[Senate Hearing 114-137]
[From the U.S. Government Publishing Office]
S. Hrg. 114-137
PATENT REFORM: PROTECTING INNOVATION
AND ENTREPRENEURSHIP
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON SMALL BUSINESS
AND ENTREPRENEURSHIP
UNITED STATES SENATE
ONE HUNDRED FOURTEENTH CONGRESS
FIRST SESSION
__________
MARCH 19, 2015
__________
Printed for the Committee on Small Business and Entrepreneurship
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COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP
ONE HUNDRED FOURTEENTH CONGRESS
----------
DAVID VITTER, Louisiana, Chairman
BENJAMIN L. CARDIN, Maryland, Ranking Member
JAMES E. RISCH, Idaho MARIA CANTWELL, Washington
MARCO RUBIO, Florida JEANNE SHAHEEN, New Hampshire
RAND PAUL, Kentucky HEIDI HEITKAMP, North Dakota
TIM SCOTT, South Carolina EDWARD J. MARKEY, Massachusetts
DEB FISCHER, Nebraska CORY A. BOOKER, New Jersey
CORY GARDNER, Colorado CHRISTOPHER A. COONS, Delaware
JONI ERNST, Iowa MAZIE K. HIRONO, Hawaii
KELLY AYOTTE, New Hampshire GARY C. PETERS, Michigan
MICHAEL B. ENZI, Wyoming
Zak Baig, Republican Staff Director
Ann Jacobs, Democratic Staff Director
C O N T E N T S
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Opening Statements
Page
Vitter, Hon. David, Chairman, and a U.S. Senator from Louisiana.. 1
Cardin, Hon. Benjamin L., a U.S. Senator from Maryland........... 2
Witnesses
Mr. David Winwood, President-Elect, Association of University
Technology Managers, Chief Business Development Officer,
Louisiana State University's Pennington Biomedical Research
Center, Baton Rouge, LA........................................ 4
Mr. Robert N. Schmidt, Co-Chair, Small Business Technology
Council, National Small Business Association, Fort Meyers, FL.. 23
Tim Molino, Director, Policy, BSA | The Software Alliance........ 40
Ms. Rachel King, Founder & CEO, GlycoMimetics, Chair of the
Maryland Life Sciences Advisory Board, Gaithersburg, MD........ 48
Mr. Craig Bandes, President & CEO, Pixelligent Technologies,
Baltimore, MD.................................................. 57
Alphabetical Listing and Appendix Material Submitted
American Continental Group, Inc.
Chart titled ``Litigation Rate 1991-2014''................... 114
American Hotel and Lodging Association
Statement dated March 19, 2015............................... 75
Application Developers Alliance on Patent Reform
Statement dated March 19, 2015............................... 77
Association of American Universities
Letter dated March 2, 2015................................... 80
Association of Public and Land-grant Universities
Statement dated March 3, 2015................................ 81
Bandes, Craig
Testimony.................................................... 57
Prepared statement........................................... 60
Responses to questions submitted by Chairman Vitter and
Senator Booker............................................. 164
Big Ten Since 1896
Letter to Senator Cardin dated January 21, 2015.............. 82
Biotechnology Industry Organization
Statement dated March 3, 2015................................ 84
Cardin, Hon. Benjamin L.
Testimony.................................................... 2
Engine
Statement of Julie Samuels, Executive Director............... 85
Patent One Page Executive Summary 2015....................... 87
Patent White Paper 2015...................................... 88
Innovation Alliance
Statement dated March 3, 2015................................ 97
Institute of Electrical and Electronics Engineers (IEEE-USA)
Letter to Senator Coons dated March 4, 2015.................. 98
Kappos, David J.
Report titled ``The Great Patent Debate: Changing Horizons''. 99
Report titled ``An Overview of the United States Patent
System, 2015''............................................. 114
King, Rachel
Testimony.................................................... 48
Prepared statement........................................... 51
Medical Device Manufacturers Association
Statement.................................................... 116
Molino, Tim
Testimony.................................................... 40
Prepared statement........................................... 42
National Association of Home Builders
Statement dated March 19, 2015............................... 118
National Association of Realtors
Letter dated March 17, 2015.................................. 122
National Retail Federation
Statement dated March 19, 2015............................... 124
National Venture Capital Association
Statement dated March 3, 2015................................ 133
Pharmaceutical Research and Manufacturers of America
Statement dated March 3, 2015................................ 134
Schmidt, Robert N.
Letter dated March 4, 2015................................... 16
Letter dated March 13, 2015.................................. 20
Testimony.................................................... 23
Prepared statement........................................... 25
Responses to questions submitted by Chairman Vitter.......... 148
Startup Investors
Letter dated March 17, 2015.................................. 135
Vitter, Hon. David
Testimony.................................................... 1
Winwood, David
Testimony.................................................... 4
Prepared statement........................................... 7
PATENT REFORM: PROTECTING INNOVATION AND ENTREPRENEURSHIP
----------
THURSDAY, MARCH 19, 2015
United States Senate,
Committee on Small Business
and Entrepreneurship,
Washington, DC.
The Committee met, pursuant to notice, at 10:02 a.m., in
Room 428, Russell Senate Office Building, Hon. David Vitter,
Chairman of the Committee, presiding.
Present: Senators Vitter, Risch, Gardner, Ernst, Cardin,
Cantwell, Shaheen, Booker, Coons, Hirono, and Peters.
OPENING STATEMENT OF HON. DAVID VITTER, CHAIRMAN, AND A U.S.
SENATOR FROM LOUISIANA
Chairman Vitter. Let's go ahead and get started.
Good morning and welcome, everybody, and welcome to our
hearing on ``Patent Reform: Protecting Innovation and
Entrepreneurship.''
I want to thank our panel of witnesses for taking time away
from their jobs and, in many cases, making the trip to
Washington for this important hearing. We look forward to your
testimony.
As many in this room are aware, there is a growing call for
the Senate to act swiftly and make patent reform legislation a
priority for floor consideration once committees have done
their work.
Today, we are here to answer a sole question: How do we
address patent reform while protecting innovation and not
impose negative consequences on small businesses and
entrepreneurs? It is important to ensure that any bill that
moves to the U.S. Senate floor achieves this goal.
Certainly, we want to combat frivolous lawsuits and patent
trolling, but we also want to maintain a level playing field
for small business investors and large companies alike.
Patent jurisprudence has changed considerably over the past
three years, and there are ample ongoing changes to the patent
system which are still being implemented.
Protecting small business and safeguarding those
innovations is the responsibility of this Committee, not to
mention the bedrock of the American entrepreneurial spirit.
Similarly, it is essential to remember that many legitimate
owners of intellectual property do not manufacture anything
but, nonetheless, have very important legitimate claims of
patent infringement against other parties. These include
independent inventors, research and development companies, and
universities, who all qualify as nonpracticing entities.
Therefore, Congress should act decisively, but it should also
act with prudence.
We have heard pleas from businesses across the board that
the patent system is increasingly becoming a forum for
financial speculation and litigation rather than innovation.
American innovators and small businesses across the country are
being forced to divert critical resources to defend themselves
against vague claims of patent infringement, resulting in
substantial drains on our economy.
Main Street businesses using off-the-shelf technology need
to be protected against frivolous demand letters and suits.
This must stop, but it would be similarly disturbing if we
uprooted a major portion of the U.S. economy to address harmful
behavior from a few bad actors.
The discussion surrounding patent reform must include a
detailed analysis of how legislation would further impact small
businesses, investors, and universities.
And as chair of this Committee on Small Business and
Entrepreneurship, I certainly feel an obligation to highlight
that our patent system fuels the economy.
Unfortunately, many businesses have seen some bad actors,
and patent abuse by bad actors certainly wastes vital funds
that could otherwise go to productive activity. It is this
reason that I fully support bringing the patent discussion
forward to address specific targeted legislative fixes as long
as that discussion carries the necessary protection for smaller
businesses and startups.
Unfortunately, when dealing with bad actors, there is very
rarely a one-shot solution. I have seen disturbing efforts
that, in an attempt to demonstrate a greater level of ``growing
abuse,'' lump innocent, well-intended business suits in that of
trolling.
So legislation should not have the effect of allowing one
group to strong-arm another smaller group simply because of
immediate access to resources. Efforts to unbalance the system
using misguided information will ultimately lead to less
prosperity in our system.
Licensing one's patents is not a bad thing. It is for that
reason I believe the discussion deserves the necessary room to
include what the legislation's further impacts will be on small
businesses and investors and universities.
And so it is my hope that today with our witnesses and
experts across the spectrum, we can discuss how best to balance
a path forward. And I certainly look forward to carrying this
issue and discussion on as a member of the Senate Judiciary
Committee as well.
With that, let me turn the mic over to Senator Cardin.
OPENING STATEMENT OF HON. BENJAMIN L. CARDIN, A U.S. SENATOR
FROM MARYLAND
Senator Cardin. Well, Chairman Vitter, first of all, thank
you for convening this hearing. This is our first committee
hearing here in Washington of the Small Business and
Entrepreneurship Committee of this Congress, and I want to
thank Senator Vitter and his staff for the cooperative
arrangements that we have in putting together this particular
hearing.
It is very interesting; there are lots of committees in the
Congress that deal with issues that affect small business.
The Finance Committee deals with the tax code, and there is
major impact on small businesses.
The Environment and Public Works Committee deals with the
regulatory environment for an environment that affects small
business.
