partners of ours, too. But it is those small 
companies that are at risk here.
    We do not disagree with going after the abusers. We 
absolutely are in line with that because we see the impact. But 
for small companies, it is the fear that even if they are 
right, there is so much uncertainty and risk in going to 
litigation, and none of these companies are litigious. They do 
not have staffs or resources to do that.
    We try to help them, but we also are not geared for that. 
We do not want to put money into litigation. We want to put it 
into research and innovation.
    Senator Durbin. And back into the GAO report: 80 percent of 
patent litigation is not being filed by trolls, it is being 
filed by small- and medium-sized patent holders who are many 
times fighting the big boys. And H.R. 9, the Goodlatte loser 
pays approach, is going to have a chilling effect on their 
efforts to protect their property rights and these ideas and 
their ability to assert those rights in our court of law.
    This so-called reform is about a lot more than clubbing 
trolls.
    Thank you, Mr. Chairman.
    Senator Lee. Thank you.
    Senator Tillis.
    Senator Tillis. Thank you, Mr. Chair.
    Actually, Dr. Crum, let me come to you first. Can you give 
me a sense--I am from North Carolina. I have got N.C. State-
Chapel Hill, Duke. They do a lot of great work there and they 
apply for a lot of patents.
    What is unique to the university setting versus, say, the 
private sector that is doing fundamentally the same thing 
outside of a university setting? What is unique to your concern 
or are there any unique considerations?
    Dr. Crum. Thank you for the question. It is a very good 
question.
    I think that there are many similarities in what we do, 
obviously. I think maybe, again, if you are taking a look at 
the kind of research that we do, that research is being 
performed largely by large companies, large private companies.
    They do have deeper pockets, but litigation is not where 
they want to put their resources and it should not be where 
they have to put their resources if it is frivolous, but they, 
at least, have that ability.
    Senator Tillis. I was trying to get a sense--in North 
Carolina, the Research Triangle, we have a lot of smaller 
companies that would probably be more resource strapped than 
the university, quite honestly.
    Dr. Crum. Absolutely.
    Senator Tillis. So, I am trying to get a better idea for 
those types of companies and why they are different and unique.
    Dr. Crum. Why they are different? I missed the point. Why 
they are different and unique from----
    Senator Tillis. From the university, the concerns and 
priorities for any kind of reform that we would pursue.
    Dr. Crum. Maybe I should address that by saying what our 
priorities are, what our mission is. We view our mission as 
research, discovery, and creating knowledge that we then move 
to the marketplace via partner companies.
    Thus, our concern is the impact on those companies that we 
work with, because we are not as good at technology 
commercialization as the private sector. We understand that.
    So, we are focusing our efforts, our resources on the 
research and then transferring that technology.
    But we have concerns, too, because the university can be 
subject to litigation. But much of our concerns are with our 
partners, particularly those small firms that we have talked 
about and the start-ups.
    Maybe I am missing your point. I am sorry if I am.
    Senator Tillis. No, and I can follow up.
    Mr. Gupta, I have a question. I know you mentioned the 
worldwide revenues for EMC. What was your profit last year?
    Mr. Gupta. That is a good question. Several billion.
    Senator Tillis. But the base really needs to be on your 
profits, not on the cost to produce.
    Then, the next question is, do you know roughly what your 
R&D budget was?
    Mr. Gupta. About $3 billion last year.
    Senator Tillis. About $3 billion. So, again, I worry about 
the amount of money spent on these matters at the expense of 
innovation. Whether you are a university, whether you are a 
small business, whether you are a large business, you all 
create technologies that keep America at the forefront. I see 
this as eroding money that can be put to a better and higher 
purpose. Thank you for that.
    I have a question, in general. We did patent troll 
legislation in North Carolina, thought it was going to be a no-
brainer. It is not. I was the Speaker of the House there when 
we started moving it. We had everybody coming in with their 
concerns.
    Since I have been up here, I have heard about everybody is 
for some sort of change, except for the kind of change that 
would harm them, which is why we probably could raise a hand 
and get 10 different groups in here for a different kind of 
reform.
    I particularly heard concerns raised between the 
pharmaceuticals industry and the high-tech industry and I get 
the sense that one kind of likes the devil they know. The other 
one thinks that there needs to be some fundamental changes.
    Can you all give me some sense of what the crux of the 
issue is? I will just leave it to those who want to volunteer 
their own perspective, and maybe we can start with Mr. Gupta 
and then we will come down there.
