ABUSIVE PATENT LITIGATION: THE IMPACT ON

AMERICAN INNOVATION AND JOBS, AND POTENTIAL SOLUTIONS

HEARING
BEFORE THE

SUBCOMMITTEE ON
COURTS, INTELLECTUAL PROPERTY,
AND THE INTERNET
OF THE

COMMITTEE ON THE JUDICIARY

HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
FIRST SESSION

MARCH 14, 2013

Serial No. 11313

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COMMITTEE ON THE JUDICIARY

BOB GOODLATTE,
F. JAMES SENSENBRENNER, JR.,
Wisconsin
HOWARD COBLE, North Carolina
LAMAR SMITH, Texas
STEVE CHABOT, Ohio
SPENCER BACHUS, Alabama
DARRELL E. ISSA, California
J. RANDY FORBES, Virginia
STEVE KING, Iowa
TRENT FRANKS, Arizona
LOUIE GOHMERT, Texas
JIM JORDAN, Ohio
TED POE, Texas
JASON CHAFFETZ, Utah
TOM MARINO, Pennsylvania
TREY GOWDY, South Carolina
MARK AMODEI, Nevada
L LABRADOR, Idaho
RAU
BLAKE FARENTHOLD, Texas
GEORGE HOLDING, North Carolina
DOUG COLLINS, Georgia
RON DeSANTIS, Florida
KEITH ROTHFUS, Pennsylvania

Virginia, Chairman
JOHN CONYERS, JR., Michigan
JERROLD NADLER, New York
ROBERT C. BOBBY SCOTT, Virginia
MELVIN L. WATT, North Carolina
ZOE LOFGREN, California
SHEILA JACKSON LEE, Texas
STEVE COHEN, Tennessee
HENRY C. HANK JOHNSON, JR.,
Georgia
PEDRO R. PIERLUISI, Puerto Rico
JUDY CHU, California
TED DEUTCH, Florida
LUIS V. GUTIERREZ, Illinois
KAREN BASS, California
CEDRIC RICHMOND, Louisiana
SUZAN DelBENE, Washington
JOE GARCIA, Florida
HAKEEM JEFFRIES, New York

SHELLEY HUSBAND, Chief of Staff & General Counsel

PERRY APELBAUM, Minority Staff Director & Chief Counsel

SUBCOMMITTEE

ON

COURTS, INTELLECTUAL PROPERTY,

AND THE

INTERNET

HOWARD COBLE, North Carolina, Chairman

TOM MARINO, Pennsylvania, Vice-Chairman
F. JAMES SENSENBRENNER, JR.,
MELVIN L. WATT, North Carolina
Wisconsin
JOHN CONYERS, JR., Michigan
HENRY C. HANK JOHNSON, JR.,
LAMAR SMITH, Texas
Georgia
STEVE CHABOT, Ohio
JUDY CHU, California
DARRELL E. ISSA, California
TED DEUTCH, Florida
TED POE, Texas
KAREN BASS, California
JASON CHAFFETZ, Utah
CEDRIC RICHMOND, Louisiana
MARK AMODEI, Nevada
SUZAN DelBENE, Washington
BLAKE FARENTHOLD, Texas
HAKEEM JEFFRIES, New York
GEORGE HOLDING, North Carolina
JERROLD NADLER, New York
DOUG COLLINS, Georgia
ZOE LOFGREN, California
RON DeSANTIS, Florida
SHEILA JACKSON LEE, Texas
KEITH ROTHFUS, Pennsylvania
JOE KEELEY, Chief Counsel
STEPHANIE MOORE, Minority Counsel

(II)

CONTENTS
MARCH 14, 2013
Page

OPENING STATEMENTS
The Honorable Howard Coble, a Representative in Congress from the State
of North Carolina, and Chairman, Subcommittee on Courts, Intellectual
Property, and the Internet ..................................................................................
The Honorable Melvin L. Watt, a Representative in Congress from the State
of North Carolina, and Ranking Member, Subcommittee on Courts, Intellectual Property, and the Internet ..........................................................................
The Honorable John Conyers, Jr., a Representative in Congress from the
State of Michigan, Ranking Member, Committee on the Judiciary, and
Member, Subcommittee on Courts, Intellectual Property, and the Internet ..
The Honorable Bob Goodlatte, a Representative in Congress from the State
of Virginia, and Chairman, Committee on the Judiciary .................................

1
3
5
6

WITNESSES
Mark Chandler, Senior Vice President and General Counsel, Cisco Systems,
Inc.
Oral Testimony .....................................................................................................
Prepared Statement .............................................................................................
Janet L. Dhillon, Executive Vice President, General Counsel and Corporate
Secretary, JCPenney Company, Inc.
Oral Testimony .....................................................................................................
Prepared Statement .............................................................................................
John Boswell, Senior Vice President and General Counsel, SAS Institute,
Inc.
Oral Testimony .....................................................................................................
Prepared Statement .............................................................................................
C. Graham Gerst, Partner, Global IP Law Group, LLC
Oral Testimony .....................................................................................................
Prepared Statement .............................................................................................
Philip S. Johnson, Chief Intellectual Property Counsel, Johnson & Johnson
Oral Testimony .....................................................................................................
Prepared Statement .............................................................................................
Dana Rao, Vice President of Intellectual Property and Litigation, Adobe Systems
Oral Testimony .....................................................................................................
Prepared Statement .............................................................................................

9
12
35
37
42
44
49
51
55
57
78
80

LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING

Material submitted by the Honorable Melvin L. Watt, a Representative in
Congress from the State of North Carolina, and Ranking Member, Subcommittee on Courts, Intellectual Property, and the Internet .........................