The Banking Committee deals with the financial systems in
this country that affect small business.
And the Judiciary Committee deals with pensions and pension
laws that affect and patent laws that affect--excuse me. They
deal with patent laws that affect small businesses.
Only this Committee focuses on the small business
community, and it is very appropriate that we have a hearing
dealing with the impact of these policies as they affect small
business. So, Mr. Chairman, I am very pleased that we are
having this hearing to deal with patents so that we can take a
look at the impact it has on small business.
We are trying to balance two different thoughts on how the
patent system is working. We have our universities and large
biotech companies that have one view, and we have smaller
companies that have different views.
And I would hope that we could harmonize those views. That
may be asking a little bit too much, but I think this hearing
can help us in trying to figure out how is the best way to deal
with these conflicting roles.
The role of small business is critical to the dialogue on
patents. Small business produces 16 times more patents than
larger businesses. And the ability of entrepreneurs to obtain
patents often acts as a precursor to investors' willingness to
provide funding at critical stages.
An effective and functioning patent system is critical to
the economic growth of the United States. Intellectual property
has been a fundamental source of American innovation and
economic prosperity since our nation's founding.
Of late, there have been many efforts to improve the
system. The administration issued a series of executive
actions, and Congress passed the America Invents Act in 2011,
which put in place our First-to-File system, procedural
changes, fee revisions, and post-grant review.
I look forward to hearing from today's witnesses as to how
those reforms and executive actions are working in practice,
the impact it has on businesses in our community.
I also look forward to hearing from our witnesses about
their experiences with the patent assertion entities, also
known as patent trolls. Small businesses are particularly
vulnerable, as the chairman pointed out. They do not have the
deep pockets. They are particularly vulnerable to claims that
their work is invalid or requires significant investment of
time and money to litigate.
Research institutions also play a significant role in the
patent arena. University-owned research labs spur innovation by
transferring patentable inventions developed in their labs to
the private sector for commercialization as new technologies.
In the State of Maryland, I have seen how technology
transfer programs at the University of Maryland, the National
Institutes of Health, the Johns Hopkins University have had to
stimulate growth in my State; indeed, in the entire country.
Nationwide, similar programs have generated hundreds of
billions of dollars of economic activity and three million jobs
in the past three decades alone.
So, Mr. Chairman, this is an issue that this Committee is
ideally suited, I hope, to find a common ground. The Small
Business and Entrepreneurship Committee has had a reputation of
working in a bipartisan way to help small business, and we will
be challenged in this area, but I think today's hearing can
help us find a way forward.
I am very impressed by the witnesses that we have before
us, and we look forward to your testimony and helping us
understand how the current system is working, the challenges we
have, how we can balance innovation moving forward, protecting
intellectual property of creative people but also allowing
companies to be able to move forward in more discoveries for
the benefit of our economy.
Chairman Vitter. Great. Thank you, Ben.
We do have five great witnesses. I am going to introduce
the first three before each of their testimony, and then
Senator Cardin will introduce the remaining two.
First, we will hear from Mr. David Winwood, President-Elect
of the Association of University Technology Managers and Chief
Business Development Officer of LSU's Pennington Biomedical
Research Center.
Prior to his current position, David served in research,
business development, and company leadership roles in three
startup businesses.
Welcome, David, and please proceed.
STATEMENT OF DAVID WINWOOD, PRESIDENT-ELECT, ASSOCIATION OF
UNIVERSITY TECHNOLOGY MANAGERS, AND CHIEF BUSINESS DEVELOPMENT
OFFICER, LOUISIANA STATE UNIVERSITY'S PENNINGTON BIOMEDICAL
RESEARCH CENTER
Mr. Winwood. Thank you, Mr. Chairman.
Chairman Vitter, Ranking Member Cardin, committee members,
I am grateful for the opportunity and privilege to testify
today.
I am President-Elect of the Association of University
Technology Managers, AUTM, a nonprofit organization dedicated
to enhancing the global academic technology transfer
profession, and as mentioned, I am also the Chief Business
Development Officer of Louisiana State University's Pennington
Biomedical Research Center in Baton Rouge.
The Center's mission is to discover the triggers of chronic
diseases through innovative research that improves human health
across a life span.
Well, university research has brought huge benefits to the
American economy, national security, and health care. An
independent survey released just this week indicates that since
1996 academic industry patent licensing has contributed up to
$1.18 trillion to the U.S. economy, bolstered U.S. GDP by up to
$518 billion, and supported up to 3.82 million U.S. jobs.
In that same 18-year period studied, AUTM reported the
creation of more than 4,200 startup companies based on academic
and nonprofit research.
And, in 2013 alone, AUTM reported 24,000 inventions from
academic research, inventions that helped launch 719 new
products and served as the basis for the creation of more than
800 startup companies.
The Bayh-Dole Act in 1980 helped unleash the power of the
patent and provided a framework in which universities are
encouraged to engage with corporate partners to take inventions
from the lab to the marketplace. Under Bayh-Dole, universities
exercise a preference for licensing to small entities,
including startup companies.
Now Congress has been a partner with universities by
funding the basic research that industry no longer performs,
and the process by which federally funded inventions are moved
to the market has been refined and improved as the technology
transfer profession has matured over the years.
Patenting is a complex, lengthy, unpredictable, and
expensive process. Yet, it is crucial for the commercialization
of most inventions, with patents often being used effectively
as collateral to attract early stage investments to allow
commercialization to proceed.
And certainly, Chairman, the innovative proof of concept
funding program recently implemented by the LSU Board of
Supervisors to turn LSU research into companies and products
requires evidence of IP protection before funding is approved.
But there is a real concern among universities and small
businesses regarding the sweeping changes to the U.S. patent
system that some in Congress are advocating in bills such as
H.R. 9., a concern that our efforts to fill a vital role in the
innovation ecosystem will be stifled.
Fee-shifting and joinder provisions proposed in the pending
legislation could effectively exclude universities and our
licensed startup companies from enforcing our legitimate patent
claims, resulting in significant losses to the entrepreneurial
and innovation ecosystem that propels the U.S. economy.
Now going to court is always a last resort for patent
holders, but if going to court becomes too risky then patents
will lose their value to licensees and to investors. We believe
the investment community would clearly be much less inclined to
risk-making, early stage funding commitments, including to
startups, if H.R. 9 became law.
Now the university community understands the concerns of
lawmakers and industry groups regarding what has become known
as the patent troll issue. Indeed, in a February 2015 press
release, six higher education associations commenting on H.R. 9
clearly stated that our associations want Congress to pass
legislation this year that would put an end to the abusive
behavior of patent trolls.
But in saying that, we mean a targeted, narrow approach
that focuses on the abusive behavior, such as that recently
proposed by Senator Coons in the STRONG Act, which is aimed at
protecting small businesses, universities, and entrepreneurs
from abusive patent litigation, addressing the problem but
without the negative side effects the other legislation might
cause by impeding legitimate patent holders from enforcing
their patent rights. So we are happy to work with Congress
toward that end.
At AUTM, we see a broad landscape as having changed over
the past year or so. The Supreme Court has issued rulings
giving judges more discretion to assess legal fees to losers in
litigation if the judge believes the case is unjustified. The
FTC has recently pursued a patent troll who sent out misleading
demand letters to hundreds of small retailers, and the
Commission says it plans to do more. And, the PTO itself has
new procedures in place that are helping remove bad patents
before they ever get to trial.
So, in closing, I would urge this Committee to express
itself to the Senate Judiciary Committee and raise these
concerns as that committee begins to work on its own version of
patent litigation reform because we simply cannot allow
overzealous pursuit of trolls to take the American patent
system out of reach for universities, small businesses, and
small inventors who are counting on you to protect them from
legislation that overreaches.
So I thank you for providing the opportunity for us to make
these comments, and I will be happy to answer questions.
[The prepared statement of Mr. Winwood follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Chairman Vitter. Great. Thank you very much.
Next, we have Robert N. Schmidt, Co-Chair at the Small
Business Technology Council and also with the National Small
Business Association.
For the past 25 years, Bob has been founding and growing
companies in the medical device and aerospace fields. He is a
professional engineer, an attorney, and specifically, a patent
attorney. He has 31 patents to his name, and the 5 companies he
has founded control over 160 U.S. patents and applications plus
additional foreign patents.
And also, one of the groups, Bob, as part of the National
Small Business Association, along with its coalition partners,
recently sent a letter to Representatives Goodlatte and Conyers
and Senators Grassley and Leahy, imploring Congress to slow
down and fully consider that legislation.
And so I want to move that we make that part of the record.
Without objection, so ordered.
[The information follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Chairman Vitter. Bob, please proceed.
STATEMENT OF ROBERT N. SCHMIDT, CO-CHAIR, SMALL BUSINESS
TECHNOLOGY COUNCIL, NATIONAL SMALL BUSINESS ASSOCIATION
Mr. Schmidt. Senator Vitter, Senator Cardin, members, thank
you very much for asking me to testify today on this very
important matter for technology startups and small businesses.
For the past 25 years, I have founded and led these
companies, and we have about 80 employees in total and a dozen
doctorate degrees and over $10 million in annual revenues. That
gives you a scale of what we do, but we sell our products on
seven continents.
So I am here today as the co-chair of the Small Business
Technology Council, speaking on behalf of the 5,000 firms who
participate in the SBIR and SDTR programs. I do so to raise our
concerns regarding the detrimental effects that patent reform,
bills such as H.R. 9, the so-called Innovation Act, will have
on small inventing companies.
