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


  ASSESSING THE EFFECTIVENESS OF THE TRANSITIONAL PROGRAM FOR COVERED 
                        BUSINESS METHOD PATENTS

=======================================================================
                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                     COURTS, INTELLECTUAL PROPERTY,
                            AND THE INTERNET

                                 OF THE

                       COMMITTEE ON THE JUDICIARY
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED FIFTEENTH CONGRESS

                             SECOND SESSION

                               __________

                             MARCH 20, 2018

                               __________

                           Serial No. 115-54

                               __________

         Printed for the use of the Committee on the Judiciary
         
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                       COMMITTEE ON THE JUDICIARY

                   BOB GOODLATTE, Virginia, Chairman
F. JAMES SENSENBRENNER, Jr.,          JERROLD NADLER, New York
  Wisconsin                           ZOE LOFGREN, California
 LAMAR SMITH, Texas                   SHEILA JACKSON LEE, Texas
 STEVE CHABOT, Ohio                   STEVE COHEN, Tennessee
 DARRELL E. ISSA, California          HENRY C. ``HANK'' JOHNSON, Jr., 
 STEVE KING, Iowa                        Georgia
 LOUIE GOHMERT, Texas                 THEODORE E. DEUTCH, Florida
 JIM JORDAN, Ohio                     LUIS V. GUTIERREZ, Illinois
 TED POE, Texas                       KAREN BASS, California
 TOM MARINO, Pennsylvania             CEDRIC L. RICHMOND, Louisiana
 TREY GOWDY, South Carolina           HAKEEM S. JEFFRIES, New York
 RAUL LABRADOR, Idaho                 DAVID CICILLINE, Rhode Island
 BLAKE FARENTHOLD, Texas              ERIC SWALWELL, California
 DOUG COLLINS, Georgia                TED LIEU, California
 RON DeSANTIS, Florida                JAMIE RASKIN, Maryland
 KEN BUCK, Colorado                   PRAMILA JAYAPAL, Washington
 JOHN RATCLIFFE, Texas                BRAD SCHNEIDER, Illinois
 MARTHA ROBY, Alabama                 VALDEZ VENITA ``VAL'' DEMINGS, 
 MATT GAETZ, Florida                     Florida
 MIKE JOHNSON, Louisiana
 ANDY BIGGS, Arizona
 JOHN RUTHERFORD, Florida
 KAREN HANDEL, Georgia
          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                   HENRY C. ``HANK'' JOHNSON, Jr., 
 STEVE CHABOT, Ohio                      Georgia
 JIM JORDAN, Ohio                     THEODORE E. DEUTCH, Florida
 TED POE, Texas                       KAREN BASS, California
 TOM MARINO, Pennsylvania             CEDRIC L. RICHMOND, Louisiana
 TREY GOWDY, South Carolina           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
                                      DAVID CICILLINE, Rhode Island
                                      PRAMILA JAYAPAL, Washington
                            
                            
                            C O N T E N T S

                              ----------                              


                             MARCH 20, 2018
                           OPENING STATEMENTS

                                                                   Page
The Honorable Bob Goodlatte, Virginia, Chairman, Committee on the 
  Judiciary......................................................     4
The Honorable Darrell Issa, California, Chairman, Subcommittee on 
  Courts, Intellectual Property, and the Internet, Committee on 
  the Judiciary..................................................     1
The Honorable Jerrold Nadler, New York, Ranking Member, Committee 
  on the Judiciary...............................................     4
The Honorable Henry C. ``Hank'' Johnson Jr., Georgia, Ranking 
  Member, Subcommittee Courts, Intellectual Property, and the 
  Internet, Committee on the Judiciary...........................     2

                               WITNESSES

John Neumann, Director, Natural Resources and Environment, U.S. 
  Government Accountability Office
    Oral Statement...............................................     6
David Hale, Chief Privacy Officer and Deputy General Counsel, TD 
  Ameritrade
    Oral Statement...............................................     7
Aaron Cooper, Vice President, Global Policy, BSA, the Software 
  Alliance
    Oral Statement...............................................     9

 
  ASSESSING THE EFFECTIVENESS OF THE TRANSITIONAL PROGRAM FOR COVERED 
                        BUSINESS METHOD PATENTS

                              ----------                              


                        TUESDAY, MARCH 20, 2018

                        House of Representatives

    Subcommittee on Courts, Intellectual Property, and the Internet

                       Committee on the Judiciary

                            Washington, DC.

