[Senate Hearing 114-899]
[From the U.S. Government Publishing Office]
S. Hrg. 114-899
S.1137, THE ``PATENT ACT''--FINDING
EFFECTIVE SOLUTIONS TO ADDRESS
ABUSIVE PATENT PRACTICES
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON THE JUDICIARY
UNITED STATES SENATE
ONE HUNDRED FOURTEENTH CONGRESS
FIRST SESSION
__________
MAY 7, 2015
__________
Serial No. J-114-16
__________
Printed for the use of the Committee on the Judiciary
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
www.judiciary.senate.gov
www.govinfo.gov
__________
U.S. GOVERNMENT PUBLISHING OFFICE
52-845 WASHINGTON : 2024
COMMITTEE ON THE JUDICIARY
CHARLES E. GRASSLEY, Iowa, Chairman
ORRIN G. HATCH, Utah PATRICK J. LEAHY, Vermont, Ranking
JEFF SESSIONS, Alabama 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, Majority Staff Director
Kristine Lucius, Minority Staff Director
C O N T E N T S
----------
MAY 7, 2015, 9:34 A.M.
STATEMENTS OF COMMITTEE MEMBERS
Page
Grassley, Hon. Charles E., a U.S. Senator from the State of Iowa. 1
prepared statement........................................... 125
Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont. 3
prepared statement........................................... 127
WITNESSES
Witness List..................................................... 47
Chandler, Mark, senior vice president and general counsel for
Cisco.......................................................... 6
prepared statement........................................... 48
Hadad, Henry, senior vice president and deputy general counsel-
intellectual property for Myers Squibb......................... 11
prepared statement........................................... 63
Lettelleir, Diane, senior managing counsel of litigation at J.C.
Penney......................................................... 10
prepared statement........................................... 76
Rhodes, Kevin H., vice president and chief intellectual property
counsel for 3M Company, St. Paul, Minnesota.................... 8
prepared statement........................................... 82
Samuels, Julie, executive director and president of the board at
Engine......................................................... 13
prepared statement........................................... 116
QUESTIONS
Questions submitted to Mark Chandler by:
Senator Grassley............................................. 129
Questions submitted to Kevin Rhodes by:
Senator Grassley............................................. 129
Questions submitted to Diane K. Lettelleir by:
Senator Grassley............................................. 130
Questions submitted to Henry Hadad by:
Senator Grassley............................................. 130
Questions submitted to Julie P. Samuels by:
Senator Grassley............................................. 130
Questions submitted to Mark Chandler by:
Senator Grassley............................................. 129
ANSWERS
Responses of Mark Chandler to questions submitted by:
Senator Grassley............................................. 131
Responses of Henry Hadad to questions submitted by:
Senator Grassley............................................. 133
Responses of Diane Lettelleir to questions submitted by:
Senator Grassley............................................. 135
Responses of Kevin Rhodes to questions submitted by:
Senator Grassley............................................. 138
Responses of Julie Samuels to questions submitted by:
Senator Grassley............................................. 144
MISCELLANEOUS SUBMISSIONS FOR THE RECORD
Submitted by Senator Grassley's Office:
Letter from Federal Circuit Bar Association dated April 13,
2015....................................................... 149
R Street letter dated April 29, 2015......................... 150
Google letter dated April 29, 2015........................... 151
JCPenny letter dated April 29, 2015.......................... 153
The Latino Coalition letter dated April 29, 2015............. 155
National Association of Realtors letter dated April 29, 2015. 157
National Council of Chain Restaurants (NCCR) letter dated
April 29, 2015............................................. 159
National Restaurant Association letter dated April 29, 2015.. 161
NRF, The Voice of Retail letter dated April 29, 2015......... 162
Oracle Letter dated April 29, 2015........................... 164
Redhat letter dated April 29, 2015........................... 166
Samsung Electronics America, Inc. letter dated April 29, 2015 167
SAS, The Power to Know letter dated April 29, 2015........... 168
Sprint letter dated April 29, 2015........................... 169
Verizon News Release dated April 29, 2015.................... 170
Adobe Letter from Dana Rao dated April 29, 2015.............. 172
American Gaming Association (AGA) letter dated April 29, 2015 173
Application Developers Alliance from Sarah Elliot dated April
29, 2015................................................... 174
Competitive Carriers Assocation (CCA) letter dated April 29,
2015....................................................... 175
Consumer Electronics Association (CEA) letter dated April 29,
2015....................................................... 176
Cisco letter dated April 29, 2015............................ 178
American Hotel and Lodging Association (AHLA) letter dated
April 29, 2015............................................. 179
Intuit letter dated April 29, 2015........................... 182
Coalition for Patent Fairness letter dated April 29, 2015.... 183
Microsoft letter from Kathryn Stack dated April 29, 2015..... 184
SAS Letter from John G. Bowell dated April 29, 2015.......... 185
Computer & Communications Industry Aassocation (ccia) letter
dated April 29, 2015....................................... 186
Biotechnology Industry Organization letter from George Goodno
dated April 29, 2015....................................... 187
The Coalition for 21st Century Patent Reform
letter from Brian Walsh dated April 29, 2015............... 189
United for Patent Reform letter dated April 29, 2015......... 191
America Trucking Association letter from Dave Osiecki dated
April 30, 2015............................................. 195
Tyco letter from Judith A. Reinsdorf dated April 30, 2015.... 197
Food Marketing Institute letter dated April 30, 2015......... 199
Global Automakers letter dated April 30, 2015................ 200
Internet Association letter dated May 1, 2015................ 202
Merick Sharp & Dohme Corp. letter from William Krovatin dated
May 4, 2015................................................ 203
National Association of Broadcasters (NAB) letter dated May
4, 2015.................................................... 204
International Trademark Association letter dated May 5, 2015. 205
Whataburger letter dated May 5, 2015......................... 206
National Association of Convenience Stores (NACS) letter
dated May 6, 2015.......................................... 208
National Association of Home Builders letter dated May 6,
2015....................................................... 210
The Pharmaceutical Research and Manufacturers of America
(PhRMA) letter from Charles M. Clapton dated May 6, 2015... 212
Rackspace letter dated May 7, 2015........................... 213
Sabre letter dated May 7, 2015............................... 214
SIIA letter dated May 7, 2015................................ 215
Statement for the Record by financial institutions dated May
7, 2015.................................................... 216
NRF, The Voice of Retail dated May 7, 2015................... 224
Dell Applauds Senate PATENT Act.............................. 232
Engine Statement of Engine Executive Director Julie Samuels
re: Introduction of the PATENT Act......................... 233
ETA Electronic Transactions Association letter dated April
29, 2015................................................... 234
Facebook Supports PATENT Act................................. 235
Higher Education Asspcoatopm Statement dated April 30, 2015.. 236
Letter from various institutions dated May 13, 2015.......... 237
Statement by Dick O'Brien.................................... 239
Submitted by Senator Coon's Office:
Key Provisions Chart dated March 23, 2015.................... 146
National Venture Capital Association Letter dated May 7, 2015 147
S.1137, THE ``PATENT ACT''--FINDING
EFFECTIVE SOLUTIONS TO ADDRESS
ABUSIVE PATENT PRACTICES
----------
THURSDAY, MAY 7, 2015
U.S. Senate,
Committee on the Judiciary,
Washington, DC.
The Committee met, pursuant to notice, at 9:34 a.m., in
room SD-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. Before I and Senator Leahy give our
opening statements, we have a vote at 10:30, and this is such
an important hearing that I hope that we can keep the meeting
going by people going over and voting. Even though I am not
here and, in fact, even if just the Democrats here, I hope you
would feel free to go ahead and take use of the time in your
turn to ask questions if I am not here.
Senator Schumer. Can we move to change staff allocations?
[Laughter.]
Chairman Grassley. I want to go even further than you. We
want to make sure that that does not happen January 5, 2017.
[Laughter.]
Senator Durbin. I understand your concern.
Senator Leahy. I am staying out of this one.
Senator Whitehouse. I would like to get involved.
Chairman Grassley. Just on a gentleman's agreement, keep
the questions going when we are voting.
Good morning. We are here to discuss the problem of abusive
patent practices and the solutions offered by the PATENT Act.
Abusive patent litigation is having a serious impact on small
companies, innovators, manufacturers, Main Street businesses,
high-tech firms, and consumers. The patent troll problem is
being felt across every sector of the economy, from small town
Iowa to Silicon Valley. It is critical that we enact reforms to
prevent this from further stifling the innovation and
entrepreneurship that our patent system is designed to protect.
The volume of abusive patent litigation has exploded in
recent years. By some accounts it is costing the U.S. economy
upwards of $80 billion annually. Bad actors are exploiting the
high costs of patent litigation and using deceptive tactics to
prey on businesses.
Last week, several of us on the Judiciary Committee
introduced the bipartisan PATENT Act. Since the process started
in the last Congress, we have engaged stakeholders that have
been targeted by patent abuse. In addition, we have sought to
be responsive to concerns raised by other industries and
constituencies. Because of this, we have made significant
progress. As I have maintained from day one, patent holders
have a very legitimate right to enforce their patents against
infringement. Our efforts must strike the right balance.
As a result of these efforts, the PATENT Act has received a
tremendous positive response. The bill has the support of
groups as diverse as hotels, retailers, tech companies,
realtors, automakers, broadcasters, homebuilders, and
restaurants. Further, other stakeholders such as the
associations representing higher education and universities,
the Coalition for 21st Century Patent Reform, and
Biotechnology Industry Organization have recognized our
commitment to finding effective solutions that do not produce
unintended consequences or impinge upon the ability of good-
faith actors to enforce patent rights. I ask unanimous consent
to put several letters and statements in the record in support
of the bill.
[The letters follow as submissions for the record]
Chairman Grassley. The PATENT Act deters abusive litigation
through a series of targeted reforms. I would like to state
briefly some of the key provisions. The PATENT Act establishes
clear uniform pleading standards in patent infringement
lawsuits and gives defendants clear notice of the claims
against them. It increases transparency of the parties bringing
lawsuits.
It places standards on demand letters and clarifies that
the widespread sending of deceptive demand letters are covered
by Section 5 of the FTC Act. The bill also allows
manufacturers--rather than end users--to litigate cases in
order to protect consumers--customers who are targeted for
patent infringement just because they buy a product off the
shelf.
Further, the bill deters frivolous suits and abusive
litigation practices by allowing the award of attorney fees if
a court determines that the position or conduct of a non-
prevailing party that was not--was not objectively reasonable.
It creates a mechanism for a court to recover fees where an
abusive litigant is judgment-proof. Finally, in order to deal
with the asymmetries in discovery burdens and litigation costs,
the bill requires courts to stay discovery pending the
resolution of certain preliminary motions such as dismissal or
transfer venue.
Because of the wide-ranging positive reactions to the
PATENT Act, I am comfortable with where we are on the language
contained in the bill. However, I am also aware of concerns
about processes at the Patent and Trademark Office that have
been recently raised by patent holders. They worry that
administrative proceedings created by the America Invents Act--
the inter partes review and post-grant review proceedings--are
being abused and are stacked against patent holders. Other
stakeholders, however, are of the view that these new
proceedings have been very effective at weeding out weak
patents.
I am committed to looking at these concerns, determining
whether they are valid or not, and working with my colleagues,
particularly all the cosponsors, to see what can be done to
improve this process.
We will be hearing from witnesses on where they stand on
these proceedings, so we will be able to evaluate what should
and can be done to ensure that they are fair to all parties.
As we move forward with this legislation, it is important
that we continue the collaborative process that has
characterized its created--creation and best represented by the
cooperation of the cosponsors of the bill. Again, I thank my
colleagues for their dedication and constructive engagement on
this bill.
It is my friend Senator Leahy's turn.
OPENING STATEMENT OF HON. PATRICK J. LEAHY, A U.S. SENATOR FROM
THE STATE OF VERMONT
Senator Leahy. Thank you, Mr. Chairman.
Last week, we had seven bipartisan members of this
Committee that came together, and we introduced legislation to
address abusive [Video stopped as this point] conduct in our
patent system. [Video started back up] We have been working on
this issue for almost 2 years. Senator Lee and I introduced
bipartisan legislation in the fall of 2013 that has been
included in this package. Last Congress, Senators Cornyn and
yourself and Senator Hatch and Senator Schumer and Senator
Feinstein all had individual bills. Senator Klobuchar had her
views. After long negotiations, we brought people together, and
I think we have crafted a strong and fair compromise that will
address abusive conduct while preserving the strength of our
patent system, and I think legislation is needed.
I hear this--I am home a number of times every month, and
we are a small State and everybody knows everybody else. Just
walking around the small businesses in Vermont, I hear what
they have been threatened with. It is the same every Senator
has, how they have been threatened with patent suits simply for
using equipment they purchased off-the-shelf. Website owners
have faced costly litigation for using basic software in e-
commerce. Predatory conduct that takes advantage of the
complexity of patent law does not serve the important goal for
which our patent system was intended. It was intended to
advance science and the useful arts.
Writing legislation that involves our patent system
requires care and balance. It can be a Rubik's Cube. Congress
spent years and years developing what ultimately became the
Leahy-Smith America Invents Act of 2011. Throughout our
negotiations on this patent abuse bill--and I see a number of
the people that we have worked with on the Leahy-Smith bill and
now worked on this bill--I have emphasized the need to work
with manufacturers, universities, and other patent holders to
ensure we get the right balance. The administration--in fact, a
number of those groups have written to this Committee to
welcome the changes we made in the Senate bill. The
administration has praised this legislation. Yesterday, the New
York Times Editorial Board came out in support of the bill.
As the legislation heads to markup, we should continue to
work on reasonable amendments--reasonable amendments--to
improve the bill. Some have raised concerns about unfair
practices that are taking place in the post-grant review
proceedings at the Patent and Trademark Office. I think we
should look at that. Those proceedings are an important tool to
improve patent quality, but if they are being misused, then let
us address it. We are already working on those ideas, and I
think we will discuss them today.
Our patent system is a wonderful thing to have, and bad
actors that use abusive practices, they discredit it. No one's
interest that they continue. Let us act on behalf of Main
Street and the patent system alike.
I welcome the witnesses that are here. Mr. Chairman, I
thank you for having this hearing. I think it is extremely
important.
Chairman Grassley. I thank you for your cooperation through
all the weeks of negotiation on this bill.
Senator Leahy. There have been a lot of them.
Chairman Grassley. Yes. I am going to call on Senator
Klobuchar because we have a Minnesota person here, but
remember, this Minnesota person was born in Iowa.
[Laughter.]
Senator Klobuchar. All right. Let me begin. Mr. Kevin
Rhodes was born in Iowa, but there is just a little bit more to
his resume, but really maybe I need to say nothing else. He is
actually the vice president and the chief intellectual property
counsel of 3M Company. Senator Franken and I are very proud of
that company, and I think that their work is very----
Senator Franken. What do the three M's stand for?