113

APPENDIX
MATERIAL SUBMITTED

FOR THE

HEARING RECORD

Prepared Statement of the Honorable Melvin L. Watt, a Representative in

Congress from the State of North Carolina, and Ranking Member, Subcommittee on Courts, Intellectual Property, and the Internet .........................
(III)

147

IV
Page

Prepared Statement of the Honorable George Holding, a Representative in

Congress from the State of North Carolina, and Member, Subcommittee
on Courts, Intellectual Property, and the Internet ...........................................
Material submitted by the Honorable Jason Chaffetz, a Representative in
Congress from the State of Utah, and Member, Subcommittee on Courts,
Intellectual Property, and the Internet ..............................................................
Letter from C. Graham Gerst, Partner, Global IP Law Group, LLC ..................
Letter from Bill Hughes, Senior Vice President, Government Affairs, Retail
Industry Leaders Association (RILA) .................................................................
Submission entitled The Costs and Benefits of United States Patents ...........
Letter from the Coalition of Patent Fairness ........................................................
Prepared Statement of the American Bankers Association .................................
Letters from John Lindgren, President and Chief Executive Officer, MOSAID
Technologies Incorporated ...................................................................................
Prepared Statement of Bruce Lehman, on behalf of TeleCommunications Systems, Inc. ..............................................................................................................
Response to Questions for the Record from Mark Chandler, Senior Vice President and General Counsel, Cisco Systems, Inc. ................................................
Response to Questions for the Record from Janet L. Dhillon, Executive Vice
President, General Counsel and Corporate Secretary, JCPenney Company,
Inc. .........................................................................................................................
Response to Questions for the Record from John Boswell, Senior Vice President and General Counsel, SAS Institute, Inc. .................................................
Response to Questions for the Record from C. Graham Gerst, Partner, Global
IP Law Group, LLC .............................................................................................
Response to Questions for the Record from Philip S. Johnson, Chief Intellectual Property Counsel, Johnson & Johnson .......................................................
Response to Questions for the Record from Dana Rao, Vice President of
Intellectual Property and Litigation, Adobe Systems .......................................

158
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171
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220
222
229
234
236
239
243
249
258

ABUSIVE PATENT LITIGATION: THE IMPACT

ON AMERICAN INNOVATION AND JOBS, AND
POTENTIAL SOLUTIONS
THURSDAY, MARCH 14, 2013

HOUSE
SUBCOMMITTEE

OF

REPRESENTATIVES

ON COURTS, INTELLECTUAL
AND THE INTERNET

COMMITTEE

ON THE

PROPERTY,

JUDICIARY

Washington, DC.
The Subcommittee met, pursuant to call, at 11:36 a.m., in room
2141, Rayburn Office Building, the Honorable Howard Coble
(Chairman of the Subcommittee) presiding.
Present: Representatives Coble, Marino, Goodlatte, Chabot, Issa,
Poe, Chaffetz, Amodei, Farenthold, Collins, DeSantis, Rothfus,
Watt, Conyers, Johnson, Chu, Deutch, Bass, Richmond, DelBene,
Jeffries, Nadler, Lofgren, and Jackson Lee.
Staff Present: (Majority) Vishal Amin, Counsel; Olivia Lee, Clerk;
and (Minority) Stephanie Moore, Minority Counsel.
Mr. COBLE. The Subcommittee will come to order. Without objection, the Chair is authorized to declare recesses of the Subcommittee at any time.
We welcome all of our witnesses and others in the audience
today.
Let me go off the record for a moment.
[Pause.]
Mr. COBLE. Good morning, again. And as Yogi Berra once said,
it is deja vu all over again.
Although the ink from the American Inventors Act of 2011 is still
setting, the first topic for our Subcommittee in the 113th Congress
is patent litigation.
In 1999, the American Inventors Protection Act dealt with submarine patents, and although the recently enacted landmark legislation, Leahy-Smith America Invents Act, is in the process of overhauling our patent system, frivolous patent litigation continues to
stifle innovation and job creation.
Patent assertion entities, or patent trolls, appear to be at the
root of many problems. The Leahy-Smith America Invents Act of
2011 reestablished the U.S. system as a global standard. The U.S.
Patent and Trademark Office has been working diligently for the
past 18 months implementing many of AIAs provisions, and we
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2
probably will not fully realize its innovative benefits and related
job growth until this implementation process has run its course.
That being said, the AIA has not resolved all of the drag created
by frivolous patent lawsuits. It is my belief that a number of patents that have been issued or are currently being reviewed under
the old system have enabled patent trolls to game the system.
Patent trolls have also sought out weak or overbroad patents to
foster more litigation. To ensure that the American economy does
not suffer due to the legal gamesmanship that is currently taking
place, it is important for us to consider ways to remedy the situation.
There are many ideas out there to deal with various aspects of
abusive patent litigation. One idea is the SHIELD Act which would
allow fee shifting in certain patent cases to the prevailing party
who asserts invalidity or no infringement of the patent.
Although another idea deals with patent discovery abuse, that
would limit discovery to court documents and require the party
seeking initial discovery to bear the cost.
Another idea deals with providing stays of action against a nonmanufacturing party in patent cases.
Apart from the legislative process, there may also be ways that
our courts, the U.S. Patent and Trademark Office, and litigants can
help remedy the patent troll phenomenon. All options should be on
the table, it seems to me, for consideration.
Another tangential issue that is not a priority for todays hearing, but I am concerned, is the result of patent litigation deals with
federally mandated services. These services transmit the callers location alongside the 911 call and PAEs or patent trolls have found
secure, wireless technology to be fertile ground. This is unfortunate
and could seriously undermine public safety.
Needless to say, we have an excellent panel for todays hearing,
with far more insightful and enlightening testimony on how we can
curtail abusive patent litigation in America.
At this juncture, I am going to reserve the balance of my time
and recognize the Ranking Member, the distinguished gentleman
from North Carolina.
But first of all, Mel, if you will, let me swear in the witnesses,
if you would.
Each of the witnesss written statements will be entered into the
record in its entirety.
I ask that each witness summarize his or her testimony in 5
minutes or less, if possible. You will not be keelhauled if you violate that, but we would like for you to stay within the 5-minute
rule, if possible.
To help you stay within that time, there is a shining light on
your table. When the light switches from green to yellow, you have
will have 1 minute to conclude your testimony. When the light
turns red, it signals the witnesss 5 minutes have expired.
I will begin by swearing in our witnesses before introducing
them.
If you would, please, all rise?
[Witnesses sworn.]
Mr. COBLE. Let the record reflect that the witnesses answered in
the affirmative.