    The Subcommittee met, pursuant to call, at 2:00 p.m., in 
Room 2141, Rayburn House Office Building, Hon. Darrell Issa 
[chairman of the subcommittee] presiding.
    Present: Representatives Issa, Goodlatte, Collins, Smith, 
Chabot, Jordan, Marino, DeSantis, Biggs, Johnson of Georgia, 
Nadler, Bass, Lieu, Schneider, and Jayapal.
    Staff Present: John Lee, Counsel; Carlee Tousman, Clerk; 
and Jason Everett, Minority Counsel.
    Mr. Issa. Good afternoon, thank you for your patience in 
the delay; the Committee will now come to order. The 
Subcommittee on Courts, Intellectual Property, and the Internet 
will come to order. Without objection, the chair is authorized 
to declare a recess of the Subcommittee at any time, which will 
not be necessary because we will get this done before the next 
vote.
    We would like to welcome today all of our guests for this 
important hearing, Assessing the Effectiveness of the 
Transitional Program for Covered Business Method Patents. Now, 
I will recognize myself for a short opening statement.
    Low quality patents are bad for the economy, and the 
Covered Business Methods Patent, or CBMs, are in fact the 
result directly of the transition from a series of patents that 
got out that the court today clearly has said the PTO should 
not grant.
    In this transition, it is essential to find an effective 
and affordable way to overturn bad patents. However, this is, 
as my introduction said, a program intended to be transitional.
    We are here today to consider legislation that could 
revise, extend, or do nothing to this important piece of 
legislation, which I believe all of our witnesses will agree. 
And if we had Apple here, one of the major opposers of it 
originally, they would agree has done a lot of good to get rid 
of bad patents.
    In the past, patent trolls have abused weak or bad business 
methods patents for years. They were so broad and vague as to 
allow you to sue anyone anywhere on almost anything. Retail 
stores, hotels, and even public transit systems have been sued 
by nonpracticing entities with low quality patents alleging 
covered basic business practices.
    And, of course, any time there is a new industry or a new 
patent, the record is not sufficient for the patent office to 
actually find the prior art. Only through expensive litigation 
can the prior art be found.
    This system has--the CBMs--for a number of years done a 
good job of lowering that cost. Today, among others, we will 
introduce our representatives from the GAO, who have completed 
an exhaustive study of the program, and the report has just 
been released.
    This, therefore, is a good time to contrast their report, 
their independent nonbias, nonpartisan, not perfect always, but 
every attempt to do a good job. And over a long period of time 
against others who think the bellwether of CBMs may, in fact, 
be different.
    It is now my great pleasure to recognize the Ranking Member 
of the Subcommittee for his opening statements, the gentleman 
from Georgia, Mr. Johnson.
    Mr. Johnson of Georgia. Thank you, Mr. Chairman. Today, Mr. 
Chairman, we will examine the recent report issued by the 
Government of Accountability Office, the GAO, which examined 
the Transitional Program for Covered Business Method patents, 
or the CBM Program.
    In July 2014, the Judiciary Committee requested a report 
from the GAO to study the CBM Program. The GAO has completed 
their report. And the purpose of this hearing today is to 
examine the findings of that report and assess the state of the 
CBM Program. This hearing will give us an opportunity to 
examine the extent to which the CBM Program has been used to 
challenge patents, and to examine how the United States Patent 
and Trademark Office, the USPTO, has engaged with stakeholders 
to improve proceedings for the program.
    I am interested to hear from the witnesses as to whether 
the CBM Program should be extended, and/or whether there are 
any modifications or improvements needed for the CBM Program. 
The Transitional Program for Covered Business Method Patents 
was created in 2011 when Congress passed the Leahy-Smith 
America Invents Act; the AIA.
    As the GAO report notes, a Covered Business Method Patent 
is a patent that claims a method or corresponding apparatus for 
performing data processing, or other operations used in the 
practice, administration, or management of a financial product 
or service.
    The CBM Program was a temporary proceeding that can be used 
to challenge a patent at any point in the life of the patent. 
The program was designed to address the problem of low quality 
business method patents. These patents were often used by 
patent asserting entities with the threat of infringement 
lawsuits to get settlements and to pressure targets to pay for 
licenses. The CBM Program sunsets in 2020.
    The GAO report found several things. First, it found that 
the USPTO has issued an increasing number of business method 
patents in the last 20 years. And it also found that from 
September 2012 to September 2017, petitioners filed 524 Covered 
Business Method petitions challenging the validity of 359 
patents.
    Although the rate of CBM filings has fluctuated, the use of 
the program has declined since 2015. The report also notes that 
there has been a decline in CBM petitions. According to the GAO 
report, there are many different reasons that stakeholders 
argue that there has been a decline in CBM petitions.
    I would like to hear from the witnesses about whether 
petitioners have successfully targeted the lowest quality 
business method patents. I would also like the witnesses to 
discuss whether patent owners may be waiting until the CBM 
Program sunsets to assert their patents. The GAO report found 
that the stakeholders generally agreed that the CBM Program has 
reduced patent litigation involving business method patents.
    The report also notes that owners of business method 
patents have adjusted their litigation strategy due to the CBM 
Program, focusing on higher quality patents that are more 
likely to withstand CBM review. The GAO has found that more 
documentation for policies and procedures is needed, although 
the PTAB has multiple policies and procedures in place to 
ensure consistency in AIA reviewed decisions.
    One of the key issues that will be discussed today is 
whether the CBM Program should be extended. Supporters of the 
CBM Program say that it should extend beyond the current sunset 
date of 2020.
    They argue that there is a strong need for the program to 
still exist, and note that fewer than 400 business method 
patents have ever been subject to a CBM petition. In their 
view, many low quality patents still exist, and there is a need 
for the program to remain in place. They also argue that the 
USPTO continues to have difficulty examining poor quality 
business method patents.
    On the other hand, we will hear today from a witness who is 
opposed to the CBM Program being extended. There are several 
arguments for why this program should be able to sunset. 
Opponents of extending the sunset argue that CBMs harm 
innovation and weaken the value of software patents. They also 
argue that the CBM Program is susceptible to abuse by alleged 
infringers who unfairly use them to delay infringement 
litigation.
    One of the key arguments that we will hear today by the 
opponents of extending CBM is that 2020 is a good time for CBM 
to end. This argument is supported by those who believe that 
the worst quality business method patents that were issued have 
been cleared away. They also dispute the view that many poor 
quality patents remain.
    While the purpose of this hearing is to examine the 
findings of the GAO report, there appear to be many good 
arguments by those who want the CBM Program extended and by 
those who want the CBM Program to sunset. I look forward to 
hearing from the witnesses. And I thank the chairman for 
holding this hearing. And I yield back the balance of my time.
    Mr. Issa. I thank the Ranking Member. We now go to the 
Chairman of the full Committee, the gentleman from Virginia, 
Mr. Goodlatte, for his opening statement.
