[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]


             THE IMPACT OF BAD PATENTS ON AMERICAN BUSINESS

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

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                     COURTS, INTELLECTUAL PROPERTY,
                            AND THE INTERNET

                                 OF THE

                       COMMITTEE ON THE JUDICIARY
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED FIFTEENTH CONGRESS

                             FIRST SESSION

                               __________

                             JULY 13, 2017

                               __________

                           Serial No. 115-39

                               __________

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                       COMMITTEE ON THE JUDICIARY

                   BOB GOODLATTE, Virginia, Chairman
F. JAMES SENSENBRENNER, Jr.,         JOHN CONYERS, Jr., Michigan
    Wisconsin                        JERROLD NADLER, New York
 LAMAR SMITH, Texas                   ZOE LOFGREN, California
STEVE CHABOT, Ohio                   SHEILA JACKSON LEE, Texas
 DARRELL E. ISSA, California         STEVE COHEN, Tennessee
 STEVE KING, Iowa                    HENRY C. ``HANK'' JOHNSON, Jr., 
 TRENT FRANKS, Arizona                   Georgia
 LOUIE GOHMERT, Texas                THEODORE E. DEUTCH, Florida
 JIM JORDAN, Ohio                    LUIS V. GUTIERREZ, Illinois
 TED POE, Texas                      KAREN BASS, California
 JASON CHAFFETZ, Utah                CEDRIC L. RICHMOND, Louisiana
 TOM MARINO, Pennsylvania            HAKEEM S. JEFFRIES, New York
 TREY GOWDY, South Carolina          DAVID CICILLINE, Rhode Island
 RAUL LABRADOR, Idaho                ERIC SWALWELL, California
 BLAKE FARENTHOLD, Texas             TED LIEU, California
 DOUG COLLINS, Georgia               JAMIE RASKIN, Maryland
 RON DeSANTIS, Florida               PRAMILA JAYAPAL, Washington
 KEN BUCK, Colorado                  BRAD SCHNEIDER, Illinois
 JOHN RATCLIFFE, Texas
 MARTHA ROBY, Alabama
 MATT GAETZ, Florida
 MIKE JOHNSON, Louisiana
 ANDY BIGGS, Arizona
          Shelley Husband, Chief of Staff and General Counsel
       Perry Apelbaum, Minority Staff Director and Chief Counsel

                                 ------                                

    Subcommittee on Courts, Intellectual Property, and the Internet

                 DARRELL E. ISSA, California, Chairman
                  DOUG COLLINS, Georgia, Vice-Chairman
LAMAR SMITH, Texas                   JERROLD NADLER, New York
STEVE CHABOT, Ohio                   HENRY C. ``HANK'' JOHNSON, Jr., 
TRENT FRANKS, Arizona                    Georgia
JIM JORDAN, Ohio                     THEODORE E. DEUTCH, Florida
TED POE, Texas                       KAREN BASS, California
JASON CHAFFETZ, Utah                 CEDRIC L. RICHMOND, Louisiana
TOM MARINO, Pennsylvania             HAKEEM S. JEFFRIES, New York
RAUL LABRADOR, Idaho                 ERIC SWALWELL, California
BLAKE FARENTHOLD, Texas              TED LIEU, California
RON DeSANTIS, Florida                BRAD SCHNEIDER, Illinois
MATT GAETZ, Florida                  ZOE LOFGREN, California
ANDY BIGGS, Arizona                  STEVE COHEN, Tennessee
                                     LUIS GUTIERREZ, Illinois
                           
                           
                           C O N T E N T S

                              ----------                              

                             JULY 13, 2017
                           OPENING STATEMENTS

                                                                   Page
The Honorable Darrell Issa, California, Chairman, Subcommittee on 
  Courts, Intellectual Property, and the Internet................     1
The Honorable Bob Goodlatte, Virginia, Chairman, Committee on the 
  Judiciary......................................................     4
The Honorable John Conyers, Jr., Michigan, Ranking Member, 
  Committee on the Judiciary.....................................     5

                               WITNESSES

Mr. Tom Lee, Mapbox:
    Oral Statement...............................................     7
The Honorable Paul Michel, Former Chief Judge. U.S. Court of 
  Appeals for the Federal Circuit:
    Oral Statement...............................................     9
Mr. Sean Reilly, Senior Vice President and Associate General 
  Counsel, The Clearing House:
    Oral Statement...............................................    11
Ms. Julie Samuels, President of the Board of Directors, Engine:
    Oral Statement...............................................    13

 
            THE IMPACT OF BAD PATENTS ON AMERICAN BUSINESSES

                              ----------                              


                        THURSDAY, JULY 13, 2017

                        House of Representatives

    Subcommittee on Courts, Intellectual Property, and the Internet

                       Committee on the Judiciary

                            Washington, DC.

    The subcommittee met, pursuant to call, at 10:04 a.m., in 
Room 2141, Rayburn House Office Building, Hon. Darrell Issa 
[chairman of the subcommittee] presiding.
    Present: Representatives Issa, Goodlatte, Smith, Chabot, 
Franks, Jordan, Marino, Labrador, Farenthold, DeSantis, Biggs, 
Nadler, Conyers, Johnson of Georgia, Deutch, Bass, Jeffries, 
Swalwell, Schneider, and Lofgren.
    Staff Present: Joe Keeley, Chief Counsel; Eric Bagwell, 
Clerk; and Jason Everett, Minority Counsel.
    Mr. Issa. The Subcommittee on Courts, Intellectual 
Property, and the Internet will please come to order.
    Without objection, the chair is authorized to declare a 
recess of the subcommittee at any time.
    We would like to welcome everybody here today to a hearing 
entitled Impact of Bad Patents on American Businesses.
    American businesses, entrepreneurs, inventors all come to 
this Congress telling us about the effects of patent trolls who 
seek to abuse the American legal systems to extract money from 
Americans, to line their own pockets using any method they can, 
including ingenious ones that have been developed only in the 
last few years.
    Although the AIA was able to immediately stop some of these 
abuses by creating new procedures at the Patent Trademark 
Office to weed out bad patents, patent trolls haven't gone 
away. And let's explore why.
    The answer is simple. One, the money is too good. And, two, 
a good patent can be used by a troll to exert claims that are 
unreasonable for that patent. Why innovate when it is far 
easier and more profitable to simply purchase a patent, acquire 
one, acquire the rights to a patent, perhaps one that has never 
been licensed, bully businesses into writing a check, go away 
without ever seriously litigating?
    As patent trolls force American businesses to spend money 
on patent lawyers and settlement checks, business investment by 
definition--investment money by definition is diverted. Over 80 
percent of patent troll litigation focused on small businesses 
that don't have deep pockets need to pay patent lawyers to 
defend them, settlement is often the only reasonable option, 
and every dollar spent in settlement is a dollar not spent in 
building a business.
    For example, Life360 spent over $1.5 million to take a 
patent case to trial, and it won it. Unfortunately, $1.5 
million was spent only to prove that it was frivolous by 
definition. The founders of Life360 could have spent that money 
improving a product and hiring more Americans.
    The testimony that will be provided today by Julie Samuels 
contains a list of examples faced by American businesses 
nationwide. Simply put, we should not confuse making America 
great again with making American patent trolls richer again.
    I am happy to see that the Supreme Court has agreed that 
patent trolling using venues of advantage is contrary to public 
policy with several unanimous decisions. Much liked by at least 
this chair in Congress, the Supreme Court hears diverse--
sorry--hears diverse issues, yet the Court has repeatedly been 
in total agreement that the fundamental goal of the American 
patent system has been--this is one of those days--of the 
patent system has been perverted by those who would use bad 
patents or, as I said earlier, good patents in bad ways to 
strong--arm the rest of America into paying them money. 
Usually, and I regret to say this, but most often in the 
Eastern District of Texas before just a handful of judges.
    Most recently in the TC Heartland case, the Supreme Court 
made a major step by trying, and I repeat trying, to stop the 
overreach of the Eastern District of Texas. However, only 2 
weeks ago, Judge Gilstrap interpreted the TC Heartland decision 
in a way that rejects the Supreme Court's unanimous decision 
and, at least for the time being, ensures that as many of the 
cases as possible will remain in his courtroom.
    Well, this may be help to the community that Judge Gilstrap 
represents. To the hotels, to the law firms, it does not serve 
justice, and is, in fact, an act that I find reprehensible by 
that judge. It is not common for a Member of Congress to call 
out an individual judge or a district, but after a long period 
of enrichment of a community by judges who consider that 
community's well--being part of their goal, I can reach no 
other conclusion.
    I look forward to hearing from all of our witnesses today, 
and would like to now recognize our ranking member, the 
gentleman from New York Mr. Nadler, for, his opening statement.
    Mr. Nadler. Thank you, Mr. Chairman.
    The United States leads the world in innovation and 
creativity, which are key drivers of economic growth, but 
creators cannot safeguard their inventions from infringement, 
exploit them for profit, or avoid unnecessary litigation 
without a strong patent system to protect them. The U.S. Patent 
and Trademark Office does an admirable job, under difficult 
circumstances, in processing the more than 600,000 patent 
applications, and growing, that it receives each year.
    But no system is perfect, and some poor patents sometimes 
slip through the cracks. Whether because of pressure to quickly 
reduce the backlog of applications without having sufficient 
resources to properly evaluate each claim or because of unclear 
guidance from the courts in what is eligible to be patented, or 
even because of simple human error, sometimes the PTO issues a 
patent that is later deemed to be invalid. This injects 
uncertainty into the market and imposes potentially huge costs 
on businesses and small inventors by requiring legal action to 
resolve claims of ownership.
    When bad patents are granted, it also encourages abusive 
litigation by bad actors known as patent trolls, who purchase 
these weak patents and use litigation or the threat of 
litigation as a weapon to extort settlements from innocent 
defendants. Because litigation can be expensive and time 
consuming, many defendants determine that it is better to 
settle even a meritless claim than to endure the significant 
burdens involved in costly litigation. With a settlement in 
hand, the patent troll is free to pursue its next victim, and 
the cycle continues.
    Going forward, we must attempt to reduce the number of bad 
patents that are granted. I support the PTO's patent quality 
initiative, which has made grade strides in this direction, and 
I will continue to advocate for the PTO to receive sufficient 
resources to do its job effectively. But it is also critical 
that we weed out existing bad patents that continue to plague 
the system.
    The America Invents Act created several mechanisms, such as 
inter partes review, or IPR, and the Transitional Program for 
Covered Business Methods to challenge and invalidate patents 
more efficiently and more cost effectively than pursuing 
litigation. These are being used widely, and they have 
successfully eliminated many patents that should never have 
been granted in the first place.
    However, some stakeholders are concerned that too many good 
patents--that too many good patents are being invalidated at 
the same time that bad patents are weeded out. They also argue 
that the standards and procedures used in these programs, which 
differ from those used in district courts, are unfair and 
sometimes lead to perverse outcomes in which the same patent is 
upheld by a Federal District Court but is ruled invalid by the 
PTO.
    Whatever the standard should be, I think most people would 
agree that the standard should be the same, whether you go to 
inter partes review or to the Federal Court.
    We should be mindful that many companies make business 
decisions and attract investors in reliance in having been 
granted a patent. As we work to strip bad patents from the 
system, we must strike the proper balance to ensure that we do 
not inject uncertainty and unfairness into the marketplace by 
throwing away good patents along with the bad.
    This hearing offers a good opportunity to examine the 
impact that poor quality patents have on American businesses 
and small inventors and to determine how best to weed out bad 
patents, while protecting legitimate patents from unfair 
attacks. I look forward to hearing from our witnesses, and I 
yield back the balance of my time.
    Mr. Issa. I thank the gentleman.
    We now recognize the gentleman from Virginia, the chairman 
of the full committee, for his opening statement. The 
gentleman, Mr. Goodlatte, is recognized.
    Chairman Goodlatte. Mr. Chairman, thank you very much. 
Thank you for holding this very important hearing, and I look 
forward to our witnesses' testimony.
    When I became chairman of the House Judiciary Committee, I 
placed a priority on reducing litigation abuse wherever it 
occurred. As the committee that oversees our Nation's Federal 
judicial system, the Judiciary Committee must fight all abuses 
of our Nation's judicial system, whether abuse occurs in the 
patent system or elsewhere.
    Litigation abuse degrades the confidence of Americans that 
the judicial branch is there to assist resolving disputes in a 
fair manner, especially when they are faced with a potential 
for a business-ending damage award due to a frivolous lawsuit.
    Unfortunately, a small number of bad patents that should 
never have been granted in the first place have been used by 
some to harass American businesses. Small and medium-sized 
businesses nationwide have been on the receiving end of demand 
letters over questionable patents for common technologies long 
in use, such as podcasting, electronic shopping carts, and 
document scanners. The demand letters typically include a 
settlement offer that is lower than the cost of retaining a 
lawyer to begin litigation.
    The patent trolls, as they are known, then move on to their 
next victim. For businesses that had planned on expanding by 
hiring new employees, the troll has already ended their ability 
to expand by diverting money away from the human resources 
department to the legal department.
    Four years ago, I introduced the Innovation Act to address 
the litigation abuse problems that could not be solved by the 
America Invents Act. The Innovation Act then passed the House 
by a vote of 325 to 91, reflecting a bipartisan desire to end 
such abuse. Although the legislation became stuck in the 
Senate, the Supreme Court was able to step in to unanimously 
resolve some but not all of the litigation abuse problems that 
were to be addressed by the Innovation Act.
    Just a few weeks ago, the Supreme Court in its TC Heartland 
decision concurred with congressional enactment of a patent--
specific venue provision in Title 18. This decision was 
expected to lead to a sharp reduction in cases being filed in 
one particular district in Texas that seems skilled at 
attracting patent trolls.
    Unfortunately, one judge in this district has already 
reinterpreted both the law and the unanimous Supreme Court 
decision to keep as many patent cases as possible in his 
district in defiance of the Supreme Court and congressional 
intent. Also unfortunate is that there are some who are now 
calling to undo much of the progress that has been made on 
patent litigation reform. Simply put, their efforts and their 
views of what makes for a strong American patent system are 
misguided.
    A strong patent system is not one that enables patents that 
should never have been granted in the first place to be used as 
a weapon against American businesses, destroying American jobs 
in the process. A strong patent system is one that has robust 
mechanisms in place to weed out bad patents and to deter 
abusive patent litigation from happening in the first place, 
while facilitating the owners of properly awarded patents in 
seeking the compensation they deserve when their patents are 
infringed.
    As the administration undertakes its search for a new PTO 
director, I look forward to working with them and their choice 
of a new director to build up the good work that this committee 
has done, along with the positive impact of several unanimous 
Supreme Court decisions. America needs a strong patent system 
where bad patents are weeded out and litigation abuse is 
sharply curtailed.
    Thank you, Mr. Chairman.
    Mr. Issa. Thank you, Mr. Chairman.
    We now go to the gentleman from Michigan, the dean of the 
House, Mr. Conyers.
    Mr. Conyers. Thank you very much, Mr. Chairman.
    We welcome all of our witnesses, particularly the former 
judge, Paul Michel, former Chief Judge, and we look forward to 
this hearing. This is a large, important part of our law and 
economy to consider, because we will examine the current state 
of patent law and to consider whether Congress should be doing 
more to promote innovation and protect inventors.
    We should also use this as an opportunity to review the 
procedures at the United States Patent and Trademark Office and 
how they are impacting American businesses. As we examine these 
issues, there are several factors I am going to be keeping in 
mind.
    First, one of the most effective steps that we can take in 
responding to abusive patent litigation is making sure poor 
quality patents are not issued to begin with. One of the major 
contributing factors to the problem of abusive patent 
litigation is the issuance of ambiguous and poor quality 
patents. Even though getting patents through the system quickly 
is an important goal, it cannot be done at the expense of 
quality. Low-quality patents undermine the patent system just 
as much as lengthy pendency times.
    Equally important, patent examiners must have the resources 
to review and analyze the hundreds of thousands of complex and 
interrelated patent applications they receive every single 
year. If the Patent and Trademark Office receives all of its 
fees and is protected from the unpredictability of the annual 
appropriations cycle, this will help ensure that the agency's 
review process remains the envy of the world.
    Problematic patents most often are issued as a result of a 
deficient review process, which in turn, is caused by 
insufficient resources for the agency. Without question, 
investing in the Patent and Trademark Office and improving the 
quality and timeliness of the agency's work has a direct impact 
on the competitiveness of American businesses and on individual 
inventors.
    The health of our intellectual property system is integral 
to the health of our Nation's economy. It provides vital 
incentives that foster innovation, which in turn creates jobs. 
America's most intellectual property intensive industries 
generate millions of jobs. According to a Commerce Department 
report, these industries support at least 45 million United 
States jobs and account for nearly 40 percent of our Nation's 
gross domestic product.
    In recognition of this fact, I have consistently sought to 
improve patent protection and have fought to protect American 
growth and innovation in our increasingly global economy. 
Congress must ensure that the Patent and Trademark Office has 
sufficient funding so that it can be truly effective in 
protecting the integrity of our intellectual property system.
    Finally, we must take a cautious approach to any future 
legislative proposals. Our Nation's economic future depends on 
the ability of inventors to innovative and create, while at the 
same time being able to efficiently and effectively protect 
their products. Even well-intentioned proposals must be 
thoroughly analyzed to avoid unintended consequences that harm 
our patent system, discourage innovation, weaken patent rights, 
or increase patent litigation. Accordingly, we must strenuously 
reject any legislative proposals that would unbalance the 
patent system, deprive inventors of full legal protection for 
their inventions, fuel more rather than less litigation, and 
weaken patent enforcement protections.
    I continue to support reasonable reforms that will improve 
and strengthen the patent system but reject any changes that 
even indirectly may undermine our Nation's patent system. And 
so I congratulate the chairman for holding this important 
hearing, and I look forward to the testimony from the 
witnesses. And I thank you.
    Mr. Issa. Thank you, Mr. Conyers.
    Without objection, all other members will have their 
opening statements made a part of the record.
    Today, we welcome our distinguished panel of witnesses. If 
you would all please, pursuant to the rules of the committee, 
rise to take the oath.
    Please raise your right hands. Do you solemnly swear that 
the testimony you are about to give will be the truth, the 
whole truth, and nothing but the truth?
    Please be seated.
    Let the record indicate that all witnesses answered in the 
affirmative.
    Today, our witnesses include Mr. Tom Lee of Mapbox; as 
previously stated so eloquently by the dean, the Honorable Paul 
Michel, the former Chief Judge of the United States Court of 
Appeals for the Federal Circuit; Mr. Sean Reilly, senior vice 
president, associate general counsel of The Clearing Company; 
and Ms. Julie Samuels, president of the board at Engine.
    For all of the witnesses today, your written statements 
will be placed in the record in their entirety. This allows you 
to use the 5 minutes, more or less, to say things that may or 
may not be in your opening statement or to summarize a longer 
opening statement.
    As most of you know, we work on the standard red, green, 
yellow system. So green means continue if you please; yellow 
means hurry like crazy; and red, we understand that there is a 
cop here that will give you a ticket.
    So with that, I will break protocol, Your Honor, and start 
down the line with Mr. Lee.
    The gentleman is recognized for 5 minutes.