3
We appreciate it. You may be seated. It is good to have you with
us.
Now, I am pleased to recognize the distinguished gentleman from
North Carolina, Mr. Mel Watt, for his opening statement.
Mr. WATT. Thank you, Chairman Coble.
And of course, this is our first opportunity to congratulate you
publicly on your Chairmanship and note how pleased I am that two
North Carolinians sit at the leadership of this important Subcommittee. I also am looking forward to working with Vice Chairman Marino.
I also want to acknowledge that one of our
Mr. COBLE. If you will suspend for a minute, Mel? I am sorry,
Mel.
When I depart, the gentleman from Pennsylvania will assume
the Chair.
Mr. Watt.
Mr. WATT. Also, I want to recognize that one of our witnesses
today is from one of our North Carolina constituent companies,
SAS, which was very helpful to us during the debate leading up to
the passage of the patent reform legislation in incorporating the
joinder provisions that were designed to address some of the issues
we continue to examine today.
Critics of the patent system, including many high-tech and software companies, believe that trolls contribute to the proliferation
of poor quality patents. Ultimately, these critics assert trolls force
manufacturers to divert their resources from productive endeavors
to combat bogus infringement suits. Other companies and individuals argue that licensing is a standard and time-honored component of the patent system. They also assert that some proposals to
change certain provisions in the Patent Act will disadvantage many
legitimate companies, vendors, and universities.
If this characterization of the debate resonates, it is with good
reason. Those were the words of then-Chairman Smith at a hearing
of the Subcommittee entitled, Patent Trolls: Fact or Fiction? June
15, 2006.
Then-Ranking Member Howard Berman made a statement at
that time, at the same 2006 hearing, that still resonates today, at
least with me. He said, Perhaps the place to start at this hearing
is not the question of whether patent trolls are fact or fiction, but
rather the definitional question of what is a patent troll.
Almost 7 years later, some things have changed and some things
have remained the same. There is widespread acknowledgment
that so-called patent trolls or patent assertion entities do exist and
that they impose a substantial cost on innovation for the companies
caught in their crosshairs by engaging in litigation strategies that
game the system.
Much has been done to address these abusive practices. In 2006,
the Supreme Court, in eBay v. MercExchange, arguably made it decisively more difficult for patent assertion entities to obtain injunctions against infringing products where money damages were sufficient to remedy the infringement.
This arguably made litigation in Federal court for the purposes
of extracting unwanted settlements less attractive, at least in so

4
far as it thwarted or frustrated the ability of companies to continue
to produce the product in question.
The Federal Circuit has increasingly issued orders of mandamus
to address venue abuse, disrupting the tactic of forum shopping
and the dubious joinder of defendants with tenuous connections to
the claim.
The America Invents Act also sought to curtail the practice of
joining unrelated defendants who, based on entirely different acts,
are accused of infringing the same patent.
The America Invents Act also gave the Patent and Trademark
Office additional tools to enhance patent quality. Of note are the
post-grant review procedures that will allow early challengers to
weed out poor quality patents.
The PTO has also embarked upon a process to aid in deciphering
ownership. This real party in interest proposal will require patent
applicants to disclose and update real parties in interest information, including transfer of ownership throughout patent prosecution. This will add transparency to the process and enable patent
users to identify whether and from whom they should seek to license.
This will also undercut the ploy of hiding ownership until infringement occurs when then suing to enforce the patent.
So 6 years since the patent troll hearing, much has been done
that acknowledges and tackles certain behaviors that must be discouraged. But acknowledgment of the problem does not expose its
magnitude, or enlighten us on the specific entities that are at the
root of the problem.
This definitional problem, highlighted by Mr. Berman years ago,
was recently echoed by Federal Court Judge Randall Rader in a recent speech, when he said that a patent troll can be anybody who
asserts a patent far beyond the value of its contribution to the art.
He went on to say, That means any institution can be a troll.
Nor has the marketplace helped in streamlining our task. Late
last year, a group of 12 high-profile companies together with a
much-maligned patent troll purchased Kodak patents for over $500
million, saving it from bankruptcy. News reports indicate that the
patent troll will retain ownership of the patents.
Under the deal, the 12 companies will be immune from suit on
those patents for which they were alleged infringers at the time of
the purchase. The purchase undoubtedly saved thousands of jobs
and it insulates innovative companies from what would have been
viewed as normal litigation had Kodak been able to survive without
the sale to press its claims.
But it also enables a non-practicing entity to pursue litigation
against other infringers on patents duly acquired from Kodak.
The GAO response to the mandate in the America Invents Act,
that it study patent troll litigation, underscores the problem of defining both the entities and activities that ought to be scrutinized.
Although the GAO study has yet to be released, and they continue to work to meet the mandate, they initially questioned the
existence of reliable data or reliable methods to identify trolls.
When anyone can be a troll, the task of Congress to craft legislation targeting only trolls becomes elusive.