Senator Klobuchar. Minnesota Mining and Manufacturing.
Thank you. It is a company that has so many patents that it
actually has more patents than it has employees, and it has a
lot of employees. We like to say that it has a patent for every
employee. They care very much about the topic today.
Kevin is responsible for managing the global intellectual
property assets of 3M Company and its worldwide affiliates. He
serves as the chairman of the Steering Committee of the
Coalition for 21st Century Patent Reform. He is a
member of the Board of Directors of the American Intellectual
Property Law Association. He also serves on the Executive
Committee of the Association of Corporate Patent Counsel.
He has used his expertise as well as the expertise of all
of the patent holder companies that are involved in 21st
Century Patent Reform to make significant and constructive
changes to this bill, and I just want to thank Senator
Grassley, Senator Leahy, Senator Cornyn, Senator Schumer,
Senator Hatch, and Senator Lee. We have all worked together to
make this bill a balance--and we know that people will have
different views on it, but a balance of not only going after
the patent trolls and the lawsuits, but also making sure that
we have made some changes to the bill that allow companies like
3M that have to assert their rights to protect patents to be
able to continue to do that.
I want to thank him for his constructive work, and thank
you, Mr. Chairman.
Chairman Grassley. I am glad to do it.
Before I introduce the other people, I want to inform my
colleagues from Minnesota that one of the reasons I am voting
for Trade Promotion Authority is because the Knoxville plant of
3M exports about 40 percent of their product.
Our first witness is Mark Chandler, senior vice president
and general counsel, Cisco. Mr. Chandler joined Cisco in 1996
upon acquisition of StrataCom, Inc., where he had been general
counsel. Prior to working at StrataCom, he worked as vice
president of corporate development and general counsel of
Maxtor Corporate, a manufacturer of hard disk drives. In 2010,
the National Law Journal named Mr. Chandler one of the 40 Most
Influential Lawyers of the Decade. In 2013, American Lawyer
numbered him among the ``Top 50 Big Law Innovators of the Last
50 Years.'' Mr. Chandler holds a bachelor's degree in economics
summa cum laude from Harvard College and a juris doctor from
Stanford Law School.
I am going to pass over for obvious reasons Mr. Rhodes.
Third on our panel is Diane Lettelleir, who is senior
managing counsel--litigation at J.C. Penney, where she is
responsible for all patent litigation matters. Prior to joining
J.C. Penney, Ms. Lettelleir was a shareholder at Winstead PC,
Dallas, and a member of the Intellectual Property and
Commercial Litigation Practice Group. Ms. Lettelleir's
litigation experience includes complex patent, copyright, and
trademark matters, including patent infringement, patent
invalidity, copyright infringement, copyright in violation of
technical--technology licensing agreements. She holds a
bachelor's degree from Indiana State University magna cum laude
and a juris doctorate from Southern Methodist Dedman School of
Law.
Henry Hadad is senior vice president and deputy general
counsel intellectual property, Bristol Squibb-Myers Squibb,
where he is responsible for all aspects of patent and trademark
procurement, counseling, litigation, and even policy. Mr. Hadad
previously held positions as vice president and associate
general counsel at Schering-Plough Corporation where he was
chief IP counsel until 2009. Immediately prior to joining BMS
in 2011, he was associate patent counsel at Johnson & Johnson.
He is a member of the Board of Directors of the Intellectual
Property Owners Association, American Intellectual Property Law
Association Education Foundation. He holds a bachelor of
science in biology from Haverford College and a juris doctor
cum laude from American University Washington College of Law.
Our fifth witness is Julie Samuels who is executive
director and president of the board at Engine, a nonprofit
focused on technology entrepreneurship and giving startups a
seat at the table of policy debates. Ms. Samuels is a frequent
commentator on technology and policy issues for national media,
particularly the intellectual property space, and she has filed
briefs with the Supreme Court and has testified before
Congress. Ms. Samuels came to Engine by way of the Electronic
Frontier Foundation, where she was senior staff attorney and
Mark Cuban Chair to Eliminate Stupid Patents. That is what it
says here.
[Laughter.]
Chairman Grassley. I think I will stop there.
[Laughter.]
Senator Leahy. Tell us what is really on your mind.
Chairman Grassley. We will go left to right here. Start,
Mr. Chandler. Then we will wait until everybody has testified
before we have questions.
STATEMENT OF MARK CHANDLER, SENIOR VICE PRESIDENT AND GENERAL
COUNSEL, CISCO SYSTEMS INC., WASHINGTON, DC.
Mr. Chandler. Mr. Chairman, Ranking Member Leahy, and
members of the Committee, at Cisco we have over 25,000
engineers who have obtained over 12,000 U.S. patents----
Senator Leahy. Is his microphone on?
Chairman Grassley. Is your microphone on? Is the red light
on?
Mr. Chandler. I have a red-green----
[Laughter.]
Mr. Chandler. There we go. OK. Thank you. Sorry about that.
Senator Leahy. We get things done technically here.
[Laughter.]
With our low-tech machines.
Senator Klobuchar. Yes, just a little 3M technology over
there.
[Laughter.]
Mr. Chandler. Chairman Grassley, Ranking Member Leahy,
members of the Committee, at Cisco we have over 25,000
engineers who have obtained over 12,000 U.S. patents who are
working hard to extend and secure the Internet. Our coalition,
United for Patent Reform, includes thousands of companies in
the automotive, retail, hospitality, and other industries.
Mr. Chairman, Ranking Member Leahy, Senators Hatch,
Klobuchar, and Lee--and I would like to thank Senator Cornyn
and Senator Schumer as well--thank you for introducing the
PATENT Act. You are addressing a fundamental systemic imbalance
that is simple to illustrate. Last year, over 4,400 patent
suits were filed, the third highest in history, and almost
double the number 10 years ago, with the pace rising this year.
Sixty-three percent of those, or about 3,000, came from
entities who do not make any product but seek only the reward
of litigation gamesmanship, compared to only 20 percent of
suits 10 years ago, a rate of about 400 or 500 a year 10 years
ago up to about 3,000 now. An astounding 40 percent of the
suits last year were filed in only two judicial districts,
where less than 1.5 percent of Americans live.
When plaintiffs and defendants pervasively believe, rightly
or wrongly, that judicial results depend on where an action is
brought, fundamental precepts of legal integrity and
consistency of legal application are endangered.
Behind these dry statistics, of course, are stories of
abuse. In one recent case, a lawyer bought semiconductor
patents related to Wi-Fi that were close to expiration and set
up a company he cynically called ``Innovatio.'' These standard-
essential patents had previously been heavily licensed to other
chip companies, so the majority of Wi-Fi devices did not need
any new license at all. Innovatio and the Niro law firm sent
over 14,000 letters to small businesses ranging from cafes to
bakeries to children's health clinics, anyone they thought
might use Wi-Fi. They did not tell them that most devices were
already licensed but demanded $2,000 to $3,000 per location.
They did not tell the victims that Cisco had intervened to
protect its customers but, rather, told them that equipment
manufacturers had not stepped in.
They planned to extract $4 billion from the productive part
of the American economy. Before we stopped them, they collected
several million. We, with other companies, litigated
aggressively, and a judge determined that the patents were, in
fact, worth 3.2 cents per chip for the ones that were not
licensed already. We got the right result, but we had to pay
$13 million in legal fees to get there.
This issue is hard because, while our cause is just--and
who comes here to testify without saying that--the concerns of
those who do not yet support the PATENT Act are also
understandable. Both sides suffer from abuse. Yes, I am
outraged by those who game the patent litigation system,
forcing Cisco alone to spend a quarter of a billion dollars in
the last decade on legal fees for cases that never should have
been brought, or who shake down small businesses with
misleading demand letters. I am equally outraged by the
activity of hedge funds, often the same people who bring the
suits against us, who use the inter partes review system to
throw doubt on the legitimacy of innovative companies' hard-won
patents in order to short the stocks and make a quick buck.
How do we get to yes? We can fix the problem by ensuring
that patents that never should have been granted are
invalidated by giving more transparency to the process and by
limiting extortion litigation games that artificially raise
costs.
As to bad patents, while everyone supports patent quality,
few raise their hands to have their own bad patents
invalidated. Patent rights are not inalienable natural rights
endowed by the Creator like life, liberty, and pursuit of
happiness. They are a Government-created tool designed, as our
Constitution says, for an industrial policy purpose, to promote
progress in science and the useful arts. They allow the patent
holder to exclude from the market even those who innocently and
independently arrive at similar results. For every entrepreneur
who is given a monopoly right in order to promote innovation,
others are precluded from exercising their God-given talents.
I do urge you to directly address, such as through
securities laws, the issue of the hedge funds I referred to.
This legitimate issue should not be used to justify unrelated
steps making it harder to invalidate bad patents like the
misguided STRONG Act proposes to do. The IPR and covered
business method programs, while limited in scope, are effective
because they provide a consistent mechanism for review.
Second, we support transparency efforts reflected in the
heightened pleading standards and disclosure of true interests
behind litigation, and we support ensuring that those
benefiting from patent litigation cannot hide behind shell
entities in egregious cases where attorneys' fees are imposed.
Third, the PATENT Act helps address procedural abuse.
Provisions on pleading, customer stay, and fee shifting are
strong steps in the right direction. We would prefer to have an
absolute stay of discovery before the Markman ruling,
understand the concerns of other industries, but we think
tightening the venue rules and the transfer rules and limiting
discovery further prior to transfer would ameliorate our
concerns.
Thank you again for the opportunity to appear today and for
your efforts to fix a national problem that each year sucks
billions of dollars from the inventive and productive parts of
our economy.
[The prepared statement of Mr. Chandler follows as a
submission for the record]
Chairman Grassley. Thank you, Mr. Chandler, for keeping
within the time limit.
Now, Mr. Rhodes.
STATEMENT OF KEVIN H. RHODES, VICE PRESIDENT AND CHIEF
INTELLECTUAL PROPERTY COUNSEL, 3M COMPANY, ST. PAUL, MINNESOTA
Mr. Rhodes. Chairman Grassley, Ranking Member Leahy,
members of the Committee, thank you for the opportunity to
testify here this morning, and thank you, Senator Klobuchar,
for that very kind introduction this morning.
Because of the longstanding importance of the patent system
to 3M and other member companies of the Coalition for 21st
Century Patent Reform, we have been engaged with members of
this Committee and your terrific staffs and many other
stakeholders for years in discussions of patent law and policy.
We bring a balanced perspective to these issues as 3M, like
other 21C member companies, has diverse business interests in
several industry segments, and we litigate patent disputes as
both a plaintiff and as a defendant. We thus support measure
reforms to curb the patent litigation abuses that undeniably do
exist today, but balanced against the need to ensure that the
ability of all patent owners to enforce their rights against
infringers is not unduly undermined by unbalanced or overly
broad reactions to litigation abuses by some patent owners.
That is the elusive balance that we have been seeking in the
patent reform legislation that was proposed last year and in
this Congress, and we very much appreciate the opportunity to
continue this dialog today.
21C congratulates Chairman Grassley, Ranking Member Leahy,
and the other cosponsors--Senators Cornyn, Schumer, Hatch,
Klobuchar, and Lee--on the introduction of the PATENT Act. We
do believe that the bill represents a significant, thoughtful,
and constructive contribution to the patent reform effort.
I will be pleased to explain further this morning, we
appreciate that the language of the bill reflects a number of
welcome compromises on such litigation issues as the way it
balances pleadings and early disclosures, the customer stay,
the stay of discovery pending early motion practice, calling
upon the expertise of the Judicial Conference to develop in-
court discovery and case management procedures for patent
cases, and fee shifting and making sure that fees are
recoverable against parties who ought to be paying them, as
well as non-parties.
21C does not believe that the PATENT ACT is ready to be
reported out of this Committee just yet. The job of patent
reform is not yet done. In our view, meaningful patent reform
legislation must also include provisions to ensure that the so-
called AIA review proceedings, the IPR and PGR proceedings that
were referenced in Senators Grassley' and Leahy's opening
remarks, are balanced and fair to patent challengers and patent
owners alike. We ask this Committee to prioritize reforms of
these AIA review proceedings equally with litigation reforms.
Let me be clear: AIA reviews are critical elements in the
overall framework of a properly functioning patent system. They
serve an essential role in providing faster and less expensive
alternatives to litigation to determine the validity of issued
patents. That is why we supported their creation in the first
place in the Leahy-Smith America Invents Act. They should be
conducted in a manner that is equitable to all participants,
not so skewed against patent owners that they invite
gamesmanship and abuse, which regrettably is the case today. I
look forward to discussing this morning some common-sense
changes to the way AIA reviews are handled that will address
the concerns without undermining their effectiveness.
It is a Rubik's Cube, as Senator Leahy said this morning.
There are a lot of moving parts. What we would propose is a
comprehensive set of reforms that gets at these issues:
First, reforming the procedures used when the PTO is
considering petitions to institute reviews, to level the
playing field in that process.
Second, allowing patent owners to have issues raised in
review proceedings first considered in reissue or reexamination
proceedings where they can amend the claim and BRI is
appropriate in that examination, and that would take place
prior to IPR or PGR review.
Third, applying the same standards in reviews that do take
place then as are applied in court, including claim
construction, burden of proof, and presumptions.
As Mr. Chandler said just a minute ago, the validity of
patents ought not to--or how patents are litigated ought not to
depend on the court. The validity of patents ought not to
depend on where it is determined either. These are intended to
be faster, cheaper alternatives to district court litigation.
They ought to apply the same standards and get generally the
same results.
These reforms will achieve increased fairness, balance, and
consistency in adjudications of patent validity in PTO and in
the courts. By addressing the questions and uncertainty that
now exist concerning these reviews, Congress can reassure the
innovation community that our patents can be relied upon to
protect and support the investments in research, development,
commercialization, technology transfer, and collaboration that
are so essential to future innovation.
As always, I, 3M, and 21C remain committed to working with
members of this Committee, their staffs, and other stakeholders
to couple the provisions in the PATENT Act as introduced with
provisions to restore balance and fairness in AIA reviews. We
look forward to lending our strong support for a bill that
addresses both patent litigation and AIA review proceedings in
an effective, balanced, and comprehensive fashion.
I will be pleased to answer any questions or supply any
additional information for the record today. Thank you very
much.
[The prepared statement of Mr. Rhodes follows as a
submission for the record]
Chairman Grassley. Thank you, Mr. Rhodes.
Now, Ms. Lettelleir.