 TESTIMONY OF TOM LEE, MAPBOX; HON. PAUL MICHEL, FORMER CHIEF 
  JUDGE, U.S. COURT OF APPEALS FOR THE FEDERAL CIRCUIT; SEAN 
 REILLY, SENIOR VICE PRESIDENT AND ASSOCIATE GENERAL COUNSEL, 
 THE CLEARING HOUSE; AND JULIE SAMUELS, PRESIDENT OF THE BOARD 
                      OF DIRECTORS, ENGINE

                      TESTIMONY OF TOM LEE

    Mr. Lee. Chairman Issa, Ranking Member Nadler, and members 
of the committee, thank you for the opportunity to appear 
before you today to speak about the need for patent reform.
    My employer, Mapbox, was founded here in Washington, D.C., 
about 7 years ago. We produce beautiful and powerful map 
technology for companies like the Weather Channel and Lonely 
Planet, and today have grown to over 250 people. Unfortunately, 
this success is not because of our country's patent system, but 
in spite of it. Predatory patent litigation has threatened us, 
generating distractions and roadblocks to growth.
    Mapbox has had multiple experiences with patent trolls, 
nonpracticing entities who file meritless lawsuits that are 
cheaper to settle than to defend. Sadly, this has become an 
expected cost of business in the software industry and a 
substantial drag on innovation. Even the decision to testify 
today was a difficult one for us, as patent trolls use public 
records to identify targets. It is only thanks to a strongly 
antitroll board and executive leadership that I am able to be 
here.
    We have seen trolls employ varying tactics, but there are 
several common themes across these episodes that I would like 
to highlight today.
    The first is the sophistication of the troll industry. 
Being a troll's target for the first time is a bewildering 
experience and all the more so when you hear the calmness in 
the voice on the other side of the phone. This is a steady, 
routinized business for them, and they are well practiced at 
it.
    When a troll finally names a settlement amount, we have 
reliably found it to be very slightly cheaper than our 
counsel's estimate of the cost of proceeding with our best 
legal remedy. The troll business is extremely well priced, 
calibrated to individual victims' means and legal situations. 
These are not rival software firms with whom we have 
conflicting claims; they are shell companies who keep minimal 
assets, employ few staff, and produce nothing except legal 
demands.
    The second common theme is venue. Every patent troll we 
have encountered has filed their claims in remote locations 
instead of where our business is located. Trolls look for 
sympathetic venues, like the Eastern District of Texas, to 
raise the costs of defense, limit choice of counsel, and make 
impractical several kinds of legal responses.
    We were pleased to see the Supreme Court curb venue abuse, 
but more must be done. Trolls can still sue customers instead 
of service providers for a venue hook, and it is expensive to 
file a motion opposing improper venue. Without additional 
efforts to control the cost of mounting a defense, such as 
limits on discovery before early motions are decided, venue 
will remain an inappropriately important consideration for 
victims of trolls.
    The third theme is the exceptionally low quality of the 
patents in question. Digital mapping is a complex computer 
science problem, but the claims we have seen have purported to 
cover techniques as prosaic as looking for a business on a map 
or dispatching vehicles from a central location. It is not an 
exaggeration to say that these techniques have been in use for 
hundreds or even thousands of years. Unfortunately, 
invalidating a bad patent is an expensive and risky 
proposition, and few companies are in a position to gamble 
their future in this way.
    In general, the quality of software patents in our system 
seems to be very poor. I worked as a programmer for almost 20 
years, and in that time I met vanishingly few peers who 
consider software patents to be beneficial to innovation.
    At Mapbox, the desire to create better products drives 
innovation, not the prospect of patent protection. When we file 
patents, it is due to other considerations, including defensive 
ones. Filing patents can be important for individual engineers' 
career advancement, but for many programmers I know, having 
one's name on a software patent is, frankly, a personal 
embarrassment. By saying this I don't mean to question the 
necessity or importance of our patent system, but it is a sad 
truth of the system's inability to adapt effectively to the 
digital age means that a large and increasingly important 
segment of our economy has lost all faith in it.
    Given the prevalence of bad patents, it is particularly 
galling to see efforts to weaken the inter partes review 
system. IPR is one of our most important tools for dealing with 
the many thousands of bad patents that should be invalidated in 
the wake of the Alice decision, but it is still inaccessibly 
expensive for small businesses. IPR must be strengthened and 
made more accessible, not less so.
    The weaknesses of the patents used against us have often 
been matched by the weakness of trolls' claims. In some cases, 
the patents' claims have no plausible relation to our 
technology, but getting to the point where a judge can affirm 
this costs time and money, particularly if the discovery 
process is allowed to begin. Low pleading standards mean trolls 
can make vague and unsupported assertions. Amazingly, it can be 
impossible even to understand their claims against you without 
incurring substantial costs.
    Trolls often withdraw their claims at the first sign of any 
real resistance. Unfortunately, they usually face no 
consequences for doing so, and can proceed to targets who are 
more easily cowed.
    Finally, let me encourage you to consider the voices that 
are not present today. Mapbox has been fortunate to have the 
resources, will, and luck to defend ourselves against trolls. 
Others are less fortunate. In researching our trolls' past 
behavior, we came across many other victims. Big companies who 
settled and were thereafter legally prevented from discussing 
their experiences publicly; a father and son software shop who 
had to watch their business get destroyed every few years when 
a troll came through making unaffordable demands of their 
clients, forcing them to move to bigger vendors who could 
afford to buy protection. And there is no way to count the many 
failed companies who have been forced to waste resources that 
should have been invested in research and development, 
equipment, or staff instead of paying off trolls.
    Your attention to this issue is welcome and sorely needed. 
I am hopeful that thoughtful reform can eliminate trolls' 
destructive practices and encourage growth and innovation.
    Thank you for the opportunity to speak today. I would also 
like to express my gratitude to CTA and Engine for their 
consistent advocacy on this issue, and I look forward to 
answering any questions you might have.
    Mr. Issa. Thank you, Mr. Lee.
    Your Honor, for such time as you need.