    Mr. Gupta. Thank you for the question, Senator. I think you 
are absolutely right that there is a fundamental difference in 
how the abuses in the system are viewed.
    Fortunately for the pharmaceutical industry, they have not 
been targeted by abusive litigation tactics. Unfortunately, our 
industry seems to draw most of the attention and----
    Senator Tillis. Are you aware of the report that was 
issued--I do not recall the professor's name at Harvard--that 
is saying it is just a matter of time where the pharmaceuticals 
industry will be next?
    As these folks continue to raise money and they can expand 
their field of play, I do not think any industry should think 
that they are somehow going to be protected from it over time 
if we do not do something about it.
    I am sorry to interrupt you.
    Mr. Gupta. I could not agree more with you, Senator. I am 
aware of that study and I think, as we found out, these shell 
companies are very creative about figuring out where is the 
next pocket of money they can chase. And pharmaceutical 
companies and biotech companies are highly profitable and I am 
sure it is just a matter of time.
    Senator Tillis. Mr. Chair, if you do not mind, I would like 
to hear from a couple of others, if I may. The gentlemen down 
here.
    Mr. Sauer. Well, thank you. Our sense is within BIO, 
because we have so many large and small members that the 
divide--I think more unambiguously thoughts between large 
companies and small companies. On many of these issues, we have 
large, robust PhRMA companies who feel that they will be able 
to weather a lot of changes in the law and a lot of 
developments, whereas 80 percent of our members are small 
companies who are much more concerned about what is going on, 
whether they are biotech or in other areas.
    A quick word about whether PhRMA will be next as targets 
for patent trolls. We, too, are aware of that particular study. 
We have discussed it at length within our membership and for 
reasons that take too long, we cannot validate hardly any of 
it. I think we do not share that particular concern because our 
landscape is somewhat different than what was presented in this 
study.
    A quick word on what the proposed legislation would 
actually do. Everybody agrees that small companies deserve more 
protection against unfair assertion.
    Our members, most of which are small companies, are quite 
concerned, though, that legislation that has been introduced 
will not do anything for them, at least to the extent they need 
to defend their own businesses against patent infringement.
    For example, provisions like enhanced pleading, the motion 
practice that would be enabled by that is not for these small 
companies to use. Impleader practice for joining parties, they 
do not need to do that.
    What we should be doing is treat demand letters like any 
other consumer scam. I think in States, your State bill, I 
think, takes the right approach. Whether it should happen at 
the State level is one question, but I think a lot of people 
and policymakers have caught onto that that is a very important 
starting point.
    We need to regulate demand letters and make sure that they 
give proper information. And we need to do other steps like 
protect consumers of products and end users of products, when 
it is really the manufacturers of these products who should be 
defending the lawsuits.
    Thank you.
    Senator Tillis. Thank you, Mr. Chair, and thank you for 
your work on this matter.
    Senator Lee. Thank you.
    Senator Franken.
    Senator Franken. Thank you, Mr. Chairman.
    Just one thing that Senator Schumer brought up that I 
wanted to sort of balance a little bit. He talked about start-
ups wanting protections from what you call the trolls.
    There is the other side of it, I think, of start-ups and I 
think the university is--the universities sort of represent 
this, because he talked particularly about venture capital.
    I think venture capitalists--is it not true that very often 
venture capitalists, when they are investing in a business, a 
start-up, see the value of the patent even if the business does 
not make it? And that is the other side of--Senator Schumer 
seemed to suggest that venture capitalists are on the other 
side of this issue because they are start-ups and they do not 
want to be attacked by a troll.
    But is it not sort of the other side, too, which is that 
venture capitalists very often are in this to have the value of 
the patent even if the business does not work?
    I guess I could ask either Dr. Crum or Mr. Sauer.
    Dr. Crum. Let me start. Thanks for the question. I think 
the venture capitalists view the patent as a very important 
reason for investing in that company, but the VCs themselves 
are looking for someone that can take the IP and develop the 
products and the processes.
    So, yes, the patent is extremely important to them and the 
ability to protect that intellectual property. But if the 
business goes under, the VCs, even if they are left with 
ownership of the patent, they still need someone that can then 
develop that, develop off of that patent.
    So, again, I think it still gets back to the question that 
we need to make sure that the small companies, the start-up 
companies that are truly innovative, have fair protection of 
IP.
    Senator Franken. Mr. Sauer?
    Mr. Sauer. In the small companies where I worked before I 
joined BIO, we went through this several times, because there 
is always need for more capital in these companies that burn 
like tens of millions of dollars per year in biotech.