STATEMENT OF DIANE K. LETTELLEIR, SENIOR MANAGING COUNSEL-
LITIGATION, J.C. PENNEY CORPORATION, INC., PLANO, TEXAS
Ms. Lettelleir. Chairman Grassley, Ranking Member Leahy,
and members of the Judiciary Committee, I am Diane Lettelleir,
senior managing counsel of litigation for J.C. Penney
Corporation. I want to thank you for the opportunity to testify
today about the devastating impact of abusive patent litigation
on J.C. Penney. It is an honor to present the company's
perspective, and I can assure you that our views are shared by
many other Main Street businesses around the country, including
other retailers, grocers, homebuilders, convenience stores,
advertisers, restaurants, realtors, and hoteliers.
On behalf of J.C. Penney, I also want to thank the
bipartisan sponsors of the PATENT Act for their commitment to
tackling this very important issue. This legislation will make
great strides toward addressing the abusive patent litigation
facing J.C. Penney and other Main Street businesses.
In 1902, James Cash Penney opened his first store in
Wyoming. Since that humble beginning, J.C. Penney has grown to
be one of the Nation's largest retailers. Today J.C. Penney has
over 1,000 stores employing approximately 114,000 associates
across 49 States and Puerto Rico.
J.C. Penney's business model is simple, but we use a
complex array of technologies to enhance our customers'
shopping experience. J.C. Penney, like countless other Main
Street businesses, has been ravaged by the exponential growth
and aggressiveness of patent troll industries.
While abusive patents initially targeted the high-tech
industry, they expanded their focus to include Main Street
businesses. In fact, in 2012, for the first time, non-
practicing entities reportedly sued more Main Street companies
than technology companies. The motivation for this strategy is
easy to understand. Main Street businesses that only use
technology are easy prey because they often lack the technical
or legal expertise to fight patent infringement claims. Abusive
patentees take advantage of these weaknesses and strategically
offer settlements at a level set below the cost of defense.
Faced with this calculus, many Main Street businesses have
little choice but to pay.
J.C. Penney's experience provides a framework for
understanding why this legislation is so important to Main
Street businesses. J.C. Penney has been a defendant in 30 non-
practicing entity lawsuits just in the last 6 years. In
addition, J.C. Penney received countless threatening demand
letters demanding settlements for what we consider to be very
weak patents or invalid patents. None of these NPE lawsuits or
demand letters relates to items we sell; every claim relates to
the technology we use to operate. NPEs frequently seek tens of
millions of dollars in damages in these cases.
J.C. Penney agrees that innovation and the U.S. patent
system are important to the U.S. economy, and J.C. Penney
respects the intellectual property rights of others. While
patent protection and the right of enforcement are important
components of the innovation ecosystem, so, too, is the
adoption of innovation. Innovation without the opportunity for
commercial adoption does not lead to economic growth or further
innovation. The current patent infringement litigation
environment is undercutting the opportunity for Main Street
businesses to adopt innovation.
In parallel to the direct costs of patent infringement
allegations, the steady stream of claims has disrupted J.C.
Penney's adoption of innovation offered by small businesses.
The disruption manifests itself in two ways. First, J.C. Penney
knows that by adopting new technology, it becomes a target for
abusive patent litigation. Second, the small technology company
itself becomes a target by virtue of its efforts to
commercialize its innovation. In both instances, J.C. Penney
knows that the small company will not have the financial
strength to defend itself or J.C. Penney against these threats.
This dynamic has caused a shift in how J.C. Penney and many
other Main Street businesses approach the adoption of
innovation. J.C. Penney's shift away from small companies has
not been driven by concerns that the new technology actually
infringes any patent. In most cases, the small companies
themselves own patents covering the technologies they offered
to J.C. Penney. Instead, J.C. Penney's shift away from small
technology companies is driven by the cost of defense of patent
litigation.
J.C. Penney and Main Street businesses fully support the
rights inventors and patent holders to market their products
and to bring claims to enforce their intellectual property
rights. We believe that the thoughtful and balanced patent
litigation reforms set forth in the PATENT Act will preserve
these rights while curbing abusive patent litigation.
Thank you once again, Chairman Grassley, Ranking Member
Leahy, and members of the Committee, for holding this critical
hearing. We urge this Congress to pass meaningful reform
without delay.
Thank you.
[The prepared statement of Ms. Lettelleir follows as a
submission for the record]
Chairman Grassley. Thank you, Ms. Lettelleir.
Mr. Hadad.
STATEMENT OF HENRY HADAD, SENIOR VICE PRESIDENT AND DEPUTY
GENERAL COUNSEL-INTELLECTUAL PROPERTY, BRISTOL-MYERS SQUIBB,
NEW YORK, NEW YORK
Mr. Hadad. Chairman Grassley, Ranking Member Leahy, and
members of the Committee, thank you for the opportunity to
appear on this panel.
Bristol-Myers Squibb is a global biopharmaceutical company
with over 25,000 employees focused on our mission to discover,
develop, and deliver innovative medicines that help millions of
patients prevail over serious disease. In 2014 alone, BMS spent
over $4.5 billion in research and development. BMS leads the
industry with our ground-breaking immuno-oncology therapies and
pipeline which harness the body's own immune system to target
and detect cancer cells. Given the extraordinary challenges,
expense, and time it takes to discover and develop a new drug,
BMS depends on strong and predictable IP protection to justify
this investment.
BMS acknowledges the patent litigation concerns expressed
by other members of this panel and appreciates the significant
efforts by the bill's sponsors and their staffs to strike a
balance between curbing abuses of the patent litigation process
and promoting innovation.
Provisions around early disclosure of ownership
information, Judicial Conference involvement in discovery and
case management, and customer stay should improve the
litigation process overall. Provisions around fee shifting
appropriate focus on objectively unreasonable behavior by a
non-prevailing party, while the fee recovery provisions reflect
a balanced and improved approach. And the discovery stay and
pleadings provisions include important concepts that should
reduce potential abuse.
Despite this significant progress, however, BMS strongly
urges the Committee to strengthen the bill by addressing
abusive litigation practices not only in the district courts
but also in the context of IPR and PGR proceedings before the
USPTO. We commend the USPTO and the PTAB for their efforts in
professionally and diligently managing nearly 3,000 IPR
filings. Unfortunately, in an effort to timely address the
deluge of filings, these proceedings have been implemented in a
manner that lacks due process protections and unfairly
prejudices patent owners.
Recent statistics show that the PTAB grants IPR petitions
and finds at least some of the challenged claims invalid over
75 percent of the time. Moreover, 80 percent of the patents
challenged in IPRs are also asserted in parallel district court
proceedings. Given this data, it is not surprising to see
increasing abuse of these proceedings, including IPR petitions
filed by hedge funds that are short-selling stock based largely
on investor anxiety around these proceedings, by parties
primarily seeking to extract a financial settlement from patent
holders, and by litigants presenting the same or substantially
the same arguments that were presented in Federal court.
The same challenges and serial harassment that confront
other members of this panel regarding patent assertion entities
are mirrored in the abuses of the IPR-PGR system. The stakes
are high. If there is a reduced confidence in the patent
system, the biopharmaceutical industry will innovate less,
invest less, and employ fewer. To that end, there will be fewer
ground-breaking therapies for patients.
There are three procedural changes that, if enacted
together, would more fairly balance these proceedings, aid in
their efficient adjudication to the benefit of patent owners
and challenges alike, and provide faith and predictability in
the patent system.
First, in IPR and PGR proceedings, the PTAB apply the same
``correct'' claim construction standard as district courts
rather than the ``broadest reasonable'' interpretation.
Second, the PTAB also should respect the presumption of
validity for granted patents and apply the same ``clear and
convincing'' evidentiary standard as applied in district courts
for establishing invalidity of the patent. By doing so, this
would minimize inconsistent results and duplicative proceedings
between the courts and the PTAB and ultimately increase
fairness and predictability.
The second proposal would be that patent owners should be
permitted to make minor amendments to claims during the
proceeding and more substantial amendments through the filing
of a reissue or reexamination application prior to the
institution of any IPR or PGR.
My third and last proposal is that the procedural rules
governing IPR and PGR should be revised to ensure fairness and
due process for patent owners, including equal opportunity to
submit evidence, reducing potential bias by having someone
other than the PTAB Merits Panel decide whether to institute
the petition, and by permitting live testimony on key issues.
I would be pleased to address these proposals in more
detail if there are any questions. The PATENT Act, with the
suggested modifications to USPTO post-grant proceedings, is a
productive step that will curb abusive practices and minimize
unintended consequences for legitimate patent owners.
I thank you for the opportunity to appear today and look
forward to answering any questions you may have. Thank you.
[The prepared statement of Mr. Hadad follows as a
submission for the record]
Chairman Grassley. Before I ask questions, I just got
notice from the floor that the 10:30 vote will probably be now
around 1:30. If you have got any other information, let me
know.
I will start, and we are going to have 5-minute rounds---I
screwed up your introduction, so I might as well do that. Go
ahead.
[Laughter.]
Ms. Samuels. No problem.
STATEMENT OF JULIE P. SAMUELS, EXECUTIVE DIRECTOR AND PRESIDENT
OF THE BOARD, ENGINE, NEW YORK, NEW YORK
Ms. Samuels. Chairman Grassley, Ranking Member Leahy, and
members of the Committee, I am Julie Samuels, executive
director of Engine, an organization started several years ago
to help advocate for high-tech, high-growth entrepreneurship.
Using policy analysis and economic research, we represent
startups nationwide. I am also a recovering patent lawyer. It
is an honor to be here today, and I look forward to discussing
effective solutions to the patent troll problem, especially
because this problem disproportionately harms the community of
high-tech, high-growth startups I represent.
Today I am going to tell you about what the startup
community needs from a functioning patent system--fairness and
balance--and why the PATENT Act would help ensure those things.
Patent trolls are armed with two weapons: low-quality,
impossible-to-understand patents, on the one hand, and the
outrageous costs, both in time and money, of patent litigation,
on the other. Imagine you are a small startup, cash-strapped
and hungry, and you get a patent demand from a company you have
never heard of, claiming to own some basic technology. Your
choices are: hire a lawyer and spend valuable time and limited
resources fighting back, or simply pay the troll to go away,
which is why I want to talk today about fairness and balance.
Right now we have a system that across the board favors
patent holders who want to abuse that system. Those parties
have exclusive access to all of the relevant information
surrounding the patent, basic things such as who owns it, who
else has rights to it, along with the ability to singlehandedly
drive up the costs of litigation with motion practice and
discovery. It is a system that essentially allows for legalized
extortion, and that leaves startups nearly powerless to fight
back without great personal risk and expense.
Take the experience of Jump Rope, a Chicago startup founded
by Peter Braxton. An Air Force veteran and former combat pilot,
Peter found himself facing a troll suit less than 1 month after
he launched Jump Rope. Peter's lawyers advised him to settle,
but he instead decided to fund the litigation himself.
Ultimately the court found no infringement and that the
plaintiff failed to conduct even due diligence before filing
suit, but not before Peter was forced to spend more than
$250,000 on his defense.
Or take Life360, an app keeps over 55 million families safe
and connected. After raising $50 million in capital early last
year, the company was hit with a troll suit that it decided to
fight. In spite of a jury finding the troll's claims meritless,
Life360 still had to spend over $1.5 million to defend itself,
with no reasonable recourse to recover that money.
Many of the startups--and this is incredibly important, I
think. Many of the startups who support reform are also patent
holders themselves, like Foursquare, which currently faces four
rolls. This year's legal budget set aside enough money for
these cases alone that could otherwise have been enough to hire
between six and ten engineers--good jobs that now do not exist.
There are countless other companies in our network, too,
who invest in the patent system, yet still support strong
reform. Many asked that I not use their names because they are
afraid of attracting more troll suits.
One startup general counsel told me, and I quote, ``The
system is set up in such a way that it pretty much guarantees
that the troll gets paid. It has nothing to do with the
patent's claims, but with the litigation fees. We were
bombarded with letters, emails, discovery requests, and
motions. It was all meaningless paper, but we still had to
spend time and money to respond.''
In each case, startups divert resources from innovating,
growing their business, and creating new jobs to fight what are
often meritless claims. To make matters worse, the bulk of this
money never finds its way back to inventors or R&D departments.
For a small startup, even one troll suit can ruin its
business, and the mere threat can cause significant disruption.
No small business owner should be forced to put her company at
risk to defend what she knows is right, which is why we need
the kind of comprehensive set of reforms that is the PATENT
Act. The PATENT Act would bring much needed transparency to the
system through heightened pleading and demand letter reform,
giving startups tools to understand the scope of the threat
they face, helping them decide how to respond. The bill creates
the appropriate incentives for startups facing meritless suits
to fight back. By shifting fees and allowing for real recovery
and by reforming discovery, the PATENT Act allows parties a
fighting chance in court.
Right now, a startup worried about its bottom line has
almost no choice but to pay a troll to go away. The PATENT Act
would dramatically change this calculation and keep the
courthouse doors open to everyone. Taken together with the
strong post-grant review procedures from the America Invents
Act, the PATENT Act represents an important package of
incentives that would rebalance and restore faith in a broken
system.
To be clear, no single reform in the bill can accomplish
this task alone. It is only when they are all taken together
that we can find the missing balance and fairness.
Opponents of reform argue that proposed changes in the law
would have the unintended consequence of making it harder to
assert valid claims. In fact, nothing in the PATENT Act would
hinder an inventor from monetizing, asserting, or enforcing
valid patents, or making claims that are substantially
justified or objectively reasonable.
The freedom to innovate has always been a central part of
the American dream. For the sake of our economy and our
identity, we must not let innovation become a legal liability.
A patent should be valued for what is covers and how it
incentivizes innovation, not for its litigation value. The
PATENT Act would go a long way to making that the case.
Thank you, and I look forward to your questions.
[The prepared statement of Ms. Samuels follows as a
submission for the record]
Chairman Grassley. We will have 5-minute rounds.
I am going to start with Mr. Chandler. We have heard
concerns that the PATENT Act could have the unintended effect
of undermining patent property rights. In your opinion, because
Cisco, I have been told, has 12,000 patents, are you concerned
that this bill would devaluate your company's extensive patent
portfolio?
Mr. Chandler. Not at all. Our portfolio is used to stop
others when they are infringing our patents. We also cross-
license freely with other companies so that each of us can be
empowered by each other's patents when that makes sense for us
to do so with other companies.
The PATENT Act is a series of changes that will bring
litigation fairness, that will allow for removing artificially
imposed costs in the system that do not produce useful results.
You know, the IPR process has been discussed a little bit
this morning, and the IPR process is good for Cisco because it
is good for the integrity of the patent system. We recently
brought litigation against a company which systematically used
our patented technology as well as word-for-word copying of our
copyrighted materials. They have asked for IPR review at the
Patent Office of our patents in the case.