                 TESTIMONY OF HON. PAUL MICHEL

    Judge Michel. Thank you, Mr. Chairman.
    It is an honor to be here. I welcome the opportunity to try 
to help the committee to stay current on the rapidly changing 
developments in the patent world. There have been many 
developments. The TC Heartland decision was mentioned and even 
a postdecision ruling by one particular judge, so that is a 
further illustration of how things are rapidly changing.
    I would like to stress that I am not affiliated with any 
company or any coalition or any other commercial entity. I am 
only interested in the economy of the country and our global 
competitiveness and in a well functioning patent system. My 
friends at this table, who are very able advocates and they are 
also friends, are advocating on behalf of particular interests, 
of course, and I am not. I don't have to worry about any bottom 
line pressure or bottom line bias.
    It is my judgment that as things have developed in just the 
last 3 years, the United States patent system is now in a 
crisis mode. It has been so beleaguered by various forces and 
reform efforts that it is no longer functioning effectively to 
incentivize the massive investment repeatedly needed in order 
to move technology forward. The ranking globally of the U.S. 
patent system in strength has now fallen to tenth. It was 
always first in all the prior years. And there are many other 
indications of problems in the system.
    Patent values are down by as much as two-thirds, according 
to some economists. Patent licensing is down. Patent 
applications are down. There is greater use of trade secrets, 
which hides the technology, instead of sharing it with other 
people the way the patent system does. So there are many 
warning signs about trouble. The uncertainty in the system is 
the biggest trouble of all, because that deters the needed 
investment.
    Now, I am a supporter of the AIA reviews. I think they have 
added a very important second line of defense when improper 
patents are granted. I do criticize some ways in which the 
patent board implemented the act and in some ways actually 
departed from what seems, to me, to be clear congressional 
intent.
    So, for example, you seem to contemplate amendments; they 
virtually never allow amendments. You seem to contemplate 
strong estoppel; they hardly ever estop anybody. And the 
statute, as I read it, suggests that the director and his 
subordinates should make the institution decision and the Board 
only make the final written decision on the merits. But it was 
all sent to the Board in a massive delegation, so the Board 
does everything now, and that doesn't seem consistent with the 
design that was put into the act.
    With regard to the eligibility issue, the Supreme Court 
decisions in Alice and Mayo have done a lot of good because 
they allow cases to be thrown out on preliminary motions 
without discovery, without expensive litigation. The problem 
part of it is that the standards are so vague and uncertain, 
there is massive unpredictability, and therefore, there are 
tens of thousands, maybe hundreds of thousands of patents under 
a huge cloud of possible invalidity, and therefore, valueless.
    The result of all this is investment is now going less into 
R&D and follow-on commercialization and more into more 
promising investments, entertainment, and many other things. 
And there are also signs that, increasingly, it is now going 
overseas instead of staying here in America. I don't think any 
of us want that.
    So the impact on companies large and small of this 
uncertainty has been huge. You know, patent litigation is so 
expensive and now more so because of the way the Board has 
implemented the procedures for AIA reviews. So we are in a 
situation where licensing has dried up, investment is drying 
up.
    Now, with regard to abuses, of course there are abuses. 
They are serious. They need to be combatted. I think the courts 
of late have made great strides in requiring detailed fact 
pleading and having eligibility and indefinite decisions made 
on preliminary motions before discovery, before claim 
construction, before expensive litigation. Fee shifting has 
been greatly increased under the Nautilus case. It is triple 
what it was before and rising. Discovery is typically delayed, 
and in any event, much more limited than it used to be.
    If you look at the actual litigated suits, the incidence of 
frivolous suits is very small. Now, that doesn't cover where 
there were settlements. It only covers where there was 
litigation. But that still gives you some sense that, yes, 
there is a problem of invalid patents and overreach on 
infringement claims, but it is a limited problem, and I think 
it is now under way better control than it was even a couple of 
years ago.
    Now, affordability is a consideration that also has to be 
on the minds of the committee, in my view. I estimate that the 
vast majority of patent owners can now not afford to defend a 
valid patent that is actually being infringed because an IPR is 
so easy to instigate. I looked for, over 29 years of reviewing 
patents, at several thousand patents. Almost every patent that 
I can recall had some claims that were clearly valid and rock 
solid, some that were maybe a little questionable, and a few 
that were overbroad and probably or certainly invalid. But what 
that means is that an IPR is easy to instigate, and that adds 
2\1/2\ years of time delay because stays are routine, and 
understandably so. And it adds cost of somewhere like a half a 
million dollars per petition, and many patents are challenged 
repeatedly by the same challenger or by other challengers so 
there can be 5 or 10 or more challenges, each one costing 
hundreds of thousands of dollars.
    So now the wags say that patent litigation has replaced 
horseracing as a sport of kings. Only the rich can afford to do 
it. The very rich can afford to do it. So that means most 
patent owners are denied the courthouse or denied justice under 
our justice system, which doesn't seem appropriate.
    I think there is a very important role for this committee 
and the Congress to monitor developments, as you did with the 
TC Heartland hearing, and to monitor further how that decision 
is being honored or not. I think there is a role to possibly 
adjust the statute itself. Beyond that, I hope that the 
committee will consider forcing the patent office board 
procedures to conform with what seemed like the legislative 
intent embedded in the statute. I hope also, as Mr. Conyers 
mentioned, that the fees that the patent office desperately 
needs to continue to upgrade its computer systems will be 
protected from diversion or impoundment.
    Mr. Chairman, you instigated a very useful patent pilot 
program. There are about 80 judges in it now. I think it has 
been very beneficial. It would be twice as effective if each of 
those judges was given an additional law clerk with technical 
training. That should be easy to do. That is a very small cost. 
It would make a very big difference, in my judgment. And in the 
same vein the patent pilot districts need additional judges, as 
do other patent heavy districts.
    And I hope, finally, that the Congress will consider trying 
to clarify the meaning of eligibility in the statute in section 
101. The Supreme Court has provided some very good impetus for 
this, but its standards are too vague to produce consistent and 
fair results. The Congress has a better capacity as a matter of 
national economic and innovation policy to state the limits of 
eligibility, and it should do so, in my opinion, by clarifying 
101. Thank you very much.
    Mr. Issa. Thank you, Your Honor.
    Judge Michel. I appreciate the extra time.
    Mr. Issa. No problem.
    Mr. Reilly, I will remind you you are not a Federal Judge. 
Thank you.
    Mr. Reilly. Thank you very much for that, Mr. Chairman.
    Mr. Issa. The Clearing House is recognized.

                    TESTIMONY OF SEAN REILLY

    Mr. Reilly. Chairman Issa, Ranking Member Nadler, and 
members of the committee, thank you for your time today and the 
invitation to testify.
    Although the financial services industry has an interest in 
all the issues related to patent reform, today I am going to 
focus my testimony primarily on the critical importance of the 
covered business method program, CBM, section 18 of the America 
Invents Act.
    The financial services industry has a balanced perspective 
on the need for both robust patent protection of actual 
innovation and also the need to decrease the transaction costs 
associated with spurious, low-quality patents being asserted in 
district courts. Financial service firms are innovators, and a 
functioning patent system is critical to the innovation in this 
industry, particularly given the fintech convergence and the 
rapid emergence of new technologies that the consumers are 
demanding today.
    Additionally, the financial services industry is primarily 
the source of capital for startups of every kind, from 
companies in the technology sector to the pharma sector. As 
lenders, it is essential that the intellectual property that we 
rely on to backstop these loans be based on strong patents and 
patents that there is certainty behind.
    Due to the industry's role as both innovators and lenders 
of innovation, the industry is uniquely vulnerable to the 
assertion of low-quality patents by nonpracticing entities, in 
particular across the economy of the United States. The CBM 
program was a landmark effort by Congress to address abusive 
patent litigation around low-quality business method patents. 
Thus far, it has operated precisely as Congress has intended.
    Seventy-nine percent of the final written decisions issued 
in CBM proceedings have resulted in an invalid challenged 
patent in whole or in part. The Federal Circuit has never found 
that any of those decisions were wrong, when you look at the 
merits of whether those patents are invalid.
    CBM is a narrowly tailored program. It was carefully 
constructed and preserves and enhances the incentives for 
innovation by protecting legitimate patents, while also 
providing an efficient alternative to litigation in district 
court.
    We believe that CBM is necessary because, unlike IPR, it 
enables a petitioner to raise nearly any invalidity challenge 
that they could otherwise raise in Federal Court. These include 
challenges related to subject matter eligibility under section 
101, also evidence of prior use or prior sale, and then 
elements related to drafting requirements under section 112.
    The ability to bring these challenges is particularly 
important in the case of business method patents. If you look 
at the filings under the CBM program, roughly half of the 
invalidity findings are based under these sections of the 
patent code that are not eligible for review under IPR. For 
these reasons we urge Congress to make the CBM program 
permanent.
    Alternatively, we urge Congress to adjust the inter partes 
review program to eliminate the current carve-out of that 
program and allow petitioners to bring all legally recognized 
invalidity challenges, including the aforementioned subject 
matter eligibility and evidence of prior use and sale. Not only 
is CBM effective in combatting low-quality patents, but it has 
been carefully constructed with ample safeguards to prevent the 
harassment of patent holders.
    First, the petitioner must be sued or threatened with a 
suit. Additionally, only those patents that claim covered 
business methods and are more likely than not invalid are 
subject to review. Finally, and perhaps most important, if the 
patent is a technological invention, it is exempt from the 
program.
    In practice, 34 percent of the petitions filed have been 
rejected due to this gatekeeping function, so we do believe it 
is effective. While opponents of the CBM program often urge 
that it is a special interest handout to big banks, in fact, 
banks only constitute 8 percent of the filings. As for the rest 
of the financial service industry filings, such as insurance 
companies, 17 percent are petitioners there. The remaining 75 
percent come from other industries.
    Other opponents of CBM have claimed that the threat of CBM 
review has undermined the perceived value of the assets. We 
don't believe that this is the case, and one place to look is 
venture capital funding. Venture capital funding, year over 
year, has increased since the America Invents Act passed. 
Furthermore, most of the criticism come directed towards 
software patents. Only 5 percent of the petitions at CBM are 
related to patents in that space. And it is worth noting that 
none of the petitions are related to patents in the pharma 
space. And in terms of the patent owners and the patents that 
are being challenged, 59 percent are owned by NPEs.
    We believe the evidence clearly demonstrates that the CBM 
program has been an overwhelming success in helping eliminate 
low-quality patents. The evidence also shows that the most 
frequently raised criticisms of the program do not apply. There 
are tens of thousands of issue business method patents, many of 
which continue to be held by NPEs, and we are seeing explosive 
growth and historic highs in the issuance of CBM-related 
patents.
    I thank the committee today for their time and the 
opportunity to testify and welcome questions from the 
committee.
    Mr. Issa. Thank you.
    Ms. Samuels.