    My experience was that whenever we went out for funding, 
one of the very first things the analysts would ask for and the 
venture capital funders would ask for would be what patent 
portfolio do you have, like what is your platform technology, 
what are the patents that protect those, can we take a look at 
those, how were they examined.
    So, they went really in depth. It was quite stressful--at 
the time, I was just a patent agent--for the company to survive 
such scrutiny.
    The scientists had it better, because they just had to talk 
about the merits of their technology. But when they went into 
the patent portfolios, because that depended on how much money 
they were going to give us, there was a lot of pressure from 
management.
    So, I can only validate that at least those VCs who invest 
in the life sciences are very, very interested in patents and 
will not fund a company, by and large, that does not have a 
meaningful IP portfolio.
    Senator Franken. Again, we are talking about balance and I 
just wanted to kind of balance what Senator Schumer said, 
because the other side of it seems to be that venture capital 
is very often invested because of the patent.
    But on the other side of it, of course, is--Mr. Anderson, I 
appreciate your being here to represent the perspective of an 
American business that has been harmed by bad actors in this 
sphere, and I know that abusive tactics have harmed Minnesota 
businesses and there is no question that we need to do more to 
stop the worst abuses of the system, of the patent system.
    At the same time, the patent itself also protects a lot of 
Minnesota businesses. So, again, I hope we can get this balance 
right.
    Can I ask you to describe to me how Culver's approaches a 
demand letter? Have you ever considered litigating a patent 
infringement claim or has the cost always been too prohibitive 
given the size of your company and the capacity to confront 
such issues? And on the other hand, how much money has Culver's 
spent settling various claims with demand letters?
    Mr. Anderson. Due to confidentiality, I cannot get into the 
dollar amounts of the settlement, and you will find that across 
the industries.
    In terms of how I handle it, the first thing I do is 
contact--I am a solo practitioner in-house and patents, when I 
came to work for Culver's, I had hardly heard of a patent and, 
unfortunately, they crept into the restaurant industry.
    I check with other in-house counsel and outside counsel to 
see how these things have played out, but ultimately we cannot 
afford to litigate.
    We are the defendant in one lawsuit. We would have settled 
but for--we were able to form a joint defense group. So, I was 
paying one-tenth of every legal fee.
    I still paid $100,000 and we were still early in the 
lawsuit, but if I was not paying one-tenth, $1 million, there 
is no way we could afford that.
    Senator Franken. Sure.
    Mr. Anderson. That is money, again, that should be going 
towards helping our franchisees succeed, not paying out to 
patent trolls.
    Senator Franken. Well, I guess my time is up, but you said 
you can't tell me because of confidentiality, but my 
understanding is that doesn't hold in Senate hearings. Isn't 
that right, Mr. Chairman?
    [Laughter.]
    Senator Franken. No, I am lying.
    [Laughter.]
    Senator Franken. That's not true. Thank you.
    Senator Lee. Senator Perdue.
    Senator Perdue. Thank you, Mr. Chairman. And thank you for 
being here.
    I was trained as an engineer. I have been very heavily 
involved in the tech community in my home State. For the last 
few years, I have actually been on the board of a high-tech 
start-up. So, I have seen both sides of this endeavor.
    It seems to me that the greatest economic miracle in the 
history of mankind--we have sat here and watched it over the 
last 70 years in the United States--and it was fundamentally 
founded on three precepts: In addition to having the best 
workforce in the history of the world, we have the ability to 
innovate, and we have the ability to form capital, and we have 
the rule of law.
    No other single country that we compete with today has all 
three of those to the degree that we do.
    It seems to me that this abuse that we are talking about 
here today is threatening two of those three and it really is 
very serious, but we have got to find a balance. I have got a 
couple of questions about trying to find that balance, but it 
just seems to me that there are two objectives here. Obviously, 
we have got to control the frivolous nature of these lawsuits 
to protect the start-ups.
    In my experience, start-ups need three things: One is, they 
have to have the innovation; two is, they have got to have the 
capital; and three is, they have got to survive the first 2 
years. And I would bet if you look at this, a lot of these 
attacks happen in these first 2 years, while angel investors 
are in there before the venture capital community is involved, 
and it will scare everybody to death and it will freeze up that 
early capital, in my opinion.
    So, I am concerned about the universities who own the 
technology. They are trying to transfer the technology and get 
a license for it, but I am also concerned about the person who 
is buying the technology and actually trying to commercialize 
it.