We would like to add small business to the list of
individuals, of individual inventors, universities, venture
capitalists, patent examiners, former patent commissioners, and
patent court judges that oppose such legislation. Crafting a
narrow and targeted alternative to this harmful legislation is
important to small business inventors as patents are critical
to all innovative firms and especially SBIR firms.
The Federal Reserve found that patents are the number one
indicator of regional wealth.
Small businesses employ 37 percent of the scientists and
engineers, 50 percent more than all the large corporations
combined.
SBIR firms have received about 121,000 patents.
The Fortune 500 firms' share of R&D 100 Awards, the world's
most valuable innovations, has dropped from over 40 percent in
the 1970s and early 1980s to just 6 percent, or 1 in 16, while
SBIR firms receive 4 times as many of these R&D 100 Awards as
the Fortune 500 firms together.
In short, SBIR firms and small business is where innovation
happens.
Large firms can, and do, survive without strong patents;
small businesses cannot. Weakening patent rights threatens the
very interest of universities and small business. Without
strong patents, we cannot commercialize our inventions, and
technology jobs will go overseas.
The over-broad and sweeping proposed legislation in H.R. 9
will have the effect of suppressing patent rights of all
patentees and, in particular, will hurt the small, high-tech,
job-creating SBIR businesses and, thus, the economy.
Simply stated, patents are far more important to small
business survival and growth than to large businesses, and
licensed patents are the only way universities can
commercialize their research.
The Senate is now presented with a choice between two
bills--the House's H.R. 9, the ill-named Innovation Act, or S.
632, appropriately termed STRONG Patents Act of 2015.
H.R. 9, which I believe should be more aptly named the
Ending the American Dream Act, with functions such as those
providing for endless review, clouds title to patents, weakens
the patent holder's ability to economically enforce their
patents, and undermines fundraising and licensing activities.
In contrast, the STRONG Patents Act ends the invention tax
by securing PTO user fees from diversion away from the Patent
Office, ensuring that resources are commensurate with
examination workload. And, the STRONG Patents Act protects
patent holders from large patent ogres, those who would
otherwise infringe small firms' invalid patents with impunity.
Let me repeat. H.R. 9 does not eliminate trolls, but it
will engender the large monopolistic and market dominant firms,
encouraging more patent ogre activity.
Finally, I want to put to rest the myth that small business
supports the Innovation Act. H.R. 9 does not solve the troll
problem.
Virginia Gavin, a small business owner who had received two
demand letters and paid twice, she was as anti-troll as one
could be. But once she understood each and every provision of
H.R. 3309, which was H.R. 9's predecessor, she stated, ``There
is nothing in this bill that will help me and several items
that will harm my business.''
Thus, we oppose H.R. 9.
However, we do support legislation proposed in the STRONG
Patents Act and the Troll Act.
Thank you very much.
[The prepared statement of Mr. Schmidt follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Chairman Vitter. Thank you. Thank you very much, Bob.
And next, we have Tim Molino, Director of Policy for BSA
the Software Alliance.
Mr. Molino has a long history of policy work related to
patents, including as a former top Senate staffer and as chief
counsel for Senator Amy Klobuchar. During his law career, Tim
focused on patent litigation in the areas of software, medical
devices, and biotech, and he also prosecuted patent
applications and provided counseling regarding non-infringement
and validity issues.
Welcome, Tim, and please proceed.
STATEMENT OF TIM MOLINO, DIRECTOR, POLICY, BSA | THE SOFTWARE
ALLIANCE
Mr. Molino. Chairman Vitter, Ranking Member Cardin and
members of the Committee, thank you for the opportunity to
testify on this very important topic of patent reform.
BSA is the world's leading voice for the software industry.
From the way our children learn, how we communicate with
colleagues and loved ones, the cars we drive, and to the
medical devices that save our lives, software is making the
world a better place.
In order to keep this innovation thriving, BSA member
companies believe that there is an urgent need for legislation
to address abuse that all too often happens during patent
litigation.
The Small Business Committee is the ideal venue for an
organization like BSA to present our views. Although our
members range in size from very small to large, each of them
was founded by one or two individuals with passion, an idea,
and a vision for bringing that idea to the marketplace.
Software-related patents are especially important for our
members and other small businesses in many sectors of the
economy that rely on the patent system--a patent system that is
strong, predictable, efficient, and fair.
In today's world, much of the innovation that is occurring
comes through the development of software, whether it is
building energy efficient offices and homes, running factories
more safely and productively, or making transportation systems
more efficient. Software patents play a vital role for small
businesses by protecting their ideas against copiers,
preserving the value of their innovation as they build their
businesses, and providing a foundation to attract the
investment capital needed to launch and grow.
But the promise of software patents rings hollow if an
inventor cannot properly enforce their rights or defend
themselves when sued.
There is no escaping the reality that patent litigation is
enormously expensive and the costs are only growing.
Unfortunately, the escalation often comes because bad actors
drive up litigation costs by employing abuse tactics.
And, more and more, they prey on smaller companies with
limited experience of the patent system and limited resources.
A small business that is the victim of abusive litigation
tactics often faces the need to use scarce resources to fund
the litigation rather than grow its business.
To be clear, however, we firmly believe that the ability to
legitimately enforce a valid patent is the foundation of a
strong and effective patent system. We are just trying to end
the abuse.
Abusive litigation tactics serve none but the abuser. They
do not create jobs. They do not deliver new products and
services. And, they do not contribute to our innovation
economy.
Senate action to end abusive litigation is urgently needed.
We believe that effective litigation must provide genuine
notice by requiring plaintiffs to clearly set forth their
allegations in their complaint, make discovery more efficient
by having courts issue an early claims construction decision
that will narrow the issues relevant to the suit before the
expensive part of discovery begins, and deter weaker frivolous
cases by awarding fees only when a party asserts objectively
unreasonable claims, and then ensuring a party that is awarded
fees has an efficient mechanism to collect them.
By enacting such legislation, Congress will help foster
innovation and entrepreneurship for businesses of all sizes.
Some argue that no legislative changes are needed to the
patent system because the Supreme Court has ruled on several
patent cases in the last few years. The Supreme Court's
decisions, however, only nibble at the edges of abuse. At
bottom, the abuses have not ended and are not likely to end
unless Congress takes action.
Some have also proposed making changes to the America
Invents Act passed by Congress in 2011. In BSA's view, doing
this would be premature. The AIA has only been up and running
for about two years. The lack of a track record under these
programs argues against making any changes at this time.
In conclusion, BSA is committed to ensuring that our robust
patent system remains the envy of the world. To advance this
goal, we believe patents should be available for all types of
inventions, including software. We also believe that there is
urgent need to end abusive litigation by focusing on
legislation that addresses opportunistic behavior. We do not
see these efforts as being inconsistent but, rather,
complementary in promoting innovation and entrepreneurship.
We urge the Senate to move quickly to enact reforms that
support a robust patent system while deterring abuse.
I look forward to answering your questions.
[The prepared statement of Mr. Molino follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Chairman Vitter. Great. Thank you, Mr. Molino.
And now I will turn to Senator Cardin who will introduce
our next two witnesses.
Senator Cardin. Well, let me first welcome Rachel King, the
CEO of GlycoMimetics, to our Committee.
GlycoMimetics is a small pharmaceutical company with about
40 employees. Ms. King guided the company as it gathered $38
million from venture companies--quite a task.
GlycoMimetics' current patent portfolio includes two main
pharmaceutical patents targeting sickle cell disease and
leukemia. It is currently in a Phase II trial for sickle cell
drugs.
All their technology is homegrown within the company's own
labs. It is located along the 270 corridor in Gaithersburg, one
of the real high-tech areas of Maryland.
We have a lot of high-tech areas in our State, and I think
what Ms. King represents is really one of the growth areas in
our country for good jobs and innovation.
STATEMENT OF RACHEL KING, FOUNDER AND CEO, GLYCOMIMETICS, AND
CHAIR OF THE MARYLAND LIFE SCIENCES ADVISORY BOARD
Ms. King. Thank you very much and thank you, Chairman
Vitter and Ranking Member Cardin, for inviting me to testify
today.
And, thank you also for the opening remarks that you both
made. I feel very encouraged by the perspective that you are
bringing, the support of innovation, the critical recognition
that we need balanced and bipartisan legislation that will
continue to support entrepreneurship and small businesses. This
is really critical and very important to biotechnology and to
companies like ours. So thank you very much.
I run a company, as Senator Cardin said, called
GlycoMimetics based in Maryland. We are focusing on developing
drugs for unmet medical needs, focused initially on sickle cell
disease and on leukemia.
And I have spent my career working in biotechnology, both
in startup companies like these and on the venture capital
side. So, from that perspective--from those perspectives, I
have seen the really critical role that patents play in
encouraging investment and how very important it is that we
ensure a robust, dependable system.
So, based on my experience in those different settings, I
can say that I think biotechnology is probably one of the most
dependent areas of the economy on a robust patent system. And
one of the reasons for this is that our patents are--we often
have products that depend on very small numbers of critical
patents.
So we do not have 20, 50, or 100 patents on our products.
We might have 1 or 2 that are critically important for us to
defend in order to bring our products forward.
And, we have to do that in a setting where we have got to
raise millions of dollars over many years at great risk.
So the amount of money, the amount of time, and the amount
of risk in our industry make it really critical that we have
strong patents.