                   TESTIMONY OF JULIE SAMUELS

    Ms. Samuels. Thank you. Chairman Issa, Ranking Member 
Nadler, and members of the committee, thank you so much for 
having us today. It is an honor to be here, and I apologize in 
advance if I cough. I have come prepared with cough drops.
    I look forward to discussing how bad patents negatively 
impact American business, especially because this problem 
disproportionately harms the community of startups I represent.
    As has been much discussed, often before this very 
subcommittee, patent litigation abuse is a real problem and one 
that consistently disproportionately targets startups and small 
businesses. The worst abusers of this system, so-called trolls, 
are armed with low-quality impossible to understand patents on 
the one hand, and outrageous costs both in time and money of 
patent litigation on the other.
    For years, the public debate has focused on litigation 
abuses and how we best close the loopholes that allow those 
abuses to flourish.
    When we would talk to entrepreneurs and engineers, those 
building companies, creating jobs, developing new technologies, 
they would always ask, what about the bad patents? And we would 
have to give an answer that I hated. Politically it is too 
hard, I would say. The most important conversation, the one 
about patent quality, involves too many stakeholders, too many 
powerful interests. I am here today to tell you we were wrong.
    For starters, we can fix patent quality. Indeed, we have 
already seen that start to happen with real success driven by 
Congress and the courts. Even more, we must fix patent quality 
for the promise of innovation and the health of our economy.
    Today, I am going to briefly talk about where we have been, 
where we are going, and what we need to get there.
    First, where are we? I am going to start with some figures, 
so bear with me for a second. There are approximately 2.5 
million patents enforced today, and 40,000 new software patents 
are granted every year. Those patents are often next to 
impossible to understand for engineers and lawyers alike. Many 
are simply bad, like a patent on filming a yoga class using a 
computer to count calories and famously exercising a cat using 
a laser pointer. When those patents end up in the hands of bad 
actors, it creates real problems for American business. Eighty-
two percent of troll activity targets small and medium-sized 
businesses who can least afford the $1- to $6 million it costs 
to litigate.
    Finally, an important fact, startups, new firms are 
responsible for all net new job growth in the United States.
    Second, the good news: We are headed in the right 
direction. For starters, the software and high tech industry is 
thriving, outperforming the market over the last 3 years. R&D 
spending in software is up. The demand for software engineers 
continues to increase.
    At the same time, I would argue not coincidentally, two 
trends in patent law have greatly benefited startups and small 
businesses. The first is section 101 and what we have seen 
since the Supreme Court decided Alice in 2014. Alice and its 
progeny have provided small businesses and startups with a 
powerful tool. Multiple companies in our network have reported 
that counsel now often recommend that they fight back against 
trolls, as section 101 now provides a viable defense to get out 
of a lawsuit early before costs become unbearable.
    These benefits have been most acutely felt in the software 
industry. More than 70 percent of patents invalidated in whole 
or part by Alice were invalidated because they were abstract 
ideas implemented on a generic computer. Alice has been a 
lifesaver for many startups and small businesses. I direct you 
to my written submission for more examples.
    The second trend is something we can thank many of you and 
the patent office for, the inter partes review that was borne 
out of the 2011 America Invents Act. Since the first IPRs were 
filed in 2012, it has proven an invaluable tool to clean the 
system of the most egregiously bad patents. To really 
understand the success of the process, we must also understand 
its limitations, meaningful and effective incentives to ensure 
only the weakest patents are targeted, like a front-loaded 
process and strong estoppel. Also, they are far from cheap, 
costing well into the six figures to file.
    These limitations have worked. As of the end of 2016, only 
.002 percent of enforced patents have been challenged, and the 
vast majority of these are in the high tech space. What is 
more, not surprisingly, is that trolls were the respondent in 
the majority of those challenges. Even more, IPRs have been 
used to stop two of the most notorious patent trolls, MPHJ, the 
infamous scanner troll, and Personal Audio, the one who 
targeted podcasters across the country.
    Third, I would like to quickly look to the future and talk 
a bit about what we need to do to rid the system of bad 
patents. For right now, I would actually say nothing. Nothing. 
Advances like Alice and IPR alone won't weed out all of the bad 
patents that exist, but they are doing important work to right 
the ship. The law may move slowly, but for innovators and 
entrepreneurs across the country, it is moving in the right 
direction.
    The freedom to innovate has always been a central part of 
the American dream. For the sake of our economy and our 
identity we must not let bad patents stand in the way.
    Thank you for your time, and I look forward to your 
questions.
    Mr. Issa. Thank you.
    It is now my pleasure to recognize the chairman of the full 
committee, Mr. Goodlatte.
    Chairman Goodlatte. Thank you, Mr. Chairman.
    I appreciate the testimony of all the witnesses. I am going 
yield my time to the chairman of the Science Committee, as he 
has another pressing obligation, and I know, because of his 
work on the America Invents Act, that he has some very 
pertinent questions.
    Mr. Issa. Chairman Lamar Smith is recognized.
    Mr. Smith. Thank you, Mr. Chairman.
    Mr. Chairman, I want to thank the chairman of the full 
committee, and very much appreciate his yielding me time.
    Let me address my first two questions to Mr. Lee and Ms. 
Samuels. And it is this: How have patent trolls specifically 
adjusted to the America Invents Act and to the recent Supreme 
Court decisions? And what more needs to be done?
    Mr. Lee. I might have to defer to Ms. Samuels, simply 
because our experience is somewhat limited and spans time both 
before and after, so I don't think I could answer that 
systematically.
    Mr. Smith. Okay. Great.
    Ms. Samuels. I am happy to answer that. So, of course, the 
cases, we are still kind of seeing where they go, particularly 
the newer ones, like TC Heartland, which is quite recent.
    What we have seen, though, in the past couple of years 
since the America Invents Act, is that--well, first, the 
litigation rates went up, and now they have kind of evened out 
a little bit. But what has been interesting is that the 
majority of new cases are filed against unique defendants, 
small companies. So while actually the big defendants, the ones 
who can probably afford to defend themselves are seeing less 
litigation, which is good, it is the small guys who are still 
getting hit. So we have got to figure out what that looks like.
    We really think that, systemically, the kind of low-quality 
patents, particularly in the high tech space are responsible 
for that, which is why we are so glad to have this conversation 
today. Also, we are encouraged by what we have seen by the 
Supreme Court. We do understand, from those of us who are kind 
of in it but also watching the system, we do understand that 
those things take some time to work themselves out. I wish it 
could be quicker, but we are encouraged.
    Mr. Smith. So wait but also watch, and then see what we can 
do about the small businesses?
    Ms. Samuels. Wait and watch. There are things in a perfect 
world I would like, which I am happy to talk about. I would 
love to expand CBM or extend, you know, as Mr. Reilly so 
eloquently said, make sure that IPRs do cover more ground. I 
have got a wish list I am more than happy to discuss at any 
time.
    Mr. Smith. Good suggestions.
    Second question, Ms. Samuels and Mr. Lee, if you feel like 
you can answer, and I won't take your response personally, but 
what should we do and what can we do about the Eastern District 
of Texas?
    Ms. Samuels. Well, you know, the couple weeks in between TC 
Heartland and the newer Gilstrap opinion, I felt very excited. 
And so now we will kind of see where that goes. I think there 
is still a lot of potential, and I think, again, the courts are 
going to work this out. Eastern District of Texas has been an 
incredibly huge part of the problem, and I would argue too that 
it is part of the problem that really targeted software, high 
tech space. So, in fact, there are a lot of graceful solutions 
there, because there are so many stakeholders in the patent 
system because we have a one-size-fits-all system, which I hope 
I can address later this morning. I think we will see where the 
courts go.
    Mr. Smith. Okay. Thank you.
    Mr. Lee, anything to add?
    Mr. Lee. Yes. I wouldn't presume to suggest specific 
remedies, but I can say that our experience is that the Eastern 
District is deliberately undermining many of the reforms that 
have been pursued. You know, in one instance, we felt we had a 
really strong Alice challenge because of the judge we drew, 
Judge Gilstrap. We were advised by counsel that that was a 
nonstarter, that if we filed it, we would still be paying 
discovery costs and that the clock would still be running if we 
pursued the IPR as well.
    You know, both of these are remedies that should be 
available to people who are being hit with spurious claims, but 
in this case, they weren't simply because of the venue we found 
ourselves in.
    Mr. Smith. Okay. I thank you both.
    Mr. Reilly, thanks for your suggestions on how we might 
change the law. And even though you have touched upon this, I 
was going to ask you to go back and revisit what the direct and 
indirect costs to financial institutions are as a result of the 
patent troll litigation.
    Mr. Reilly. Yes. Thank you for the question, Congressman, 
and I appreciate the time. I think most important in financial 
services we are directly hit and volume drives damage models, 
at least initially in terms of damage demands. We have 
tremendous volumes that we flow through our networks, and that 
creates a huge leverage point for us.
    Through CBM and these alternative programs, being able to 
get out of district court levels the playing field, and we 
think that that is really the needle mover here. That is what 
hits us with the costs. Defense costs are there, and, yes, they 
are high, but we do think they are fairly reasonable in 
comparison to district court going to the PTO and these 
alternative proceedings.
    We are very focused, as are the other witnesses here today, 
on the impacts on small business. I think it is crippling to 
the small business when they are dragged into a district court 
litigation. And, you know, that impact--we care because that 
impacts our collateral. We also, of course, care about the U.S. 
economy and the health of it. Having these viable alternatives 
to get out of district court is critical and make sure that we 
maintain the integrity of these programs.
    Mr. Chairman pointed out that there is going to be a 
process to appoint a new director. I think it can be really 
important that we look closely at the policies that they want 
to bring to bear. There is a lot of discretion in these 
programs, and they are quite fragile.
    Mr. Smith. Okay thank you, Mr. Reilly.
    Thank you, Mr. Chairman.
    Mr. Issa. I thank you, and I apologize but, Judge Michel, 
did you have something briefly?
    Judge Michel. Yes. In answer to Congressman Smith's 
question, the committee could shape the venue future by more 
clearly defining the statutory phrase ``regular and established 
place of business.'' The TC Heartland case settled residency, 
one-half of the statutory provision, but the other half is the 
phrase I just quoted. If you defined that in whatever way you 
saw fit, that would add great clarity and could adjust where a 
case is going.
    Mr. Smith. Thank you, Judge Michel. By the way, since you 
are speaking, and not to quibble, but I thought the sport of 
kings was falconry, not horseracing.
    Judge Michel. It might depend on the country.
    Mr. Issa. What is it in Texas, Chairman?
    Mr. Smith. Probably horseracing.
    Mr. Issa. Oil drilling? Horseracing, okay.
    With that, pursuant to the wishes of the subcommittee 
chairman, we now recognize the dean of the House for his 
opening questions.
    Mr. Conyers. Thank you.
    I appreciate the testimony of all the witnesses, but let me 
ask Judge Michel, what do you think the U.S. PTO has as a 
patent quality problem?
    Judge Michel. I think the core of the problem, Mr. Conyers, 
is that most of the 8,300 patent examiners today are not cross-
trained in law, as well as in various fields of technology. 
Patent scope involves claim construction, which means people 
who understand claim construction case law can do it right. 
People not trained in that law, can't do it right. So that is 
an area where the patent office could make huge strides by 
retraining examiners in relevant parts of claim construction.
    The second big area of improvement would be to train and 
supervise examiners more closely with respect to section 112, 
where the scope of the protection is supposed to be limited to 
what the inventor actually invented. But 112 is not well 
understood by the patent examiners and not well applied by 
them, and a great effort at retraining and closer supervision 
about 112 would likewise help patent quality measurably.
    Mr. Conyers. Let me ask you just one more question. What 
makes a patent high quality, and why does that matter?
    Judge Michel. I think at the end of the day, patents are 
either valid or invalid as a legal instrument, and therefore, 
it is not very helpful to talk about quality or good or bad. 
They are either valid or not valid. And with respect to someone 
else using the technology, the patent is either infringed as 
correctly construed or it is not infringed. They are the two 
questions that matter. They are legal questions. They have to 
be sorted out, ultimately, in courts where there are disputes. 
But the patent office could do a great deal more to help make 
sure that the issuance of invalid patents is cut way down from 
where it is today. I think it is better today than it was 5 
years ago. It needs to get better still.
    Mr. Conyers. Well, I hope we can satisfy that last desire 
on your part, and I agree with you.