    So, Dr. Crum, I would love for you to talk about this 
transfer process and about the Innovation Act, but also to talk 
about the specific provisions of the various bills that you 
believe adversely affect the ability of universities not only 
to transfer the technology, but also to help these start-ups, 
because I know you guys and other universities are very 
involved with angel investors in helping these start-up 
entities attract capital in the early, early stages of their 
incumbency.
    Dr. Crum. Thank you. When we have those first conversations 
with companies about what their needs are, what their goals 
are, what they are trying to do, we sit down and we work very 
closely with them. They become a partner. We license the 
technology to them. We try to help them attract capital.
    I talked to the person who runs our IP and tech transfer 
operation just yesterday and asked if she could give me a few 
examples of companies for which the patents were absolutely 
critical to getting capitalization, and she ran through 15 just 
off the top of her head.
    So, you are absolutely right, having the technology, the 
ability to protect it, is absolutely critical to attracting the 
capital, no question about that.
    And, the second part of your question was?
    Senator Perdue. Well, it seems to me that one of the 
problems you have is in helping these young entities survive.
    Dr. Crum. Exactly.
    Senator Perdue. And so, the frivolous lawsuit, you see both 
sides of this equation.
    Dr. Crum. Yes.
    Senator Perdue. I think that you and Dr. Sauer particularly 
can empathize with these business owners and yet you are 
protecting the university for their rights as well.
    So, there are two sides of this and we have got to find a 
balance and the way through here, the 20 percent that end up 
being the frivolous cases. I do not know where Google or 
Microsoft or Apple might have been in their first few years of 
development, but if they were caught up in this, they may never 
have gotten to maturity.
    Dr. Crum. And I think you were asking what things do we see 
maybe that we would strongly support. I think we have talked 
about a lot of that already, and a key one is ending the 
abusive demand letters. As has been discussed, those need to be 
more narrowly focused, specific, and nonthreatening.
    There needs to be recourse against those who are filing 
those frivolous demands, the trolls.
    Also, I think any changes that lead to higher-quality 
patents, more narrowly scoped, better defined, that would also 
include some of the mechanisms that were being discussed 
earlier by the panelists that enable and encourage challenges 
to patents before litigation occurs.
    If we keep out of the courts, I think that is really 
critical in those first couple years in particular for the 
start-up companies.
    I think there are other things out there. I am not an 
attorney and I am not as deep into the weeds on the proposals. 
I think the other panelists here probably are better suited for 
that.
    Senator Perdue. Dr. Sauer, would you like to answer the 
second part of that question?
    Mr. Sauer. Yes. So, I think the small businesses need 
protection before large businesses. In this debate, I think we 
should give precedence for the concerns of small businesses and 
abuses that they suffer.
    To that end, I agree we need to treat demand letters like 
other consumer scams. We need to get them within the ambit of 
consumer protection agencies. We need to enhance clarity and 
transparency in patent enforcement for everybody.
    And we could talk and should talk about provisions that 
protect end users and consumers of product from being sued for 
using this product that they just bought off the shelf 
somewhere at retail or bought from somebody else.
    I think those are worthwhile proposals. I think there is a 
lot of consensus that can be reached. Our worry at BIO, again, 
is that on some level, our small companies they feel there is a 
bait-and-switch at the same time going on, where there are a 
lot of systemic litigation reforms being proposed that do not 
benefit companies that do not want to or cannot litigate.
    Small companies tell us, ``that is not going to benefit 
us,'' like most of the things that are in the litigation 
reform, but those are for big guys.
    The Game of Kings, that is what patent litigation is and 
the bigger king you are, the more you will be able to leverage 
the systemic litigation reforms that are being proposed.
    So, they fall into two buckets and our members have 
different views on one versus the other.
    Senator Perdue. Thank you very much. Thank you, Mr. 
Chairman.
    Senator Lee. Thank you.
    Senator Coons.
    Senator Coons. Thank you, Senator Lee. And I would like to 
thank Chairman Grassley and Ranking Member Leahy for holding 
this hearing, and for the witnesses, the broad and 
representative panel that we have got today, and for your 
testimony.
    This hearing has helped reinforce a valuable lesson that I 
think we should all keep in mind. How you view patents and 
patent litigation really depends a lot on where you operate 
within our wide-ranging economy: whether you are a start-up or 
a large company, whether you are investing millions or billions 
of dollars into a research-intensive business model, or 
providing a service directly to consumers.
    Our economy, as a number of Members have commented, remains 
incredibly successful, and important businesses that cover the 
whole spectrum of these characteristics have been affected, and 
we are all better off by retaining the diversity, the 
innovation, the creativity of the full scope of our country.