5
Proposals have emerged to target specific entities, like the
SHIELD Act. Others aim at specific phases of litigation, like e-discovery. Others directly challenge patentability altogether, specifically they call to eliminate or restrict software patents. And one
proposes to give judges greater latitude to impose attorneys fees or
other sanctions by lowering the exceptional case standard under
current law.
While I believe that there is abuse in patent litigation, particularly in suits against downstream users, we should be cautious in
considering remedies that focus on disincentivizing poorly defined
entities without examining the collateral effects on the system as
a whole.
Moreover, I am concerned that an insular view that only seeks
to deter one class of conduct without examining the incentives that
may unintentionally be provided to others is wrongheaded and may
result in todays prey becoming tomorrows predators.
Erecting overly broad barriers to enforcing patents could lead to
infringers having little or no incentive to respect the patent owner,
which would, in turn, destabilize the marketplace and devalue patents.
In a letter to the Subcommittee, which I offer for the record, renowned civil rights procedure and Federal courts expert, Professor
Arthur Miller, reminds us that, From its inception, the U.S. system was designed to encourage people to buy and sell patents, because doing so enabled the ordinary worker or inventor that didnt
have capital to commercialize his or her own discoveries to still
participate in the economic upside of inventing and publishing
those inventions. This ability to license patent rights turned inventing into a career path for thousands of peoplebut technically
creative citizens.
As we continue to examine the competing data and explore possible solutions, I hope that we will do so with all that background
in mind. While we should seek meaningful reforms, I believe that
measures that would up-end or create more uncertainty and litigation about definitions in other parts of the judicial system are illadvised.
I thank the Chairman for his indulgence, and I yield back, and
look forward to listening to the witnesses.
Mr. COBLE. I thank the gentleman.
The Chair recognizes the distinguished Ranking Member of the
full Committee, the gentleman from Michigan, Mr. Conyers.
Mr. CONYERS. Thank you, Chairman Coble.
I come here with a couple problems, and I apologize to this distinguished group of witnesses that have to listen to us first. And
then after you are thoroughly exhausted, we listen to you.
But I do want to commend you, Chairman. We have a pretty
even distribution of the witnesses here. We have two people with
us that have some reluctance about the SHIELD Act and patent
assertion entities.
But let me get to the heart of the matter, as far as I am concerned.
We have a measure before us that the plaintiff pays and the defendant, who might be the alleged patent infringer, pays nothing,
and this is disturbing.

6
We have a situation in which, in this kind of system, the corporations can pressure injured parties into settlements, because the
dangers are so much greater for a small business. And I hope we
have some discussion about that.
In my view, so far, the law already provides a balanced approach
to fee shifting. And to the extent the bill is designed to protect
against meritless claims of patent infringement, I suspect that the
tools to deal with this already exist.
So I am going to listen carefully, but, if in the course of your
presentation or discussion that we will share with each other, I
want to try to find out if most of you agree with me that current
patent law already allows a judge to award attorney fees for
meritless cases, patent law allows that a court may award reasonable attorney fees for the prevailing party in exceptional cases.
And most of all, why cant we fix this problem by improving patent quality and notice of patent ownership? What is the big deal?
The America Invents Act directed the GAO to study the consequences of this kind of litigation and will soon make recommendations. And so we look forward to reviewing these findings.
The final rules of the America Invents Act were implemented
last September, and I think they will help address this abusive behavior. So we should work with PTO, all of us, to require better
notice requirements of patent ownership to enable folks to avoid infringement.
This Congress can make sure that, going forward, the Patent and
Trademark Office retains its fees, all of its fees, to hire more patent
examiners to allow them to find all of the relevant prior art for
every patent application.
So I am happy to join you. I invite your best thinking on this
subject, and I thank the Chairman for allowing me this time and
return the balance of it.
Mr. MARINO [presiding]. Thank you, Mr. Conyers.
The Chair now recognizes the Chairman of the full Judiciary
Committee, Congressman Goodlatte.
Mr. GOODLATTE. Thank you, Mr. Chairman.
During the last Congress, we passed the America Invents Act.
That bill was the most significant reform to our patent system in
my lifetime. The AIA modernizes our patent system and sets it on
the right path for decades to come.
The AIA included a number of provisions that went directly to
addressing the issues surrounding patent quality. The PTO has
new programs in place to ensure higher quality patents that can
stand up to review, setting the bar higher so that quality control
starts on the front end rather than relying on the Federal court
system to fix problems.
The U.S. patent system is designed to be fair, meeting our international obligations and not discriminating against any field of
technology.
The strength of the U.S. patent system relies on the granting of
strong patents, ones that are truly novel and nonobvious inventions, those that are true innovations and not the product of legal
gamesmanship.
An example of a positive retrospective provision from the AIA is
the work being done to implement a transitional program to correct