    Turning to Ms. Samuels, how do low-quality patents impact 
startups and entrepreneurs?
    Ms. Samuels. Thank you for the question. So first, of 
course, when a low-quality patent ends up in the hands of a bad 
actor, that is pretty much the worst-case scenario, and we have 
seen a lot of that. We have talked a lot about that in front of 
the full committee, the subcommittee already this morning.
    I would argue that, secondarily, when you have got a bunch 
of low-quality patents out there, and Mr. Lee kind of brushed 
on this in his opening statement, it harms the whole system. 
And when it harms the whole system and when it undermines faith 
in that system, that is really bad for entrepreneurs. That is 
really bad for engineers. I too have many experiences with 
software engineers who want nothing to do with patents. They 
are embarrassed to get them at a lot of tech companies. That is 
a real thing right now. And that is not--we want a strong 
system. I am not up here today to be anti-patents, right? We 
want a strong functioning system.
    The last point I will make, and I think this one is 
incredibly important, is about scalability. It is about the 
scope and the size of the system. When you have tens of 
thousands, hundreds of thousands of patents that could 
potentially apply to a single invention, device, you name it, 
it becomes nearly impossible to understand the scope of what 
you are dealing with, particularly for a small company, but 
also for a large multinational company. So what many in that 
situation tend to do is put their head in the sand. Better not 
to know than to try and, you know, address this mountain of 
patents, and that is not good for the system either.
    Mr. Conyers. Thank you so much.
    My last question will go to Mr. Lee, and it is why do you 
believe the inter partes review is one of the most important 
tools for dealing with some of the bad patents?
    Mr. Lee. Two things come to mind. One is the accessibility 
of the system. It is, in its ideal form, more affordable for 
businesses, vastly more affordable compared to the cost of a 
full legal defense. It is also advantageous in that it can get 
bad patents out of the system definitively. I think that, you 
know, we have a lot of particularly bad software patents 
floating around, and IPR is a potentially really important tool 
for getting rid of them.
    Mr. Issa. Would the gentleman yield, just to follow up on 
yours?
    Ms. Samuels, Chairman Conyers brought something out that 
Judge Michel said and then you touched on it. Would you agree 
with Judge Michel that the 112, in other words, not properly 
defining the breadth of a patent based on invention, when we 
most often say bad patents, that is what we are really talking 
about?
    Ms. Samuels. I absolutely would agree with that. My notes 
have 112 circled with exclamation points. In particular, means-
plus-function claims, I would say, need a lot of help, but yes. 
Thank you.
    Mr. Issa. Thank you both.
    Mr. Conyers. Very good. Thank you, sir.
    Mr. Issa. We now got to the gentleman from Texas, who was 
here at the gavel, Mr. Farenthold.
    Mr. Farenthold. Thank you very much, Chairman Issa.
    Judge Michel, you--in your written testimony, you talk 
about how abusers can be punished and deterred by surgical 
means, and weakening the entire system is surely unnecessary 
and unwise.
    What are some of the surgical means to deter bad actors in 
the patent system that you were referring to there?
    Judge Michel. Well, Congressman, first, obviously, fee 
shifting. If I file a frivolous lawsuit against you, the 
Federal trial judge should force me to pay your costs and fees, 
as well as my own, when he throws the case out. That is first 
and foremost.
    Secondly, on motions to dismiss, which now are very, very 
common, both with regard to eligibility questions under section 
101 and indefiniteness questions under section 112, those suits 
get thrown out at the very start of the process without claim 
construction, without discovery, without high litigation cost.
    People talk about $1- to $6 million to litigate a patent 
case. But that assumes the case goes through the whole gamut. 
When the case is thrown out, at the very start on a motion to 
dismiss, a preliminary motion, that is a huge deterrent to 
anybody else filing a similar case in the future.
    Mr. Farenthold. And I don't mean to cut you short. I have 
only got 5 minutes, and I have got a couple of things that I 
want to hit.
    Does anybody on this panel think fee shifting in a 
frivolous lawsuit case would be a bad idea?
    I see no one objecting to that.
    Judge Michel, you also talked about lowering costs, 
regardless of fee shifting or not. We want an affordable 
system, especially in an environment where you see some of the 
greatest inventions in this country coming out of somebody's 
garage who can't afford massive litigation.
    What are some of the other suggestions you might have for 
lowering costs?
    Judge Michel. I think the patent office needs to police the 
intake for the three AIA reviews more carefully and competently 
than it has so far. As I read the statute, the intent was to 
have policy officials and their subordinates review the intake 
part and the Board only make the final written decision. But 
both have been bucked over to the Board, and I don't think the 
Board has the ability to focus on the policy considerations 
that are in the statute, like the health of the patent system, 
the resources of the office, and other such considerations.
    So one way to help would be to better control the intake so 
the proper cases go in but not excess intake.
    Mr. Farenthold. All right. Thank you.
    And, Ms. Samuels, I wanted to visit with you for a second. 
You talked about maybe there being a problem with the one size 
fits all. I am going to open the door and give you about a 
minute to talk about what you would propose as an alternative.
    Ms. Samuels. Thanks. I appreciate that. I would quickly say 
that we have decided, as a country, that we are a one-size-fits 
system, international harmonization is important. I would argue 
it doesn't really work all that well. The fact that we treat 
pharmaceutical inventions the same as software doesn't actually 
make that much sense, from an economic perspective.
    Mr. Farenthold. Can I stop you there for a second?
    Ms. Samuels. Yes.
    Mr. Farenthold. You see software patents saying a system 
for e-commerce in ordering something over the internet. Would 
that not be the equivalent of a drug company saying a drug to 
cure cancer?
    Ms. Samuels. So that is the problem we have seen, right? 
And, of course, software patents are still fairly new, right? 
We have just seen them since the late 1990s, early 2000s. We 
are still, I would say, working it out. But, yes, they are 
incredibly broad.
    Alice has helped narrowing it a little; 112 could do a lot 
more to narrow them a lot, I would argue. But I think that 
there are things we can do about a one-size-fits-all system.
    A bifurcated system isn't the world's craziest idea, 
particularly in the current political climate when we are 
readdressing a lot of our trade deals, maybe we should 
readdress trips. I know to some people that sounds crazy, but I 
do think that this doesn't make sense. And we are here to find 
compromise, and we will, because that is how the system has 
always worked. But maybe it is easier to take different 
industries and treat them differently.
    Mr. Farenthold. Mr. Reilly, you're in the financial service 
industry. You do a lot about covered business method patents. 
Do you think a different treatment for that type of--would be 
something we should look at?
    Mr. Reilly. Thank you for the question. Look, we strongly 
support a second look on all patents. And the industry has 
always been advocates of IPR allowing for all invalidity 
grounds to be challenged. Right now, you only have a subset in 
CBM. CBM has been highly, highly effective. Out of 358 
petitions, you have knocked out over 1,600 litigations in 
district court saving tens, if not hundreds of millions. So we 
are a big fan of these post-grant review proceedings.
    And we do think on some level--not on some level, but we do 
think it is important that all grounds can be challenged 
regardless of the patent.
    Mr. Farenthold. All right. Thank you very much. I see my 
time has expired.
    Mr. Issa. Yes, it has. Thank you.
    We now go to the ranking member of the subcommittee, Mr. 
Nadler, for his questions.
    Mr. Nadler. Thank you, Mr. Chairman.
    Mr. Lee, particular criticism was leveled at the quality of 
software patents. They are hardly worth anything. How would you 
improve the quality of software patents by statute?
    Mr. Lee. I think that weeding out bad ones that have 
already been issued, which would not stand--would stand an 
Alice challenge is an important consideration. My hope and 
expectation is that the patent office won't be granting 
frivolous ones in the future.
    Mr. Nadler. Yeah, but that is a hope. What can we do on 
this subject?
    Mr. Lee. You know, a dual system like what Ms. Samuels just 
proposed is not crazy to me. I think, speaking broadly, by way 
of comparison, yesterday, I spent some time writing a system to 
properly capitalize text in Estonian. You know, this was a task 
that took me a few hours. I did not conduct a patent search in 
advance of beginning work on that. And there is just no 
comparison between the amount of investment and thought that 
goes into it and the billion dollars that a pharmaceutical 
company might spend to bring a drug to market.
    There needs to be a recognition that software innovation 
happens too quickly for the patent system to keep up with it, 
at least in its present form, and also that it enjoys other 
forms of intellectual property protection. We rely heavily on 
copyright. We rely heavily on license agreements, trade 
secrets.
    Mr. Nadler. So you wouldn't patent software innovation?
    Mr. Lee. My personal opinion is that it would be a better 
system if we did not patent software and used other forms of IP 
protection for it. I know that most--many, if not most, 
software engineers share that opinion.
    Mr. Nadler. Judge Michel, what would you say to that?
    Judge Michel. Mr. Nadler, I think the problem is the 
category is too broad. It is not true that all software-related 
patents are bad. It is not true that all business method type 
patents are bad. Some are very bad, some are borderline, and 
some are rock solid. So using those categories doesn't get us 
where we need to go. It has to be better examination, better 
review under AIA, and better analysis in the courts so these--
--
    Mr. Nadler. And what could we do about that?
    Judge Michel. Strengthen the patent office along the line 
that Mr. Conyers mentioned with protecting the fees. And 
calling to task the patent office implementation of the AIA, 
which has not been optimal. I think in ways, as I said, it is 
inconsistent with the statute.
    But putting that aside, it hasn't been efficient. And if it 
got more efficient, everybody would benefit. The people with 
bad patents would lose fast, and the people with good patents 
wouldn't be pulled into the process at all.
    Mr. Nadler. Okay. I have a couple more questions. Let me 
ask you, Judge Michel, quickly. Does it make sense that patents 
are evaluated under different standards in the IPR and in the 
district courts?
    Judge Michel. Not to me. I don't see any justification for 
a legal question, like patent validity, to be decided 
differently in an administrative agency than it would be 
decided in a court of law. It is a legal question.
    Mr. Nadler. Thank you.
    Mr. Reilly, you talk about the necessity of extending the 
CBMs. CBM was an 8-year temporary program to solve what was 
regarded as a temporary problem. Why should we extend it? And 
why shouldn't this be handled in the IPR and the normal patent 
system, especially assuming we had one standard?
    Mr. Reilly. Thank you, Congressman. Simply put, it is not a 
temporary problem. We are seeing a high number of bad patents 
issued at the PTO. I am a former patent examiner, and patents 
are inherently complex. The PTO does a great job. I think there 
has been significant improvements to the PTO. There is a lot of 
room for improvement. We strongly support improvements at the 
PTO.
    But at the end of the day, we are looking for a viable 
alternative in district court from district court. And to get 
that, you have to have----
    Mr. Nadler. Why do you want a viable alternative to 
district court?
    Mr. Reilly. Simply put----
    Mr. Nadler. Oh, I'm sorry. The IPR would do that. Go ahead.
    Mr. Reilly. Well, the IPR won't do it, though, in the CBM 
case--or in the case of patents and business method, because 
you need to have the other invalidity grounds available for 
petitioners. And you don't have that----
    Mr. Nadler. And let's say we did.
    Mr. Reilly. Say you did? Then that--we strongly support 
that. That is a number one move-the-needle solution.
    Mr. Nadler. And then we wouldn't need the CBM?
    Mr. Reilly. If you modify IPR that way, absolutely.
    Mr. Nadler. Okay.
    Well, let me ask you, Ms. Samuels. I think we may have--we 
may have touched on this. You point out in your testimony that 
low-quality patents often suffer from vague or undefined terms, 
which make their application scope difficult to understand.
    Are there specific procedures that PTO can put in place 
that would improve how patents are defined or is this something 
that we in Congress need to address?
    Ms. Samuels. So the patent office did a glossary pilot 
program to address this. It recently ended. It was a good 
pilot, we think. There are things that can be done at the 
patent office. There are also things that could be done at 
Congress.
    I think this is interestingly a problem that tends to 
exist, again, in the space of software and high-tech patents. 
In, for instance, pharmaceuticals, there are more general 
definitions that apply across patents so that practitioners can 
read a patent and understand what they are reading. So we would 
love to see the patent office do more. We would love to see 
that glossary program expanded. And I think that it could be 
largely taken care of at PTO.
    Mr. Nadler. Without us doing anything?
    Ms. Samuels. I'm sorry?
    Mr. Nadler. Without us doing anything?
    Ms. Samuels. I think this one we could probably handle at 
PTO, if they do it. And I think they could. And we saw a lot of 
great work under Director Lee, and we are optimistic in that 
whoever comes in will continue that great work.
    Mr. Nadler. Thank you.
    My time has expired. I yield back.
    Mr. Issa. I thank the gentleman.
    We now go to the very patient Congressman Biggs.