Of course, I do not want my patents invalidated, and I
believe our patents are strong. If I do not like the result of
the IPR, there is an appeal process. But at the end of the day,
the patents need to be more than just a blank and unexamined
check to bring litigation. It really needs to stand for true
innovation. If some of my patents are invalidated after getting
a closer look under the rules that exist before I am able to
enforce them, so be it. We will have a stronger, more credible
patent system as a result, even if I do not like a particular
short-run result.
We strongly support the PATENT Act, and we do not buy the
need to undermine the ability of the Patent Office to undertake
the reviews that were created in the America Invents Act.
Chairman Grassley. I would have questions for Chandler,
Samuels, and Lettelleir, hopefully a short answer: Do you
believe that the PATENT Act is effective in addressing the
patent troll problem? Would you in a short way say what you
think is the most important reform in the bill? I will start
with Chandler.
Mr. Chandler. I think the most--the answer is yes, and the
most important reform in the bill is the fee-shifting, fee
recovery provisions that ensure that people with weak lawsuits
and weak patents think twice before bringing them.
Chairman Grassley. Ms. Samuels.
Ms. Samuels. I would also answer yes to the first--sorry.
Sorry about that. Yes, I think it is effective, and I actually
have a hard time saying that there is one most effective
provision. I think the most effective characteristic of the
bill is that it is comprehensive and that, when taken together,
we have a package of incentives that can rebalance the system.
Chairman Grassley. Ms. Lettelleir.
Ms. Lettelleir. I agree with Ms. Samuels. I think that it
is a very important piece of legislation and will be a powerful
tool for those that are the victims of abusive patent
litigation tactics. I feel like the most important attribute of
the PATENT Act is the fact that the provisions complement each
other, and one provision makes another provision more
effective, more meaningful, as it is applied to individual
scenarios. I think the fact that they work together, they
complement each other, and they strengthen each other--if you
start picking apart one aspect, one provision, it weakens
another provision. It is a very carefully crafted piece of
legislation, and we think that has been very well crafted, and
we support all the provisions as they work together.
Chairman Grassley. A short question for Mr. Rhodes. Do you
believe that the PATENT Act's litigation provisions strike the
right balance between patent holders and petitioners?
Mr. Rhodes. Yes, thank you for the question, Chairman
Grassley. Yes, we think a lot of very welcome compromises have
been made to the provisions that get it to that balance and
really address the concerns that we have heard about on the
panel this morning, while still providing balance and for the
ability of patent owners to assert their rights against true
infringement and to attain effective and prompt and expeditious
relief. We think that the improvements that I mentioned in my
opening statement are welcome advances in that regard.
Chairman Grassley. I am skipping over a question here
because my time is running out. For Ms. Samuels, as you note in
your testimony, patent abuse is a problem that
disproportionately targets startups and small businesses, so
legislation trying to put a stop to these predatory practices
is something that companies should welcome. However, at the
same time, concerns have been expressed that some of the
proposed patent reform bills will negatively impact the ability
of these same startups and small businesses to attract
investment.
Since you are someone that deals with startups on a daily
basis, do you believe that the PATENT Act will have an adverse
impact on venture capital investment for small companies and
startups?
Ms. Samuels. Thank you for the question, Chairman Grassley.
I absolutely do not think this will have any impact on the
venture capital as opposed to startups.
Chairman Grassley. OK. Senator Leahy?
Senator Leahy. Thank you, Mr. Chairman.
Mr. Rhodes, you are a chief of intellectual property
counsel for 3M, but you also wear another hat, the chair of
21C. Let me ask you, you have been involved in this. An
important part of the PATENT Act was the customer stay
provision. Those who are not familiar with that, it allows end
users and retailers to stay a lawsuit against them when the
manufacturer is available to litigate the case instead.
Some have criticized this for not focusing on end users.
They have said, and I believe incorrectly, that the provision
would leave patent owners without redress for infringement by
foreign manufacturers outside of the jurisdiction of U.S.
courts.
Senator Lee and I authored this provision in our original
bill last Congress. I hate to think of the number of hours and
months we spent reworking it to address those exact concerns.
As a patent holder and a manufacturer, can you share your views
of the concerns that have been raised?
Mr. Rhodes. Yes, thank you for the question, Ranking Member
Leahy. I have heard those concerns. I do not share them. I
think the customer stay provision is a very carefully crafted
compromise among many different stakeholder groups, some of
whom are sitting at this table this morning. We are really
talking, with respect to customer stay, about a three-part
negotiation balancing the interests of the patent holder, the
manufacturer, and the customer. I will assure you that we
looked very carefully at the issues that you talked about in
reaching those compromises.
In particular, with respect to retailers and end users, we
did define ``covered customer'' to only encompass those
entities, not entities who either manufacture products or who
modify the products in a way that gives rise to the charge of
infringement. Those are the parties that should be defending
against the infringement charge.
As to foreign, if you would like me to answer that
question, the stay is only available if the manufacturer is
either a party to the case in U.S. court with the covered
customer or a party to another case in U.S. Federal district
court. We added that language into the bill to address the
exact concern you mentioned, so it is just not possible that a
manufacturer beyond the jurisdiction of U.S. courts could--its
customer could avail itself of the stay. That is just not
possible.
Senator Leahy. I assumed that was going to be your answer,
but after all the time that Senator Lee and I spent on that, I
am glad to have that answer.
Mr. Hadad, you raised concerns about abuses of post-grant
review programs created by the America Invents Act, and I am
troubled by the behavior you described. It is vital, I think we
would all agree, that PTO programs remain a strong tool for
patents to be reviewed in an efficient setting. Of the reforms
you are suggesting, what is most important? Can you assure us
that those reforms would not undermine the law as it is now,
the America Invents Act?
Mr. Hadad. Thank you for the question, Ranking Member
Leahy. I think the three proposals I set out are somewhat
interconnected, and I think they all serve to make it a fair,
more balanced proceeding. I think----
Senator Leahy. You would make them of equal importance?
Mr. Hadad. I do, but I would say the first one, though, I
think really sets the tone for the rest, which is the standards
that the claims are reviewed by, whether it is a claim
construction standard that is used in district court, which
takes into account the extensive examination record of the
patent that took place before the USPTO; whether it is the
clear and convincing evidentiary standard for establishing
invalidity; or the presumption of validity.
What those things do, when you think about it, is make a
patent the property right that it is. When you diminish that,
it undermines the strength and, frankly, the predictability of
whether that patent right can be invested in in the future.
I think that piece of it, coupled with if the standards
were the same, you would actually have decreased duplicative
proceedings because then the courts and the USPTO would
acknowledge each other's determinations as being of equal
weight.
Senator Leahy. My time is almost up, and if anybody wants
to add anything for the record, either in agreement or
disagreement to what Mr. Hadad said, please do so. I did want
to ask Ms. Samuels, you talked about the abusive letters, and,
man, I hear that all the time in Vermont. We address it by
making clear that it is a deceptive trade practice to send
misleading demand leaders and the power of the FTC to give
civil penalties. Does that make sense? And do you have examples
from your own experience why we have got to have Federal
legislation here?
Ms. Samuels. Thank you for the question, Senator Leahy. I
think that definitely makes sense, and I applaud what this
bill, this piece of legislation does to address the demand
letter problem. The demand letter problem is such a big
problem, and we cannot even know the scope because it is all
pre-complaint, right? There is no public record. I think when
you empower the FTC, what you do is you really get at the worst
actors, and those are the people who are sending the abusive
demand letters. I think that that is a great step in the right
direction.
Senator Leahy. Thank you. Thank you very much, Mr.
Chairman.
Chairman Grassley. Thank you, Senator Leahy.
Now, Senator Hatch.
Senator Hatch. We are happy to have all of you here. This
is a really, really important hearing. All of us have worked
for a long time to try and get a patent bill that had pretty
much great success.
Let me ask you this, Ms. Samuels: As you know, especially
over the past year, I have been working on a fee recovery
provision to ensure that those who defend against abusive
patent litigation and are awarded fees will actually get paid
for them, and I am pleased that the PATENT Act includes this
provision.
From the small inventor startup point of view, can you
explain how important the recovery provision would be in
stopping patent trolls from litigating and dashing?
Ms. Samuels. Yes, thank you, Senator Hatch, and thank you
so much for making sure that recovery language was in the bill,
because as you say, if we are going to have any kind of fee
shifting, without an effective way to actually recover those
fees, the fee shifting would be meaningless. We think that fee
shifting is a core principle that is so important for small
startups and for anyone facing abusive patent litigation,
because right now, when you are a startup facing a patent
demand, facing a lawsuit, you are looking at years of
litigation and millions--potentially millions of dollars in
legal fees. That is untenable. When there is no real
expectation that you might see some of that money back, there
is no incentive to fight back. If there is no incentive to
fight back, then we are just, you know, emboldening the trolls'
continued behavior.
What you are doing is you are giving these tools to these
small companies to really push back, and there are really
important safeguards in the recovery language. I am not worried
about any abuse. I mean, it has to be objectively reasonable,
the case that is brought. I think we are in really good shape
with the language as it is.
Senator Hatch. Thank you.
Mr. Chandler, the PATENT Act includes a provision to stay
discovery if the defendant files certain motions like a motion
to transfer venue. The provision also allows courts to order
the exchange of information such as infringement intentions.
What type discovery is typically required to create
infringement contentions? With respect to motions to transfer
venue, do you think that infringement contentions and any
subsequent discovery should be postponed until the case is
actually transferred to the appropriate court?
Mr. Chandler. Yes, Senator, we do believe that the--all
discovery should be stayed pending the resolution of the
transfer motion, and there should be pressure on the judges to
rule quickly on the transfer motion. Infringement and
invalidity contentions can involve voluminous discovery. In
fact, the invalidity contentions could end up implicating the
majority of the discovery that would happen in the case. Costs
typically can exceed $1 million to proceed with that discovery.
The proposed legislation refers to the district court or local
rules in terms of what would be required for discovery, and we
see no reason to permit that discovery to proceed pending a
transfer motion. The judge should rule quickly on the transfer
motion. There should be an interlocutory appeal available on
that, and the case should get going as quickly as possible in
the appropriate court.
Senator Hatch. Well, thank you.
Mr. Rhodes, for several months now I have heard a great
deal about what many stakeholders argue is an unanticipated
abuse of the inter partes review process we established in the
America Invents Act. I am committed to working to address any
illegitimate instances of what some now refer to as ``reverse
trolling.'' I was looking for realistic reforms that address
the problem, but also ensure that the IPR process remains an
effective option for ridding the system of invalid patents.
Do you have any thoughts on what might fit that
description?
Mr. Rhodes. Yes, thank you very much for the question,
Senator Hatch. The patent system is a Rubik's Cube. The patent
ecosystem is very complex. We have heard here this morning the
proponents for litigation reform saying it is interlocking, you
know, multiple provisions are needed. We have heard those
concerns. We have worked in good faith and constructively to
address them on the litigation side. We think the mirror, the
reverse, the converse is true with respect to PGR and IPR
reforms in the Patent Office.
I listed to three big buckets in my opening statement, and
I think, you know, more fairness in reviewing petitions so both
parties can submit the same evidence, different bodies consider
it initially within the PTAB, and then at the end of the day,
there is an obligation to disclose evidence at the outset. We
think the hybrid approach which will make the right to amend
real and put BRI in its proper place in the reexamination and
reissue of claims, and then the fairness in burdens and
presumptions that Mr. Hadad mentioned.
We think just as the litigation reforms that we have
listened to and responded to are interlocking, so, too, are our
reforms that we are asking for in IPR and PGR interrelated and
interlocking.
Senator Hatch. Mr. Chairman, my time is up. I will submit
the rest of my questions.
Chairman Grassley. Yes.
[The questions of Senator Hatch follow as a submission for
the record]
Chairman Grassley. Senator Schumer--well, she came after--
yes, Senator Schumer, and then Senator Durbin.
Senator Feinstein. He came after me.
Senator Schumer. No. I was here earlier.
Chairman Grassley. No. He was here at----
Senator Whitehouse. Ladies first.
Senator Feinstein. OK.
Senator Schumer. Would you like to go?
Senator Feinstein. No.
Senator Hatch. Typical of----
Senator Schumer. Chauvinism is dead.
Chairman Grassley. We are wasting----
Senator Klobuchar. Senator Grassley says you are wasting--
--
Chairman Grassley. We are wasting time. Go ahead.
Senator Schumer. Excuse me. Do you want to go?
Senator Feinstein. No. You go.
Senator Schumer. OK. She was busy showing me the terrible
thing that ISIS puts out, which people should look at, called
``Inspire.''
Senator Durbin. Another patent troll.
Senator Schumer. They could be.
I want to thank Chairman Grassley and Ranking Member Leahy
for organizing this hearing and for your leadership and
partnership on this issue. I really want to thank Senator
Cornyn, whom we have worked closely with on this, as well as
Senators Klobuchar, Lee, and Hatch, our cosponsors who have
done a great job on this legislation.
I am grateful that the Committee has the opportunity to
hear today about the incredible strides we have been crafting
in coming to a meaningful solution to the scourge of patent
trolls without damaging the rights of legitimate patent
holders.
It is clear, based on what we are hearing today, that this
is not yesterday's patent bill. This bill is different, and we
are going to get it done. There will be patent legislation
along the lines of what we proposed on the President's desk
this year. I truly believe that. I think the panel, which last
year, if all of you came, there would have been a much wider
disparity. The consensus is growing around this bill, and we
thank you for that, particularly our 21C friends who are
helping us and being very constructive. Thank you.
I want to make sure everyone watching this hearing
understands what a breakthrough we have before us. Today's
hearing marks the first time Congress is hearing a unified
chorus that legislation we have drafted balances the interests
of traditional patent holders and businesses that are only on
the receiving end of infringement accusations.
Have we made everybody happy? Of course not. That is
literally impossible in the patent space, as we learned during
the debate over the AIA. But I feel confident we have taken
tremendous steps toward the goal that my colleagues and I all
identified: solve the problem of frivolous, expensive lawsuits
without damaging the legitimate claimants. I am committed to
working with those who have opposed previous iterations of
reform, especially those in the life science industry, to
identify workable solutions to the problems they perceive in
the PTO system.
I do want to sound a note of caution. Just as we have said
for years that it is important that patent litigation reform
not undermine the legitimate rights of patent holders, it is
similarly critical that the reforms to the post-grant system
not undermine the ability of the PTO to provide cost-effective,
efficient alternatives to litigation for the consideration of
poor-quality patents.
I have said many times, my lodestars in this debate are the
small New York startups. These are the seed corn of New York's
economy and similar companies throughout the country of
America's economy. These are the companies, the future Googles
and the future Facebooks and the future Oracles, that are going
to create thousands and thousands of jobs and export so much
materials. They are snuffed out by these parasitic trolls, and
we cannot allow that to happen.
The post-grant proceedings at the PTO are particularly
important to those companies who simply do not have the
resources to litigate or who benefit from the collective
efforts of others who have been hit by the same troll to
invalidate bad patents.