7
the egregious errors made in the granting of a wide range of business method patents.
This program will provide the PTO with a fast, precise vehicle
to review low-quality business method patents, which the Supreme
Court has acknowledged are often abstract and overly broad. This
program will make our patent system stronger and better, and it
may even make sense to make it permanent in the future and expand its applicability to other nontechnological patents.
While the AIA paved the way for higher quality patents on the
front end, there were a few issues that were left on the cutting
room floor during the last Congress that could help go more directly to the immediate issues surrounding patent assertion entities, or patent trolls.
Abusive patent litigation is a drag on our economy. Everyone
from independent inventors to startups to mid- and large-sized
businesses face this constant threat.
The tens of billions of dollars spent on settlements and litigation
expenses associated with abusive patent suits truly represent wasted capital, wasted capital that could have been used to create new
jobs, fund R&D, and create new innovations and technologies that
would promote the progress of science and useful arts.
Nonpracticing entities are those that hold patents, but do not
practice or produce an actual product based on those patents. The
term NPE covers everything from universities to high-technology
companies that focus on R&D, but monetize their research through
legitimate licensing.
But within that universe, there are a specific subset of entities,
PAEs, which oftentimes acquire weak or poorly granted patents
and proceed to send blanket demand letters, or file numerous patent infringement lawsuits against American businesses with the
hopes of securing a quick payday.
Many of these PAEs file lawsuits against small- and medium-size
businesses, targeting a settlement just under what it would cost for
litigation, knowing that these businesses will want to avoid costly
litigation and probably pay up.
PAE lawsuits claim ownership over basic ideas, such as sending
a photocopy to email, podcasting aggregated news articles, offering
free Wi-Fi in your shop, or using a shopping cart on your Web site.
Something is terribly wrong here. The patent system was never
intended to be a playground for trial lawyers and frivolous claims.
We need to work on reforms to discourage frivolous patent litigation and keep U.S. patent laws up-to-date.
Abusive patent troll litigation strikes at the very heart of American innovation and job creation, and that is why Congress, the
Federal courts, and the PTO should continue to take the necessary
steps to ensure that the patent system lives up to its constitutional
underpinnings.
I look forward to hearing from all of our witnesses on the issue
of abusive patent litigation and potential solutions to this growing
problem in order to ensure that we continue to promote American
ingenuity, innovation, and jobs.
Thank you, Mr. Chairman.
Mr. MARINO. Thank you, Chairman.

8
Initially, I am going to introduce each of our witnesses. I want
to thank you for being here today. Once you are introduced, then
you will have up to 5 minutes to make an opening statement. You
do not have to take 5 minutes, and I reserve the right to determine
whether I will use the keelhauling if one goes over 5 minutes, particularly with us up here.
So to begin with, our first witness today is Mr. Mark Chandler,
Senior Vice President, General Counsel, and Secretary of Cisco
Systems, Inc. Mr. Chandler leads a team of 250 professionals and
has served in that role since 2001. Prior to his current position, he
was the companys managing attorney for the Middle East and African region, based in Paris. Mr. Chandler joined Cisco in 1996,
when the company acquired StrataCom, where he served as General Counsel. Mr. Chandler received his bachelor degree in economics from Harvard College and his law degree from Stanford Law
School.
Welcome, Mr. Chandler.
Mr. CHANDLER. Thank you, Mr. Chairman, Ranking Member
Watt, Chairman Goodlatte.
Mr. MARINO. I am to go through and introduce everyone.
Our second witness is Ms. Janet Dhillon, Executive Vice President, General Counsel, and Secretary for JCPenney, Inc. Prior to
joining JCPenney in February 2009, she served for 5 years at U.S.
Airways as Senior Vice President and General Counsel. In that
role, she directed the airlines corporate governance and legal affairs, including litigation, commercial transaction, and regulatory
matters. Ms. Dhillon received her J.D. from UCLA Law School and
her bachelors degree from Occidental College, graduating magna
cum laude.
Our third witness is Mr. Boswell, Senior Vice President, Chief
Legal Officer, and Corporate Secretary of SAS, pronounced sass,
Institute, where he manages a group of 40 attorneys and 220 staff
members globally. He joined SAS in 1991 as a Senior Marketing
Counsel, where he authored many of the companys standard license agreements. Mr. Boswells prior experience includes serving
as President of Vista Development, a software company, and General Counsel and Secretary for Raima, another software company.
Mr. Boswell attended the University of South Carolina at Columbia, where he received both his law degree and bachelors degree
in philosophy.
Our fourth witness is Mr. Graham Gerst, partner at the Global
IP Law Group, where he specializes in patents including sales, licensing, and litigation. Before joining Global IP Law Group in
2009, he served as Senior Counsel to the Deputy Attorney General
at the Department of Justice, handling technology-related security
matters, international IP enforcement, and computer forensics. He
also served as Special Assistant U.S. Attorney and as Deputy U.S.
Coordinator for International IP Enforcement. Prior to that, Mr.
Gerst spent 9 years as partner at Kirkland and Ellis, specializing
in patent litigation. Mr. Gerst received hisgood point, Mr. Nadler.
Okay, I think we got it. Thank you.
Mr. Gerst spent 9 years as partner at Kirkland and Ellis, specializing in patent litigation. Mr. Gerst received his J.D., cum laude,

9
from the University of Chicago Law School and bachelors degree,
cum laude and with honors, from Williams College.
Our fifth witness is Mr. Philip Johnson, Senior Vice President
and Chief Intellectual Property Counsel at Johnson & Johnson,
where he manages a group of 100 patent attorneys in the United
States and in Europe. Prior to joining Johnson & Johnson in January 2000, he worked in the private sector for 27 years. Mr. Johnson
also served as trial counsel in more than 100 patent cases, with
more than 50 cases resulting in reported decisions in the Federal
District Courts. Mr. Johnson received his bachelor of science degree, cum laude, from Bucknell University and his law degree from
Harvard Law School.
Last but not least, our sixth witness and final witness is Mr.
Dana Rao, Vice President and Associate General Counsel for Intellectual Property and Litigation for Adobe Systems. Prior to joining
Adobe, he served as Associate General Counsel of Intellectual Property at Microsoft for 11 years. Mr. Rao received his BSEE, bachelor
of science in electrical engineering, degree from Villanova University and his J.D. from George Washington University Law School.
Mr. Rao also worked as an engineer at GE Astro Space before attending law school.
I want to welcome you all and thank you for being here. And we
will begin with no more than 5 minutes with Mr. Chandler.
Thank you.
TESTIMONY OF MARK CHANDLER, SENIOR VICE PRESIDENT
AND GENERAL COUNSEL, CISCO SYSTEMS, INC.

