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Ms. LOFGREN. Madam Chair, I thank Mr. Conyers and Chairman Goodlatte. I am glad we are here today addressing these issues of abusive lawsuits in the patent system.
As has been mentioned by others, we do have a problem, it is widely agreed to, among patent assertion entities, sometimes called patent trolls. These lawsuits, these abusive lawsuits that are brought, can easily cost $2 million to $10 million apiece, and that is why, when a meritless lawsuit is threatened, it is easy to extort a smaller payment to make it go away, and that is what we are trying to deal with here.
This is a big issue for small businesses. Professor Colleen Chien of Santa Clara University, now with the White House, did a study and found that more than half of these suits were against companies with less than $10 million in annual revenue.
And that is why this bill, it is not a perfect bill, but why this bill has such broad support. It is genuinely a bipartisan bill. I am a cosponsor of this bill, along with the Congresswoman Anna Eshoo, Mike Honda, Peter DeFazio, Jared Huffman, and many others. At a time when the country is saying, ``Can't you just work together?'' we have. Reasonable people can differ, which is why we have this debate here today. We have 40 members in the House Judiciary Committee. Only five members voted against reporting this bill out. That is remarkable.
The White House has just issued a very strong statement of administrative policy. They support this bill. So at a time when too often we are seen as the battling Bickersons, we have support across the aisle with the White House to do this.
What does the bill do? It deals with pleading requirements. Oftentimes, these patent assertion entities will allege infringing, but they don't, with any particularity, say what is being infringed.
It does a change in attorneys' fees that matches the existing rule in copyright. I oppose fee shifting in civil litigation generally, but the Congress has, on many occasions, narrowly cast fee shifting to deal with specific problems. This would join that. I would note that the shifts would not occur unless the party's position is unreasonably justified. The court is not to allow this shift if the party has a reasonable case in fact or law or, as my colleague, Mr. Jeffries, had added, a severe economic harm.
I would note that this is supported from start-ups to big companies.
Startup Investors Nationwide Support Broad Patent Reform
Dear Congress: Each year, we invest hundreds of millions of dollars in software and information technology businesses and emerging mobile technologies. Together with other investors, we commit more than $1 billion annually in angel and venture capital that ensures continuing growth of young, high-tech companies employing 1.4 million people. Collectively, we have invested in companies such as Netflix, Twitter, Facebook, Dropbox, Palantir, Kickstarter, and countless other technologies that power American businesses everywhere. We are the fuel in America's startup economy engine.
We write to urge comprehensive legislation to address the troubling growth and success of the patent troll business model. Young, innovative companies are increasingly threatened and targeted by patent troll lawsuits. In fact, the majority of companies targeted by patent trolls have less than $10 million in revenue. And while big companies paid the lion's share of the $29 billion of direct costs resulting from patent troll activities in 2011, the costs borne by small companies are a proportionately larger share of their revenues.
As a result, Congress and the Administration are considering multiple reform proposals. None alone will fix the problem, but together they will make a substantial dent in what one famous troll recently called ``a new industry.''
Successful legislation should make it harder to be a patent troll, and easier for targeted businesses to protect and defend themselves. Legislation should:
Make it easier to efficiently review patents at the Patent Office, as an alternative to litigation. Increase transparency by requiring patent trolls to specify, in complaints and demand letters, which patent and what claims are infringed, and specifically how the offending product or technology infringes.
Limit the scope of expensive litigation discovery.
Require patent trolls to pay legal fees and other costs incurred by prevailing defendants.
Protect end users of technology [e.g., wi-fi, printers and scanners, and APIs) from being liable for infringements by technology providers.
Our Founders did not intend to incentivize patent trolling in the Constitution--nor did Congress intend the Patent Act to promote this industry. Comprehensive legislation to reduce abusive patent litigation will make the patent troll business model less attractive, and will protect software, mobile and information technology entrepreneurs. In turn, our digital economy will continue to grow and so will our national economy.