I will not be able to support any deal on post-grant that
does not preserve the viability of the process for these little
startups. I do have to say that, again, we are making good
progress here. There are ways we can all come together.
My questions: First, to Mr. Samuels--Ms. Samuels, you
represent exactly the kind of startup companies I care about in
New York and elsewhere. Do you think that this bill solves
their problems? You can give a short answer?
Ms. Samuels. I will be very short. I think, yes, it mostly
does. Obviously, there are some things we can discuss, but it
is a good compromise bill, and it will allow those companies to
do what they do, which is innovate and create jobs, in New York
and all across the country.
Senator Schumer. I know Mr. Chandler and Ms. Lettelleir,
because Senator Grassley asked the question, feel the same
about problems faced by Cisco and J.C. Penney. It is amazing.
One of the reasons we are gaining support is Main Street is
being hit by these trolls. A restaurant owner said to me in New
York that, ``They are going to sue me because they say they
patented the spoon.''
OK. Now, to Mr. Rhodes, last question, to Mr. Rhodes and
Mr. Hadad. Both of you represent companies that have had
substantial concerns about previous versions of patent reform
legislation. Do you feel like the sponsors of this bill have
listened to you, been responsive to the concerns you have
raised? You may answer any way you choose. Mr. Rhodes?
Mr. Rhodes. Yes, I am happy to go first. Thank you, Senator
Schumer. We do think we have been listened to. We think many of
our concerns have been addressed, and that is why in the
context of an overall bill that addresses our additional
concerns about IPR and PGR, we would look forward to supporting
the bill as a whole moving forward.
Senator Schumer. We have been mindful of your concerns,
because you have a lot of expertise in your organization.
Mr. Hadad, who represents retailers who have just all of a
sudden been right in the cross hairs of these horrible trolls.
Mr. Hadad. I represent Bristol-Myers Squibb, and I agree
with----
Senator Schumer. Sorry. Represents pharmaceuticals.
[Laughter.]
They retail pharmaceutical drugs.
Mr. Hadad. In the interest of time, I agree with Mr.
Rhodes' characterization.
Senator Schumer. Right. J.C. Penney, a retailer, agrees as
well. That is who I was referring to.
OK, Mr. Chairman. My time has expired.
Chairman Grassley. Senator Lee.
Senator Lee. Thank you, Mr. Chairman, and thanks to all of
you for your help and for your insight today.
I would like to thank all of the other original
cosponsors--Senators Leahy, Cornyn, Schumer, Hatch, and
Klobuchar--for their work in putting together this really
important legislation.
In the last Congress, Senator Leahy and I proposed
legislation to deal with abusive patent practices directed at
small businesses: sending demand letters, extorting money, and
filing expensive patent infringement lawsuits filed against
retailers and other end users of products instead of against
the manufacturers of those products. We are pleased to report
that in the PATENT Act, with the support of a bipartisan array
of cosponsors, we will finally be able to enact these reforms.
It has been a pleasure working with this great bipartisan group
and with so many people in the industry who have provided such
valuable insight.
I would like to start with you, Ms. Lettelleir. You said in
your testimony that you support a statutory customer stay. I
just want to make sure that everyone understands why that is
important. J.C. Penney is in the retail sales business. You all
do not manufacture technology or design complex software for a
living, right? You sell clothing and you sell other
merchandise. You do not know anything about the microprocessors
in the bar code reader or some other technology that you use in
order to get on with your business. When you get slapped with a
patent infringement lawsuit over some product that you did not
design, that you did not manufacture, you are not going to be
able to evaluate the merits of that suit. The manufacturer has
to do that. Yet, according to your testimony, district courts
are currently somewhat reluctant to stay litigation against
retailers or against end users, even when the manufacturer is
already defending its patent litigation.
Can you tell us a little bit more about that and about how
you think the customer stay language in this bill will help in
the industry?
Ms. Lettelleir. Yes, thank you for your question, Senator
Lee. We have been called upon to defend various aspects of
technology we have acquired from other companies, companies
like Cisco, companies like Oracle, intel processors, the whole
array of technology that you can imagine we have been called
upon to try and defend. You can imagine when J.C. Penney is
sued on the premise that an intel chip that resides in its
point-of-sale terminal in its store, that we are at a severe
disadvantage in terms of even beginning to defend that
technology. We do not have access to the evidence that would
even be required to defend that.
A customer stay is very important to us with respect to
those particular types of suits. It is not all the suits that
we see, but it is a good percentage of them. I think the
customer stay provision is really geared toward getting to the
truth. Does the chip infringe? It addresses the issue of who is
the best party to defend that issue, and we feel it is the
manufacturer, and we think that the language that has been
carefully crafted to balance all the different interests of the
different stakeholders is the best way to get to that result.
It does not absolve us of liability, but it does shift the
burden of proving and addressing the infringement allegations
to the manufacturer who actually supplied the technology.
Senator Lee. Thank you.
Mr. Rhodes, you have been focused, and appropriately so, on
ensuring balance in our litigation reform proposals. You have
been an honest broker in this process, and I hope you know how
much we appreciate that.
Are you satisfied that under our proposal eligibility for a
customer stay is sufficiently far down the chain of
distribution?
Mr. Rhodes. Yes, thank you for the question, Senator Lee. I
do think that we took careful pains, as I mentioned earlier, in
the definition of who a ``covered customer'' is to limit it to
retailers and end users who are reselling products from covered
customers who are in a position to defend the case. They have
not manufactured, they have not modified the product in a way
that gives rise to the charge of infringement. They are well
positioned if they have done that to defend based on their
modifications.
I think with those protections in place, we are not talking
about absolving people of liability. I think that is an
important principle on which I agree. We are talking about, in
the first instance at least, having the parties well positioned
to defend the case have the first and foremost role in
defending it.
Senator Lee. Thank you very much.
I see my time has expired. Thank you, Mr. Chairman.
Chairman Grassley. Thank you.
Senator Durbin.
Senator Durbin. Thank you, Mr. Chairman.
Chairman Grassley. Senator Durbin, and then it will be
Senator Perdue. I am going to go to Agriculture for a few
minutes.
Senator Durbin. Thank you, Senator. Let me thank the panel.
Throughout the morning we have heard the word ``balanced''
used repeatedly. I thank you for coming here to testify, but it
appears that this panel is divided between those who love the
bill and those who really love the bill.
There are some people who may not be in that category. They
include the National Venture Capital Association, which said of
this bill, ``We think as presently worded it will raise the
cost and risk of patent litigation for startups that need to
defend their intellectual property against much larger
incumbents and will discourage investment in any new company
that wants to enter lines of business where patents are
important.''
The U.S. Alliance for Startups and Inventors for Jobs said
of this bill, ``It will make it far more difficult for small
companies to protect and enforce their patented technologies
against larger competitors.''
There is another side to this story which has not been
given a chance to speak this morning, and I hope that during
the course of considering this bill we can reflect on it.
Let me also say to Mr. Chandler from Cisco, I do not think
you started with your strongest argument, your strong argument
that you spent $50 million in legal fees defending against
these nuisance lawsuits. The revenues of Cisco last year were
$47 billion; $50 million represents one-tenth of 1 percent of
your revenues. It is as if a $1 million corporate making
$20,000 a week had to spent $20 a week in legal fees. Let me
ask you, since both you and Mr. Rhodes represent companies that
have patents, how many patent lawsuits did you file to protect
your patent lawsuits last year?
Mr. Chandler. We filed one lawsuit last year.
Senator Durbin. Only one?
Mr. Chandler. Only one.
Senator Durbin. Mr. Rhodes?
Mr. Rhodes. We filed--over the last 5 years, 60 percent of
our patent lawsuits have been patent--when we have asserted our
patents against others. We currently have a dozen of those
suits pending and only three cases that we are defending.
Senator Durbin. This is what it gets down to is Large
corporations either filing one or more lawsuits have the
resources to play under this new law as proposed, because it
takes quite an effort under the proposed law to assert your
rights under a patent. You have the requirement of detailed
pleadings. You have the reduction of opportunities for
discovery. You have fee shifting, and in a great number of
cases at least leads to the possibility of fee shifting, which
could discourage the small patent holder.
One small business witness said in the Small Business
Committee, ``If you need to pay $5 million in order to assert
your patent rights, that is not petty cash for me. It is taking
my house, my spouse, and my children.''
This responsibility that is put into the law makes it much
more difficult than it might for Cisco or for 3M.
Ms. Samuels, the case that you referred to here, the Jump
Rope case, where a patent troll called Smart Options sued them,
you are aware of the fact that the court awarded fees after
finding that Smart Options, the patent troll, failed to perform
even minimal due diligence before suing.
Ms. Samuels. That is right, Senator Durbin, but then the
patent troll came back and sued again under new patents, and
they have just recovered a small fraction. What I would like
to----
Senator Durbin. Do you know what percentage of cases now
recover fees for this type of nuisance litigation under patent
law?
Ms. Samuels. I understand it is still a very, very low
percentage, and in certain districts it has not happened at all
since the----
Senator Durbin. It turns out, according to the Federal
Circuit Court Bar Association, defendants have a 50-percent
chance of winning these fees. It is not as if we are dealing
with a remote possibility. Under the current law, a 50-percent
chance of winning these fees.
Ms. Samuels. Fees are not granted in 50 percent of patent
litigation.
Senator Durbin. This is the Federal Circuit Court Bar
Association. You are welcome to look at their report.
May I ask the panel here, particularly those who are
representing the larger corporations, there are exemptions
built into this law, exemptions from fee shifting, pleadings,
and discovery. One of the exemptions relates to bill--patent
infringement lawsuits between generic and brand-name drug
companies. In other words, the bill protects this one type of
patent litigation from the burdens and risks the bill would
impose on all other patent holders.
I am not saying that drug patent cases should not be
exempt. Maybe they should. Why does the bill draw the line
there? Shouldn't we also protect original inventors in the
bill? They are not trolls. They earned their patent. What about
small businesses and universities? Can you tell me why we have
carved out one group in this bill to say that they would be
exempt from the more demanding procedural requirements than
these other categories? Would anyone like to----
Mr. Hadad. Senator Durbin, I will, since I am in the
industry. As you know, with cases under 271(e), or the so-
called Hatch-Waxman procedure, these cases have to get done
within a 30-month period--that is sort of a statutory mandate--
because that is the period where the FDA is stayed from
approving any products while a litigation is pending. Anything
that would delay the case would somehow maybe derail, I think,
the balance of that statute, and that is, I believe, why those
exemptions are in there.
When it comes to the fee shifting, I have to say I have a
bit of mixed feelings about that one myself, because I believe
that the standards for behavior in cases should be applied
equally in all cases, and so I do not see the need to
necessarily differentiate here.
Senator Durbin. I may come to a different conclusion as to
fee shifting, but I would say that since we are dealing with
patent trolls, which, according to the GAO, represent 20 to 25
percent of all the patent litigation, this new proposed law
applies to all patent litigation, I think--except for the ones
that I mentioned, the expectation that was made.
I yield back to whoever is presiding. I think it may be
Senator Lee at this point.
Chairman Lee. [Presiding.] Thank you.
Senator Perdue.
Senator Perdue. Thank you, Mr. Chairman, and thank you,
panelists, this morning for your testimony.
You know, in my experience--I have been on both sides of
this in my career--the economic boom of the last 70 years is
really attributable, in my opinion, to three things: one is
innovation; two is our ability to form capital; and, three, the
rule of law. Unfortunately, today we face abuses in several of
those areas, and I have got a real concern that we find the
right balance that does not hinder our ability to form capital.
Ms. Samuels, I think you mentioned this earlier,
particularly as it relates to the fee shifting part of this
bill. Can you give us your views? You are the closest to--I do
not know how many rounds you have been through. I am part of a
little startup--have been part of a little startup. We went
through four rounds, and I know what impact this can have on
small companies' abilities to raise capital.
I share Senator Durbin's concern about the small player,
the young player, getting from that angel stage into the
venture capital stage, and then being hit by a fraudulent or
problematic lawsuit that is totally frivolous.
Ms. Samuels. Thank you for the question, Senator Perdue. As
a preliminary matter, the VC community--and particularly the
venture capital community that invests in high-tech, high-
growth entrepreneurship, that invests in software companies--by
and large supports this kind of comprehensive legislation. I
can happily provide lots of examples. I have some written down,
but I would rather just get to the meat of what is going on
here. I think what we see is that those venture capitalists who
are investing in small startups, their interests are so closely
aligned with the small startups, of course. It is in their
benefit to see those startups succeed.
When a patent troll comes after that company, you run into
a lot of problems because a small company, even backed by
venture capital, does not have a lot of resources to fight
back. That is incredibly problematic.
I think, you know, to address some of the things that
Senator Durbin said that play into this, there is some concern
that this kind of legislation makes it harder to attract
investment. I do not think that is true at all. This
legislation is a compromise piece of legislation. It is really
measured.
The kinds of things that this bill wants a company to do
before filing suit, like basic due diligence, are the kinds of
things anyone should do before they take advantage of the
Federal court system in our country.
Senator Perdue. Right. Thank you very much.
Ms. Samuels. Thank you.
Senator Perdue. Ms. Lettelleir, I competed with Penney and
I also sold to Penney, but welcome this morning. I just have a
question about balance. We have heard that mentioned several
times today. The balance I am concerned about is between, you
know, the focus on pleading and the initial disclosure
provisions of the bill. Can you speak from your perspective
about have we found that balance? Or do you still have
concerns?
Ms. Lettelleir. I think the bill has done--it presents a
very finely crafted compromise position between all the
stakeholders, and I think that it achieves what we will need to
make meaningful changes to the system. You know, as a target of
this type of litigation, we receive just ridiculously broad
assertions.
For example, I just received one last month that they list
a patent number and then beside it they have only the word ``e-
commerce,'' and that constitutes my notice of what they are
alleging. I do not even know where to start in terms of
analyzing the potential risk, whether, in fact, I should seek a
license, or if I think that, in fact, we do not actually
practice the invention.
I think that the pleading requirements that are set forth
will be very helpful, I think the requirements in the demand
letters will be very helpful, in terms of moving the ball down
the path in a less expensive way for all the parties.
Senator Perdue. Thank you.
Mr. Rhodes, relating to demand letters, in your written
testimony I think you suggested that provisions of the bill on
abusive demand letters may encourage a ``sue now, talk later''
approach. I would like to give you an opportunity to expand on
that, because we are really trying to make sure that these
provisions will actually--well, basically you are saying that
this increases the likelihood of litigation. Is that correct?
Is that a correct observation from your testimony?