Mr. CHANDLER. Mr. Chairman, Ranking Member Watt, Chairman Goodlatte, Members of the Subcommittee, I apologize for my
jumping the gun, but I am eager to testify before you today about
abusive patent litigation.
Mr. MARINO. That is quite all right. I think I led you on there
for a moment, so I apologize.
Mr. CHANDLER. This Subcommittee and the Judiciary Committee
as a whole have consistently shown leadership on a bipartisan
basis in addressing problems in the patent system, and for that, we
are grateful.
I have testified previously on the economically destructive nature
of certain aspects of patent litigation. In fact, since the first time
I testified on this issue in 2006, Cisco has spent a third of a billion
dollars in legal fees alone related to this type of litigation.
This problem has now spread to my customers and partners, retailers like JCPenney, as well as small businesses, hospitals, auto
companies, the telecom companies that use our equipment. In
short, this problem has now spread from Silicon Valley to Main
Street.
I am here today in support of three legislative changes: first, passage of the SHIELD Act or other means to discourage the procedural abuses that feed this litigation; second, completing a technical fix to the post-grant opposition provision that was in the AIA;
and third, slowing down patent assertion entity, or PAE, use of the
International Trade Commission as another shakedown mechanism.

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As general counsel of Cisco, I am responsible both for intellectual
property and for litigation for the worlds largest manufacturer of
telecom equipment. This year, we expect to receive our ten-thousandth U.S. patent, a reflection of our long-term investment in
telecom innovation, and our commitment to a strong patent system.
However, despite spending over $6 billion per year on R&D, employing over 20,000 engineers in the U.S., we currently spend more
than $50 million a year on legal fees, fighting about 50 PAE litigations, a phenomenon that did not exist for us a decade ago. We
have virtually no patent litigation with companies that make products.
In one current matter, a PAE, which bought nearly expired patents from a large chip manufacturer, has targeted 13,000 entities,
including small businesses, retirement homes, childrens health
clinics, restaurants, which happen to offer Wi-Fi to their customers
using equipment supplied by Netgear, Motorola, my company, and
others.
Tellingly, much of that equipment is already licensed, because
they include chips costing just a few dollars apiece that are made
by licensed manufacturers.
This PAE tells these targets, however, that unless they pay up
$2,000 or $3,000 per location within 2 weeks, they will be sued and
have to engage counsel to review thousands of pages of documents.
While we are pursuing our rights against this PAE in court, this
case is just a symptom, sort of like lab mice running through a
maze andactually, I wanted to say rats, but my staff asked me
to soften itlike lab mice running through a maze because there
is food at the end, PAEs simply follow the incentives in their ecosystems. It is up to Congress to redesign the maze to remove the
incentive for antisocial behavior, so that patents are used to defend
actual markets for real products.
First, we need to fix the cost asymmetry by making PAEs pay
when they bring litigation on weak patents and drive costs up by
abusing discovery or using procedural games. The SHIELD Act
starts us down that road, and we command you, Congressman
Chaffetz, and also Congressman DeFazio, for your efforts in that
regard.
For instance, PAEs would be more likely to voluntarily stay their
patent litigation if the patent office has found cause to commence
a reexam if they are the ones who face both sides costs for fruitless
litigation if the patents are invalidated.
Now that the AIA has speeded up the time for reexams, there is
no excuse for refusing such a stay.
Second, many asserted PAE patents are weak, either because
they are invalid or cover very narrow inventions. PAEs ultimately
lose 92 percent of the time of the court, versus 60 percent for other
plaintiffs.
The AIA, as passed for this by this Committee, included a new
procedure to challenge weak patents when they are first issued.
But somehow the language changed to raise an unreasonable estoppel bar to those challenges before it was voted on the floor. Congress should fix what leaders in both chambers have called a scriveners error.

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Third, many PAEs now use the ITC as an additional shakedown
forum. The ITCs mission is to protect U.S. industries and universities by excluding foreign knockoffs. PAEs use the ITC as leverage
for larger settlements.
Face it, they do not want an injunction; they do not make a product. They just want the money.
We recently spent $13 million defending ourselves in the ITC
against a Canadian PAE called MOSAID, using a patent originally
created in Israel, but trying to keep our products out of the United
States, which the ITC judge ultimately called out for its wrongdoing for improperly trying to concoct a domestic industry.
Finally, we need more clarity on how damages should be calculated, as uncertain damage awards are one of the biggest incentives for patent profiteering. We applaud Chief Judge Rader, Judge
Posner, and others efforts to focus damage calculations on the
value of the invention itself, rather than on systems which use the
inventions.
In conclusion, the $50 million my company spends annually on
patent litigation does not grow on trees. To meet my budget, I have
reduced the number of new patent filings we make each year from
1,000 to 700, in order to fund the litigation.
This isnt a trade-off American industry should face. We ask for
your help in having the patent system operate as it did for over
200 years before being transformed by 21st-century financial operators into a casino unrelated to innovation.
Thank you.
[The prepared statement of Mr. Chandler follows:]

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Appendix A:
RPX Research Patent Litigation Data (20062012)

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Appendix B:
ITC Working Group white paper

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Mr. MARINO. Thank you, Mr. Chandler.
Ms. Dhillon, please.
TESTIMONY OF JANET L. DHILLON, EXECUTIVE VICE PRESIDENT, GENERAL COUNSEL AND CORPORATE SECRETARY,
JCPENNEY COMPANY, INC.