    We have heard from witnesses, Mr. Gupta from a multi-
billion-dollar technology company, Mr. Anderson from a 
restaurant company, who have both testified to the cost and the 
disruption of companies, large and small, of demand letters, 
and of some of the aspects of patent litigation.
    But we have also heard from Mr. Powers at KINZE, from Dr. 
Sauer on behalf of 1,100 companies that are members of BIO, and 
Dr. Crum from Iowa State, who have all cautioned strongly 
against overreach and the unintended consequences that could 
come with litigation reforms that may be hitting on that with a 
hammer in an effort to club the trolls.
    So, while we work to fight abuses of the system, we have to 
keep in mind that we have to honor and respect the diversity of 
our economy and the range of sources of innovation.
    There is a great deal at stake, not the least of which is 
our ability to cure diseases, as Dr. Sauer referenced in his 
introduction, from Alzheimer's to multiple sclerosis to 
leukemia; our ability to develop new materials, new crops, new 
biofuels.
    It hangs in the balance of whether we overreach in our 
efforts at reform. Patents are a property right at the very 
core of the American dream, enshrined in our Constitution, and 
for generations Americans with little funding or manufacturing 
capabilities have clung to that patent right which gives them 
the possibility of taking a chance, of building a new model, of 
tinkering and solving a problem, and that is the kind of 
entrepreneurship that has made America great and we need to 
work to preserve the best of that system and inspire future 
generations.
    So, to address abuses in our patent system, the real abuses 
that have been described today, yet ensure fairness in post-
grant proceedings and a strong patent system, I have introduced 
the STRONG Patents Act of 2015, along with my colleagues, 
Senators Durbin and Hirono.
    This legislation would ensure that we strengthen the 
pleading requirements for patent litigation to match the 
stringent standard currently enforced in other civil 
litigation.
    It empowers the FTC to go after those who send deceptive 
and abusive letters to extort from large and small businesses, 
and it tackles some of the recent abuses of the post-grant 
system at the PTO, described by Dr. Sauer, when a hedge fund 
can raise hundreds of millions of dollars of investor capital 
simply by filing a challenge for the purpose of profiting from 
shorting the stock. And it would end fee diversion to ensure an 
increase in the quality of the work at PTO.
    I look forward to working with my colleagues to enact 
meaningful reforms that will respect the diversity of business 
models in our economy.
    And if I might, Senator Lee, I would like to submit for the 
record letters that express support for the approach of the 
STRONG Patents Act from the National Venture Capital 
Association, the National Small Business Association, the 
Biotechnology Industry Association, the Association of American 
Universities, the Association of Public and Land-Grant 
Universities, the Medical Device Manufacturers Association, the 
Pharmaceutical Research and Manufacturers of America, the 
Innovation Alliance, and the IEEE USA.
    I think it is important when we look at the very wide range 
of folks who have weighed in on behalf of this focused, 
targeted approach that we respect the range of innovators in 
our economy.
    So, if I might, I think I have time for one question, to 
Mr. Powers, if I might.
    I really appreciate your testimony about the growth of 
KINZE Manufacturing from a small welding shop to a company that 
today employs 1,000 people. Your CEO was named the inventor on 
19 patents, including, I think, if I remember, the rear folding 
planter toolbar, which I couldn't describe in any detail if my 
life depended on it.
    But just help us understand how these patents helped KINZE 
attract investors and compete against larger competitors.
    I was struck that, in your written testimony, you said, 
``we should urge caution on provisions which would create 
significant hurdles for legitimate inventors seeking to enforce 
their patent rights, such as blanket fee-shifting provisions. 
There is a balance to be struck, and''--that word, balance, has 
been used by most of the Senators who spoke today--``we want to 
be careful to go far enough to take away the incentives from 
those who abuse the litigation system, and no farther.''
    In KINZE's experience, what does that mean? And then I 
would like to ask other members of the panel if you care to 
comment: What does it mean to go ``no farther'' and why is that 
important given the history of your company and the inventions 
of your founder?
    Mr. Powers. Thank you for the question, Senator. Starting 
out with the role of patents in KINZE Manufacturing, Jon has 
been fortunate enough to be a good enough businessman that he 
did not need to seek outside investment, just truly a self-made 
man.