Mr. Rhodes. Thank you, Senator Perdue, and that is the
concern. I think the risk is if companies that want to put
others on notice of their patent rights confront the current
landscape that we are dealing with, with demand letters, the
risk may be too high, and we may be incented into a ``sue
first, talk later'' strategy--not because we do not want to get
the information out there, but because the risks of doing so
under the current regime are too high. What I mean by that is
two problems and two proposed solutions.
One is if it is not clear what the rules of the road are
with respect to a particular demand letter, you might not know
what you should or should not put in the demand letter. And
people just want clear rules of the road. We do not have that
today because different States have different rules now where
they have legislated demand letter provisions. What we would
like is national uniformity, consistency. We are asking that
the U.S. FTC be allowed to enforce the uniform standard. If
they do not, State Attorneys General would be empowered to step
in and enforce that uniform standard. But it would be uniform
so we would not have to wonder, you know, what we put in a
letter in this State or that State.
We also think the addition of a bad-faith requirement, as
is in the bill proceeding in the House Energy and Commerce
Committee, would be helpful to help really distinguish the
truly bad-faith assertion letters that we heard about from some
of the panelists this morning, from parties legitimately trying
to put others on notice of their rights or promote licensing
discussions, who may, for whatever reason, make a mistake.
Senator Perdue. Thank you.
I will now yield to Senator Klobuchar, who I think is next.
Senator Klobuchar. Very good. Thank you very much. Thank
you to all the witnesses. I know we have mentioned all of the
cosponsors of this bill many times, but I also want to thank
Senator Coons for his work. He knows a little bit, having been
a counsel in the past, about how important it is to protect the
rights of patent holders, as well as in a previous life in the
private sector, as well as the work of Senator Durbin. I know
people have some differing views here, but I think this is very
important, and I really came around to working with our patent
holder companies and making sure that there were provisions in
the bill, as Mr. Rhodes has expressed, that make sure that we
can differentiate some between legitimate assertions of patents
and then the troll situation.
I do not know if anyone has brought out this stat, but
there were more cases filed by patent trolls in 1 month, in
January 2015, than in the entire year of 2004--250 compared to
234, just to give a sense of this changing problem and why we
are doing something about it today.
I also believe that we need to make some--look at some of
the additional needs with this bill, and I deeply appreciate
everyone's willingness to work on this issue.
I thought I would start with one of the most poignant
examples that I heard when I did a roundtable with 50 patent
lawyers in Minnesota. It was a lot of fun. I heard at the
roundtable the story about an infusion pump used to administer
critical medicines to patients, including premature babies. The
maker of the pumps has been sued by a patent troll who is
claiming that the patent on the--that the infusion pump
infringes on a fuel delivery system that is intended for the
use in tractor-trailers. The litigation reforms in the PATENT
Act are aimed at stopping, of course, these kinds of abuses.
I have also heard, of course, from small inventors who are
concerned about how this legislation might affect them, so I
guess I would start with you, Ms. Samuels, and how you balance
that, the small inventor's interest and then the effect on so
many businesses across the country.
Ms. Samuels. Thank you for the question, Senator Klobuchar.
For starters, we have in our network of startups people who
strongly support this reform and are patent holders themselves,
and I think it is because we have crafted the kind of
compromise here that I really do not believe puts much of a
burden on a small patent holder. I mean, you are talking about,
before you file a lawsuit in Federal court, doing certain due
diligence. The fee-shifting standard, for instance, that you
bring an objectively reasonable case, that is the kind of
behavior we want to incentivized, right? And ``objectively
reasonable case'' does not mean you have to win. You can lose
and not get your fee shifted, right? You just need to give some
thought before you go and sue someone in Federal court.
I think--you know, to take a quick step back, I think part
of the problem here is there is this knee-jerk reaction in a
lot of what we are discussing, where people just assume that a
patent is, as someone else said, some kind of God-given right
to make money, and it is not. A patent exists to incentivize
innovation, the progress of science and useful arts. And that
is what we are talking about here.
I actually think, to answer your question, that the
balancing act that this bill does both protects small
businesses who are targeted by trolls, but it also protects
small businesses who have patents and want to assert them.
Senator Klobuchar. OK. Thank you.
Mr. Rhodes, as I mentioned in your introduction, innovation
has been key to your company. You brought the world the Post-it
Note, as we know, and as you point out in your testimony, some
stakeholders continue to claim that the customer stay provision
is subject to abuse that will harm legitimate patent rights. Do
you agree with this concern?
Mr. Rhodes. Thank you for the question, Senator Klobuchar.
I do not. As I mentioned earlier, I think really the trick
there was that delicate three-part negotiation: the patent
holder, the covered manufacturer, and the covered customer. We
really focused at the end of the supply chain so that the stay
would be available for retailers or end users who really should
be in the position of obtaining a stay.
Senator Klobuchar. When you and I talked yesterday, you
talked about some of the additional reforms that you thought
could be helpful here. Do you want to enumerate those?
Mr. Rhodes. Yes, and certainly I mentioned those this
morning with the post-grant review procedures and inter partes
review procedures in the Patent Office. I mentioned, you know,
three buckets of interlocking reforms that we would like to see
added to the bill: at the institution phase, leveling the
playing field there; having sort of the hybrid approach where
claim amendments could be considered if a patent owner elected
to take the patent into a reexamination or reissue proceeding;
and then for those claims that are examined--or, I am sorry,
are adjudicated under IPR and PGR proceedings, making those
consistent with the court.
I would just like to emphasize that on the litigation
pieces we have listened to the concerns of those who have
called for changes to litigation practice to address imbalance
and unfairness. We would now ask for the same attention and
concerns on our side to what we perceive to be imbalance and
unfairness to be brought to real solutions on the IPR and PGR
front. Thank you.
Senator Klobuchar. Thank you very much.
Chairman Grassley. [Presiding.] Now, we have Senator
Tillis.
Senator Tillis. Thank you, Mr. Chair.
Mr. Hadad, I had a question for you. I have heard from a
lot of pharmaceutical companies about maybe one of the
unintended consequences of the America Invents Act is some of
this economic espionage that is going on with manipulating
stock prices. I think you mentioned some of that in your
opening testimony.
Do you believe in the bill's current form that it
adequately address those threats going forward?
Mr. Hadad. No, it does not.
Senator Tillis. Can you give me some idea of what we could
potential look at that would improve our standing in that area?
Mr. Hadad. Absolutely. Today I enumerated three proposals
modifying the U.S. PTO's post-grant review proceedings which
would make them more fair. What we are asking for is--and I
just want to make it clear. BMS and other industry members are
on both sides of this issue. Yes, we are patent holders, but we
are also defendants at times. What we are looking for is a
proceeding which is fair, which is a faster, cheaper, and
analogous proceeding to what is going on in district court, but
one that does not arrive at greatly different results every
time, which is what we are seeing right here.
The things that you mentioned about hedge funds trying to
torpedo patents and take advantage of the stock market anxiety
around this are really a symptom of an underlying condition.
The underlying condition is these proceedings are at least
perceived to be slanted against the patent holder, and they
just need to be balanced.
I also just want to follow-up, too. We have talked a lot
about startups today and concerns of startups around patent
assertion entities, but I would also want to point out that
there are a lot of startups in the biotech area, and those
startups, when bigger companies are looking to do deals with
them, they have to have IP protection, meaningful IP protection
for that investment and for that drug to be developed. I do not
want that to be lost in the mix as well. Thank you.
Senator Tillis. I talked with a pharmaceutical company down
in North Carolina, the CEO, and we were talking about, because
of this uncertainty, the long-term impact it has on very
important business decisions. This particular company is in the
middle of getting an Alzheimer's treatment drug ready. It is
about 4 years out. They have to start making decisions about
manufacturing capability today, billion dollar investments.
With this level of uncertainty, it really changes the matrix
for them in terms of making those sorts of capital
expenditures, which are delaying good outcomes that the
pharmaceutical industry is poised to provide.
I do have another question. Mr. Rhodes, this may go to you
because you mentioned, I think, a case for preemption.
Generally speaking, I do not like the Federal Government
preempting States' efforts. I understand the complexity that
comes from having different rules in different jurisdictions.
Last year, when I was Speaker of the House, we actually
passed a bill that I think actually goes further. It
essentially created a cause of action against entities who
assert a bad-faith patent infringement and claims or who made
bad-faith infringement assertions and demand letters.
Do you believe that--it sounds like you would be arguing
for a position that this may be preempted. Do you believe that
the bill right now preempts that sort of law in North Carolina?
Mr. Rhodes. Thank you for the question, Senator Tillis. I
do not believe there is a preemption in the bill as introduced,
no. To be clear, you know, what I am seeking, I think what the
overwhelming majority of patent holders in this country are
seeking, are, as I said, clear rules of the road so there is no
ambiguity or confusion as to what we should or should not put
in our demand letters. We have no wish to send out false or
deceptive demand letters. We just want to know what we can put
in the letter in this State or that State. You know, much like
we are trying to make sure that we have a level playing field
outside the U.S. with our trading partners and their patent
laws, within the U.S. we would like that same kind of level
playing field and certainty and uniformity.
Patent law has always been a creature of Federal statute. I
think it is really up to Congress, the Federal courts, and
Federal agencies to develop that policy, and there is certainly
a role for concurrent enforcement, but I would like that to be
a uniform standard for enforcement.
Senator Tillis. Ms. Lettelleir, the customer stay
provision, the thing that concerns me is the way that that
process could be gamed in terms of maybe technologies that have
a 24-or 48-month cycle, components of products that may be a
brand, and people could game the system to where it would be
very difficult for someone who ultimately proves that their
patent has been infringed upon actually collecting anything. Do
you think there are safeguards in the proposed legislation
against that?
Ms. Lettelleir. I think that the very fact that the
customer stay does not absolve the end user from liability,
from the recovery potentially of damages, is the safeguard. It
is just the way it mechanically would work. All it really would
do would pause the cause of action against the end user while
the manufacturer case proceeds on liability questions. Then at
the conclusion of that, whatever may remain in terms of issues
to be resolved with the end user simply picks back up, and you
continue down that path. I do not see there--it does not really
significantly delay or hinder their ability to be made whole
if, in fact, there was infringement.
Senator Tillis. My question more is once they get to the
original offending entity, whether or not there is anything
there to help make them be made whole. My time has expired. We
will follow-up with questions. Thank you.
Chairman Grassley. Thank you, Senator Tillis.
Senator Franken.
Senator Franken. Thank you, Mr. Chairman.
Mr. Rhodes, I appreciate that you are here to offer 3M's
perspective, and I know that abusive tactics have harmed 3M, as
well as other Minnesota companies. I also understand that your
business relies heavily on the continued strength of the United
States patent system, and I remain hopeful that we can support
that system with narrowly tailored legislation that targets bad
actors while preserving our innovation economy.
I know you have been involved in the discussions
surrounding the PATENT Act, but you also wrote in your
testimony,``. . . we do not believe that the PATENT Act is
ready to be reported out of this Committee just yet . . .''
Can you tell me how your perspective has changed over the
last year overall, but also and specifically as it relates to
the growing popularity of post-grant review proceedings?
Mr. Rhodes. Yes, thank you very much for the question,
Senator Franken. I think my perspective over the last year has
changed in two respects: one is I am very much appreciative of
the work that has been done by the Committee and their staffs
to address some of the imbalance and concerns that we had
expressed with the bill that--or prior bills that had been
introduced. I agree this is different and improved in many
ways.
I think concurrently with that, the concern has growing--
has been growing with respect to the IPR and PGR proceedings in
the Patent Office. We now have over 3,000 of those filed, we
think under procedures that are not fair even beginning at the
outset, where the challenger can put in all of its evidence to
begin a review; the patent holder really has to respond with
one hand tied behind its back and cannot put in testimony to
rebut expert testimony put in by the challenger. The same body
then decides on that incomplete record that it is more likely
than not that one of the claims is invalid. That same body then
carries through and is sort of in a position of justifying that
initial decision in the final ruling.
When you get into the proceedings, the right to amend
claims that was codified in the AIA has effectively been
negated. The way the rules have been set up, only a very small
handful of amendments to claims have ever been granted. We
think taking the amendment process out of perhaps what is not a
good mix in the context of IPR and PGR and putting in a new
hybrid process where you could have an effective ability to
examine amended claims and BRI would make sense is a way to go.
Then for those claims that really are adjudicated in IPR and
PGR, those are supposed to be faster, more cost-effective
alternatives to district court litigation. Let us make them
that.
You know, again, as was said this morning, we want to have
consistent among courts. I think we ought to also have
consistency among adjudicatory bodies when they are looking at
patent claims. We ought not to have, as in the example I listed
in my testimony, 4 years of district court litigation and then
all the way up to the Federal circuit, a patent claim is
upheld, its validity is upheld, and then you turn around and
get an IPR petition that expressly leverages the difference in
claim construction between the two to start over from scratch?
That is not what--I would submit that is not what Congress
intended when it set up these procedures of the AIA.
Senator Franken. Thank you.
Mr. Hadad, in your testimony you focus heavily on
statistics that some in the pharmaceutical industry have argued
demonstrate a pro-challenger bias in the post-grand review
proceedings. What would you say to those on the opposite side
who say that these statistics actually reflect the fact that
the PTO has all too often issued overly broad patents? In other
words, the people on the other side would say that these
statistics demonstrate that these proceedings are serving the
precise function they were intended to. What would you say to
that?
Mr. Hadad. Thank you, Senator Franken, for the question.
I think when you look at the analogous proceedings in
district court, I think no one has thus far, in my mind,
criticized the excellent work the district courts have been
doing in adjudicating patents in terms of the merits. The
procedure has been somewhat onerous, the discovery and the
like. Those statistics, from what I understand, are far lower
in terms of the overturning of patents, certainly around, I
think, 40 percent or so from the last statistics I saw. When
you look at the USPTO, that is about a 75-percent rate of
invalidation.
I think that delta tells a story that suggests that perhaps
if there were level standards, as I mentioned earlier, Senator
Franken, they would consider these things in a corresponding
way. I do not think bad patents would survive more reasonable
standards any more than they would under these current
standards. I think bad patents will go down in either case.
Senator Franken. OK. Well, thank you.
Thank you, Mr. Chairman.
Chairman Grassley. Senator Coons.
Senator Coons. Thank you, Chairman Grassley, for calling
this hearing. It is my hope that this will be the first of
several hearings on the proposed reforms to the patent system
and that we will have an opportunity to hear from as broad a
range as possible of the folks who will be affected by the
proposed changes, including some of the critical voices not on
today's panel, which I think essentially includes small
businesses who rely on patent protection for attracting
investment, especially in the bio and pharma and materials
spaces and the venture capital community that invests in them.
While I congratulate my colleagues on their bipartisan
effort, this is not a bill that I can support. While it has
made progress and is less bad than H.R. 9, currently under
consideration in the House, there are still, in my view, two
central concerns that I have in reviewing this act.