Gil Bickel, St. Louis Arch Angels, St. Louis, MO; David Bradbury, Vermont Center for Emerging Technologies, Burlington, VT; Glen Bressner, Originate Ventures, Bethlehem, PA; Brad Burnham, Union Square Ventures, New York, NY; Jeff Bussgang, Flybridge Capital, Boston, MA; Steve Case, Revolution Capital Washington, DC; Jeff Clavier, SoftTechVC, Palo Alto, CA; Ron Conway, SV Angel, San Francisco, CA; Mark Cuban, Investor in over 70 startups, Dallas TX; Peter Esperago, Cultivation Capital, St. Louis, MO.
Brad Feld, Foundry Group, Boulder, CO; Nicole Glaros, Techstars, Boulder, CO and New York, NY; David Gold, Access Venture Partners, Westminster, CO; Greg Gottesman, Madrona Venture Group Seattle, WA; Paul Graham, Y Combinator, Mountain View, CA; Bill Gurley, Benchmark Capital, Menlo Park, CA; Reid Hoffman; Greylock Partners, Menlo Park, CA; Kirk Holland, Access Venture Partners, Westminster, CO; Len Jordan, Madrona Venture Group, Seattle, WA; Scott Levine, iSelect Fund, Clayton, MO.
John Lilly, Greylock Partners, Menlo Park, CA; Trevor Loy, Flywheel Ventures, Albuquerque and Sante Fe, NM; Chris Marks, High Country Venture, Boulder, CO; Dan Marriott, Stripes Group, New York, NY; Matt McCall, Pritzker Venture Capital Group, Chicago, IL and Los Angeles, CA; Jim McKelvey, Cultivation Capital, St. Louis; Andrew McLaughlin, BetaWorks, New York, NY; Josh Mendelsohn, Hangar, San Francisco, CA; Jason Mendelsohn, Foundry Group, Boulder, CO; Michael Neril, Webb Investment Network, San Francisco, CA.
Charlie O'Donnell, Brooklyn Bridge Ventures, New York, NY; Alexis Ohanian, Angel Investor, New York, NY; Bijan Sabet, Spark Capital, Boston, MA; Devin Talbott, Enlightenment Capital, Washington, DC; Brett Topche, MentorTech Ventures, Philadelphia, PA; Jorge M. Torres, Silas Capital, New York, NY; Hunter Walk, Homebrew, San Francisco, CA; David Weekly, Startup Founder and Angel Investor, Palo Alto, CA; Fred Wilson, Union Square Ventures, New York, NY.
Professors' Letter in Support of Patent Reform Legislation
To Members of the United States Congress: We, the undersigned, are 61 professors from 26 states and the District of Columbia who teach and write about intellectual property law and policy. We write to you today to express our support for ongoing efforts to pass patent reform legislation that, we believe, will improve our nation's patent system and accelerate the pace of innovation in our country.
As a group we hold a diversity of views on the ideal structure and scope of our nation's intellectual property laws. Despite our differences, we all share concern that an increasing number of patent owners are taking advantage of weaknesses in the system to exploit their rights in ways that on net deter, rather than encourage, the development of new technology.
Several trends, each unmistakable and well supported by empirical evidence, fuel our concern. First, the cost of defending against patent infringement allegations is high and rising. The American Intellectual Property Law Association estimates that the median cost of litigating a moderately-sized patent suit is now $2.6 million, an amount that has increased over 70% since 2001. These and other surveys suggest that the expense of defending even a low-stakes patent suit will generally exceed $600,000. Moreover, the bulk of these expenses are incurred during the discovery phase of litigation, before the party accused of infringement has an opportunity to test the merits of the claims made against it in front of a judge or jury.
The magnitude and front-loaded nature of patent litigation expenses creates an opportunity for abuse. Patentholders can file suit and quickly impose large discovery costs on their opponents regardless of the validity of their patent rights and the merits of their infringement allegations. Companies accused of infringement, thus, have a strong incentive to fold and settle patent suits early, even when they believe the claims against them are meritless.
Historically, this problem has largely been a self-correcting one. In suits between product-producing technology companies, the party accused of infringement can file a counterclaim and impose a roughly equal amount of discovery costs on the plaintiff. The costs, though high, are symmetrical and, as a result, tend to encourage technology companies to compete in the marketplace with their products and prices, rather than in the courtroom with their patents.