In our company's case, we raised about $60 million through
private venture capital. We had to raise that money to complete
our initial study in sickle cell patients. We then had to do
another major partnership with a pharmaceutical company to
bring in more money. We raised another $64 million in an IPO
last year. So our own company's story is one of many years of
long, risky investment.
And, if we are successful, it will probably take something
like 15 years and tens of millions of dollars until we actually
have a drug that could be available to patients. And, during
that time we really, critically, have to be able to defend our
patents.
If patents can be invalidated under overly broad criteria
or if we have difficulty enforcing them, then it makes it very
difficult for us to raise funds.
So I want to urge Congress as you look at issues related to
patent trolls, I want you to also keep in mind the need to
protect patent innovators, so to protect the people who
actually generate patents in the first place, not to only look
at abuses by patent owners but abuses perpetrated against
patent owners and against innovators.
And, in particular, one of the things that is of a great
deal of concern to us in the biotech industry is this new
system of patent challenges called Inter Partes Reviews, which
is really having a game-changing effect on our industry because
so many patents can be invalidated under that process.
Something like 80 percent of the challenges that are brought
result in the innovator's patent being invalidated.
And, it is so bad now that people who have no standing are
bringing these challenges because they are betting on the
ability to invalidate these patents.
We have cases in our industry, for example, where hedge
funds will short a biotech company's stock, file an IPR, make
money when then the company's stock goes down as a result of
the announcement of the IPR just having been filed.
I think that should be criminal. It is manipulation. It
invalidates patents inappropriately. And, this whole IPR
process basically sets a lower standard than the current
district court standard has, which is very well-developed, with
a lot of experience.
And we cannot--we are particularly vulnerable to that type
of challenge. So I really think that needs to be addressed.
And so I am particularly appreciative of the STRONG Patents
Act, and I want to thank Senators Coons, Durbin, and you,
Senator Hirono, for sponsoring that Act. That would address a
lot of the problems with the IPR case in our view and, I think,
could be very important to continuing to support innovation in
biotechnology.
So I want to make the point--obviously, I am biased--I
think biotechnology is not like just any other business. It is
a business that we really, critically, have to support because
of the important work that we are doing.
We are not finished in developing cures for cancer,
Alzheimer's disease, diseases like sickle cell. These are
critically important needs that we need to continue to address
in our society.
And I want to ask you to specifically be concerned about
the role that patents play in biotechnology and to continue to
support us.
Thank you.
[The prepared statement of Ms. King follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Senator Cardin. Well, thank you for your testimony.
Mr. Craig Bandes is President and CEO of Pixelligent
Technologies. It is a Baltimore-based company that creates nano
materials that allow more light to be derived out of LED light
bulbs, panel display, and optical components.
Pixelligent started with 9 employees and currently has 42
employees. They have received funding through both government
and private investment sources during the course of their
development.
Pixelligent holds 25 patents, spends hundreds of thousands
of dollars each year developing its patents and attorneys to
ensure patent protection.
They currently have an international reach and are looking
to start distribution in Europe soon.
It is a pleasure to have Mr. Bandes here.
As I explained earlier, in Maryland we are proud throughout
our State of having a lot of high-tech type operations in the
Baltimore region and the Washington region and throughout our
State.
Mr. Bandes.
STATEMENT OF CRAIG BANDES, PRESIDENT AND CEO, PIXELLIGENT
TECHNOLOGIES
Mr. Bandes. Thank you, Senator Vitter and Senator Cardin,
for the opportunity to come speak today.
There has been a lot of discussion on the panel already,
which I will save us all from repeating.
Our company is very focused on--and patent protection is
critical to our ultimate success as a company. We believe when
we think about patents that there is both the focus on
protecting patents and protecting innovation but also
accelerating the innovation that we have here in the United
States.
So, again, my name is Craig Bandes. I am the CEO of
Pixelligent Technologies.
And the materials that we make here in Baltimore enable us
to take materials, put them into a number of devices, and
materials that are commonly used in electronics today. Our main
focus is in LED lighting, which is sweeping the world really in
next-generation lighting, and OLED lighting, where using our
materials makes those lights more efficient, gets more light
out, and actually creates better economics.
Our materials also go into things like touch screens to
help improve scratch resistance and overall image quality.
The company has been funded today through a combination of
private equity funding, some venture but a lot of what you
would call ``super angel'' type of investment, about $23
million to date, and we also have received about $11 million of
funding from government programs.
All of this funding has really gone to initially focus on
building a team of technologists, manufacturing experts, sales
and marketing folks, but it is all based on the core of our IP.
Ultimately, when we go to market and we are selling to big
multinationals, which include today 3M and Dow Chemical and
Samsung and OSRAM and LG, on a global basis, the first thing
they do is take a sample and see if it works. Then they figure
out, okay, well, the economics work to get a product into their
system. All that is very hard and takes anywhere from six
months to a year. So it is easier said than done.
And then, if you get through all of that, you then go
through a process of having to show that the IP they are going
to incorporate, our IP, into their products will not infringe
when they go to the marketplace. And it goes through a pretty
exhaustive process called the Freedom to Operate.
So here is where the challenges come in, where invariably
just because of how many technologies there are in our space--
nano has become a very active space for patenting--that they
will find something that may give them some concern.
Our job then is to show them that we can beat back that
concern. The best way we can do it is having very strong
patents that are defensible and having a broad set of patents
that show they really cover the landscape and the areas that we
focus on, which are making the material, how we coat that
material, how we put it into our customers' material, and then
how we manufacture that material.
And we have to be able to prove that we have protection
really across that to convince someone like a 3M, for example,
because ultimately if there is a problem, someone that would
come after the company more will focus on a 3M with much deeper
pockets than a Pixelligent which is just now starting to
commercialize.
So our focus really is making sure that the patents that we
have and we put into the Patent and Trademark Office come out
and are strong and defensible.
One of the challenges that we see today is less because we
have not been directly involved in any kind of troll situation.
And I think the panel here has covered the universe on the
issues there, and a balanced approach clearly is the best
answer.
But our focus is when we file a patent it takes 2.3 years
to get that patent out of the Patent and Trademark Office.
There are currently 600,000 patents in backlog in the PTO. You
think about the amount of economic value and real value that is
being held up in that.
Now these folks work hard. Examiners work hard. They care
about their jobs. There just are not enough of them.
And when you think about the PTO, it is one of the few
agencies in the government that actually self-funds and
actually makes what we call in our world a net profit--about
$300 million addition, or 350, on almost every year beyond the
$3 billion they get appropriated to go spend. And then there is
a battle over who gets that money.
Imagine if you reinvested that money like a business would,
to create a more efficient system, bring in more people, and
drive more value.
Not only will there be more value and more fees--and it is
a great strategy because you pay once and then you pay forever,
or at least the 23 years while your patents are active, but the
ability to unlock all of that innovation so that I do not have
today 23 patents pending.
Today, maybe I only have 10 patents pending, which means
when I go and I talk to 3M or Dow or Samsung or whoever, I am
saying we have a broader portfolio of patents that are actually
issued and we can defend them versus pending and waiting.
So I would encourage this Committee to think about this
concept of innovation and protecting and accelerating patents
beyond just the issues of litigation.
Thank you.
[The prepared statement of Mr. Bandes follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Chairman Vitter. Okay. Thanks to all of you.
We will now have a round, a five-minute round of questions
from the members here. I will start and then Senator Cardin,
and then we will alternate sides using the ``early bird'' rule.
Mr. Winwood, you mentioned that universities conduct 15
percent of all R&D and over 50 percent of all basic research in
the U.S. and spend over $65 billion in research funds, $40
billion is from Federal sources, and that results in all sorts
of inventions and patent applications.
How does abusive patent litigation affect universities now,
number one?
And, number two, you specifically referenced mandatory
joinder and presumptive fee-shifting as provisions you would
oppose in any patent bill. Why don't you elaborate on that, and
why would this be bad for universities?
Mr. Winwood. Thank you, Chairman Vitter.
Yes, how does this affect universities now? I think our
primary area of interest here is our relationship, our very
close relationship, with our startups and our small businesses,
and the fact that most university technology licensing offices
run on a very, very narrow margin.
We are determined to help bring our technologies to the
private sector, who can move it on into the marketplace for the
benefit of consumers.
When it comes to taking that extra risk of maybe being
exposed to some of the abusive litigation, our universities
simply do not have the depth of pocket to make that happen.
And so there is a reluctance to engage, presumably, in this
pursuit of moving technologies out to the marketplace if we
have the threat over our head of this kind of abusive
litigation, if we are in the firing line, if you will, along
with our licensees and startup companies.
So, in particular, the fee-shifting and joinder provisions
cause us great concern. Imagine following the joinder
provisions through whereby anyone with a financial interest in
the outcome of a litigated procedure could be joined.
So the universities certainly, but as you know, our
universities share our royalty revenues with our inventors.
These may be faculty members. These may be students. They may
be post-docs. I suspect that there would be a chilling effect
on disclosure to my office, and many other offices, if those
inventors were aware that they might suddenly be joined into a
suit with--maybe it is a hedge fund at the helm of this thing,
as mentioned by Rachel.
So there is a real chilling effect, I suspect, that is
possible on participation from our universities and our
inventors because we just do not have the capacity in this kind
of combat. We run on very, very narrow margins to keep these
things moving into the private sector.
Chairman Vitter. Okay. Thank you.