First, the reforms in this bill that will make it harder to
enforce patents are not targeted toward trolls but will affect
all patent holders. What this will mean in practice is that
small investors, small inventors, startup businesses taking the
biggest risks will be potentially hit the hardest by the
proposed litigation reforms.
Second, the bill contains nothing to encourage the
innovation that our patent system is designed to support. In
particular, there is nothing in this bill to remedy the well-
documented abuse of post-grant proceedings, and I greatly
appreciate the comments of my colleagues Chairman Grassley and
Senator Cornyn who have expressed a desire to incorporate
improvements in these areas in markup.
Allow me to briefly elaborate on both points, if I might.
I am starting with the bill before us today. Our panelists
have described some truly egregious conduct by trolls,
including companies sending thousands of letters to small
businesses or retailers and a company suing based on nearly
expired patents. Yet none of those circumstances are
limitations actually embedded in the provisions of this bill.
Instead, it changes the rules for all patent holders.
Specifically the provisions in heightened pleading
requirements, delayed discovery, enhanced fee shifting do not
even attempt to distinguish between patent trolls and the
startups and small businesses across America that are
potentially creating jobs and making new discoveries and
delivering life-saving cures. We can make that distinction, and
we must. The patent system is simply too important to make
speed the ultimate goal of our efforts rather than accuracy.
Several of you have described it as a Rubik's Cube, a
complex system where there is a real risk of unintended
consequences, and I think, frankly, the point about post-grant
review makes that abundantly.
Do not just take this from me. I have a letter--and, Mr.
Chairman, I would ask permission to enter this into the
record--from the National Venture Capital Association, which
does----
Chairman Grassley. Without objection, so ordered.
Senator Coons. Thank you.
[The letter follows as a submission for the record]
Senator Coons. Which does speak on behalf of all of the
venture capital community, that speaks to the significant
unintended consequences that we may face, and I quote: ``It is
important to recognize a patent is only as strong as the
owner's ability to enforce it and the awareness of others of
that ability. If the bill as written were to pass, NVCA
believes both of these parameters would be impaired, making it
more difficult to invest in early stage companies working on
life-saving cures or significant breakthroughs.''
To further understand these views, I encourage any of my
colleagues or staff to watch the hearing and associated
testimony from the recent Small Business and Entrepreneurship
Committee hearing chaired by Senator Vitter. In that hearing,
we heard from Rachel King, CEO of a small biotech company
developing potentially life-saving treatments for blood
cancers. She testified, quote ``If the ability to enforce
patents becomes limited due to excessive lawsuit filing
requirements or undue delays, third parties would be less
likely to invest in or license our technology, and major
sources of R&D funding would dry up.''
We also heard from Robert Schmidt, co-chair of the Small
Business Technology Council, who expressed fear that weakening
patent laws would only benefit large, dominant firms in
maintaining their market power.
On the second issue, there is nothing in this bill that
helps inventors attract investment to find new cures or disrupt
current technologies, and I am pleased to hear Mr. Chandler's
testimony in which he acknowledged that recent abuses of post-
grant review is outrageous and the expressed concerns by Mr.
Rhodes and Mr. Hadad that these need to be addressed. My STRONG
Patents Act, which Senator Vitter has joined Senators Durbin
and Hirono in cosponsoring, really would address IPR abuse, and
I would be interested, if I might, Mr. Chairman, in hearing Mr.
Hadad speak to what are the changes in IPR and PGR proceedings
that you would like to see incorporated into the bill. Since
Mr. Rhodes has already had an opportunity to address that, I
would be interested, Mr. Hadad, in how you see the changes
needed to really deal with this issue.
Mr. Hadad. Thank you, Senator Coons, and thank you for your
concerns and considerations of these issues in your STRONG
Patent Act.
Many of the proposals that I brought up have analogous
provisions in the existing text of the STRONG Patent Act. There
are refinements, as thinking has continued, to really target
this to the abusive conduct and really tailor it in a way that
makes sense. As I mentioned, having the equivalent standards as
the district court, giving an alternative to amending claims
through this reissue or reexamination, and then providing some
basic fairness and equity in terms of the type of information
you can introduce, those three areas that I said--and I think
Mr. Rhodes agrees with--are areas that would be areas of focus
going forward, in my mind.
Senator Coons. Thank you, Mr. Hadad.
Thank you, Mr. Chairman.
Chairman Grassley. Now, Senator Whitehouse.
Senator Whitehouse. Thank you all. Let me begin by thanking
the cosponsors and negotiators who worked so hard on this bill.
I am at this point in undecided mode. I am waiting to let my
Rhode Island universities have a chance to digest the bill a
little bit more and to have a better sense from the small
business and startup community in Rhode Island weigh in a
little bit more with me. I echo Senator Coons' suggestion that
there should be more hearings on this that bring in a wider
range of viewpoints.
My concern is that among the different conflicts that
inhabit this patent space includes the ones we have talked
about, like patent holders versus patent infringers or alleged
patent infringers; includes the difference between the
pharmaceutical companies, which have a huge stake in a
particular patent but want to defend it at all costs, and tech
companies that may have a product that implicates potentially
thousands of patents and that gives them very, very different
motivation in this space.
Behind all of that, as somebody who used to do a certain
amount of litigation, is the conflict of big versus little and
the advantage that our litigation system kind of systemically
gives to big, particularly through the ability to just crush a
small plaintiff with endless discovery, lots of paper blizzard
litigation techniques and strategies that basically prevent the
small plaintiff company from ever getting to the merits. If you
are gigantic incumbent, then you have enormous power to crush
potentially disruptive competition by climbing into their space
and simply overpowering them in court. All of the moves that
were made in this bill with respect to heightened pleading
standards and discovery limits and adding a threat of a
potentially game-ending fee-shift award into the equation seem
to move in the direction of big versus little.
I am going to need to hear a little bit more from my
universities, which tend to represent smaller folks, and from
small businesses. I do think that a lot of progress has been
made.
I do think it is also going to be important that we have a
clear understanding, Mr. Chairman, as we go forward, that if we
reach an agreement that is very solid in the Senate, that we
have some reassurance that we will not just get rolled in the
conference process and end up with a bill that looks like the
House bill, which I think is really unacceptable to most of us
and would do real wrong as opposed to this, which I think is--
you know, we are in the hunt on this bill, and the question is:
Have we got it right yet?
My basic question, I would like to ask it to each of you.
If you want to expand a little bit, please feel free to, but I
think it is a yes-or-no question. If you had to sit down and
write a definition of what a troll was so that you could tell a
troll apart from a legitimate patent holder, would you be able
to do that? Mr. Chandler.
Mr. Chandler. I have felt for a long time that the issue
here is abuse of the litigation process by big and small alike
potentially, by active companies and inactive, that certainly
there has been a huge increase in the number of suits brought
by companies that are basically investment vehicles for buying
patents and litigation. The reforms we are looking at in this
legislation should improve the patent system overall.
Mr. Whitehouse. My point is: Can you tell a troll apart
from other litigants? Is there a way to define--we use the word
a lot. Would you be capable of defining it if you had to?
Mr. Chandler. Certainly--well, I do not use the term
because I think the problem is systemic.
Senator Whitehouse. OK.
Mr. Chandler. I think you have rats running through a
maze----
Senator Whitehouse. Mr. Rhodes----
Mr. Chandler [continuing]. because there is food at the end
of it.
Senator Whitehouse [continuing]. Would you be able to
define the term if you had to?
Mr. Rhodes. I do not use the term because I do not think
there is any common or understood definition to it that people
agree on, certainly that I am aware of, and I think it is
important----
Senator Whitehouse. Ms. Lettelleir?
Mr. Rhodes [continuing]. to identify behavior, not people.
Ms. Lettelleir. I have to agree with my colleagues on that
because I really think it--at one point it might have been more
easily defined, say 10 years ago when this movement started.
Over time the vortex of behavior has drawn in what previously
might not have been----
Senator Whitehouse. Two seconds left on my clock. Mr.
Hadad?
Mr. Hadad. No.
Senator Whitehouse. No.
Ms. Samuels. I agree. It is trolling behavior, not troll as
a party.
Senator Whitehouse. Got it. OK. Thank you very much.
I yield back my time, and I guess that puts Senator Cornyn
in charge.
Chairman Cornyn. [Presiding.]
Good morning. Thank you for being here today. I was just
getting a little update on what has happened. We have a
remarkable way of scheduling multiple meetings and hearings at
the same time around the Senate.
I understand there was some concern about the process
leading up to today's hearing, and I just would like to remind
all of my colleagues, we got very close to actually bringing a
bill from the Senate Judiciary Committee to the floor last
year. Senator Reid, who then was Majority Leader, reportedly
told the Chairman of the Judiciary Committee, ``Do not bother
because I am not going to schedule it for debate and votes.''
We were unsuccessful bringing the bill to the floor then, but
it has been a 2-year process, as many of you know, because we
have consulted with each of you, and we have had intense
involvement with stakeholders, an incredibly diverse array of
stakeholders. This is the second hearing we have had on this
issue this Congress.
I just wanted to say that to remind all of my colleagues
that we have worked very hard to get to where we are today,
which is not to the finish line, but we are a lot closer. My
thanks to each of you for your contribution to help us get to
where we are today. I realize we are not done, but we are much
closer.
Mr. Chandler, I understand that Senator Durbin has some
questions about the fee-shifting provisions. This is something
that Senator Schumer and I worked hard to try to get right. As
a former judge--State court judge, I had some concerns about
the presumptive fee-shifting idea. I have seen a lot of people
lose lawsuits that were not frivolous. They just lost. In cases
where there is objective unreasonableness of the position, I
think one of the things that is important is to have the fee-
shifting mechanism that we have tried to put in this
legislation to make sure that it acted as an additional
deterrent and did justice to the people who were sued based on
a frivolous claim.
Could you talk about the importance of fee shifting a
little bit more and explain why the Supreme Court's decision in
Octane Fitness was not enough?
Mr. Chandler. Thank you, Senator Cornyn, and thank you for
your sponsorship of the PATENT Act.
The Supreme Court decisions are based on a statute that
still refers to exceptional cases and have been very spottily
applied. In fact, in one district a judge has indicated that he
felt it was a suggestion, not mandatory law. The number of fee
awards still based on the principle of exceptionality has been
very low and we do not think serves as a sufficient
disincentive to unmeritorious litigation.
We do--we would prefer the presumptive language in the
Innovation Act in the House but understand the process of
crafting this bill and are comfortable with the way the
language is presented in the PATENT Act to address this and to
provide the district judges with a uniform national standard,
which has not been the result from the Supreme Court decisions
last year.
Chairman Cornyn. I thought it was important to have--to
require a hearing and to require evidence be introduced at that
hearing and then to have an opportunity for appellate review to
keep the district judges doing what Congress intended them to
do when it comes to considering this matter.
Mr. Rhodes, thank you for your contribution to this effort
and working with us. Can you explain why this fee-shifting
provision is an improvement over current law in your view?
Mr. Rhodes. Yes, thank you for the question, Senator
Cornyn. I do believe that the interests of uniformity are
important. As Mr. Chandler said, you know, we currently have
the Supreme Court opinions. We have long supported more
frequent fee shifting in patent cases to drive the right
behavior. The Supreme Court in giving district courts more
discretion is still working within the confines of existing
Section 285, which is an exceptional case. The Supreme Court
defined that as cases that stand out from others, but, you
know, there is still a lot of ambiguity in that.
I would submit that having the protections, the safeguards
that you mentioned, as well as making it clear that fees are
not automatically shifted--that has been one of our core
principles. It really should target bad behavior, not parties,
got to go both ways and be premised on, as the bill says, you
know, behavior or conduct that is not objectively reasonable.
There is an interest-of-justice exception at the end.
I think there is actual protection as compared to current
law that this statute would provide to those who are concerned
about more frequent fee shifting.
Chairman Cornyn. I've heard--on a different topic, I have
heard from life sciences industries and other concerns about
inter partes review that was created by the 2011 America
Invents Act, and I would like to hear from people on both sides
of that discussion here. Mr. Hadad, you have testified your
belief that reforms to IPR are necessary, in part because of
what you view as a high rate of invalidation of patents after
they have been issued, and I can understand the uncertainty
that that might create, and particularly if there are different
legal standards that apply to litigation as opposed to the IPR
process. Could you share your views with us on that?
Mr. Hadad. Thank you, Senator Cornyn. Yes, I do believe the
IPR proceedings, as they have been implemented--and I think
they have been implemented in the best of intentions by the
USPTO, but there is a considerable deluge of these IPRs, and
they have to be managed. I think to some degree lost in the mix
a little bit have been some of the procedural safeguards to
ensure a fair and level playing field between parties.
You mentioned the standards, and I had mentioned them
earlier. I think what they would do would be to give basically
analogous type of decisionmaking to the district courts and the
USPTO. We are looking for the USPTO to be a more efficient
forum, not to be a different forum in terms of the level of
invalidations.I think what we are seeing is an increased lack
of confidence in patent--for patent holders in terms of
investment when you consider that there is effectively a 75-
percent chance that your patent at one point will go down in a
USPTO proceeding, at least based on current statistics.
Mr. Chandler. Senator, may I address that as well?
Chairman Cornyn. Certainly.
Mr. Chandler. Thank you. I think first we ought to get a
grip on the statistics. There are 2.48 million outstanding and
in-force patents in the United States. There have been 3,000
petitions for IPR review. The PTO has granted about 1,300 out
of those 3,000, and that has resulted in 391 patents having
some or all of their claims eliminated.
I can understand why that is painful for the people who
have that happen. I also understand that they are going to
petition Congress for redress.
The fundamental issue, though, that we see is things like
this hedge fund activity that is initiating IPRs and then
trying to short stocks. We ought to address that directly
through securities laws, for instance. That is not acceptable
behavior, in our view.
The reforms that are being proposed to the IPR process
would basically force the Patent Office to use standards that
were set for the district court rather than taking a fair look
at whether a patent was granted in the first place. The types
of standards that the PTO uses where they use broadest
reasonable interpretation to figure out what the scope of a
patent should be, where they do not apply a clear and
convincing evidence standard that we put in the district courts
because they are not the experts the way the Patent Office is.
All that does is roll back the ability of the PTO, which was a
fundamental part of the process that was implemented in the
America Invents Act, to take a fair look, should this patent
have been granted in the first place, using the same standards
that were used when the patent was looked at in the first
place. If a mistake was made, let us fix it. There is no excuse
for letting a mistaken patent grant result in a 20-year
monopoly that raises costs to customers and keeps other
entrepreneurs out of the marketplace.
We think there are targeted reforms that should be
implemented, but rolling back the standards the PTO uses is not
the right answer.
Chairman Cornyn. I know there are different views on the
panel----
Mr. Chandler. There sure are.
Chairman Cornyn [continuing]. and that is the reason for
the hearing in the first place so we can flesh this out and we
can hopefully make better decisions.