    Chairman Goodlatte. Thank you, Mr. Chairman. A strong and 
healthy patent system is important to the economy, and to 
American technological leadership. A strong patent system 
requires high-quality patents that are clear, precise, and 
claim actual innovations. Congress passed the America Invents 
Act in 2011 because the health of our patent system was in 
jeopardy.
    The system was clogged with numerous low quality patents 
that had slipped past the Patent and Trademark Office. These 
patents were vague, overly broad, and often claimed to cover 
things that had been well-known and widely used for many years. 
Such patents harm innovation by blocking off broad areas of 
endeavor, and not giving inventors enough room to innovate.
    Further, bad actors discovered they could use these bad 
patents to hold businesses hostage. Vague patents could be 
reinterpreted and repurposed to broadly cover products and 
processes used or sold by many companies. Litigating in court 
to invalidate even a bad patent could cost millions of dollars 
and take years.
    The consequences of losing often meant the company's 
existence could be threatened. Small businesses without the 
resources or expertise to defend themselves from bad patents 
were particularly at risk. For such businesses, a lawsuit was 
not even necessary. The mere threat of a lawsuit was often 
enough to extort a settlement from them.
    For many patent trolls, their weapon of choice was a 
business method patent. Ill-advised court decisions in the 
late-1990s and 2000s opened the floodgates to overly broad 
business method patents, in particular those relating to the 
use of financial services. These patents posed unique 
challenges to the U.S. Patent System, so the America Invents 
Act included a specialized procedure to address them, the 
Covered Business Method Program.
    Many stakeholders, including the financial industry and the 
software industry, worked with Congress as we formulated the 
program. In 2014, 2 years after CBM patent reviews began, I 
requested the Government Accountability Office to study the CBM 
Program so that the committee's oversight could be informed by 
its unbiased research.
    With the sunset date of the program approaching, the GAO's 
report is timely because the committee is faced with a decision 
of whether to renew the program. With over 500 cases and over 
300 patents having gone through the CBM Program, we now have 
enough information to assess how effective the program has 
been, and whether it is accomplishing the goals Congress had in 
mind for the program.
    This information will be important as we examine if the 
program is still needed. I thank Chairman Issa for overseeing 
this hearing. And I thank the witnesses for their 
participation. I look forward to exploring these important 
issues.
    Mr. Issa. I thank the gentleman. It is now my pleasure to 
introduce the Ranking Member of the full Committee, my former 
partner on the Committee, the gentleman from New York, Mr. 
Nadler.
    Mr. Nadler. Thank you, Mr. Chairman. Mr. Chairman, the 
United States leads the world in innovation because our strong 
patent system helps translate creativity into economic growth 
by enabling creators to protect and to exploit their 
inventions. But maintaining a strong patent system also 
requires that only truly novel and useful inventions receive 
this protection.
    Over the last two decades, business method patents have 
posed a unique challenge to this vibrant patent system for a 
variety of reasons, including the difficulty in identifying 
prior art where business methods are concerned; the lack of 
clear guidelines for what was eligible to be patented; and then 
overburdened Patent and Trademark office. The significant 
number of poor quality business method patents began flooding 
the system starting in the late 1990s when the courts first 
ruled that business methods could be patented.
    Many of these business method patents were over broad or 
unclear, and they became prime targets for so-called patent 
trolls. With these low quality patents in hand, the patent 
trolls could extort financial settlements from defendants who 
might reasonably conclude that it made financial sense to 
settle even a bogus claim rather than to engage in costly 
litigation.
    Although later court decisions and new Patent Office 
procedures limited the impact of future business method patents 
would have on the patent system, these improvements could not 
address the existing patents that were still wreaking havoc, 
particularly within the financial services sector. It was 
against this backdrop that Congress created the transitional 
program for Covered Business Method patents as part of the 2011 
America Invents Act, which ushered in a host of reforms to 
strengthen the patent system and to promote innovation.
    At the time that the CBM Program was created, proponents 
argued that the financial services sector was being especially 
harmed by low-quality business method patents, and that the 
other post grant review procedures established by the AIA were 
insufficient to address this category of patents. Therefore, a 
special temporary program expiring in 2020 was created 
specifically to weed out those financial services-related 
patents that in hindsight should never have been granted in the 
first place.
    By most accounts, the CBM Program has successfully carried 
out its mandate of offering a cheaper and more efficient 
process than district court litigation to challenge this subset 
of business method patents, and to filter out the poor quality 
patents. This success has spurred some proponents to advocate 
for a long-term, or even a permanent, extension of the CBM 
Program. Some have even argued that CBM should be expanded to 
include other types of patents.
    Opponents of extending the program point out that the 
number of CBM challenges has declined significantly in recent 
years. And they argue that this is evidence that most of the 
weak patents have now been eliminated from the system. They 
also note the value of uniformity within the patent system, 
which can be upset by carve outs for certain industries and 
specific types of patents.
    While I have supported the limited extension of the CBM 
Program in the past to ensure that the program can fully 
complete its job, I am skeptical of any effort to expand it 
beyond its limited scope, which has significantly lengthened 
the life of the program. The CBM Program was enacted in part on 
the premise that it would be temporary. And I have not seen 
evidence to date that a dramatic expansion is warranted.
    The GAO has written a thorough and detailed report 
evaluating the CBM Program. And I appreciate the opportunity to 
hear from Mr. Neumann today about his findings, and to hear the 
perspectives of our two stakeholder witnesses as well. I thank 
the chairman for holding this important hearing. And I yield 
back the balance of my time.
    Mr. Issa. I thank the gentleman. All Members will have 5 
days in which to put their opening statements and extraneous 
material into the record, without objection.
    Today, we welcome our distinguished panel of witnesses. If 
you would all, pursuant to the Committee's rules, rise to take 
the oath. Please raise your right hand. Do you swear or affirm 
that the testimony you are about to give will be the truth, the 
whole truth, and nothing but the truth? Thank you very much. 
Please be seated. Let the record reflect that all members 
answered in the affirmative.
    Today, our witnesses include Mr. John Neumann, Director of 
Natural Resources and Environment, U.S. Government 
Accountability Office, and a key proponent of the report that 
just came out; Mr. David Hale, Chief Privacy Officer and Deputy 
General Counsel, TD America; and Mr. Aaron Cooper, Vice 
President of Global Policy at BSA, the Business Software 
Alliance.
    Pursuant to the rules, each of you will have 5 minutes for 
your opening statements. You are all experienced. Green means 
keep going, yellow means you should have probably stopped, and 
red means that I am going to find the gavel. So with that, Mr. 
Neumann, please begin.