Ms. DHILLON. Thank you. Good afternoon. And I appreciate the

opportunity to appear before you this afternoon.
Every day, stories are written about patent lawsuits between
large technology companies, but very little is reported about the
abusive patent lawsuits filed against retailers like JCPenney.
Through my testimony, I hope that the Subcommittee will have
a better understanding of the constant struggle by JCPenney and
other retailers to contain the damaging effects of abusive lawsuits
that are brought by an ever-growing group of increasingly sophisticated and well-financed patent trolls.
My name is Janet Dhillon. I am the executive vice president,
general counsel, and corporate secretary of JCPenney. JCPenney is
a 111-year-old company. We operate 1,100 stores in 49 states, and
we employ over 100,000 team members.
Our business model is simple. We sell quality, affordable mens,
womens, and childrens apparel and footwear, and a collection of
home products. While our business model is simple, the means that
we use to promote and deliver our products and services to our customers is not.
As customers embrace and utilize technology in their daily lives,
they expect retailers to do the same. And, therefore, to support and
deliver the services to our customers, we are employing innovative
technology to heighten the shopping experience, both in our stores
and online.
When I joined JCPenney over 4 years ago, we had no patent
cases, and I did not expect that we ever would. We are a department store. But over the past 4 years, the company has had to defend or settle over two dozen patent infringement lawsuits that
have absolutely nothing to do with what we sell. These suits forced
the company to invest in an infrastructure to defend these cases
and to hire sophisticated outside counsel who charge well for their
services.
And the number of lawsuits is just continuing to grow. In 2012,
the number of patent suits increased over the 3,600 that had been
filed in 2011. And for the first time, a majority of these cases were
filed by patent trolls.
The fact that our company headquarters is in the Eastern District of Texas, and that we are increasing our use of technology, are
two reasons that JCPenney has become a target. The other core
problem is that patent trolls attempt to extend the reach of the
issued patent far beyond the metes and bounds of what is allowed
by the PTO.
Please understand, JCPenney is a responsible user of technology.
We pay the license fees that we owe when we license technology.
But what patent trolls are attempting to do is something fundamentally different from the way the process was designed to
work.

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The PTO awards the inventor a narrow invention, but long after
the issuance, most times near the end of the life of the patent, the
patent is acquired by the troll who then attempts to enforce the
patent far beyond what the invention intended.
We have been sued for displaying catalog images and having
drop-down menus on our Web site, activating gift cards at the
point-of-sale, being able to browse our mobile Web site on a phone,
or enabling the customer to put her purchases in an electronic
shopping bag.
We have also been subject to multiple claims for providing information regarding our store locations on a mobile phone.
These patents date back to the late 80s and the early 90s, have
had multiple owners with minimal or no continuing involvement by
the actual inventor.
Defending suits against broadly asserted patents that are 15 to
25 years old is very difficult. The trolls know that the evidence necessary to invalidate these patents has been discarded, potential
witnesses have died, memories have faded, and that reconstructing
the prior art can be almost impossible, and in all cases is extremely
expensive.
And the cost of defending these suits is why we have to settle
so many of them without a judgment on the merits, which means
that the companies often settle even though there is no actual infringement, and the patent holders are compensated far beyond
what they have invested to acquire these patents.
A study by the American Intellectual Property Law Association
reported that the median cost of litigating a patent case, asserting
a single patent through trial, is between $650,000 and $5 million.
The discovery phase alone costs between $350,000 and $3 million.
In the retail business, our margins are already thin and the decision to settle or go to trial and spend millions of dollars litigating
what we know is a junk patent has to be weighed against growing
our business.
Unlike retail, patent trolls do not manufacture or sell any product to American consumers. They do not build stores. They do not
contribute to charities in our communities. They do not create local
jobs. And they do not participate in civic organizations.
JCPenney does all of those things. What patent trolls do is
produce lawsuits against retailers and other businesses just to enrich themselves.
At the end of the day, companies like ours have to ask a simple
question: Do we pay to settle, or do we spend millions of dollars
to invalidate patents that we know are simply junk and that we
are not infringing on in the first place?
It is a situation that no general counsel should have to be put
in to, but it is something that I and my colleagues face on a regular
basis. That is why I look forward to continuing this dialogue with
the Committee in hopes of finding some solutions to curtailing
these abusive suits, while maintaining a robust patent system.
Thank you.
[The prepared statement of Ms. Dhillon follows:]

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Mr. MARINO. Thank you, Ms. Dhillon.
Mr. Boswell, please.
TESTIMONY OF JOHN BOSWELL, SENIOR VICE PRESIDENT
AND GENERAL COUNSEL, SAS INSTITUTE, INC.

Mr. BOSWELL. Mr. Vice Chairman Marino, Ranking Member

Watt, Members of the Subcommittee, SAS is a privately held software company based in the great State of North Carolina.
We have been in business since 1976. We do our software development in North Carolina and in Texas.
The only time SAS ever gets sued for anything, we are being
sued by a patent troll.
Now, we have never lost a patent troll case, but that does not
mean we are not losing. Patent trolls are business terrorists. Their
weapons of mass destruction are software and business method
patents with fuzzy boundaries that can be asserted against many
different products, many different companies, in many different
ways.
And the terror is not really the threat of losing the case. It is the
cost to fight.
Patent trolls have no employees. They make nothing. They sell
nothing. They have no witnesses. Therefore, they are immune from
the discovery burden.
Given that patent trolls are immune from the discovery burden,
their strategy is to make discovery as broad and expensive as possible. Patent troll cases are filed in jurisdictions that allow broad
discovery and that do not decide dispositive motions, including motions to transfer, until most of the money for discovery has already
been spent. In other words, when the case is filed, the defendant
has already lost.
In a recent case, we actually won the case on summary judgment, but we had to spend over $8 million to get there. $1.5 million
of those dollars was paid to an outside consultant simply to collect
electronic documents. We had to collect over 10 million documents
because the judge allowed that level of discovery.
The plaintiff in the case listed as possibly relevant 1,873 documents. Had the case gone to trial, probably 20 or 30 of those documents might have shown up.
The stack of documents that might possibly have been relative,
I did the math: 8 inches tall. The stack of documents, if we had
had to print them out, that we had to collect, if you took the World
Trade Center and put the Washington Monument on top of it, the
stack of documents would have been higher than that.
That is abuse.
Now, to be clear, SAS is not in favor of ending the ability for legitimate inventors to enforce their patents in Federal court. That
is not what this is about at all.
It is about ending abusive litigation tactics by entities that are
not advancing the idea behind the patent system. They are not advancing knowledge and advancing society. They are taking advantage and being opportunistic through weakness in the patent system, and they are extorting money from the very companies that
are advancing, that are inventing, that are hiring people, that are
moving the economy forward.