In recent years, however, a second trend--the rise of ``patent assertion entities'' (PAEs)--has disrupted this delicate balance, making the high cost of patent litigation even more problematic. PAEs are businesses that do not make or sell products, but rather specialize in enforcing patent rights. Because PAEs do not make or sell any products of their own, they cannot be countersued for infringement. As a result, PAEs can use the high cost of patent litigation to their advantage. They can sue, threaten to impose large discovery costs that overwhelmingly fall on the accused infringer, and thereby extract settlements from their targets that primarily reflect a desire to avoid the cost of fighting, rather than the chance and consequences of actually losing the suit.
To be sure, PAEs can in theory play a beneficial role in the market for innovation and some undoubtedly do. However, empirical evidence strongly suggests that many PAEs have a net negative impact on innovation. Technology companies--which, themselves, are innovators--spend tens of billions of dollars every year litigating and settling lawsuits filed by PAEs, funds that these tech companies might otherwise spend on additional research and design. Surveys also reveal that a large percentage of these suits settle for less than the cost of fighting, and multiple empirical studies conclude that PAEs lose about nine out of every ten times when their claims are actually adjudicated on their merits before a judge or jury.
The impact of these suits is made more troubling by the fact that PAE activity appears to be on the rise. Empirical studies suggest that at least 40%, and perhaps as high as 59% or more, of all companies sued for patent infringement in recent years were sued by PAEs. PAE suits were relatively rare more than a decade ago, and they remain relatively rare today elsewhere in the world.
More worrisome than these bare statistics is the fact that PAEs are increasingly targeting not large tech firms, but rather small business well outside the tech sector. Studies suggest that the majority of companies targeted by PAEs in recent years earn less than $10 million in annual revenue.
When PAEs target the numerous small companies downstream in the supply chain, rather than large technology manufacturers upstream, they benefit in two ways. First, for every product manufacturer, there may be dozens or hundreds of retailers who sell the product, and hundreds or thousands of customers who purchase and use the technology. Patent law allows patent owners to sue makers, sellers, or users. Suing sellers or users means more individual targets; some PAEs have sued hundreds of individual companies. And, more targets means more lawyers, more case filings, more discovery, and thus more litigation costs overall to induce a larger total settlement amount.
Second, compared to large manufacturers, small companies like retailers are less familiar with patent law, are less familiar with the accused technology, have smaller litigation budgets, and thus are more likely to settle instead of fight. In fact, many small businesses fear patent litigation to such an extent that they are willing to pay to settle vague infringement allegations made in lawyers' letters sent from unknown companies. Like spammers, some patent owners have indiscriminately sent thousands of demand letters to small businesses, with little or no intent of actually filing suit but instead with hopes that at least a few will pay to avoid the risk.
This egregious practice in particular, but also all abusive patent enforcement to some extent, thrives due to a lack of reliable information about patent rights. Brazen patent owners have been known to assert patents they actually do not own or, conversely, to go to great lengths to hide the fact that they actually do own patents being used in abusive ways. Some patent owners have also sought double recovery by accusing companies selling or using products made by manufacturers that already paid to license the asserted patent. Still others have threatened or initiated litigation without first disclosing any specific information about how, if at all, their targets arguably infringe the asserted patents.
In short, high litigation costs and a widespread lack of transparency in the patent system together make abusive patent enforcement a common occurrence both in and outside the technology sector. As a result, billions of dollars that might otherwise be used to hire and retain employees, to improve existing products, and to launch new products are, instead, diverted to socially wasteful litigation.
Accordingly, we believe that the U.S. patent system would benefit from at least the following six reforms, which together will help reduce the cost of patent litigation and expose abusive practices without degrading inventors' ability to protect genuine, valuable innovations:
1. To discourage weak claims of patent infringement brought at least in part for nuisance value, we recommend an increase in the frequency of attorneys' fee awards to accused patent infringers who choose to fight, rather than settle, and ultimately defeat the infringement allegations levelled against them.
2. To reduce the size and front-loaded nature of patent litigation costs, we recommend limitations on the scope of discovery in patent cases prior to the issuance of a claim construction order, particularly with respect to the discovery of electronic materials like software source code, emails, and other electronic communications.