Mr. Rhodes.
Mr. Rhodes. Yes, I think that, you know, these states that
there are 2 million patents and only 3,000 IPRs have been file
so far, that misses the point that this is not a representative
sampling of the 2 million patents that are in force.
What patents do you think are being challenged right now?
The most important ones, the most valuable ones, the ones that
are either in litigation or that others would like to be able
to practice. Therein lies the problem.
There is less confidence than has ever been, and this goes
beyond the life sciences sector that we heard from Mr. Hadad.
There is less confidence now, when I am talking to business
decisionmakers, about whether we can safely put investments in
commercializing patented technology and building products based
on that technology, can we assure investments by knowing that
we have patent rights that can protect them. That is a less
certain question than it has ever been. It is because of the
uncertainty, the perception of unfairness, the reality of
unfairness that I mentioned in several respects this morning,
and that directly drives business decisions, and it is beyond
the life sciences sector.
We have proposed a series of reforms. You know, we hope
that our ask is listened to. The same way those who said there
was imbalance in litigation that needed to be addressed, we
hope our concerns are listened to as well in terms of the post-
issuance proceedings.
Chairman Cornyn. Ms. Lettelleir, I should have recognized
you first since you are a constituent, but welcome to today's
hearing. We have heard testimony on the alignment or we should
not align the IPR standards with those in district courts. What
is your view of that?
Ms. Lettelleir. I think the one thing that is very
important for the Committee to keep in mind as it considers
these requests for changes is that the post-grant review
proceedings that were adopted as part of the AIA was part of a
carefully structured provision, and if you now go in and try
and pick just one element of that or two elements of that, you
disrupt the balance of what was accomplished in the AIA.
While I have heard the arguments that there is an imbalance
between the district court standards and the PTO standards, the
reality is that throughout the rules governing IPR and PGR that
have been adopted and applied, there are imbalances. If you
just start looking to making one element of those proceedings
line up with district courts, then you have changed
fundamentally the balance between challengers and patent
holders. We are very concerned of disrupting the balance that
was achieved when AIA was accomplished.
As challengers of patents before the PTO in the context of
these post-grant review proceedings, we are seeing unfairness
as to the challenger as well. There may be a broader discussion
that needs to be had down the road, but as part of this, I do
not think you can just take one element and disrupt the entire
balance that was achieved in the AIA.
Chairman Cornyn. I have gone over my time for now. I will
recognize Senator Blumenthal, who I think is next.
Senator Blumenthal. Thanks, Senator Cornyn, and thank you
all for being here. Thank you for the excellent testimony. I
had to step out to attend one of the numerous conflicting
hearings and meetings that we find we have in the Senate.
I am very, very interested in this dilemma. For me it is a
dilemma. I have wrestled with it for quite some time. I
recently heard, for example, from a Connecticut Navy veteran
names Michael Skelps whose photography company was, in fact,
sued by a patent troll. The troll claimed to have patented the
idea of taking pictures at a finish line and selling them to
racers. I am a runner. I know about these photographs at finish
lines. They are done commonly. Michael Skelps was threatened
with this lawsuit. In fact, he was sued, and the troll's demand
letter contained no information about his supposed patent. It
made the case to Mr. Skelps that it would be cheaper to settle
than to litigate, and it announced that the troll had already
forced nine businesses to settle with much the same kind of
claim.
Mr. Skelps fought it as hard as he could. He spent $100,000
and ultimately all three of the troll's patents were
invalidated. He won the battle. He lost the war. I learned last
night that Mr. Skelps will file Chapter 13 bankruptcy this
month, and within 60 days his business will be gone.
I have heard from innovators who are afraid what could
happen if patent reform goes too far, but I am convinced that
there are ways to focus and target legislation to help not only
big companies and very well resourced entrepreneurs, but also
the Michael Skelpses of the world, of America. He happens to be
a veteran who obviously was not going to give up without a
fight, and he fought and he won. Ultimately, though, he lost.
I am hopeful that we will have a result here that
vindicates the legal rights of people in America generally,
both the entrepreneurs and the innovators, the business people,
and our veterans. I want to thank all the bill's sponsors. I am
not one of them. I hope that we can improve even more on what
has been done already, which leads to the question that I have
for you, and I will accept volunteers. Do you think there are
parts of the bill that can and should be improved? What would
you do to make it better and--what always troubles me,
especially in an area that is so complex and challenging--to
avoid unintended consequences?
Ms. Samuels. I can answer that. Thank you, Senator
Blumenthal, for the question. I think that this bill represents
a really good compromise, which means, of course, that I do not
think it is perfect. Right? That is the definition of
compromise. Some of the things that I wish we saw in there
were--I wish that we were dealing with quality, like we talked
about last year, 2 years ago, with an expanded covered business
method review; that we more directly were talking about
improving patent quality, which for people in my industry, in
the small startups in the tech space and not unlike the
photographer, Mr. Skelps--if I got that correctly.
Senator Blumenthal. You did.
Ms. Samuels. That is what would really help. That is the
core of this problem. I--actually the discovery provisions have
been dialed back some during compromise, and I wish that were
not the case, because I was so glad to hear your story and I
will be quick just to say that there has been a lot of talk
today about small businesses and they hurt on both sides of the
equation, and I think that is probably always true. In this
instance, we are so worried about small businesses having
access to the courthouse, and that just does not mean
plaintiffs, but it really means defendants in these cases, so
that you do not have to spend $100,000, $200,000, $1 million to
defend yourself, but you can go to court and make your case. So
thank you for the question.
Senator Blumenthal. Thank you.
Mr. Chandler. We would--thank you, Senator. We would
support making sure that the discovery stay in the case of
transfer motions, motions to dismiss, motions to sever be more
robust. Right now it allows for local rules that could impose a
significant amount of discovery while a transfer motion is
being considered, and we would hope there would be an
interlocutory appeal on the transfer motions as well. As we
noted, 40 percent of the patent litigation is now brought in
two judicial districts where only 1.5 percent of Americans
live. That imbalance forces people to bring large numbers of
witnesses and travel to places that are very, very
inconvenient, but cases are brought there for reasons that are
obscure to us.
Mr. Rhodes. We would certainly hope that any of the welcome
compromises that we mentioned would not be dialed back in the
bill. We think that would be a big step backward.
Beyond that, I have mentioned two areas where we think
improvement should be had this morning--no surprise to those of
you who have been here the whole morning--AIA reviews as well
as the demand letter section. We think if we could couple
changes to those with what is in the bill today, at that point
we would be in a position where we could support the overall
package.
Ms. Lettelleir. Senator Blumenthal, from the Main Street
perspective, we recognize the balance that has been struck, and
we accept that. While we would always hope to have stronger
provisions, we accept the balance that has been struck.
However, any further erosion of the critical provisions of the
PATENT Act would greatly challenge our continued support for
the PATENT Act as introduced.
Mr. Hadad. To finish it up, we appreciate the compromises
in the current existing bill. We do remain concerned about
these post-grant proceedings and believe a comprehensive bill
addressing abusive litigation procedures would also include
those as well. Thank you.
Senator Blumenthal. Thank you. I want to thank you all. As
my colleague Senator Schumer remarked at the very beginning,
the witnesses that we have before us today reflect a consensus,
but it also may be without some of the disagreeing views, some
of the other views, which may not be reflected simply because
others have not been invited for whatever reason. I think that
this Committee has an obligation to reach out for views that
represent the diversity and continue to work to improve it
without necessarily disrupting the compromise that has been
struck. Even with a compromise, I think there may be room for
improvement.
Thank you, Mr. Chairman.
Chairman Cornyn. Thank you, Senator Blumenthal.
I agree with Senator Blumenthal, there is always room for
improvement. But we----
Senator Blumenthal. I want to thank the Chairman for his
role in forging this compromise, along with our colleagues
Senator Leahy, Senator Grassley, Senator Schumer, and Senator
Klobuchar.
Chairman Cornyn. We have learned, even with consensus
legislation, which this is not yet, it is still hard to pass
legislation in the Senate. We are going to keep at it. We are
trying to make sure that we do get the views of stakeholders,
and we have worked very hard at that, and, again, I will thank
you once more for your sharing that with us and working with us
in good faith.
This to me is the sort of important piece of legislation--
maybe it is not important on a global scale, but it is to a lot
of people. I have heard from everybody from restaurant owners
to hotel/motel owners to operators, to people in the building
trades that they are somehow swept up by the patent trolls
litigation, and it is just incredibly destructive and unfair.
Ms. Samuels, I think you had a great phrase: ``defendants
access to justice.'' Sometimes we focus on the plaintiffs'
access to justice in a lawsuit but do not give adequate
recognition to the defendants' access to justice as well.
I might just cover with you--and I apologize if you have
talked about this before when I was not able to be here and I
was at one of those other conflicting meetings and hearings
that Senator Blumenthal alluded to. How would the pleading rule
in this proposal help small businesses?
Ms. Samuels. Thank you for the question, Senator Cornyn,
and I have to thank you so much for your leadership on this
effort.
I think the heightened pleading provision is actually one
of the most important parts, particularly for startups, for
small businesses, for individuals who face threats from patent
trolls, because you need to be able to understand the scope of
the threat you face before you can make appropriate decisions
about how to proceed, and without basic information, you cannot
make those decisions.
I think this is especially true when we are talking about a
patent system--a patent system that is a system of public
notice. That is the point of the patent system, and right now
it does not operate like that. When we talk about property, we
are talking about metes and bounds. If you want to grow a
company, make some innovation, put something out there, it is
literally impossible right now to know the scope of your rights
because there is no information out there to help delineate
that. The heightened pleading requirement would help fix that
problem.
Chairman Cornyn. Mr. Rhodes, you testified to the
safeguards and the pleading rule. Would you describe those and
perhaps explain those a little more?
Mr. Rhodes. Yes, thank you for the question, Senator
Cornyn. I think the trick with pleadings is to achieve, as in
so many other areas of the bill, the right balance between
putting all parties, both plaintiffs and defendants, on fair
notice of the claims and the defenses at issue in the case
without making the requirements too high or onerous that there
is an access-to-justice issue or that the pleading targets do
not just become a motion to dismiss--that it does not become a
target for motions to dismiss. I think, you know, that is a
balance we are trying to strike here.
I was encouraged that some of the initial information that
is not required to establish a claim for relief was moved to
initial disclosures, so that cannot serve as the basis for a
motion to dismiss.
There is also an ability to plead matters generally,
consistent with the Plaintiff's Rule 11 obligation, but more
generally if information is not available to the plaintiff at
the time the complaint is file.
In addition, there is confirmation within the heightened
pleadings requirement of the right to amend pleadings
consistent with the standards in Rule 15(a) of the Federal
Rules of Civil Procedure. I think those safeguards are
important.
Chairman Cornyn. If we can turn to the issue of discovery,
if I worry about--the two things I worry about the most about
our civil justice system is the costs and the delays necessary
to resolve disputes. Not everybody can afford a high-priced
lawyer or the discovery costs associated with protracted
litigation. One of the things we tried to address here is a way
to deal with this in an appropriate way. It is an item of
consensus because you have plaintiffs who complain about
discovery, and you have defendants who complain about
discovery, too. But some, especially those with little to
produce, rely upon the high cost of discovery to extract
settlements regardless of the merits of the case.
Since the introduction of the Patent Abuse Reduction Act 2
years ago, which included a discovery stay, I have heard a lot
from both sides about the right way to address discovery costs.
Ms. Samuels, would you please tell us how you view the
discovery stay in the PATENT Act and its impact on startup
companies?
Ms. Samuels. Of course, Senator Cornyn. Thank you for the
question. You know, I think that a lot of what I said about
heightened pleading is also true with regard to the discovery
reforms in the early stays. What you are allowing startup small
companies without a lot of resources to do is really take the
necessary time with the necessary information to understand the
scope of what they are facing, to understand as they make these
decisions whether they should pay a lawyer and continue to
fight, whether they should settle. These are the kinds of
things we need to give these folks so that they, like we have
talked about, have access to the courthouse.
To be honest, while I am glad that the stay is in here, I
wish it went farther. I wish it were to Markman. I understand
we have a compromise and that is life, so we just think that
anything that allows these people to get into the courthouse is
a good thing.
Chairman Cornyn. Mr. Rhodes, I think you touched on this,
but let me just ask you again. Do you think we have reached a
balanced approach on deterring frivolous litigation without
unduly burdening patent holders who need to assert their rights
when it comes to discovery?
Mr. Rhodes. Yes, I think with respect to the discovery
stay, that was a major area of concern for 3M and for 21C. As
the original proposal that you referenced was drafted, it would
stay discovery pending claim construction, and that is a
complex and often protracted procedure that takes place in
every case, nearly every patent case before the claims are
construed. We were very concerned, as a company that makes
investments based on our patent rights and, unfortunately,
sometimes has to enforce those patents to prevent infringement,
that staying all discovery in a case pending the claim
construction process might delay our ability to get fast,
expeditious, and effective relief.
I think walking that back to preliminary motions does
address concerns. The discovery proceeds while motions to
transfer, for example, are not ruled upon. It does address some
of that concern about discovery taking place in a court where
maybe the case is not even going to proceed, while balancing
the risk--against the risk of a protracted delay of that
discovery stay as pending claim construction.
I do disagree strongly with the pushback that we have heard
this morning about the exception for initial disclosures. I
think if you look across the country at the patent courts that
have done the best job of--at the district courts that have
done the best job of managing patent cases, a common
denominator that you see are initial disclosure requirements,
local patent rules that provide for an early exchange of
information that helps narrow the issues in dispute. It helps
identify opportunities on issues for early resolution. It helps
identify early settlement opportunities. I think allowing that
process to proceed in an orderly fashion, drawing upon the
experience and the expertise of the Federal judiciary that has
adopted that process is very important, even if we stay more
intrusive discovery pending those preliminary motions.
Chairman Cornyn. Thank you. I know Senator Blumenthal
mentioned some concern about people who are not represented at
today's hearing. I just wanted to note for the record that at
the last hearing one of the universities were engaged, and I am
pleased that as a result of the work we have done reaching out
to the various university groups, we have welcomed both their
input, and I think we were in a pretty much better place as far
as their concerns and the compromise that we have reached,
which is, as we have all said, is not perfect, but seems to be
a consensus--we have reached a consensus, by and large, with
some notable exceptions on the IPR and other areas where we
need to continue to work.
Senator Blumenthal, do you have any other questions you
would like to ask?
Senator Blumenthal. I do not. Thank you.
Chairman Cornyn. OK. Thank you. Well, since we have run out
of Senators and questions, thank you for your patience and your
time, and thanks for continuing to work with us and get this
right. Thanks. The hearing is adjourned.
[Whereupon, at 11:54 a.m., the Committee was adjourned.]
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