    Mr. Biggs. Thanks, Mr. Chairman.
    And thanks to each of the members of this panel today. It 
has been very interesting.
    One of the things that I am really interested in, and Judge 
Michel touched on it when he talked about fee shifting as a 
deterrent. I am really trying to get at the deterrent. We have 
talked about IPR. And those are really--those are post-hoc 
remedies is really what those are.
    So my question is, what happens--you know, what is the best 
way to get a deterrent? So I turn to Mr. Lee first, because one 
of the things you said in your statement was trolls often 
withdraw their claims at the first sign of any real resistance. 
Unfortunately, there is no consequence for them.
    So I guess my question is what do you see as an effective 
deterrent to kind of slow that down to a--on the front end as 
opposed to getting yourself and the small business or big 
business involved in a lengthier process?
    Mr. Lee. I think raising the bar to filing an initial 
abusive claim would be a tremendous help so that companies are 
able to respond more rapidly. The fee-shifting question is 
complicated, though, by the fact that trolls are often designed 
to be disposable corporate entities that don't have assets that 
can be reclaimed.
    Mr. Biggs. Right. That is a fair comment on the fee 
shifting. So how would you raise the bar? I don't know. Ms. 
Samuels, you might have a thought on that.
    Ms. Samuels. Raise the bar specifically with regard to 
pleadings? So I think pleading standards--there is a new form 
8. I think we could go farther.
    I think--I agree with what Mr. Lee just said about fee 
shifting. There are creative things you can do, like bonding 
requirements and otherwise to avoid that problem. I would also 
say I think this is an incredibly important line of 
questioning, something many of us in this room have worked for 
years trying to think through and understand. And I believe--I 
believe it was Judge Michel who talked a little bit about 
access to the courts for patent holders, which I think is 
wholly appropriate and important.
    I would also argue we need to ensure there is access to the 
courts for defendants as well, because the current system makes 
it unaffordable. So you need access to justice on both sides of 
that equation, and I think that is a really important way to 
look at this.
    Mr. Biggs. Yeah. Something that you had in your written 
statement dealing with limitations of IPR. And I guess I would 
say how have the outcomes been measurable in IPR? I mean, I 
want to know who is really prevailing there.
    Ms. Samuels. So like I said--or I think in my--well, at 
some point I said that a majority of respondents have actually 
been nonpracticing entities. So we have seen IPR being 
effective in the most egregious situations.
    What is interesting about IPR is that, while I and my 
community are incredibly supportive of these ways to clean out 
bad patents, they are still really expensive. You know, it is 
over $100,000 to file one. Sometimes you have to file multiple. 
That is something that has come up a bit.
    And so a lot of our startups can't afford to file IPRs. I 
have been involved at least in one case where third parties 
were able to bring it on behalf--bring an IPR on behalf of an 
impacted industry of small people who can't afford it. That is 
incredibly important.
    Also, over time, we hope that the IPRs will build a body of 
case law that implements patent quality that will kind of, you 
know, move down the system. And, in fact, I would point out 
that the PTAB has been upheld on appeal I think 78 percent of 
the time.
    Mr. Biggs. And kind of rifting on that, Mr. Reilly, I guess 
my question would be, if there remain some barriers to using 
the IPR, just based on cost alone--and you've talked about a 
different way of opening up IPR as well--how do you reduce the 
barrier to use the IPR to kind of provide an early and 
equitable and accessible way to resolve these issues?
    Mr. Reilly. Thank you, Congressman. I mean, these are tough 
issues to solve. And IP law is inherently complex and, 
therefore, high cost. All of the case law that we have seen 
coming out and some potential fixes in litigation, we don't 
think ultimately is the answer. We really do think looking at 
these post-grant proceedings is the answer.
    And one of the main things on removing the barriers of fee 
shifting and litigation, it is still a big fight and still 
very, very costly when you are in district court. Well, you 
can't band together in district court. You can't have the 
masses band together. You can in a post-grant proceeding. And I 
think one suggestion there is that smaller entities can band 
together--and we are seeing that--and more coordination there. 
And this is really private sector action. It starts to 
eliminate the pricing barriers.
    Relatively speaking, though, we are talking about 100- to 
200,000 to go through a post-grant proceeding as opposed to 
potentially millions.
    And just triggering off of the former Chief Judge's 
comments, yes, some of the numbers look at going all the way 
through litigation. But once you get hit with a complaint, the 
meter is on. Okay. You are distracting your best and brightest 
innovators, you are distracting that. You are also flipping the 
switch on discovery. Discovery is the number one price driver 
for us. And that is front-loaded in a district court litigation 
and one of the biggest obstacles. And that is why getting out 
of district court is really the number one attack vector.
    Mr. Biggs. Thank you. My time has expired.
    Thank you, Mr. Chairman.
    Mr. Issa. We now go to the gentleman from Georgia, Mr. 
Johnson.
    Mr. Johnson of Georgia. Thank you, Mr. Chairman.
    And I am impressed with the testimony of Judge Michel, a 
seemingly fair and disinterested party in any particular group 
of stakeholders looking at it from a 40,000-foot level. And his 
testimony, basically, is that patent enforceability has become 
less certain. The patent review process is certainly of high 
importance to the Nation. And, unfortunately, from his point of 
view, it is no longer viewed as a reliable process, the patent 
review process.
    And he points to the fact that our system has dropped from 
its customary first place in the annual chamber of commerce 
global ranking to an embarrassing 10th place, tied with the 
former Soviet bloc country Hungary. And also the fact that 
patent values have plummeted by as much as 60 percent, 
according to several studies by economists, based on public 
sales and licenses. And I take it from Mr. Lee, Mr. Reilly, and 
Ms. Samuels that you all believe that, though there should be 
some tweaking, everything is working as it should.
    I might further add that Judge Michel holds the position 
that we have done a lot of--we have done a lot of patent 
reform, which has produced this state where it is no longer 
reliable and our patent system has dropped in world rankings. 
And he is saying that we base reform on three myths: One is 
that patents--we have got a lot of bad patents being issued. 
The second myth is that lawsuits--most lawsuits are frivolous. 
We proceeded on reform based on trying to root out frivolous 
lawsuits, which are not, in fact, a problem in the patent 
system. And last but not least, the courts are unwilling or 
unable to deal with the limited number of actual abusers of the 
patent system.
    And I hear from the three of you all that you are not in 
agreement with Judge Michel. Can you tell me why, Ms. Samuels?
    Ms. Samuels. Sure. I am happy to. Thank you for the 
opportunity. First, I would kind of take a look at the premise. 
And I think that--I would disagree with some of it--much of it. 
But I think we often, in this country, assume that more patents 
are good. A lot of times, you will read reports by researchers 
or economists that look at patents, the number of patents, as 
if it is somehow related to innovation or the productiveness of 
the economy. And I would start by pushing back on that notion.
    What we have seen, at least in the industry with which I am 
most familiar that I can speak to, is that that is not always 
the case.
    Mr. Johnson of Georgia. Well, how do you account for the 
chamber of commerce study that shows that the Nation has fallen 
to 10th ranking?
    Ms. Samuels. So I would point out that, for starters, when 
we were first, we were actually tied, I believe, with four 
countries. And so we have actually--by those rankings. And to 
be honest----
    Mr. Johnson of Georgia. So you don't take issue with the 
fact that we have dropped?
    Ms. Samuels. I don't. And I am not sure----
    Mr. Johnson of Georgia. What about you, Mr. Reilly?
    Mr. Reilly. I don't take issue with it either.
    Mr. Johnson of Georgia. Why has it occurred, in your view?
    Mr. Reilly. I think when you look at the numbers, we are 
talking about patents that shouldn't have been issued in the 
first instance, right? And so just taking the CBM program as a 
benchmark----
    Mr. Johnson of Georgia. So you stated--and excuse me for 
interrupting, but I am getting ready to run out of time.
    You stated in your testimony that you think that there are 
some improvements. There is room for improvement at the patent 
office. Can you describe what those improvements you would 
recommend? What improvements you would recommend at the patent 
office?
    Mr. Reilly. Sure. As a former examiner, they still use the 
same search technology that I used 14 years ago. Improvements 
on the technology, infrastructure, and accessibility to prior 
art is probably number one. Sufficient funding, sustainable 
funding is number two.
    Mr. Johnson of Georgia. Have we done enough to drive reform 
at the patent office as opposed to other areas, like limiting 
lawsuits and trying to get at patent trolls, Judge Michel?
    Judge Michel. I think the patent office is the place where 
you are going to get the most improvement. They have made some 
strides on patent quality. They can make much greater progress 
under strong leadership, if this committee monitors what they 
are doing and forces them to continue to upgrade the quality of 
the examination, supervision of examiners, and the use of 
section 112 that requires definite claims that are commensurate 
with the actual invention. That is the place to make the great 
saving.
    And in terms of affordability, the magic bullet here is the 
motion to dismiss. That doesn't cost much at all. And they are 
being granted in huge numbers for ineligibility, for 
indefiniteness, for defective pleadings.
    And, in fact, in further answer to Congressman Farenthold's 
question, if somebody files repeated frivolous lawsuits, the 
courts can bar them from being able to file any more lawsuits. 
That is the ultimate deterrence. And it is available, and it is 
sometimes used, and maybe it could be used more often.
    Mr. Johnson of Georgia. Thank you. I yield back.
    Mr. Issa. Thank you.
    We now go to the gentleman from Idaho, Mr. Labrador.
    Mr. Labrador. Thank you, Mr. Chairman.
    Mr. Lee, I am very proud of the growing tech presence in 
Idaho. From conversations that I have had with several 
businessowners throughout the State, it is my understanding 
that more and more companies are using teleworkers instead of 
having employees relocate.
    In your testimony, you cited one of the common tactics used 
by trolls is venue. How will the TC Heartland decision impact 
tech companies who have a presence of teleworkers all around 
the country?
    Mr. Lee. I am afraid I am an engineer by trade and not a 
lawyer and so probably not qualified to speak to specifics of 
the Heartland issue.
    Mr. Labrador. Okay. How about you, Judge Michel?
    Judge Michel. Congressman, I think that a regular and 
established place of business--that is a statutory phrase--
contemplates a significant physical presence: a laboratory; an 
administrative office; maybe not the headquarters, but a 
significant facility. And I certainly----
    Mr. Labrador. Is there anything we could do in Congress to 
curb any venue abuse?
    Judge Michel. I'm sorry?
    Mr. Labrador. Is there anything that we could be doing to 
curb venue abuse?
    Judge Michel. Yes. You can clarify what that phrase is 
intended to mean.
    Mr. Labrador. Okay. Excellent. Thank you.
    Mr. Chairman, I understand you want a little extra time, so 
I will yield my time.
    Mr. Issa. I thank the gentleman for yielding.
    Judge Michel, you hit a point earlier that I would like to 
go right back to, and that is the two different standards 
between the district court hearing a case and ultimately you, 
when you were at the Fed circuit, and the PTOs. And you said 
you want to unify them.
    Would you please tell me which way you would unify them?
    Judge Michel. Sure, Congressman. I would make--since their 
validity is a legal question, I would make the patent office 
standards and procedures conform to those used in court. So, 
for example, the patent office would have to use correct claim 
construction, the accurate construction, not the so-called 
broadest reasonable construction, which is hopelessly vague and 
hopelessly lax.
    Mr. Issa. Let me follow up on that. So we are not talking 
here about the IPR process. We are talking about original 
applications. Is that correct?
    Judge Michel. No. I am talking about in the IPR process.
    Mr. Issa. But let me go through that. If that is the IPR 
standard, wouldn't you have to use that same standard at the 
time you are considering it?
    In other words, if you were not going to have two standards 
between granting and elimination, then you would have to look 
at the patent examiner. And I'll go to Mr. Reilly, perhaps, for 
that.
    Patent examiners today have very little information. Most 
of it is--much of it is presented by the applicant. And they 
give the broadest interpretation at the time of the granting, 
right? So I guess my question to both of you--and I will go 
between the two of you--Mr. Reilly, is if we went with Judge 
Michel's suggestion, which I do not disagree with in principle, 
then don't we have to go back to the PTO and say, now you have 
to be--you have to use the standard that is anticipated to be 
used to invalidate it at IPR, at ex parte, and in the court, 
which means you have to narrow what you are willing to give in 
the beginning? Is that correct?
    Mr. Reilly. I think that is exactly right. And clever 
drafting is a big challenge that is out there, and I think that 
is going to perpetuate the problem further if we were to go 
with that approach.
    Mr. Issa. So going back to Judge Michel--and I respect the 
years we have worked together--if we were to go with your 
proposal, in other words, hold the IPR to that standard the 
same as the court, which many have come to me to say, and if 