3. To further protect innocent retailers and end-users that are particularly vulnerable to litigation cost hold-up, we recommend that courts begin to stay suits filed against parties that simply sell or use allegedly infringing technology until after the conclusion of parallel litigation between the patentee and the technology's manufacturer.
4. To facilitate the early adjudication of patent infringement suits, we recommend that patentees be required to plead their infringement allegations with greater specificity.
And finally, to increase transparency and confidence in the market for patent licensing, we recommend:
5. that patentees be required to disclose and keep up-to-date the identity of parties with an ownership stake or other direct financial interest in their patent rights, and
6. that Congress consider additional legislation designed to deter fraudulent, misleading, or otherwise abusive patent licensing demands made outside of court.
In closing, we also wish to stress that as scholars and researchers we have no direct financial stake in the outcome of legislative efforts to reform our patent laws. We do not write on behalf of any specific industry or trade association. Rather, we are motivated solely by our own convictions informed by years of study and research that the above proposals will on net advance the best interests of our country as a whole. We urge you to enact them.
Professor John R. Allison, The University of Texas at Austin, McCombs School of Business; Professor Clark D. Asay, Penn State University Dickinson School of Law (visiting); Professor Jonathan Askin, Brooklyn Law School; Professor Gaia Bernstein, Seton Hall University School of Law; Professor James E. Bessen, Boston University School of Law; Professor Jeremy W. Bock, The University of Memphis Cecil C. Humphreys School of Law; Professor Annemarie Bridy, University of Idaho College of Law; Professor Irene Calboli, Marquette University Law School; Professor Michael A. Carrier, Rutgers School of Law, Camden; Professor Bernard Chao, University of Denver Sturm College of Law.
Professor Andrew Chin, University of North Carolina School of Law; Professor Ralph D. Clifford, University of Massachusetts School of Law; Professor Jorge L. Contreras, American University Washington College of Law; Professor Rebecca Curtin, Suffolk University Law School; Professor Samuel F. Ernst, Chapman University Dale E. Fowler School of Law; Professor Robin Feldman, University of California Hastings College of the Law; Professor William T. Gallagher, Golden Gate University School of Law; Professor Jon M. Garon, Northern Kentucky University Chase College of Law; Professor Shubha Ghosh, University of Wisconsin Law School; Professor Eric Goldman, Santa Clara University School of Law.
Professor Leah Chan Grinvald, Suffolk University Law School; Professor Debora J. Halbert, University of Hawaii at Manoa Department of Political Science; Professor Bronwyn H. Hall, University of California Berkeley Department of Economics; Professor Yaniv Heled, Georgia State University College of Law; Professor Christian Helmers, Santa Clara University Leavey School of Business; Professor Sapna Kumar, University of Houston Law Center; Professor Mary LaFrance, University of Nevada Las Vegas; William S. Boyd School of Law; Professor Peter Lee, University of California Davis School of Law; Professor Mark A. Lemley, Stanford Law School; Professor Yvette Joy Liebesman, Saint Louis University School of Law.
Professor Lee Ann W. Lockridge, Louisiana State University Paul M. Hebert Law Center; Professor Brian J. Love, Santa Clara University School of Law; Professor Glynn S. Lunney, Jr., Tulane University School of Law; Professor Phil Malone, Stanford Law School; Professor Mark P. McKenna, Notre Dame Law School; Professor Michael J. Meurer, Boston University School of Law; Professor Joseph Scott Miller, University of Georgia Law School; Professor Fiona M. Scott Morton, Yale University School of Management; Professor Lateef Mtima, Howard University School of Law; Professor Ira Steven Nathenson, St. Thomas University School of Law.
Professor Laura Lee Norris, Santa Clara University School of Law; Professor Tyler T. Ochoa, Santa Clara University School of Law; Professor Sean A. Pager, Michigan State University College of Law; Professor Cheryl B. Preston, Brigham Young University J. Reuben Clark Law School; Professor Jorge R. Roig, Charleston School of Law; Professor Jacob H. Rooksby, Duquesne University School of Law; Professor Brian Rowe, Seattle University School of Law & University of Washington Information School; Professor Matthew Sag, Loyola University of Chicago School of Law; Professor Pamela Samuelson, University of California Berkeley School of Law; Professor Jason Schultz, New York University School of Law.