    What it did give us the ability to do is to get out in 
front and commercialize a planter that made farmers' lives much 
easier, reduced the amount of time that they had in the field, 
and gave them the ability to plant their fields during a very 
narrow window during the spring. You actually have, roughly, 
about 2 to 3 weeks where if you can get your crop in during 
that time, you are going to get peak yields. If rain or other 
things delay you, the farmer is going to be hurt.
    So, that having been said, patents are very important to us 
and we would like to see a strong patent system.
    Turning to the limits--you know, we should go no further 
than to prevent the patent trolls. KINZE is not in favor of 
blanket fee-shifting or mandatory fee-shifting provisions. 
However, we do believe that fee shifting when parties bring 
baseless litigation would serve as a practical deterrent to 
those who would go ahead and do abusive patent litigation.
    Senator Coons. Thank you, Mr. Powers. And I appreciate 
KINZE bringing a balanced view to this.
    Dr. Sauer, would you just make some comment about how some 
of the proposals that were discussed today, like a blanket fee 
shifting or a loser pays system would impact the way that BIO 
as an ecosystem operates, particularly the smaller and start-up 
companies you described earlier.
    Mr. Sauer. I think it can be well exemplified by perhaps 
the impleader provisions that are connected to the fee-shifting 
provisions of the bill. From fee shifting comes concepts of, 
how do we make sure the loser pays once we have a loser pays 
system.
    The impleader provision, like a few other provisions, 
exemplifies the ecosystem within which biotech works, which 
implicates small companies, university licensors, and the like. 
So, that system works in a way that implicates not just patent 
owners who must defend their businesses against patent 
infringement, but drags their business partners into the 
litigation as unwilling co-plaintiffs and subjects them to 
potential liability.
    That makes a big difference on the ability of biotech 
companies and their licensors to agree on the scope of their 
business, do licenses and the like.
    Senator Coons. Thank you, Dr. Sauer. I can see my time is 
coming to a close.
    Mr. Sauer. I regret that.
    Senator Coons. I just wanted to make sure, whether it is a 
Hawkeye, a Cyclone or a Panther, we had an opportunity to hear 
from Dr. Crum on behalf of Iowa State and the other inventors 
and innovators at the university system. Can you just give us a 
context about the dangers of overbroad patent reform on 
universities?
    Dr. Crum. Yes. I just would follow up on what Hans was just 
saying about the involuntary joinder concerns, that is really 
huge for us, because we could have our university individual 
faculty and departments pulled into this. And if you want to 
talk about throwing a wet blanket over innovation: that kind of 
fear and concern about being pulled into something over which 
you had no control, because you developed some outstanding 
technology, that would definitely throw a wet blanket over 
innovation. That is a real concern for us and it also diverts a 
lot of resources that we should be putting back into the 
research enterprise and diverts it to litigation.
    Senator Coons. Thank you. I appreciate the entire panel and 
I appreciate the opportunity to focus on the idea that 
inventors, innovators, companies large and small, established, 
private, public, have real concerns about overreach in patent 
litigation reform and we need to find a balance.
    Thank you, Mr. Chairman.
    Chairman Grassley [presiding]. Well, without objection, the 
material that Senator Coons wanted put in the record will be 
made a part of the record.
    [The information appears as submissions for the record.]
    Chairman Grassley. And quite frankly, I believe it would be 
Senator Whitehouse would have priority, if you want it.
    Senator Whitehouse. Thank you, Chairman. I will be brief 
and I will yield to my extremely distinguished colleague, 
Senator Blumenthal, very shortly.
    I just want to make the point that I think we have a really 
significant opportunity to pass a significant piece of 
legislation.
    If people will rein in their ambitions for ulterior 
purposes being achieved through this, I think the key areas 
have been addressed, in large part, in Senator Coons' 
legislation, then I think there is agreement. I think we could 
pass that very quickly if people did not want to add extraneous 
things.
    The areas where I hear from Rhode Islanders that I 
particularly want to focus on are making sure that a plaintiff 
is a real plaintiff and there are not shell and sham plaintiffs 
that are allowed to exist; that patents that were written at a 
time when people did not understand the internet or other 
things and need to be reviewed, there is an ability to review 
those patents rather than to have them be weapons in the hands 
of trolls; that the abuse of demand letters, which has become a 
scandal, be controlled, and that we focus the litigation 
between the patent holder and the person who is actually using, 
in the ordinary sense of the word, the patented technology--not 
the florist or the grocer who is using the end product.
    And I think if we can agree on those four things--and for 
the record, I see an awful lot of heads nodding here--we have a 
bill that we can pass.