Mr. Reilly's concerns are that it is hard to get the PTO to do 
that, wouldn't we be creating a new reason to overturn a 
patent, which is that if the examiner fails to use that narrow 
standard, then doesn't that come back to you to second-guess 
the PTO, because they were overly broad in the granting and, 
thus, that patent is invalid because it is vague?
    Judge Michel. Chairman, I think the uniformity should be 
between the PTAB review procedures and the courts, not between 
the PTAB judges and the examiner.
    Mr. Issa. Well, let's go back to that again for a moment, 
because that is an extremely important point. And I will 
probably continue it in a moment. But the--if there is no new 
information, I might agree with you. But let's just assume for 
a moment that Mr. Lee brings the evidence of a substantially 
identical or similar invention--a 102, let's say. Isn't that 
new information that Mr. Reilly, when he was a patent examiner, 
didn't have, and wouldn't you prefer, as a judge at the 
district court level--I realize you were at the Fed circuit--
that you be able to consider it de novo since it was not 
considered by Mr. Reilly and, thus, essentially there but for 
that knowledge, Mr. Reilly would have likely given a more 
narrow or no patent at all?
    Judge Michel. Well, the problem is you don't know in 
advance what the outcome is on validity. So the question is 
what standard works appropriately at each of the three stages.
    It seems to me, for the examiner, the broadest reasonable 
construction is the preferable, even though it is laxer, 
because it gives the examiner extra leverage to force the 
applicant to narrow the claims by amendment, to define terms, 
to explain what he really invented and prove that it fits the 
scope of what he is trying to get. But once you get with an 
issued patent--not an application but an issued patent in front 
of the Board or the court, then you have to use the correct 
construction. Otherwise, it is just chaotic.
    Mr. Issa. Well, let me go back again.
    Mr. Reilly, if the IPR were to be reformed, and let's just 
say IPR ex parte, the two types of reexaminations--and I 
personally only went through ex parte reexaminations on my 
patents, so I don't have the separate experience. As an 
examiner, is it reasonable to say that you would like to be 
able to consider the new information, as lawyers say, de novo, 
consider it as though you were considering the patent anew but 
now have more information? Is that the standard you would like 
to see?
    Mr. Reilly. Mr. Chairman, I think that is absolutely the 
point, right? We want to focus on the integrity of the patent 
system, and a review de novo under that standard is the right 
way to go.
    Mr. Issa. Ms. Samuels, you would agree with that?
    Ms. Samuels. I would agree with that.
    Mr. Issa. And, Mr. Lee, I will recognize you as an 
engineer. You are willing to live with that, that information 
not known should be considered relative to your patent in this 
case?
    Mr. Lee. Yes. I would say that, in general, engineers' 
objections to separate patents relies on the invention being 
obvious.
    Mr. Issa. Okay.
    Mr. Nadler. I'm sorry. Would you----
    Mr. Issa. Go ahead and repeat.
    Mr. Lee. Sorry. I think that software engineers generally 
object to patents affecting their work on the basis of the 
patent being overly broad and not reflecting other innovations 
that had occurred prior to its granting.
    Mr. Issa. Okay. Now, this actually puts the three of you 
into a trap set by Judge Michel here. And I don't know if he 
knows it yet, but I am going to explain--springing a trap. 
Never a dull moment.
    Judge Michel commented in his opening statements that I 
thought were very profound, and that is that IPR does not grant 
as though it is a de novo review, as though they simply have 
new information on a patent. They do not grant what ex parte 
reexaminations historically would do, which is you strike claim 
one, the independent claim; claim two, seven, 15, become 
independent claims on their own. And you essentially may narrow 
the patent, but you reconstruct it as though the information 
was available at the time of the examiner.
    Ms. Samuels, would you agree that that is not what is 
happening in IPR to any great extent today?
    Ms. Samuels. So I actually--I think what is happening with 
IPRs today is not that simple. I mean, I don't think it is that 
black and white.
    Mr. Issa. Let me put it this way: Is it, as Judge Michel 
said, is it something that should happen and routine? In other 
words, the legislative language that left here would seem to 
have given them that requirement to use this, as they have in 
many cases in IPR, to allow the patent holder to essentially 
argue for what he would have received had that information been 
available at the time of the application, which is what 
historically happened in ex parte, and Judge Michel believes 
doesn't happen enough.
    So not arguing does it happen enough. Should it happen? 
Should that be the intent, thus patent holders can retain the 
claims they would have had had that information been before 
them?
    Ms. Samuels. Listen, I think the reason we have different 
types--we have ex parte and inter partes--is because it is 
presumed that in inter partes there will be some back and 
forth, that you will have--the very structure of the process is 
different for that very reason. I think that is how Congress--
how you all intended in 2011, and I think that is what we are 
seeing play out.
    The processes are different. If they weren't different, we 
would have one. We don't.
    Mr. Issa. Judge Michel, I have given a lot of credence to 
your comments. I want to make sure that they are accurate.
    Do you believe, both by congressional intent and, if you 
will, the fairness to the process, to the inventor who is 
defending his or her claims, that it should be considered in 
the inter parte as though it was knowledge known at the time 
before the examiner? And I think that is what I heard you say.
    Judge Michel. Well, it is my view that amendments should be 
freely allowed during an IPR. That would get you the result 
that, if all the new information had been known, the original 
examiner would have acted correctly. If you allow amendments, 
the end result is the bad claims go out, the good claims stay, 
everybody goes away better off. But they don't allow 
amendments. The facts are not in dispute. Out of several 
thousand decisions, they have only allowed six of them to have 
amendments.
    If I were recommending what----
    Mr. Issa. Your Honor, don't the exceptions prove that they 
understand the law allowed them to do it, they are simply 
choosing not to provide what might be reasonable?
    Judge Michel. Well, I think what it shows is that they have 
an impossible standard. And the reason is they can't examine 
it. It is not practical for them to examine. So if they allow 
an amendment, then they become an examiner, which they are not 
prepared to do.
    What I would recommend to the Congress is allow an off-ramp 
to go back to reexamination, the way you were explaining it. 
And if you allowed it to go back for a reissue, reexamination, 
the patent would not be enforceable in court, because you have 
to give up the patent in a reissue. It could then be 
reevaluated with all the new information and allowing free 
claim amendment, and you would end up with an accurate patent 
that would benefit everybody.
    Mr. Issa. Not buying completely into one part of what Judge 
Michel said, but, Mr. Reilly, as a former patent examiner and 
as somebody interested in, ultimately, patents being good and 
enforceable, if they are, in fact, good, do you see that as 
part of where Congress could provide what Judge Michel said was 
an off-ramp, the ability to avail ourselves of, essentially, an 
ex parte reexamination as part of IPR if that is not reasonable 
to do at the IPR process?
    Mr. Reilly. Mr. Chairman, I would be cautious here. I think 
the congressional----
    Mr. Issa. What I am asking you is--I am cautious. I want to 
hear.
    Mr. Reilly. Yes. I think the congressional intent was clear 
here to have an amendment, and I think the PTO has been looking 
at enhancements there. There is a lot of reasons why patent 
owners have not been amending. Part of it is potentially the 
process. But there is other incentives out there. One of them 
is past damages get wiped away, so they are not incentivized to 
do so. And I think that is a very important point and a part of 
this debate.
    The vehicle is there. The congressional intent was there. 
And I think this is a place probably best served for the PTO. 
We do need to stay focused on the compactness of these 
proceedings. The reason why we think they are working is 
because you have got a year-and-a-half fuse and you get to a 
final result. That certainty is pretty critical to maintain the 
integrity of the programs.
    Mr. Issa. Thank you.
    And I am going to now recognize the ranking member for a 
round of questions.
    Mr. Nadler. Thank you.
    Mr. Reilly, what if--and you said--what would it do to your 
conclusion in what you just said if past violations were not 
wiped away by an amendment?
    Mr. Reilly. Past damages is a factor that I think patent 
owners look at. And it is just that, a factor. And I am not 
sure----
    Mr. Nadler. No, no. If you went to inter partes review and 
we changed the standards--or we changed certain factors so that 
they would allow more amendments, you said one of the things 
that--why they never do it is that past awards would be wiped 
away. What if we change that? Would that change the amount of--
the number of amendments that would be considered?
    I mean, clearly, the congressional intent was that they 
should consider amendments to that stage. They don't for 
practical reasons. What if we started dealing with some of 
those practical reasons?
    Mr. Reilly. Well, I think you have to look at the factors 
as a whole, specifically on past damages. You know, the 
American public needs notice. Alright? If they are going to be 
on the hook for damages, someone is going to amend their 
claim----
    Mr. Nadler. Well, you can't give notice to the past.
    Mr. Reilly. Right. And that is what I am suggesting. If the 
scope of the claims changes, you can't go back and have a claw-
back on damages----
    Mr. Nadler. No, no. That is exactly right. You shouldn't.
    Mr. Reilly. Right. And right now, that is the way it is set 
up. If they do amend, then there are no past damages.
    Mr. Nadler. I am suggesting, what if we change that?
    Mr. Reilly. I think that is problematic for those reasons, 
that there is----
    Mr. Nadler. No, no. You say it is problematic. But the 
logic of what you are saying is that it is a good idea. I don't 
understand that.
    Mr. Reilly. I'm sorry. I am not following you, Congressman, 
as far as the----
    Mr. Nadler. You are saying that the people need some 
certainty, that we can't claw back previous awards. I agree 
with that. So if we said, all right, we will--and that that is 
one of the reasons amendments aren't done, even though we have 
told the IPR that they can do amendments. So what if we change 
it? In the past, we said if you do an amendment to the IPR 
grants and amendment, it is like a new application, but only 
going forward. It doesn't affect prior awards. Now, what is 
your objection to that? Or is there an objection?
    Mr. Reilly. My apologies, Congressman. I think that is the 
way it is today. And my apologies----
    Mr. Nadler. I thought you said----
    Mr. Reilly [continuing]. I am not tracking with you.
    If they do amend it, right, in the proceeding, and they do 
avail themselves of that mechanism, then past damages are taken 
off the table. That is how it stands today.
    Mr. Nadler. I thought you said the opposite?
    Mr. Issa. Will the gentleman yield for a second?
    Mr. Nadler. Sure.
    Mr. Issa. Maybe I can clarify. If a dependent claim becomes 
an independent claim and you fall under it, they are not wiped 
away?
    Mr. Reilly. Correct.
    Mr. Issa. Okay. So it is only if, in fact, you have a truly 
new claim that would assert. But often, what happens in a 
reexamination, for my colleague and myself to clarify, is that, 
in fact, you simply strip away, but you modify the patent. And 
there is a continuity of infringement that often is there.
    I agree with you, if it is a brand-new claim that evolves, 
that is different. But in most cases, they are defending a 
portion of a patent that survives, even though the independent 
claim often goes away, which is the most broad of them. Isn't 
that correct?
    Mr. Reilly. That is correct. And I completely agree. If a 
claim survives, past damages should remain on the table.
    Mr. Nadler. Okay. Thank you.
    Judge Michel, where some of us are upset, as you are, about 
the two different systems, IPR--two different standards, IPR 
and ex parte. If you appeal to the courts--you don't start in 
the courts. You go through the IPR, you appeal to the court 
from the IPR decision. What is the standard of review?
    Judge Michel. Well, it is highly differential for fact 
issues and free review, de novo review for legal issues, as 
typically is the case. So the fact-intensive nature of IPR 
reviews means that it is preordained that the Federal Circuit 
will have to affirm in 90 or 95 percent of the cases whatever 
the PTAB does. So to me, that is okay, if what the PTAB does is 
really accurate, really fair, really reliable. But it often 
isn't. So that is the process that needs to be improved, 
because the Federal Circuit can't realistically fix it. Too 
late.
    Mr. Nadler. So when we say that there are two standards of 
review, what we really mean is that the standards of fact 
determination in the Federal court ab initio as opposed in the 
IPR is different?
    Judge Michel. Well, yes. The procedures are different. The 
standards are different. And they shouldn't be, because the 
Federal court standards are the ones that the country is----
    Mr. Nadler. Right. The standards on fact determination?
    Judge Michel. Pardon?
    Mr. Nadler. The standards on fact determination, because 
you are saying the legal question--the legal standards are 
obviously what the court says.
    Judge Michel. Correct.
    Mr. Nadler. So you are talking about, to coin a verb, 
uniformalizing the fact determinations?
    Judge Michel. No. What I am trying to suggest is that the 
tests used in court and the standards for using those tests 
apply equally in IPRs as they would in a district court 
proceeding. So, for example----
    Mr. Nadler. And that is what I just said. That is what I 
meant by uniformalizing it.
    Judge Michel. Yes. Correct claim construction, not BRI, for 
example. But now they use BRI, and it is not fair, it is not 
appropriate, and it is not just, because we have defined 