  STATEMENTS OF JOHN NEUMANN, DIRECTOR, NATURAL RESOURCES AND 
ENVIRONMENT, U.S. GOVERNMENT ACCOUNTABILITY OFFICE; DAVID HALE, 
     CHIEF PRIVACY OFFICER AND DEPUTY GENERAL COUNSEL, TD 
 AMERITRADE; AND AARON COOPER, VICE PRESIDENT, GLOBAL POLICY, 
                   BSA, THE SOFTWARE ALLIANCE

                   STATEMENT OF JOHN NEUMANN

    Mr. Neumann. Chairman Issa, Ranking Member Johnson, 
Chairman Goodlatte, and Ranking Member Nadler, and members of 
the subcommittee thank you for the opportunity to be here today 
to discuss our recent report on the Covered Business Method 
Patent Review Program.
    As you know, this program was created to provide a less 
costly and a more efficient alternative to challenge a business 
method patent's validity at the Patent and Trademark Office 
rather than having to go through the Federal Courts. This 
program was established in September 2012, and is slated to 
sunset in September 2020.
    My statement today summarizes the findings from our recent 
report on this program, which examined three areas: first, the 
extent to which the Covered Business Method Program has been 
used to challenge patents. Secondly, the extent to which the 
Patent and Trademark Office ensures timeliness of trial 
decisions, reviews decisions for consistency, and engages with 
stakeholders to improve proceedings for the program. And 
lastly, stakeholder reviews on the effects of the Covered 
Business Method Program and whether it should be extended past 
its 2020 sunset date.
    First, in our review of the extent to which the Covered 
Business Method Program has been used, our analysis of the data 
show that since it began in 2012 through September 2017, 524 
petitions have been filed with the Patent Trial and Appeal 
Board to challenge the validity of 359 patents. This has 
resulted in decisions that invalidated about one-third of these 
patents.
    While the petitions filed has fluctuated over the last 5 
years, they generally have declined from an overall average of 
nine petitions per month to about five per month in the most 
recent year 2017. Secondly, we found that the Patent Trial and 
Appeal Board has completed all of its proceedings within 
statutorily directed timeframes of up to 18 months for the 
entire process. We also found that the appeal board has several 
review processes in place to ensure the consistency of its 
decisions.
    But it did not have documented procedures to conduct such 
reviews. So, based on that we recommended that the Patent 
Office develop guidance for its appeal board judges to ensure 
consistency of the decision review process. The Patent Office 
agreed and has begun to take steps to implement our 
recommendation.
    In addition, we found that the Patent Office takes steps to 
engage with stakeholders through a variety of means to get 
feedback. And has made several changes to its policies and 
procedures to address stakeholder concerns on various aspects 
of its trial proceedings.
    Lastly, we met with a range of stakeholder groups. Those 
with direct knowledge and experience with the Covered Business 
Method Program to obtain their views on the effects of the 
program, and whether it should be extended past its scheduled 
2020 sunset date.
    Stakeholders generally agreed that the program has had its 
intended effect of reducing litigation involving business 
method patents. Stakeholders also describe some additional 
effects of the program, including a deterrent effect on patent 
holders asserting lower quality patents that may be vulnerable 
to challenges under the program.
    According to stakeholders, the Covered Business Method 
Program has also had a positive effect on patent quality, as 
applicants are more aware of what steps to take during the 
patent application process to ensure that a patent will survive 
a postgrant challenge. Although there are very many differing 
views on the need to continue the program beyond 2020, 
stakeholders, for the most part, said there is value in 
maintaining aspects of the program, or the program in its 
current form. There were also some opposing views to that as 
well. And I will be happy to discuss that in further detail.
    This concludes my prepared statement. I would be happy to 
respond to any questions you may have.
    Mr. Issa. Thank you. Mr. Hale.

                    STATEMENT OF DAVID HALE

    Mr. Hale. Chairman Issa, Vice Chairman Collins, Ranking 
Member Johnson, and members of the committee, thank you for 
holding this hearing, and for the invitation to testify on this 
important topic. I will focus today on the success of the CBM 
Review Program, and the clear need to make the program 
permanent.
    Due to the necessity of interoperability in the financial 
services platforms, if a nonpracticing entity, or NPE, asserts 
a low quality business method patent against one financial 
institution, it is likely it will assert it against everyone 
operating in that same space. Given the high and asymmetric 
cost of patent litigation, companies are heavily incentivized 
to settle and license rather than litigate, regardless of the 
merits of the patent in question.
    The CBM Program was a landmark effort by Congress to create 
a relatively cheap alternative to civil litigation for 
challenging low-quality patents, and to reduce the burden on 
the courts of dealing with the backwash of invalid business 
method patents. And it has worked. CBM is a narrowly tailored, 
carefully constructed program that preserves incentives for 
innovation while providing an efficient, cost-effective 
alternative to litigation for the review of questionable 
business method patents. It has operated precisely as Congress 
intended.
    I can personally attest to this since the implementation of 
the CBM process, TD Ameritrade has actively used it to combat 
several of the low-quality patents brought against it. The CBM 
Program has played a critical role in mitigating the harmful 
effects that the assertion of low-quality business method 
patents has on innovation.
    This is true not only for established financial 
institutions such as TD Ameritrade, but for fintech start-ups, 
small businesses, and local banks. Through July 2017, 358 
patents asserted in 1,662 patent infringement lawsuits were the 
subject of CBM review. On average, each CBM review impacts 
almost 18 defendants compared to barely seven per IPR. The CBM 
review has had a significant ripple effect in terms of 
collateral beneficiaries to the program.
    This ripple effect extends far beyond the number of patents 
asserted or suits filed. Perhaps the most important evidence of 
CBM's effectiveness is the decline in the number of CBM 
challenges brought at the PTAB. This decline is a sign that 
many of the low-quality patents are just not being asserted by 
NPEs, because an efficient effective review of the validity of 
those patents is now available.
    But we should not confuse temporary deterrents with the 
elimination of the underlying threat. There are more than 
85,000 business method patents issued with thousands more added 
each year. And while the PTO has made progress, quality 
business method patents continues to be a problem, which is why 
the CBM Program should be made permanent. The threat of these 
patents does not disappear in 2020. Even patents that expire 
between now and then have the ability to be asserted 
postexpiration, as patent law allows a look back of up to 6 
years.
    At present, there is no viable alternative to CBM, 
particularly for sectors such as financial services against 
which low-quality business method patents tend to be asserted 
most frequently. Procedural deficiencies make the three 
alternatives to CBM poor substitutes. Litigation is expensive, 
uncertain, and protracted.
    In some districts, obtaining a ruling and a validity of a 
patent before conclusion of the discovery phase is virtually 
impossible. Postgrant review does not apply to patents issued 
before March 2013 and requires companies to monitor and 
ultimately contest every patent that could possibly be asserted 
against them.
    And finally, inter partes review most closely resembles CBM 
but varies in key ways that makes the current IPR process a 
poor substitute. Review for patentable subject matter cannot be 
challenged under an IPR. IPRs also permit fewer types of 
evidence and restrict review of indefinite claims. CBMs also 
include safeguards to prevent abuse. They can only be brought 
in response to litigation or threat of litigation. They have a 
more likely than not standard for institution. And the estoppel 
provisions provide a significant detriment to bringing CBMs 
inappropriately.
    The GAO report speculates that abuses to the CBM processes 
are possible, but notes that abuses appear to be rare. Any 
process can be abused. And potential abuses identified by the 
GAO pale in comparison with the historically extensive abuses 
of district court procedures by holders of low quality patents. 
The CBM Program has been a success. Letting the CBM Program 
expire would harm innovation that keeps our industry start-ups, 
small businesses, and our customers competitive in a rapidly 
changing economy.
    In short, as Congress continues efforts to address the 
challenge of nonpracticing entities asserting low-quality 
patents, CBM should remain in place for its core elements, or 
its core elements should be incorporated in the IPR Program. 
Thank you, again, for this opportunity. I welcome your 
questions.
    Mr. Issa. Thank you. Mr. Cooper.