And, Mr. Molino, can you give some thoughts about how
ongoing activity addresses some areas of abuse and if you think
it is adequate for those areas or not?
For instance, there are ongoing judicial conference changes
related to the Federal Rules of Civil Procedure. What is your
thought about that work and how it will properly address those
possible areas of abuse or not?
Mr. Molino. So thank you for the question.
We are very encouraged by the judicial conference's work.
However, we do not think that the judicial conference is going
to address the abuses that actually happen in patent cases.
I think the judicial conference's work is more based on
overall litigation. While that will be helpful, there are
certain things in patent cases that only occur with patent
cases, such as a Markman decision.
No other area of law has something called a Markman
decision, where a court actually issues an order defining what
the scope of the patent is. Because of that, oftentimes, once
you have a Markman order, the scope of the case narrows and the
cost of discovery narrows.
We do not believe the judicial conference is going to
address that. So I think that while the judicial conference is
doing a lot of good things they certainly are not going to be
addressing the specific issues to patent law.
Chairman Vitter. Okay. Thank you.
And going back to Mr. Winwood, some small inventors have
raised the issue of a so-called integrity loophole cause by a
court decision denying judicial relief to patent holders whose
patents have been subject to fraudulent or sham petitions for
reexamination at the Patent and Trademark Office.
Do you agree that this is a problem? Would you support
Congress restoring a judicial remedy specifically to that?
Mr. Winwood. Yes, Chairman Vitter. Clearly, there are areas
of disagreement regarding patent reform, but one area where we
believe everyone should agree is that fraud cannot be
tolerated, or deliberate abuse of patent reexaminations, or
post-grant reviews.
Applicants are held to a very high standard of honesty in
dealing with the PTO, or else they risk losing their patent
rights. So we believe that third-party requesters should be
held to a similar standard. The patent owner currently has to
be truthful, but a third-party requester can basically commit
fraud with no financial penalty due to some recent court
decisions.
So it appears the door is wide open for unscrupulous
parties around the world to abuse our system, knowing that it
will take the patent owner years and cost them hundreds of
thousands of dollars of effort just to defend their patent in
the U.S. PTO.
So this, as indicated by some of my small business
colleagues here, is time and money that they just do not have
and cannot afford to fight such challenges. It can really deny
them access to desperately needed venture funding while there
is a cloud over the patent, as referenced earlier, or delay
entry into the marketplace for valuable new drugs, medicines,
and so on.
So we think that there should be an opportunity to restore
traditional rights of patent owners to sue for damages in these
cases and that will close this integrity loophole, if we are
able to do this, and particularly prevent it being used against
small companies who would seem to be very vulnerable in this
regard. And, obviously, many of those small companies are our
startups and licensees.
Chairman Vitter. Right. Okay. Thank you.
Now, Senator Cardin.
Senator Cardin. Well, thank you, Mr. Chairman.
Again, I thank all five witnesses for your time here today.
It is extremely helpful to us.
Your testimony recalls some of the hearings that I attended
when I was on the Senate Judiciary Committee, and they were
long hearings, and it is a technical field.
But I cannot imagine the fear that a small high-tech firm
must go through if they receive a letter where they do not know
really the source of who is behind it, who threatens their
existence, challenging their legitimacy to the work that they
have done.
And it is very interesting; there are two sides here, and I
am not sure why there are two sides to this debate because both
sides agree that we have got to protect intellectual property
and both sides believe that fraudulent activity and patent
trolling is wrong.
So I am going to start with the two business owners that
are here. Could you just highlight what you think the most
important change could be in our patent laws to protect the
work that you are doing?
There are two different companies here. One relies on
basically one patent to advance a drug. The other is advancing
a final product that will contain what you are doing, which
will rely upon a lot of patents, ultimately.
What is the one change we could make, or the two changes we
could make, in the patent laws that would protect your type of
work, give you better access to capital so that you can get
more predictable funding, and yet, avoid the problems of
fraudulent activity or at least make it less vulnerable?
Ms. King. I can begin by answering that I would suggest
reforming the current problems that we have under the IPR
system.
And, as I mentioned in my testimony, I think that the fact
that a hedge fund could come out of nowhere and short a company
stock, knowing that they are about to file an IPR, which then
drives the company stock down. I think that is criminal, and I
think that is an abuse that really needs to be corrected.
One way to correct that is to address the issue of standing
because that is the case where a hedge fund would have no
commercial standing to bring that case.
But the basic problem, I think, with the IPR system as it
currently is, is that it currently sets a lower standard than
the district court current system sets. And so--and we can see
that because there is so much abuse that has started now, where
people try to bring these challenges through that system.
So, in my view, that would be the critical thing that we
would need to correct.
Senator Cardin. Thank you.
Mr. Bandes.
Mr. Bandes. So I would say in the--two areas.
One is, you know, in business there is nothing that will
make you more nervous, or an investor more nervous, than
uncertainty. And so having a blind letter that does not really
tell you who it is and what the actual rights are they are
saying you may be infringing on is an impossible battle.
So there should be full disclosure. If you are going to get
contacted and say that there may be a patent issue, they need
to be forthright in telling you what the issues are so you can
address them early.
I would say the second piece is--you know, I read this a
little bit, and I think it was in one of the acts, and I have
read many in the past few days--about the concept of loser
pays.
I mean, there really is no risk. You know, if you are a big
fund and you are going after a small company, you know, part of
what you are trying to do is just bleed them dry. You know, you
do not have the resources, and so you can play bully tactics.
But if there is a chance that if they lose they have to pay
up for all of the costs involved in that case, then maybe they
think a little more about it before they just, you know, send a
letter and try and use bully tactics.
Senator Cardin. I think that, Ms. King, your suggestion is
one that could be addressed rather quickly.
I think the points that you raise, Mr. Bandes, are more
complicated because the judicial system is not always amenable
to the statutes we pass as to how they enforce. So it is not as
easy to deal with some of the issues you did.
Several of you mentioned the patent office itself. How
effective is the patent office? Do you think they have the
resources they need in order to expedite this process?
You mentioned something about hundreds of thousands of
backlogs.
Mr. Schmidt.
Mr. Schmidt. Yeah, 600,000 is the backlog.
And you should be very thankful for your 2.3 years because
most of ours are 6 years and over; we have got some that are 8
years now, that are pending. So this means things do not get
commercialized as timely as they could. It is an extreme
problem.
So, right now, we have $1.7 billion that has been diverted
from the patent office that could be paid for, you know, better
examiners, more qualified examiners, and more time for an
examiner versus roughly a week to be able to--or, pardon me, a
day to be able to look at a patent and examine it and be able
to rule on it, which means almost everything gets rejected the
first time through.
So you submit an application, and if it is not rejected you
are just shocked.
So, you know, this is all because of this huge diversion,
what I call the invention tax on inventors that, you know,
Congress and the system extracts from us and then uses the
money for something else.
So just letting the patent office keep their own money
would be a huge benefit to be able to plough back into the
system.
Senator Cardin. Thank you.
Thank you, Mr. Chairman.
Chairman Vitter. Okay. Next, we have Senator Peters.
Senator Peters. Thank you, Mr. Chairman, and thank you to
our panelists here today.
Certainly, a very important topic. There is not anything
more important for the productivity of this country than to
have innovation that is the driver of economic well-being for
everybody, middle-class families, and everybody in this
country, and you are a big part of that.
And I appreciate this discussion because this debate is
going to be important for us to move that forward.
I just want to pick up on some of the comments on the
patent office and the backlog because I think that is very
significant.
Mr. Bandes, I appreciate your comments. This is not about
just litigation. We also have to make sure we are moving this
through the process.
And I am happy, as the Senator from Michigan and Detroit,
we actually had the first field office of the U.S. Patent
Office in Detroit. I want everyone to know that. It was not in
Silicon Valley. It was not in the Research Triangle of North
Carolina. It was in Detroit, Michigan, because of the work that
we do.
But it is a significant problem when you have a backlog of
600,000 cases now, 2.3 years.
When I was in the House, I actually led a letter to try to
deal with this tax, which it is; it is an inventor's tax.
When we had the sequestration, the sequestration actually
funneled money away--these across-the-board cuts that then took
the seed corn, which is the patents, away from it.
So I would just like a yes or no from each of the
panelists. Do we need to have--the Congress has to put in law
that we do not need additional congressional action.
This is a user fee. All of these resources need to be
applied to the patent office. That is probably one of the top
priorities as we are dealing with this issue. Would all of you
agree this would have a significant impact on our ability to be
a leader in patents?
We will start with Mr. Winwood, just yes or no or a brief
comment.
Mr. Winwood. Yes, I would agree with you it is a big
problem.
Mr. Schmidt. Yes, we are supportive of that.
Ms. King. Yes, I would agree.
Mr. Bandes. No question.
Senator Peters. I have never found anybody against it.
[Laughter.]
So this just approves that.
So, Congress, we need to act on this, and I think this has
got to be at the top of our priorities.
Next, what I want to do is go to the litigation aspect and
to Mr. Winwood.
Since the House passed the Innovation Act, the judiciary
has made some progress towards patent litigation, and I think
some of you have referred to that, particularly on fee-
shifting, where the Supreme Court decisions have led to fees
being awarded in more cases than prior to those decisions.
However, Judge Gilstrap, who had about 20 percent of all
patent cases last year filed in front of him, said in a recent
Law360 article that Highmark and Octane does not really change
much.