``just'' as being what the courts do. That is----
    Mr. Nadler. And we have to define it that way.
    Judge Michel. Yes.
    Mr. Nadler. Thank you very much. I yield back.
    Mr. Issa. Thank you.
    Mr. Johnson, did you have a further question?
    Let me try to ask a few--if you don't. Okay.
    Thank you. I appreciate that.
    Let me go through a couple of more things.
    Mr. Lee discussed earlier that he had a task. He didn't 
look at patents, but it took him a few hours using available 
coding software to accomplish a task. Isn't he dividing--and I 
will go to each of you, but, Mr. Reilly, I am going to start 
with you, as a former examiner.
    Wasn't Mr. Lee giving us something that, notwithstanding a 
passage of time, potentially, is exactly what we did not intend 
to make patentable?
    In other words, someone of ordinary skill in the art needs 
to be able to be taught an invention that has been patented. 
But, in fact, if somebody of ordinary skill in the art given a 
common task would be able to accomplish it in a few hours, 
doesn't that inherently make it obvious?
    Mr. Reilly. Mr. Chairman, I mean, I think you would always 
have to look at the specific facts, but I completely agree with 
that line of reasoning there. And the bigger challenge here is 
looking at the evidence and getting the prior art or the 
evidence of invalidity in front of the PTO, whether it is at 
the examining level; the district court, if you are trying to 
invalidate it there. That is the big challenge. Where is the 
stuff written down? Where can you get it to invalidate these 
assets, and that is quite complex.
    Mr. Issa. I understand. But as a former examiner, wasn't 
that one of your challenges, is that you only heard from one 
side, they certainly didn't tell you that what they were doing 
was anything other than pioneering, novel, a breakthrough--I 
can't remember all the things I claimed, but I remember there 
was a court case afterwards that said be careful how you use 
those words, because that is another element for disagreement.
    But habitually you saw that, including your years before 
the decision on means plus function. But in the old days, 
people would come up with a simple means plus function and then 
want the broadest interpretation, wouldn't they?
    Mr. Reilly. Yes. I think we have to be cautious here, 
though, putting--you know, we really want to be respectful of 
patent owners' rights and establishing too much of a burden on 
the way in with applications.
    Mr. Issa. No, I don't want to establish a burden. I 
recognize that the patent owner will always come with a verbose 
statement of invention, argue for the broadest claims, as you 
try to narrow them.
    I am really concerned about that next step. When Mr. Lee 
describes what he has done 100 times on request and says, but 
that is obvious, and then Judge Michel's former colleagues have 
a case coming up to them where the court says, well, I don't 
have the ability to really consider the obviousness on the same 
standard that you would have been able to consider it as a 
patent examiner. And that is a lot of what I hope to learn here 
today, because Mr. Nadler and I, I think, want to further fix 
venue, and we want to make IPR more just, and we want to deal 
with covered business methods expiration in a way that is fair, 
because it was a temporary program.
    So, again, particularly between the two of you, Judge 
Michel cannot, or his colleagues in the district court cannot 
consider what you could consider as an examiner. Isn't that 
true?
    Mr. Reilly. That's correct.
    Mr. Issa. And we--is it fair to say we need to have a 
process that brings back to the examiner or equivalent level 
new information that can be considered as though it was known 
so that we can get a just result while, in fact, the court has 
to defer to the examiner ultimately? Isn't that correct?
    Mr. Reilly. Mr. Chairman, on this, I think as a general 
matter here, we already have that in the post-grant review 
proceedings. I think you have a BRI standard that is applied, 
and you have, most importantly, the ability to bring the best 
prior art forward, if you are in the IPR, and the best 
invalidity grant if you are----
    Mr. Issa. I couldn't agree with you more. But Judge Michel 
has brought up a valid point, and we have known each other for 
a long time. He brings up a lot of valid points. He did when we 
were considering the legislation before it was passed. And that 
is if the IPR process is not doing what you would have done as 
an examiner, if a patent holder in the final stages brought you 
new information he became aware of and wanted to amend his 
claims, not based on his original disclosure, but based on the 
claims with this new knowledge, you did that regularly, didn't 
you? You considered those things in the continuation in part 
and so on. That is something that Judge Michel says doesn't 
happen in the IPR process.
    Mr. Reilly. I think, Mr. Chairman, that the chief judge 
and--the chief judge and I have spoken on occasion. I think 
what he is focused on, correct me if I am wrong, is the burden 
that is placed on the amendment process. And I am not sure that 
off-loading that to a whole separate regime within the PTO is 
the best way to solve it but interested in discussing the 
proposed solutions there and weighing in from the financial 
services perspective.
    Mr. Issa. Yeah. And I am not prepared to talk about 
solutions today as much as I want to vet the problems, the 
differences between ex parte, where it does effectively go back 
to an examiner or equivalent, and the inter parte.
    But, Judge Michel, again, I have been quoting you without 
properly giving you an opportunity to interpret yourself.
    Judge Michel. Well, I think the offering is critical, 
because, as you say, if there is new information and the patent 
owner is willing to give up some broader claims in order to 
sustain the narrower claims, then everybody benefits. People 
can't be threatened with invalid, overbroad claims, because 
they go away. The inventor gets the narrow claim he is entitled 
to by having a reexamination by an examiner.
    The problem is the Board judges are not examiners. They 
can't do examination. They don't have the skill and they don't 
have the time. So where the situation arises where there is new 
prior art and the patent owner wants to narrow his protection, 
let him go back to examination. Give him an off-ramp. It is not 
mandatory, but it is his choice. And meanwhile, he has to 
surrender the patent, so it can't hurt anybody. Nobody can be 
sued on that patent until the reexamination and reissue is 
concluded. And then you come out with the narrower patent. 
Everybody is better off.
    Mr. Issa. Food for thought.
    The gentleman from New York has joined--another gentleman 
from New York, from Brooklyn.
    Mr. Jeffries, do you have questions?
    Mr. Jeffries. Yes. Thank you.
    I thank the distinguished chairman as well as the ranking 
members for convening this very important hearing. I thank the 
witnesses for your presence here today.
    I just wanted to explore some territory. I apologize in 
advance if it may have already been covered. But I believe, 
Judge Michel, you mentioned during your testimony that you 
believe the U.S. patent system was in crisis mode. Is that 
correct?
    Judge Michel. Yes.
    Mr. Jeffries. And I think you testified that it no longer 
incentivizes investment and innovation. Is that right?
    Judge Michel. Yes.
    Mr. Jeffries. Now, I believe there was a chamber of 
commerce study that was done, which concluded that the U.S. 
patent system, which had long been number one in the world, had 
declined to number 10 in the world. Is that right?
    Judge Michel. Correct.
    Mr. Jeffries. And I believe they concluded that that 
decline took place over a 1-year period. Is that right?
    Judge Michel. Yes.
    Mr. Jeffries. Would you agree with that conclusion or do 
you think that there are factors that have been at play for a 
longer period of time that have resulted in what you have 
concluded is a crisis and what many others have concluded has 
been a decline in the system?
    Judge Michel. Well, the problem is that the level of 
uncertainty that drives away investment has been going up 
sharply in recent years. So it doesn't surprise me that a year 
or two ago, the rating was number one, but then, in the most 
current rating, we dropped to 10, because there has been an 
escalation of the uncertainty that drives away the investment.
    And it is not my opinion, the National Venture Capital 
Association has massive evidence of what the investment trends 
are. And there is more venture investment now, as Ms. Samuels 
said, but it isn't going into R&D. It is going into things with 
lower risk and higher return on investment. So the R&D world is 
being starved for the necessary money because the venture money 
is going into non-R&D, nontechnology investments, like 
entertainment, that have a better return.
    And it is often going abroad where patent systems are 
stronger, where injunctions are routine, where trials are very 
fast and very cheap, where eligibility has been made much 
broader in Europe and in Asia, even in China this past spring, 
compared to the United States where we have been shrinking 
eligibility hugely, denying injunctions except in rare cases, 
and making litigation so expensive that 90 percent of the 
owners of valid patents cannot afford to enforce their rights.
    Mr. Jeffries. Thank you.
    As it relates to how we deal with this crisis, as well as 
the uncertainty that exists, is there an administrative 
approach that can be taken through the Patent and Trademark 
Office, including presumably reducing the caseload of workers 
there so they can better evaluate the appropriateness of 
patents? It seems to me that there is obviously a legislative 
approach that can be taken.
    And then there is also deference to the judiciary in light 
of the Supreme Court decisions that have been issued most 
recently in terms of venue and prior to that as it relates to 
strengthening the opportunity for fee shifting pursuant to 
section 285. Could you just comment on your view as to whether 
a balanced approach, you know, utilizing the tools that are 
available administratively, legislatively, judicial deference, 
what is most appropriate?
    Judge Michel. Certainly, balance is a critical 
consideration. Balance between plaintiffs and accused 
infringers, between small companies and large companies, 
between drug technologies and software technologies, and on and 
on like that. So balance certainly is a key part of it.
    In terms of balance among the different actors--the 
Congress, the courts, the patent office--there is a role for 
everybody. Obviously, I think big improvements can be made in 
examinations and in IPRs in the patent office, particularly 
under the leadership of this committee, if you monitor what 
they are doing and make them justify what they are doing.
    But, you know, at the end of the day, our system is a 
statutory system. It is not a common-law system. So when the 
Supreme Court says, well, we think eligibility should be this, 
that, or the other, okay, they can think that. But you have the 
final say, because eligibility is defined by the Congress in 
section 101.
    If you think the Supreme Court has restricted it too much, 
you can broaden it by changing the wording. If you think the 
Supreme Court didn't restrict it enough, you can narrow it 
further by changing the wording. It is really, in the end, up 
to the Congress. You are the elected representatives of the 
people who should be making national innovation policy, not 
unelected judges on the Supreme Court. They don't have the 
information about investment that you can procure by having 
hearings like this and other hearings. You have the database to 
make sound decisions; the Supreme Court doesn't. They just have 
the briefs of the party and a few amici. And they don't really 
understand what is going on in the investment world. And that 
is where the action is. The shift of investment out of R&D and 
out of America, that is the problem.
    Mr. Jeffries. Thank you for your testimony.
    I yield back.
    Mr. Issa. Thank you.
    I am going to try and bring this to a close. We did a great 
deal, and there is more to do.
    First of all, sort of doing in reverse order, as Judge 
Michel said at the end, the obligation to promote and reward 
for these useful inventions and works is ours. And so a body 
made up of people who, for the most part, have not been 
technology promoters and creators does fall to us. And that is 
an area of great concern that we, in fact, do have an 
obligation to find ways to make, among other things, 101 as 
broad or narrow as is necessary to promote those useful--the 
investments that lead to useful discoveries.
    Additionally, it is clear that we are going to have 
followup in a number of areas. And I am going to encourage each 
of you to supplement what you have said today in your written 
thoughts of any length. And they have to do not exclusive but 
including thoughts on how venue could be further legislated as 
a companion to the TC Heartland case and, in fairness, a 
response to the Raytheon v. Cray case that now has a four-part 
test, at least in one place in the United States.
    Secondly, the comments and the discussion on the 
harmonization between the court and the PTAB for inter parte 
reexamination. It is a valid question. It is one that has been 
asked a great deal, and I would ask all of you to supplement 
your thoughts.
    Harmonization, of course, does bring us to what Judge 
Michel talked about, and that is the lack of the ability for 
what would effectively be ex parte reexams or reexams in which 
claims could be appropriately narrowed and, as we discussed I 
think fairly well, when they would or wouldn't relinquish prior 
damages rights.
    Lastly--and, again, there are other items, but I am just 
closing with this. The question of the expiration of CBM. And 
since it was intended to be a temporary program, whether or not 
some part of IPR should be modified to take on legacy 
activities that would otherwise not be covered, which, of 
course, brings us in a vast way back to the possibility of 
broad IPR reform, not to bring uncertainty, but to further 
empower a system which is considered by all of you to be good. 
But, quite frankly, I think I heard from all of you, not good 
enough.
    So that is a lot of homework.
    Judge Michel, I appreciate the fact that you have not 
retired, you have simply changed suits.
    And with that, does the ranking member have any comments?
    In that case, we stand adjourned.
    [Whereupon, at 12:00 p.m., the subcommittee was adjourned.]

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