                   STATEMENT OF AARON COOPER

    Mr. Cooper. Thank you. And good afternoon, Chairman Issa, 
Chairman Goodlatte, Ranking Member Johnson, and members of the 
subcommittee. My name is Aaron Cooper. I am Vice President for 
Global Policy at BSA, the software alliance. Thank you for the 
opportunity to testify today.
    BSA is a leading advocate for the global software industry 
in the United States and around the world. A well-functioning 
patent system is important to promoting innovation and, 
therefore, patent policy is important to BSA and our members. 
BSA members produce much of the software that power cloud 
computing, block chain, artificial intelligence, and cyber 
security tools.
    Our member companies are among the Nation's leading 
innovators and patent holders. Due to the complexity of their 
products and services, they are also frequently the target of 
patent infringement claims. As a result, BSA has a unique and 
balanced perspective on patent policy. For instance, BSA 
strongly supports efficient non-discriminatory mechanisms at 
the USPTO to challenge wrongfully issued patents, such as the 
Inter Partes Review Program.
    BSA also supports litigation reforms to reduce frivolous 
patent litigation. But in our view, programs that discriminate 
based on the area of technology, such as the Transitional CBM 
Program, are detrimental to the patent system in general, and 
the software industry in particular.
    In our view, the CBM Program should be allowed to end as 
Congress intended, and as the USPTO has recommended, in 2020. 
We appreciate that the GAO report makes one recommendation, and 
it is not about extending the program.
    As Chairman Issa and Chairman Goodlatte said, ``Patents on 
true inventions provide an important incentive for research and 
development.'' On the other hand, overly broad or obvious 
patents chill innovation and increase prices for consumers. It 
is, therefore, important that review mechanisms are in place 
that cost effectively and efficiently weed out mistakes. The 
2011 America Invents Act created postgrant review and inter 
partes review to do just this for patents on a 
nondiscriminatory basis.
    By contrast, the transitional CBM Program, which the AIA 
also created, applies only to technology areas within the 
covered definition. The CBM Program was enacted as a 
transitional program to address a discreet issue in the 
financial services area. After the Federal Circuit's 1998 State 
Street Opinion, the USPTO began issuing patents on methods of 
doing business in the financial sector.
    In 2010, the Supreme Court's Bilski decision effectively 
reversed the practice, but in the intervening years many 
business method patents were issued. Since a specific problem 
was created during a finite period of time--between the State 
Street and Bilski decisions--Congress made the program 
transitional determining that the 8-year window would be 
sufficient.
    The GAO Report shows that Congress was correct. It includes 
helpful statistics drawn from the PTO's data that shows a sharp 
decline in the number of CBM challenges falling from 177 in 
2014, to just 48 last year.
    The USPTO has similarly recommended ``adhering to the 
sunset period and discontinuing CBM proceedings on September 
16, 2020.'' We at BSA agree. The CBM Program imposes unintended 
costs on the software industry. While the program was not 
intended to apply to core software innovations, in some 
instances around cyber security and general database 
architecture it has been.
    A program that makes it easier to challenge patents 
claiming software related inventions than others decreases the 
value and respect for software-related patents. And this impact 
is true regardless of the validity of the patent. It is 
effectively a government program that picks technology winners 
and losers. And while this program specifically impacts the 
software industry, we would have the same concern with a patent 
program that discriminated against manufacturing, agriculture, 
or any other industry sector.
    In assessing the GAO report, it is important to distinguish 
between what the PTO data objectively show and statements 
reflecting the views expressed by the small sample of 
stakeholders GAO interviewed for the report. While there may be 
stakeholders that would like the program extended or expanded, 
there is far broader opposition.
    In summary, BSA remains committed to maintaining tools that 
deter abusive litigation, and improve patent quality. BSA 
supported the Innovation Act, which was approved by this 
committee in the 114th Congress. And has filed numerous Amicus 
briefs supporting similar reforms in court.
    In addition, we urge Congress and the USPTO to resist 
efforts that would reduce the effectiveness of Inter Partes 
Review as a patent quality mechanism. But Congress was right to 
include an end date for the technology specific CBM Program, 
and the USPTO was right to recommend adhering to it.
    BSA is grateful to the committee for its commitment to 
ensuring our patent system as the gold standard around the 
world. Thank you, again, for the opportunity to testify. And I 
look forward to answering your questions.
    Mr. Issa. Thank you. I will now recognize myself for a 
short round of questioning. And Mr. Cooper, he who is last 
sometimes is first, so get that drink of water. You know you 
mentioned the earlier decision in 2010, but the Alice decision 
in 2014 was, to a great extent, needed because PTO did not get 
it in 2009, 2010, 2011, correct?
    Mr. Cooper. Well, but the patent at issue in Alice was 
issued, I believe, before the Bilski decision. So, I think we 
have an issue where there is a period of time where patents 
were----
    Mr. Issa. Right. Okay, but effectively 2014 was when the 
PTO began changing its procedures. So, bad patents probably, by 
today's definitions, came out in 2011, 2012, 2013, correct?
    Mr. Cooper. I think it is fair to say that there were 
patents that should not have been issued that come out in all 
our areas frequently. And that is one of the reasons why it is 
so important to have the Inter Partes Review Program and the 
PGR Program as patent quality improvements.
    Mr. Issa. Mr. Hale, to that point if there were bad patents 
issues in 2011, 2012, 2013, 2014, and as Mr. Cooper, who would 
like to see the program go away by his own statement, said, 
They are still issuing bad patents, right? There are still 
vague patents that come out that CBM, among those nearly 600, 
include some that were issued after 2014 that were just as 
vague and as a result were struck down, correct?
    Mr. Hale. Certainly. The, great question, the process has 