He said, ``I really do not see it changing what we would
have determined was appropriate for the award of fees even
before the case came out.''
He also said, ``I do not think it changed the internal
dynamics of what judges like me or my colleagues would be
convinced is exceptional but made it clear we have the option
at our disposal.''
So you, Mr. Winwood, have articulated a concern with the
proposed fee-shifting position.
And I am concerned that the decision, the Octane Fitness
decision, may not have provided sufficient guidance for some of
patent litigation.
So, if you could talk maybe specifically about language in
the bill that you particularly find problematic, if that is
possible.
And, what if the potential fee-shifting role was not
presumptive but, rather, we just provided the court with some
additional guidance on how to deal with fee-shifting? Is that
something you think may make some sense?
Mr. Winwood. First of all, thank you for the question.
Yeah, I am not an attorney. So I am not going to give the
specificity that you may be looking for in that particular
language.
But I do believe that we want to make sure that this is a
discretionary and appropriate shifting rather than presumptive,
which I think would really tend to persuade most universities
and startup companies that they cannot engage in these
activities.
And this is our main fear, that if this is sort of a
mandatory aspect of any engagement, then our boards of trustees
and supervisors will simply say we do not have that capacity.
So I think the language, as I understand it, is a little
beyond what we would be comfortable with in the higher ed
associations community, and we prefer to defer to what the
judges have set out as discretionary decisions to levy costs as
they see appropriate in justified cases.
Senator Peters. Well, if the judge, as I mentioned, who I
quoted, reviews 20 percent of all patent litigation cases, does
not believe that the Supreme Court has made a substantial
change, do you agree that there might still be some work that
should be done by Congress in that area?
Mr. Winwood. It is quite possible that there is work to
clarify how this should be implemented.
Senator Peters. Very good. Thank you.
Thank you, Mr. Chairman.
Chairman Vitter. Okay. Next, we have Senator Shaheen.
Senator Shaheen. Thank you, Mr. Chairman.
Thank you all for being here today.
You know, when we passed the America Invents Act in 2011,
one of the selling points was that that was supposed to
expedite the patent process. Have we seen any improvements as
the result of that legislation in the backlog of patents?
I am up for anybody who would like to address that.
Mr. Bandes. The data would say we may be moving in the
right direction, but it is, you know, a slow-turning barge. I
think it is--the backlog has been running around the same
level, in the 600,000 range, for the last 3 or 4 years.
There is a goal, I think by 2019, to go from 2.3 years to 2
years or 23 months.
But I think if you pass an act but do not give the
resources to deliver on the changes that that act is trying to
enable, you are tying their hands.
So, you know, back to the innovation tax that we are
talking about here, you know, we are all paying fees into it.
And, ultimately, why that should not be reinvested in PTO to
bring on more resources and more examiners does--you are not
going to fix it if you keep taking the resources away.
In fact, you should be doing the opposite. You should be
trying to find ways to put in more resource because you
actually see a significant economic return on those
investments.
Senator Shaheen. Anyone else want to respond to that?
I mean, I certainly agree with that and agree with the
point that Senator Peters was making, that the resources are
there; we need to use them for innovation and to keep the
patent system moving.
One of the challenges--as someone who is not an attorney,
who is dealing with a very technical issue, one of the
challenges I have--coming from a small state where we have a
number of large businesses, technology businesses represented,
but we also have a lot of innovation in our small businesses--
is balancing what the larger firms say they would like to see
with respect to patent reform versus what the small businesses
say with respect to patent reform, and they are not on the same
page.
So I do not know if--and certainly, the university, or main
research university, is also not on the same page.
So I do not know, Mr. Winwood, if you have any--as someone
who represents an academic perspective, a research perspective,
who I think may generally be viewed as having less of an ax to
grind on this issue, if you have a view about how we balance
those interests.
Mr. Winwood. I think it really is--and thank you for asking
me that.
I think it is really important to balance those issues; I
think between the divide, whether it is between large companies
and small companies. It may actually be between different
industries as much as it is between size of company.
You have heard a little bit about the length of time it
takes to get a patent issued.
Senator Shaheen. Right.
Mr. Winwood. And I think while the hundreds of thousands of
backlog cases is certainly serious, it varies between art
groups within the office.
I think, Bob, you recognize that within different groups
you might wait six or eight years to get a patent issued;
others may be much faster than that. So there is a massive
imbalance.
And when you then look at--I think Mr. Bandes referenced
taking 6 to 12 months to do a proof of concept study.
Well, I think if Rachel could do a proof of concept study
in 6 to 12 months she would be a very happy person.
The two sides of the industry coin are very different. So I
think that is probably one of the areas that really leads to
some of these perceived frictions.
What I wrote down earlier in the testimony here was we are
in raging agreement about almost everything except for how to
implement it because I think we all are opposed to patent----
Senator Shaheen. Sounds like Congress.
[Laughter.]
Mr. Winwood. Yeah. I will let you say that and not me.
But we are in agreement that abusive behavior is bad.
And I think whether you are a large or small company,
abusive behavior is inappropriate, is wrong, and should be
stymied and corrected, if necessary by congressional action.
But do not make that action an impediment to those of us
who are trying to push our technologies from the very, very
fundamental and basic research level out to companies such as
the ones represented here along the panel with me.
That is the key thing to do--balance and target.
Senator Shaheen. Yes, I think addressing abuse is the
critical issue, and I acknowledge the difficulty in balancing
these concerns.
And I think we--you know, we live through this too when we
try to make our own points. We all need a strong system.
And I think what happens often--you know, you pass a law,
and then we see the unintended consequences. So if you could go
after the abuses, I think we could all benefit.
And, thank you.
I am almost out of time, but I just wondered; in 2014, the
Patent and Trademark Office launched an online tool kit to help
consumers and mainstream retailers deal with patent trolls. Is
anybody familiar with this effort?
Have you heard of anybody using it?
Do you think it would be helpful? No?
Mr. Molino.
Mr. Molino. So I am aware of it, and I think it is a
helpful tool because one of the biggest things that patent
abusers do is focus on those that are not educated about the
system and take advantage of that. So any education that we are
doing for smaller businesses, retailers that do not usually
involve themselves in the patent system I think is a very
positive thing.
Some of our members have used it, our smaller members, but
it is a positive thing.
Senator Shaheen. Mr. Schmidt.
Mr. Schmidt. Well, one of the things we need to remember is
this is all about how do you make sure you can try and
invalidate patents. The entire U.S. PTO system there is to say,
you know, we want to keep people and defend them from patents
that we are issuing.
There is nothing there that says we want strong patents and
we want to enforce it. There is no balancing. There is no
balancing in any part of H.R. 9 to be able to say we would like
strong patents.
It is all about how do we take away the rights of patent
owners, how do we eliminate these, you know, smaller patents.
And this is just very bad for small inventors.
The whole thing with the fee-shifting, it is like I do not
think anybody understands.
When a big company says, oh, you have got to pay $5 million
to that thing, well, you know, let's take it out of the petty
cash thing.
For me, it is I not only lose my company. They then take my
house. When they take my house, they take my spouse, and my
children go with it. I am betting my entire life on a patent.
And this is just, oh, it is fee-shifting. You should be
able to do this.
Well, I am submitting myself to, you know, the problems of
the court who may go any way. So I cannot enforce my own
patent.
So Congress is telling me, Schmidt, you are too poor to
invent. Stop inventing. Stop inventing.
Senator Shaheen. But you are speaking to the House bill.
You are not speaking to the effort to educate.
Mr. Schmidt. Yes, that is absolutely correct.
And since we have two-thirds of the Coons-Hirono bill, I
would like to thank you both for your support of that because
you obviously have seen the light. Thank you.
Senator Shaheen. Thanks very much.
Thank you, Mr. Chairman.
Chairman Vitter. Great. Next is Senator Hirono.
Senator Hirono. Thank you, Mr. Chairman, for holding this
hearing.
And as long as I believe that two out of the five panel
people have read the STRONG bill, I would like to know whether
the other panelists have also read the STRONG bill.
Okay. Good. Then I would like to ask what your view is
about the STRONG bill because as one of the supporters of the
STRONG bill we obviously are against patent trolls, but we
would like to present a balanced approach to how we are going
to make those changes.
So I would like to ask each of the witnesses, very briefly,
if you think that the approach represented by the STRONG bill
is a good approach.
Go ahead. We will just start from Mr. Winwood.
Mr. Winwood. Yes. Thank you, Senator.
Yes, the higher education associations, in general, have
written and supported very strongly the legislation that was
introduced by yourself, Senators Coons and Durbin recently.
We do support this targeted, balanced approach. We think it
really hits the right way for doing this, to let the FTC take
care of these issues rather than burden or really mangle the
patent system, which we believe is really the great strength of
the U.S. economy and innovation system. So we are very
supportive of it.
Mr. Schmidt. Again, thank you very much.
The Small Business Technology Council, the 5,000 firms that
participate in the SBIR program, we can take your bill just as
it is. It is much better than any other alternative we have
seen in the past.
However, there are some other things that, you know, since
we are doing legislation, that I would love to see--is the
return of the one-year grace period. This is a disaster for
America's budding scientists and engineers.
Out of--a group of 150 patent attorneys were asked, can you
explain whether you have a grace period or not? No one would
raise their hand to be able to respond to that issue. It is so
unclear as to whether we have a grace period in America.
And the only person that would dare to answer said, yes, I
tell all my clients there is no grace period.