Professor Christopher B. Seaman, Washington and Lee University School of Law; Professor Carl Shapiro, University of California Berkeley Haas School of Business; Professor Lea Shaver, Indiana University Robert H. McKinney School of Law; Professor Jessica Silbey, Suffolk University Law School; Professor Christopher Jon Sprigman, New York University School of Law; Professor Madhavi Sunder, University of California Davis School of Law; Professor Toshiko Takenaka, University of Washington School of Law; Professor Sarah Tran, Southern Methodist University Dedman School of Law; Professor Catherine Tucker, Massachusetts Institute of Technology Sloan School of Management; Professor Jennifer M. Urban, University of California Berkeley School of Law; Professor Samson Vermont, Charlotte School of Law (visiting).
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Ms. LOFGREN. I thank the gentleman for yielding.
Madam Chair, I am afraid I must oppose my colleague's amendment. I believe that the amendment would basically gut core elements of the Innovation Act protections for small business and leave small businesses exposed.
We have discussed the fee-shifting issue, so I want to focus on two other issues: the discovery cost-shifting and the heightened pleading provisions that I think are very important in the bill.
First, on pleading requirements, patent assertion entities often sue and do not reveal what patent the defendant is allegedly infringing or how, and that is why the Innovation Act requires greater particularity in pleading. The bill's requirement includes information that the plaintiffs should already have on hand, but the bill specifically provides an exception for information that is not reasonably accessible to the plaintiff. The amendment would eliminate that provision.
Relative to discovery, one of the ways that patent entities bully defendants is by driving up the cost of litigation through broad discovery requests. Section 3 of the bill directs the court to limit discovery until claim construction occurs in the routine Markman hearing. That gives defendants a break from costly discovery requests until it is more clear what the claims against them are.
Now the bill also says the court shall--that is mandatory--shall require discovery beyond that related to claim construction if it is necessary to ensure a timely resolution of the action. The bill provides the court with discretion to permit discovery to prevent manifest injustice.
I believe that the bill before us is a very important element of protecting against abusive litigation, and the amendment would do damage to it.
And finally, I would just associate myself with the chairman's comments on fee-shifting.
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Ms. LOFGREN. I thank the gentleman for yielding.
Mr. Chairman, while Mr. Rohrabacher and I do not agree on the underlying bill, I do support his amendment.
The Innovation Act would repeal section 145, the right of a patent applicant to appeal an initial PTO determination in Federal court.
This is a long-standing provision of law, and while it is rarely used, and even less often successful, I do believe that it poses at least theoretically a hedge against misconduct in the Patent Office and, at a minimum, will help ensure that the PTO's initial determinations are as meticulous as inventors deserve.
I spoke in favor of this amendment and voted for it when it was offered in the Judiciary Committee, and I continue to support it. I urge my colleagues to vote in favor.
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Ms. LOFGREN. Mr. Chairman, I appreciate the time.
Earlier in the debate, I jumped ahead of myself and addressed the issue of pleadings and discovery costs during the Watt amendment about fee shifting. So I will focus on fee shifting now.
The provision in the bill is absolutely right on. I oppose the English rule generally, but we have created dozens of times instances where the losing party can pay--let me just read the language:
The courts will shift the costs and fees to a non-prevailing party unless the party's position is reasonably justified in fact or law or the fee award would cause economic harm.
The discretion is still with the judicial officer to avoid harm.
In terms of what should be in the bill, I mentioned at the outset that I don't believe this bill is perfect. If it were up to me, the bill would also exempt PTO user-fees from sequestration; it would clarify the scope of prior art and the grace period; it would allow the PTO to continue using its BRI standard in post-grant and inter partes review. I hope that the Senate will address those issues. Certainly, the amendment by Mr. Watt and Mr. Conyers does not.
It pains me when I have to disagree with my ranking member, who I admire so very much, but I do disagree with this amendment. I think it will absolutely gut the bill. I intend to vote against it, and I hope that others join me.
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