been changed over time at the Patent and Trademark Office, but 
there is still the possibility of bad patents coming out. 
Likewise, patents that were issued in 2010 and 2012 or, for 
that matter, 2002 would still be eligible to be brought past 
2020. If I were in possession of a patent that issued in 2005 
and considering bringing it today: I would wait.
    Mr. Issa. So, there is still 3 or 4 years of extension just 
to cover patents from that period where we know that these two 
decisions found that they were weak. Or patents granted based 
on things that would not be granted today.
    Mr. Neumann, your report obviously sees an effective tool, 
but a tool that you are not supporting specifically extending, 
correct?
    Mr. Neumann. Right. So, we spoke to a wide range of 
stakeholders, including practitioners, people who are opposed 
to CBM and have done poorly under it, and those who have done 
well under it, as well as legal scholars, and a range of 
companies. So, we feel like we got a good cross-section of 
views on it.
    Mr. Issa. And so, I mean a yes, I reached the right 
conclusion that you generally----
    Mr. Neumann. Right, we did not come out with a position one 
way or the other. But definitely the stakeholders had some 
strong views about the benefits of CBM, but a lot of mixed 
views on how it should be handled in the future.
    Mr. Issa. Well, within your study, you were limited to CBM, 
which is limited to financial-type transactions. So, you were 
not able to ask the question of what if CBM was applied to 
other areas where there are, if you will, Lucy Goosey patents 
granted.
    Mr. Neumann. Well, we did hear from stakeholders on that 
point.
    Mr. Issa. And what did they say?
    Mr. Neumann. A range of them were suggesting that perhaps 
that the CBM Program could be extended, for example, by just 
removing the financial services part of that definition to 
allow other types of patents related to business methods, or 
expanded to other areas, or keep some aspects of CBM Program. 
For example, the various forms of challenges and add that to 
other proceedings like the inter partes review.
    Mr. Issa. Well, and that brings up the final question for 
each of you. The Inter Partes Review System is currently a 
single sort of a system. You go in, you make your pleading 
basically, and then you go through a process that is 
dramatically cheaper, but not free, in which if both of you 
have attorneys, and both of you defend your positions, you will 
spend some money and some time.
    The question is: is there any valid reason that as we are 
looking at--and I happen to have a judge who is on loan to us 
from the system working with us. Is there any reason that if we 
are going to make this program go beyond 2020--I even-outed, 
John, sorry--that we should not try to consolidate into as few 
organizations as we can these procedures, including CBM. And I 
would go to you first, Mr. Neumann.
    In other words, purely an efficiency question of if we go 
to, let's say, 2035 this is no longer a temporary or a 
transitional program. So, standing on its own does it make 
sense to have this here, yeah, the ex partes oppositions. In 
other words, the noninter partes oppositions that go on, the 
inter parte. And then, obviously, the other courts that we are 
in. Is there any reason we should not try to at least cut one 
court down if we are going to keep this for a long time?
    Mr. Neumann. There was certainly support amongst many of 
the stakeholders we spoke to do that.
    Mr. Issa. Mr. Hale, I am going to be brief. Any reason that 
we should not try to at least consider, if we are extending for 
a long period of time, consolidating the bureaucracy involved 
in this?
    Mr. Hale. We are supportive of the idea of consolidation. I 
mean, bringing over some of the key aspects of CBM into the IPR 
process would be an excellent idea.
    Mr. Issa. Mr. Cooper, you are the lone dissenter here 
because we have a neutral, a for, and then yourself. Briefly, 
if there were one thing that you could get out of a change at 
time of extension, if there is one, what would that be?
    In other words, you have already you would like to kill it, 
put a stake in it and it go away, and thank you for having 
existed. But, if you could just have one item what is the most 
important item that BSA would say is there that you would like 
to not see there going forward?
    Mr. Cooper. Well, I think what we like about the review 
processes that exist at the PTO generally is that we 
experienced the problem of patent trolls. We have a need to be 
able to oppose patents that should not have been issued. But 
where we have concerns with the CBM Program in particular is 
that it identifies a specific area of technology, in this case, 
software-related.
    Mr. Issa. Okay. So, I will take that, as I give this to Mr. 
Johnson, that your preference would be we take out that 
limitation of financial services, and simply make it in some 
way equal to all types of patents.
    Mr. Cooper. Well, no Mr. Chairman, because that would still 
have it be discriminatory if you just took out the financial 
services aspect of it. If you applied it across the board----
    Mr. Issa. That is what I said.
    Mr. Cooper. I am sorry. Then, yeah, applying it across the 
board. Yeah.
    Mr. Issa. Take out the limitation it apply to everyone. Mr. 
Johnson.
    Mr. Johnson of Georgia. Thank you. To apply the Covered 
Business Method Program across the board, I guess, Mr. Neumann, 
you would say that that would create cost deficiencies? It 
would be cheaper for the stakeholders?
    Mr. Neumann. Well, yeah. And then some of the stakeholders 
also noted that the expertise of the patent judges there versus 
going through the courts where the judges and juries do not 
have the expertise. That was another benefit of having a 
procedure that can be used as an alternative to the courts.
    Mr. Johnson of Georgia. Well, now it is a fact that going 
through the CBM Program does not bar one from going to court.
    Mr. Neumann. That is correct. It does not.
    Mr. Johnson of Georgia. So, it is an additional step that 
can be costly, or that adds cost to the ultimate end which can 
come about to change litigation.
    Mr. Neumann. Right. Or, in many cases it resulted in 
settlement or the claim being dropped, and then there was no 
further litigation.
    Mr. Johnson of Georgia. So, now the one-third of the cases 
filed that has resulted in the patent being invalidated, are 
there settlements that have taken place that are not included 
within that one-third? Or, does that one-third include 
settlements?
    Mr. Neumann. No, that would not include settlements. 