So that is gone in America.
And I have had 5 different people come up to me that had
gone to inventors fairs or science fairs dealing with 15- and
17-year-olds, and they are telling them: Why are you here? You
should not be presenting your material. Stop talking about
this.
And so this is squashing innovation. So that is number one.
Number two, patentable subject matter. Since the Supreme
Court cannot decide what is patentable subject matter, somebody
needs to be able to help them. So that is a Section 101, which
is--the first one with the grace period was 102. This is
Section 101.
The third thing is greater elasticity for punitive
behavior.
So since the Supreme Court cannot tell me whether my patent
is valid or not, or has trouble with it--obviously, they do at
the end, but there is great concern--how am I supposed to know
as a little inventor of whether this is patentable or not?
And all of a sudden I fall into this trap. I have sued
somebody, and now I get my patent invalidated. I did it in good
faith. I thought I was on right standing. And all of a sudden,
you know, I go through my lose my house, spouse, children
routine. And you know, that is a problem.
And so I am looking for a get-out-of-jail card for honest
people. So that is the third thing.
And then, finally, there should be a balance between
plaintiffs and defendants because the whole way these other
bills are all done it is all on the--you know, it all protects
the infringer rather than the patent enforcer. And so I am
looking for a balance there.
Thank you.
But other than that, we can take everything the way it is.
Senator Hirono. Mr. Molino, we are running out of time. So
if we can----
Mr. Molino. We are unable to support it right now.
We think that the AIA has just been implemented basically
about two years ago. We are seeing some issues pop up, but I
think it is too early to tell if those are going to be
systematic problems that require Congress to act.
Senator Hirono. But aren't you supporting the Innovation
Act?
Mr. Molino. We do support the Innovation Act.
Senator Hirono. Which is very broad. It is much broader
than what we are proposing in the STRONG Act. So I am a little
bit confused about your position.
Mr. Molino. The Innovation Act addresses abuses that occur
in the litigation system that have been going on for over a
decade, to which there has been a ton of study showing that
these abuses happen. There have been years and years of
academic, congressional research on this.
Whereas, the Innovation Act--and the alleged abuses that
are beginning to pop up, I think it is a little too early to
tell whether those are actually going to continue and deserve
congressional action.
Senator Hirono. I am sorry. Did you say you are not
supporting the Innovation Act or you are?
Mr. Molino. No. We do support the Innovation Act, yes.
Senator Hirono. Okay. I guess there are differences of
opinion on that.
Ms. King.
Ms. King. Yeah, I respectfully disagree.
I think that these are not alleged abuses. These are
clearly abuses. And I think that the way that you have
addressed them is really right on point.
Three things: Setting the same standard for what is
happening in IPRs and what happens in district court, allowing
greater flexibility in amending claims, and addressing this
issue of standing. I think those are three critical issues.
We have seen the abuses, and I really appreciate what you
are doing with this bill to address them.
Senator Hirono. Mr. Chairman, if I can ask the last panel
person to respond briefly.
Chairman Vitter. Sure.
Mr. Bandes. Yeah. So, far from an expert, but from what we
have seen, we are also in favor of the STRONG Act.
I think having the FTC involved is great, but I would go
back to a similar theme around the PTO. Make sure you give them
enough resources because if you give them the enforcement but
not the capability to actually help with this problem my
question would be how quickly will they be able to resolve
issues. So, if you are going to ask them to do it, make sure
you give them the resources they need to go do it.
Senator Hirono. All right. Thank you, Mr. Chairman.
Chairman Vitter. Great. Thank you.
Senator Coons is next.
Senator Coons. Thank you, Mr. Chairman.
And thank you, Senator Hirono, for your great partnership
in this work, and Ranking Member Cardin.
I want to say that it is, for me, exciting to hear this
being considered in the Small Business Committee as well as on
the Judiciary Committee on which I serve.
As someone who was in-house counsel for eight years to a
highly inventive company that had thousands of engineers but
that began literally in a basement by a sole inventor, I had
the experience and the excitement of working with a company
that was constantly generating ideas and filing patents and
relied on that patent protection to grow from a new small
startup to, ultimately, a more sustained and successful
company.
So I am pleased we have had a chance today, Mr. Chairman,
to hear from this impressive group of witnesses, all of whom
have testified to the enormous importance of a strong and
predictable patent system, a system of patent rights that is at
the basis of our nation's innovative ecosystem.
This property right, rooted in our Constitution, is one I
think we should be very careful about how we revise, or amend,
and how we change the system of litigation.
Now there has been a lot of talk--there has been not just
talk but legislation in the last Congress--about how we need to
diminish the rights of patent owners for the benefit of small
businesses, but today's hearing has done no less than turn that
argument, in many ways, on its head.
And what we have heard today is that strong predictable
patent rights, the ability of a patent owner to enforce that
patent against infringement, is central to the ability of small
businesses in technology, biomedical, and material sciences to
survive by attracting and sustaining investment.
So, to address these abuses, Senator Hirono and I, along
with Senator Durbin, have introduced the STRONG Patents Act, as
has been discussed, which streamlines and strengthens pleading,
empowers the FTC to go after the real patent trolls, those who
really have no basis in law or fact for their suits, tackle
some of the recent and notable abuses of the post-grant review
system at PTO.
When a hedge fund can erase $100 million or more of
investor capital simply by filing a PGR, solely for the purpose
of shorting the stock, I think it is time for us to look
seriously at acting.
And it ends fee diversion to fully fund the Patent and
Trademark Office and improve patent quality, something I think
everyone can support.
So I look forward to listening and working with my
colleagues to enact meaningful, targeted reforms that respect
the diversity of the innovative ecosystem.
And, if I might, Mr. Chair, I would like to submit for the
record letters that support either explicitly the STRONG
Patents Act or its approach from the National Venture Capital
Association, the National Small Business Association, the
Biotech Industry Association, the Association of American
Universities, the Association of Public and Land-Grant
Universities, the Medical Device Manufacturers, the
Pharmaceutical Research Manufacturers, the Innovation Alliance,
and the IEE-USA.
Chairman Vitter. Without objection, so ordered.
[The information follows:]
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Senator Coons. Let me, in the time I have left, ask a
question or two.
Ms. King, your testimony goes to the heart of my interest
and concerns about this debate, and I am appreciative of your
support for the STRONG Patents Act.
You explained that in raising $64 million just to support
your R&D pipeline focused on patients with sickle cell anemia,
it was possible only because of the strength of your patent
portfolio.
And you note every biotech exec has stories to tell about
very promising compounds that ultimately did not work out and
the risks taken.
And your comment: The injection of additional systemic
uncertainty by making the enforceability of patents more
uncertain negatively affects which new cures and treatments may
be available a decade from now.
So let me just summarize that in plain terms. If we make it
harder for a small company like yours to enforce your patent
rights, they will suffer from less external investment and
narrow the scope of diseases we could otherwise hope to cure in
the next decades.
Ms. King. Absolutely.
Senator Coons. Is that right?
Ms. King. Yeah, that is absolutely correct.
And, as I said at the end of my testimony, we have so much
work still to do in terms of diseases that need to be treated
that we really have to thoughtfully continue to incentivize
investment in this sector.
And, the ability to hold and to defend and to really depend
upon patents is critical to our ability to raise the amounts of
money that we need to raise over the long periods of time for
which we have to get the investment. So it is absolutely
critical to us.
Senator Coons. And Mr. Molino just commented that it is too
early for us to try and address abuses in the Inter Partes
Review or the post-grant review processes.
Isn't that abuse actually directly affecting the ability of
companies like yours to attract and sustain investment?
Ms. King. Yeah. Well, the example you gave is a biotech
company, and the difference we have in biotech versus some
other industries is that our products have very few critical
patents associated with them. So, unlike a cell phone that may
have hundreds of patents, you know, we might have a drug that
has one or two critical patents, and that is why it is so open
to the possibility of abuse if someone files an IPR against us.
So these are extremely problematic, currently.
Senator Coons. Well, my core view is that how you see
patents and their importance, in some ways, depends on the
sector you are in, whether you are in software or in bio or
pharmaceuticals or materials.
And we should first do no harm. We should not address--we
should not adopt a legislative solution that is so over-broad
that it will kill the ability of a small inventor to defend
their patent or that will impart other agendas into trying to
fix the real patent troll issue in a way that defeats the
ability of patent owners to exercise their right.
I see I am out of time.
Thank you very much, Mr. Chairman, for bringing this
hearing forward today.
Chairman Vitter. Thank you, Senator.
Senator Cantwell is next.
Senator Cantwell. Thank you, Mr. Chair.
You know, my colleagues comments provoke me to comment on
the last--the bill that we passed. I think we do need to take
inventory of where we are and what it has done to impact small
inventors.
But I think I want to turn--keep going with you, Ms. King,
on the issue of the uniqueness of the biotech industry and on
the patents and how you think this litigation reform proposal
will impact the industry uniquely.
And I also see where the House already did like a carve-out
on some generic drugs and so if you would comment on that as
well.
Ms. King. As far as the challenges that we face, I mean,
because our products, as I said, are often covered by just a
very few number of patents, if any one of those is challenged
or invalidated, it has a great impact on our ability to raise
money and on the value of the----
Senator Cantwell. And I think what people do not understand
is juxtaposed to Mr. Molino's group, who can build and ship a
product, or show you a beta, in 6 months, you sometimes have to
work for 18 for 20 years before you can even--and you have to
get capital during that whole process.