    But if we want to add, you know, abortion provisions to 
human trafficking bills, and if we want to add running around 
in national security WRDA dam and hydroelectric sites with 
firearms to bills that protect sportsmen, and if we want to add 
tort reform to this bill, then we are going to end up with 
unnecessary fights. And I hope we can go forward with that.
    I'd like to read into the record what Brown University 
says, which is a very, very important player in our Rhode 
Island ecosystem.
    Brown University President Christina Paxson says that ``the 
bill in the House of Representatives, H.R. 9, the Innovation 
Act, goes far beyond what is needed to curb abusive patent 
practices. Of particular concern are very broad mandatory fee 
shifting and involuntary joinder provisions. I urge you to 
oppose efforts to add broad provisions like these to any Senate 
patent troll legislation.''
    And Brown has a lot of patents. URI has a lot of patents.
    Our university signed another letter that I would like to 
read from into the record. In fact, I think every State 
represented on this Committee has a university on this list 
that signed this letter, except maybe Utah. I think they are 
the one exception.
    But every other State represented on this Committee has 
signed this letter and it says that ``mandatory fee shifting 
and involuntary joinder are especially troubling to the 
university community because they would make the legitimate 
defense of patent rights excessively risky and thus weaken the 
university technology transfer process, which is an essential 
part of our country's innovation and entrepreneurial 
ecosystem.''
    So, I hope with universities like that making the point 
that if we focus on what is really the problem, we can get 
something done.
    In that spirit, I hope we can move significant bipartisan 
legislation. And my plaudits again to Senator Coons for the 
scope that he has provided. I have not signed onto that bill 
yet because I am not--I am in the same neighborhood that he is 
in, if I am not exactly down to the same street and mailbox.
    But I really think that is the way to proceed, Mr. 
Chairman, and adding extraneous fights to things where we can 
go forward on a bipartisan basis I do not think is helpful.
    So, I hope we can go forward in that spirit, and I will 
leave with that comment.
    Chairman Grassley. Thank you, Senator Whitehouse.
    Now, Senator Blumenthal.
    Senator Blumenthal. Thanks, Mr. Chairman, and thanks for 
holding this hearing on a supremely important topic where I 
think there is broad consensus that abuses need to be stopped 
and inventiveness and creativity encouraged. And the great 
enemy of constructive change has been overreaching.
    My colleague, Senator Whitehouse, referred to it as 
overbroad ambitions, but I think it is overreaching in terms of 
what proponents have sought to accomplish. And we need to 
respect what is happening in the real world where circumstances 
are changing.
    The Supreme Court has changed the law. The Octane Fitness 
decision, which makes it significantly easier for the 
prevailing party to get attorney's fees in patent cases, the 
Nautilus decision, which required more specificity in patent 
claims, the Alice decision, and the very likely development in 
the Judicial Conference abolishing Form 18, these are changed 
circumstances that we need to respect because they are having 
some results.
    And likewise, for me, as a former law enforcer, the great 
question here is how can existing law be used more effectively. 
The mantra in the legislature always is there ought to be a law 
or a new law. But if existing law, let alone new law, is 
unenforced, it is dead lettered, it is useless.
    So, the Federal Trade Commission ought to be using existing 
law. Federal officials ought to be following the lead of State 
attorneys general, who are going after deceptive or misleading 
practices under the good old consumer protection laws. Fraud 
and deception in some of the letters that are sent widely 
perhaps can be pursued under existing law.
    So, I would like to know from this panel what existing laws 
can and should be enforced more aggressively to pursue this 
problem and who ought to be doing it.
    Mr. Gupta. Senator, I can take a shot at it, if you would 
like.
    I think, first off, it is not really about labeling the 
actor. If it is a large company, a small company, a university, 
if they initiate abusive litigation, unmeritorious claims, 
there has to be a remedy available to those that are subject to 
it.
    So, requiring that pleadings be specific to state with 
clarity what the defendant is accused of having done wrong 
seems to be a fundamental principle that everyone should be 
able to agree to. And right now you stated that the Judicial 
Conference has recommended that Form 18 be abolished. At least 
Form 18 gave us a form that we knew that we had to be able to 
comply with.
    With Form 18 being abolished, we are being asked to refer 
to Iqbal and Twombly, which are not patent cases and which all 
the guidance that those two cases provide is to say that you 
need to state enough facts to show that you plausibly----
    Senator Blumenthal. Well, State attorneys general are 
taking more action under existing laws.
    Mr. Gupta. Yes.
    Senator Blumenthal. Why not encourage law enforcers to use 
those existing laws more aggressively and effectively? 