Settlements may have taken place in other cases where the 
patent was not invalidated. Before it went to that point, a 
settlement was made.
    Mr. Johnson of Georgia. And the settlement would then 
preclude litigation I would presume----
    Mr. Neumann. Presumably.
    Mr. Johnson of Georgia [continuing]. In most cases in 
typical cases. So, what percentage of the cases were settled 
along with those where the patents were invalidated? What would 
be the percentage?
    Mr. Neumann. I do not know that we collected that 
information, because we looked at the results of the 
proceedings. I can respond with a response for the record, 
rather, to see if we did have that information. But that was 
not included in our report, that information.
    Mr. Johnson of Georgia. I think that would probably be 
useful information. Mr. Cooper, you indicated that the 
stakeholders that Mr. Neumann and the GAO talked to were 
insufficient in terms of making the determination that there is 
value in continuing the CBM Program. You take issue with that 
conclusion, correct?
    Mr. Cooper. I think, as you well know, in Congress as you 
hear from stakeholders, as many stakeholders as possible as you 
are formulating legislation, that there is an array of views on 
any one issue. I think the GAO spoke to a number of parties 
that had an interest in the CBM Program. But I think that if 
you look broadly across the patent system, both for patent 
holders and users, you would find that the vast majority oppose 
having the CBM Program, and would like to see it expire.
    Mr. Johnson of Georgia. So, I guess your stakeholder group 
would include nonfinancial services stakeholders. And, Mr. 
Neumann, I suppose yours included only financial services 
stakeholders, is that correct?
    Mr. Neumann. No, that is not correct. We looked at a broad 
cross section of different stakeholder views, including 
software companies and other practitioners who have experience 
in other areas, not just financial services.
    Mr. Johnson of Georgia. So, is it your opinion, Mr. 
Neumann, that the CBM Program should remain and be made 
permanent?
    Mr. Neumann. We did not reach a conclusion on that. There 
are many competing interests there and it is a decision best 
left to the policymakers. What we did do is talk to a range of 
stakeholders to identify what their concerns would be, either 
for or against continuing the program. And many saw the value 
in continuing the program, and some even suggested that there 
could be changes made to further expand it. But that was not an 
overwhelming viewpoint.
    Mr. Johnson of Georgia. Mr. Hale, how has Ameritrade used 
the CBM process to combat low-quality patents brought against 
it?
    Mr. Hale. Thank you for the question. We have generally 
used it exactly as intended. When patents have been asserted 
against us that fall into the category that it falls under the 
CBM process, we have filed for petitions to initiate reviews. 
And then, it turned around in the district court litigation 
that initiated the issue with the patent and filed stays to 
stop that litigation so that we are not duplicating efforts. 
And that we are not, as intended under the CBM process, we are 
not incurring additional costs for both sides. So at any given 
point there is only one line of litigation, not two.
    Mr. Johnson of Georgia. Thank you. I yield back.
    Mr. Issa. I thank the gentleman. I believe we now go to the 
vice chairman of the full committee, Mr. Collins.
    Mr. Collins. Thank you, Mr. Chairman; I appreciate that. 
And before I get started, there is a letter that was sent back 
in 2013. But I think it reflects the position of BSA and many 
others on this issue that I would like to submit for the 
record.
    Mr. Issa. Without objection, so ordered.
    Mr. Collins. Thank you, Mr. Chairman. Again, Mr. Chairman, 
thanks for holding this hearing today. And thanks for the 
witnesses for being here. I think this is something that I am 
eager to talk about. I think patents, and the U.S. Patent 
System more broadly and to move forward to ensure that the 
United States remains a beacon for innovation, and intellectual 
property rights.
    In talking about the Covered Business Method Transition 
Program, a topic that was a source of considerable debate 
before this very committee just a few years ago. Just under 3 
years ago during this committee markup of the Innovation Act, I 
opposed an amendment that would have extended the Covered 
Business Method Transition Program.
    I opposed the amendment for various reasons, but the chief 
among them was that it would have extended the recently created 
CBM Transition Program 5 years before it was set to expire. At 
that time, we did not know what the world of patent litigation 
would look like in 5 years, and we did not know much about the 
program itself.
    Now, we have the benefit of 3 years of information with 2 
years to go before the CBM Program is set to sunset. To be 
clear, I am concerned now as I was then about the potential 
implications for our economy and U.S. innovation of a program 
that by its nature discriminates among types of inventions. 
Additionally, I remain concerned about expanding or extending a 
program that was specifically implemented to address the well-
defined problem, and not intended in perpetuity.
    I also want to note that the fact that the recently issued 
GAO report states that the use of CBM Program has declined 
since about 2015. I appreciate the input from the GAO and 
relevant stakeholders about the Covered Business Method 
Program. And I think that, as Congress, we have a 
responsibility to review the effectiveness and efficiency and 
efficacy of these programs.
    I am particularly interested today in the hearing on how 
CBM Program has been operating, its impact on the economy and 
innovation, and arguments about whether the extension of the 
Transition Program will be necessary to achieve the 
Congressional intent behind its creation. Many of these issues 
affecting patent litigation have also changed in the 3 years 
since this committee debated the Innovation Act. And this 
committee will need to consider many of those things again and 
look at the issues with fresh eyes.
    I expect that, ultimately, we will be best equipped to 
debate the future of the CBM Program in the context of a 
broader debate on the future of our Patent System, because as 
we have seen every change to our Patent System has ripple 
effects that impact the future of innovation and our economy.
    For all of you here, especially the GAO reporting for the 
testimonies given, I am not going to go back over a lot of what 
you said. I think it is very, and Mr. Hale and Mr. Cooper 