Ms. King. Yeah, exactly. And if we are successful at our
company, it is going to take us about 15 years and tens of
millions of dollars to get our first drug on the market.
And so we have successfully raised a lot of money so far,
but we are constantly continuing to face that issue.
And so, if our patents were to be invalidated, that would
completely undermine our ability to raise the funds to go
through that long period of time that is required for our
development.
Senator Cantwell. Okay. And any comments about what the
House is looking at--various legislation where they would do
carve-outs?
Ms. King. Actually, I am not familiar with the specific
carve-out.
Senator Cantwell. Okay. We will get you information on
that.
Mr. Molino, what about the software innovations and recent
developments? Do they raise concerns for you?
Mr. Molino. Yes. Thank you very much, Senator.
The Supreme Court recently ruled on a case involving
software patentability called Alice v. CLS Bank. One good thing
about that decision is it reaffirmed the patentability of
software, which some have questioned. However, the Supreme
Court did not provide a ton of guidance for lower courts on how
they should analyze these types of cases.
So our organization is very active in working with both the
PTO to ensure that software patents remain available and also
through our amicus filings in court to try to give lower courts
and the PTO sufficient guidance on how to analyze these cases.
Thank you.
Senator Cantwell. Well, I think, Mr. Chairman, I am glad
you are having this hearing and certainly support efforts to
make sure that small businesses and their innovations are
protected.
So I think looking at what we did--and, again, to my
colleague's point, it would have been great if we did major
reform and protected the dollars in the patent office, but we
did not accomplish that, and then moving first to--I am sorry.
Moving to the European model I also do not believe is helping
us.
But I think let's see what the patent office is coming up
with in details, and let's look at it.
Thank you.
Chairman Vitter. Great. Thank you.
Next is Senator Ernst.
Senator Ernst. Thank you, Mr. Chair.
And I appreciate the witnesses' testimony today. So thank
you for being here and raising such an important issue on a
wide range of interests, especially to Iowa, from small
businesses and individual inventors to our universities as
well. And so we look at larger agricultural and biotech
companies. Many of them are interested, very interested, in
this topic.
So I know that Senators Leahy and Lee have been pursuing
legislation to prevent misleading demand letters, specifically
making it an unfair trade practice.
And do you believe that this should be part of an approach
within patent reform? Could any of you answer that, please, and
your thoughts?
Mr. Schmidt. Well, unfortunately, you missed my comment on
H.R. 9, which to a large extent is very similar to what Leahy
and Lee were pushing in the Senate last year. Our concerns are
numerous about this.
First thing, I want to put some historical perspective on
this whole patent issue because we went through this in the
1990s with General Motors, and it is always about large,
dominant players weakening patents because market-dominant
companies do not need patents. And all patents do is keep them
from keeping their market share because it is these new patents
that are going to come and eat their lunch and eventually put
them out of business.
So it was the AT&Ts of the world that were supporting this
previously, and you know, now they are gone. And GM is, you
know, a new GM.
And so we are going to see that with these new market-
dominant companies if we can keep a strong patent system, and
so this is very important to be able to allow our companies to
have creative destruction with new patents.
Senator Ernst. Thank you.
Any other thoughts from the panel?
Yes, sir.
Mr. Molino. So, yeah, thank you very much for the question.
From our members' perspective, we are in favor of figuring
out how to end the widespread sending of bad faith demand
letters. We think it is a real problem. We think it preys on
those that are the least educated on this with regard to the
patent system, and it should be stopped.
At the same time, we also note that a lot of states are
implementing their own laws, and for national companies it is
very challenging to try to navigate various state laws that can
be very specific.
So, from our perspective, not only do we want to end the
widespread sending of bad faith demand letters, but we would
like to have a national standard for that as well.
Senator Ernst. Okay. Any other thoughts?
Yes, sir.
Mr. Winwood. Well, Senator, I would just say that last year
Senator Leahy introduced legislation in the last Congress,
1720, which we were quite supportive of. It was withdrawn later
in the session, but that approach was one that was favored
pretty well by all of the higher education association groups
last year.
Senator Ernst. Very good. Thank you.
And, following up with that, as we talk about our
universities, how do we balance the interests of the
universities, smaller companies, larger technology and biotech?
Many patent holders have the legitimate rights and claims
that need to be available to them, but we also have a litany of
frivolous law suits, legal tactics that are causing significant
challenges to small businesses and inventors. So there has to
be a balance that we can find.
And, to all of you, if you were a legislator for a day,
what would be your answer?
Ms. King. I want to, first of all, acknowledge the
complexity that you reference because it is absolutely correct
that this is challenging to find a balanced perspective.
I think that the best thing that we can do now is to go
after what we know are examples of abuse because a lot of the
system actually does work pretty well in terms of getting
patents. You know, we can be proud of what we have been able to
accomplish in this country with the system that we have.
However, I think we can improve it, and I think we can
certainly address abuses.
The bill that Senator Coons and others have introduced, I
think, does that quite well. So I would support that STRONG
Act. I think that is a great step in the right direction.
Mr. Molino. So we are also very interested in trying to
prevent abuses--abuses that we know have been going on in the
litigation system for well over a decade.
So the things that we would be most interested in are just
making sure:
That when somebody actually files a case they clearly
disclose why they are filing the case and what their claims
are;
That we do not start really expensive discovery until we
figure out what the scope of the case is going to be, and a
judge issues an order in patent cases unlike any other case
that actually does that, and do not start discovery until then;
That we do implement a fee-shifting provision that only
shifts fees if a party brings an objectionably unreasonable
claim.
Again, both sides of the--both defendants and plaintiffs
would be subject to this standard.
And I think those are the main issues that we are concerned
about.
Senator Ernst. Okay. Well, I--yes, sir, did you have
something?
[Pause.]
Well, I thank the witnesses very much.
Thank you, Mr. Chair.
Chairman Vitter. Great. Thank you.
And I think Senator Cardin has some final questions or
thoughts.
Senator Cardin. Well, thank you, Mr. Chairman.
I, again, want to thank the witnesses not only for their
testimony but their candid response.
As I said in the beginning of the hearing, we are very
concerned to make sure we protect intellectual property.
Whether it is a university so that we can get tech transfer to
create jobs, whether it is a large multinational company that
needs to be protected in the United States on global
competition, we are concerned.
The focus of this Committee is on small business, and that
is why I think it was particularly important to hear from a
small pharmaceutical company and a small high-tech company that
is dealing with adding to the technology and value of larger
products as to how the system is working.
What impressed me is that it seems to me that we can do a
better job--and I am glad that Senator Coons is still here--in
dealing with areas where there should not be much controversy.
There should not be much controversy in requiring standing
for someone to challenge.
There should not be much controversy to go after those who
try to manipulate the value of stock by what they do in order
to make a profit on that. We should be able to correct that.
We should be able to have more transparency in the process,
that you know who is challenging.
And, we should be altogether against abusive practices,
whether it is challenging for the purposes of trying to get a
nuisance settlement on your legitimacy to use a patent or to
review a patent that you currently have.
I think in those cases we should be able to come together.
And I thank Senator Coons and Senator Hirono for their
leadership, and Senator Durbin.
I am not endorsing a bill today; do not get me wrong.
But I do think it is important that we have to take action
to deal with those types of abuses in a way that we can find
common agreement among the different stakeholders because there
is no disagreement that we want to end abusive practices and we
want to protect legitimate patent rights. So let's figure out
where we can make some progress.
And, lastly, I think there is also agreement that we have
to make sure the resources are there in the patent office to
give timely considerations to all these issues because it does
delay the certainty that is necessary for Ms. King's
contemporaries and colleagues to be able to get the type of
financing they need in order to do their very, very creative
work.
I applaud the creative people that are here for what you
have done, and I know that there are people in Maryland and
throughout our country who are going to benefit from your
creativity. And our economy certain benefits from a strong
patent system that protects that type of intellectual property.
Chairman Vitter. Great. I am going to move to Senator
Coons.
But before I do, I want to just say--briefly, because I am
going to have to excuse myself and I am going to give the gavel
to Senator Cardin if that is all right--thanks to all of our
witnesses. You are all great witnesses.
This is actually the first hearing in D.C. of the Senate
Committee on Small Business and Entrepreneurship this Congress.
I think this was an extremely appropriate topic because, quite
frankly, there has been a lot of discussion and some activity
elsewhere that I do not think appropriately focuses on the role
and the interest of small business entrepreneurs, including our
universities. So I am very glad this was a robust discussion
and our first hearing.
And certainly, I am committed to continuing to recognize
that patents are a fundamental property right that our founders
recognized and valued, that is in the Constitution--we need to
protect that--and that our U.S. patent system has been strong
and unique in a good way, and we should not rush to match other
parts of the world necessarily that have very different
systems, I think, and are not as positive as ours, and that
certainly small businesses and innovators and entrepreneurs are
absolutely at the center of our economy and prospects for
better economic growth.
So, thank you.
With that, Senator Coons.
Senator Coons. Thank you, Chairman.
That was a beautiful, thorough, broad summary. I could ask
other questions, but frankly, I think we should let that be the
last word.
Thank you for calling this great hearing.
Chairman Vitter. You are just concerned about my handing
the gavel to Senator Cardin, obviously.
[Laughter.]
Well, with that, thanks to all of our witnesses, and the
hearing is adjourned.
[Whereupon, at 11:29 a.m., the hearing was adjourned.]
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