Apparently, all of these developments are having some effect 
because the numbers of patent cases has diminished. You would 
agree with me on that point. Mr. Sauer made that point in his 
testimony.
    Mr. Gupta. I would respectfully sort of disagree in that 
the last 3 months of data that we have from December, January, 
and February, if you look at the same period the previous year, 
the litigation numbers are up again.
    So, we do not know whether that was a temporary modest dip 
in 2014, but certainly the data that we have from January and 
February of this year suggest that the numbers are up again 
relative to the same time----
    Senator Blumenthal. Do you agree, Mr. Sauer?
    Mr. Sauer. I think the more robust data show--if we 
compared, let us say, the whole year last year to the year 
before, the year was down almost 20 percent over the year 
before. So, we can wait until the end of this year and see what 
the numbers show.
    What we are not seeing is skyrocketing or the sky is 
falling or other strident rhetoric what would support that.
    With respect to your question about which existing laws 
could be enforced, I would add to your list, veil piercing--
corporate veil piercing. This is not the first time the law 
encounters shell corporations and undercapitalized paper 
entities. But they are well-established principles. Veil 
piercing is difficult, but the corporate form is very 
important. But it is not that judges are unfamiliar with 
companies who set up paper entities behind which they hide. So, 
the law is not helpless against these kinds of events.
    Senator Blumenthal. Mr. Gupta, from what we have seen, I 
think we can agree, and I do not want to make too much of the 
data that exists, but I think we can agree that the trend is 
heading in the right direction. And if that is so, shouldn't we 
be cautious about legislating in an area where circumstances 
are changing and the courts are developing new law in the wake 
of the United States Supreme Court opinions?
    Mr. Gupta. As I stated, Senator, I am not sure that 2014 
was not a one-time----
    Senator Blumenthal. Well, shouldn't we wait until we know 
what is actually happening in the courts on the ground in the 
real world?
    Mr. Gupta. Unfortunately, the Supreme Court decisions that 
we have discussed today, none of them address the issue of 
reduction of discovery expenses or unreasonable discovery. 
Those decisions do not provide us with any guidance in terms of 
how specific pleadings need to be, and how a defendant is 
notified as to what is it that it is accused of infringing.
    Senator Blumenthal. I know that the Supreme Court has not 
dealt with the whole problem for all time, but in terms of 
framing solutions when circumstances seem to be changing, 
shouldn't we target those solutions to the problems that are 
causing the abuses and target them narrowly in very limited 
ways, especially since the facts on the ground--and facts are 
stubborn things--seem to be changing and perhaps going in the 
right direction?
    Mr. Gupta. I agree, Senator, which is why I think we have 
been a proponent of very specific reform targeted at pleadings, 
something that the courts are not looking at, and discovery 
reform, something that the courts are not looking at, and also 
an ability to recover fees.
    Now, the Supreme Court decision says that the prevailing 
party--it says nothing about the defendant--so, a prevailing 
plaintiff is actually now better able with a fee shifting--I am 
sorry--with the fee-shifting proposal says that the prevailing 
party would be entitled to their fees. So, it helps plaintiffs 
and defendants. In fact, a small plaintiff without the ability 
to hire a lawyer could actually now get a contingency attorney 
who knows that even when the damages are small in a case, they 
have an upside because they can get their fees recovered.
    So, these are areas where we want targeted reform because 
the Supreme Court does not have anything on their docket today 
that would address those issues.
    Senator Blumenthal. My time has expired. Thank you, Mr. 
Chairman.
    Chairman Grassley. This will end the hearing, but before 
you get up, I want to thank you, once again, for a good 
discussion on a very controversial issue. I do not think it is 
controversial that things need to be done in this area, but it 
is somewhat controversial even in my own State between various 
interests.
    We are going to have to find common ground, particularly in 
the Senate, to get a bill through the United States Senate. We 
are open to hearing everybody's point of view. But we thank all 
of you very much for your fine testimony.
    I have questions I am going to submit for the record and 
for the benefit of the other Members of the Committee the 
record will be open for a week for questions to be submitted 
for answer in writing, and particularly from Members that could 
not be here to participate in oral questions, I am sure you 
will get some questions.
    So, we would appreciate very much your response to those 
written questions.
    Thank you very much. The meeting is adjourned.
    [Whereupon, at 12:24 p.m., the hearing was adjourned.]
    [Additional material submitted for the record follows.]

                            A P P E N D I X

              Additional Material Submitted for the Record


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