especially in your positions. But I do want to say this this 
committee has very broad jurisdiction in this area. This is the 
next step in, I think, the broad based economy for the next 40 
to 50 years.
    I looked forward and I appreciate the chairman having this 
hearing today. I think these reports are necessary. But I want 
to make sure that as I go far as a member of this committee to 
make sure that our patent, our innovation system, our creative 
process continues to be the place in which people want to 
invest.
    They want to create, they want to put their emphasis and 
time because this is where the best ideas we feel like come 
from. And we do not want that transferred to other countries or 
other areas simply because they have chose to do a better job 
dealing with, basically what I call their creative community, 
that intellectual property space.
    When we understand that, and I think that gives us a good 
basis to go on, I believe the GAO report reflects some things 
that I thought a few years ago, and some other things that I 
think we can continue to work on. I do believe as we look 
forward though this is something we can look at in the picture 
of a bigger contextual issue of patents. And I look forward to 
having that debate as we go forward.
    So I want to thank you for the report. And I thank you for 
the information we have. And for Mr. Hale and Mr. Cooper, 
again, we have had conversations before. I look forward to 
having continued conversations as we go forward. And with that, 
Mr. Chairman, and in the interest of time and a wonderful 
snowstorm outside, I yield back.
    Mr. Issa. The Chairman yields back. We now go to the 
gentlelady from California, Ms. Bass.
    Ms. Bass. Thank you very much. I know votes are going to be 
called soon, so I will be quick. So just a couple of questions; 
I wanted to know if----
    Mr. Issa. If the gentlelady would suspend. If other members 
would like to go vote and come back, we could probably not 
adjourn at all because there is only one vote. So if a couple 
of Members would go and then when they come back if we can that 
would keep us from stopping altogether. Please continue.
    Ms. Bass. Okay. So this is a question that maybe all three 
of you could answer quickly. If it would make more sense to 
have an independent judicial process, like the district court 
litigation settle patent disputes between two parties versus 
the agency that I know some people have said, you know, the 
agency has its challenges. And I wanted to know how many 
patents challenged at the PTAB were also challenged in district 
court, and maybe you could comment on this.
    Mr. Cooper. If I may, so I do not have the specific numbers 
about how many are challenged in court and also at the PTO. I 
think, you know, representing an association that would like to 
see the CBM Program sunset, we still believe that it is 
important that the PTO have a good strong system for reviewing 
patents that it should not have issued in the first place. I 
think that is important to be there in addition to having the 
ability to challenge patents in court if you are sued for 
patent infringement.
    So I think having both is important. Our concern with the 
CBM Program is that it is effectively the government picking 
winning technologies and losing technologies, and that is 
probably not the best way to go.
    Ms. Bass. And what do you say to that, Mr. Hale, in terms 
of picking winning technologies and losing technologies?
    Mr. Hale. So I think that there are two aspects to that. 
One is that, first of all, it seems to have been the sense of 
Congress and we do not disagree that the financial service 
industry was particularly susceptible to these types of 
patents; and this type of resolution mechanism was particularly 
applicable. That being said, we are not opposed to having this 
type of review being available to all industries.
    The second, to answer your first question you asked, which 
is with the CBM process in particular, every instance of a CBM 
in order to initiate a CBM you either have to have been sued or 
have to have threat of suit. And I believe almost all of them 
were actually initiated through lawsuits. And because of the 
CBM's processes stay provision, which is a very strong stay, it 
actually stops the other suit, stops the district court 
litigation almost entirely, so that there is only one track 
going at any given point.
    Ultimately, our view is that the CBM process changes the 
order of consideration, and changes in some cases the person 
who is making the decision. But it does not duplicate effort 
because of the stay and estoppel provisions.
    Ms. Bass. Mr. Neumann.
    Mr. Neumann. Yeah, I would say most of the stakeholders we 
spoke to, and this is a broad cross section of folks, saw value 
in having cost efficient time, more time sensitive, way to have 
the Patent Office reconsider poor-quality patents.
    In our past work in 2016, we found that 70 percent of 
patent examiners felt they did not have enough time to do a 
thorough review of a patent application, which is one of the 
reasons why there are some poorly written patents out there. 
And so, many of the stakeholders believe that having these 
processes was very beneficial to weed out some of those poor 
quality patents more efficiently, and more cost-effectively.
    Ms. Bass. Thanks.
    Mr. Issa. The gentlelady yields back. What we are going to 
do is we are going to recess. If Mr. Collins comes back here 
before I do, he will pick it right back up. And the hope is 
that we will get you out of here, let's say, by 4:00. So, I am 
going to run to the vote and come right back. We stand in 
recess.
    [Recess]
    Mr. Collins [presiding]. We have asked and many other 
members--due to the timing there is going to be no other 
questions. I will ask this, is there any other member of the 
panel, I appreciate you staying, would you like to have a 
brief--anything that you would like to add for this hearing for 
the record? Mr. Neumann.
    Mr. Neumann. No, I do not, thank you.
    Mr. Collins. Mr. Hale.
    Mr. Hale. No, thank you.
    Mr. Collins. Okay, Mr. Cooper.
    Mr. Cooper. No, thank you for the opportunity.
    Mr. Collins. You have all earned great points today. That 
is a wonderful closing statement. I love it. No, this concludes 
today's hearing.
    Thanks for all our witnesses for attending. Without 
objections, all members will have 5 legislative days to submit 
additional material, written questions for the witnesses, and 
additional materials for the record. With that, this hearing is 
now adjourned.
    [Whereupon, at 3:39 p.m., the subcommittee was adjourned.]

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