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And ladies and gentlemen, this is completely a Federal Government problem. We are being sued on patents that should have
never been issued, that were issued by a Federal agency. We are
being sued in Federal courts that are allowing this abuse to happen. And unfortunately, this has been going on for some time.
So I disagree with some of my colleagues who are going to advocate lets just wait and see if this will all work itself out. I dont
think we need to do anything. No, if the courts were going to fix
this, they would have done so already.
There are many good ideas being discussed, some of which Chairman Coble mentioned. One that I think bears serious consideration
is an idea that we sort of borrowed from Chief Judge Rader, and
that is the only thing you really need to decide a patent case is,
what does the patent say and what does the product do? And if you
share the information around that, you should be able to decide
your patent case.
If you want more discovery than that, fine. You just have to pay
for it.
In that way, patent cases that should go forward, can go forward.
We do not have to worry who is or isnt a patent troll or a patent
assertion entity. It will rein in abusive discovery, whether it is
done in the patent troll litigation or in any other litigation.
If we did that, and if, additionally, we made sure that judges
first decided motions to transfer before you had to go through the
process of paying for discovery, so they would decide whether you
should be there at all before you had to pay for it, I think that we
would go a long way to ending abusive patent tactics.
But unfortunately, or maybe fortunately, only you can help us.
And that is why we are here.
Thanks.
[The prepared statement of Mr. Boswell follows:]

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Mr. MARINO. Thank you, Mr. Boswell.
The Chair recognizes Mr. Gerst, please.
TESTIMONY OF C. GRAHAM GERST, PARTNER,
GLOBAL IP LAW GROUP, LLC

Mr. GERST. Thank you very much.

My firm, the Global IP Law Group, represents the broadest
range of interests represented on the panel today. We have represented very large technology companies like Alcatel-Lucent, Motorola Mobility, and Nortel Networks. We also represent midsized
and small companies, including many startups. And we also represent non-practicing entities.
What I hope to do today is highlight how changes at one end of
the spectrum can have ramifications throughout the system that
are unanticipated.
Any large system is going to have problems and inefficiencies,
and the patent system is no exception. But you run the risk of unintended consequences for the system as a whole in trying to fix
those limited problems.
And lets remember that this is the system that is, overall, working very well. That is something that often gets lost.
The Founding Fathers included the patent system in the U.S.
Constitution to encourage innovation. Today, we have the strongest
patent system in the world, and at least part in relation to that,
or part as a result of that, we have the most innovative economy
in the world. And we need continuing innovation to maintain the
strength of our economy.
Changes that weaken our patent system put future innovation at
risk. It is the sort of risk that isnt immediate or that makes for
good stories in the newspaper. The biggest issue our patent system
does face is the cost of litigating patent disputes, which creates two
problems. One is the opportunity to sue simply to get a settlement
that is less than the cost of litigation, and numerous of my fellow
panelists have already talked about this, and that will continue
during the remainder of the panel here today.
The second problem is less talked about, and that is that a lot
of companies that cannot afford to protect their own investments
in innovation by asserting their own patents. Moreover, because of
recent changes to the Federal Circuit in damages law and related
to injunctions, those costs are even more difficult to justify.
When I had lunch with the chief IP counsel at a sizable company,
he said that he no longer considers the NPEs anything more than
a nuisance. But he is worried that his company, which relies on innovation to distinguish itself, cannot use it patent portfolio because
of the costs and the weakened remedies. And a couple weeks ago,
I was at an event where the chief patent counsel for Conair said
much the same thing.
This is part of the reason why the statistics about how big a percentage of patent cases are brought by NPEs, why that statistic exists. It is because a lot of small and midsize companies cannot afford to bring their own patent cases.
What is not an issue for the patent system is the existence of
NPEs. NPEs are not new, and they do fill a valuable role in the
patent system by helping to reward innovators. My firm recently

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represented a technology company that was one of the lead developers of electronic communication technology in wide use today.
That company invested in the development incentivized by the
promise its patents would ultimately prove very valuable. We, ultimately, sold those patents to one of a group of NPEs that were the
only ones really willing to give what approached fair value for
those patents, thereby rewarding those innovators.
In addition, NPEs provide a way to recirculate capital to investors. In the situation I just described, I know that major investors
in that company have circulated some of those earnings from that
patent sale back to other innovative companies.
And finally, by acquiring patents, non-practicing entities keep
the market liquid and keep patent values up, which is valuable to
companies that use their patents as collateral. That includes large
companies, like the recently concluded Alcatel-Lucent deal, and
small startups.
What can Congress do to improve this system? It can make
changes that are limited and target particular behaviors, but minimize the risk to the system from unintended consequences.
I would echo what Mr. Chandler said about changing the law regarding injunctions at the ITC. But that is a limited change, and
it creates consistency through the patent system.
In addition, the creation of a small claims patent court would
help some of the problems with companies being able to enforce
their own patents, which are blocked today by the cost of litigation.
And continuing to fund the PTO to improve patent quality is important.
What Congress should not do is engage in getting into the business of dictating to the Federal courts about how to manage Rule
11 sanctions and discovery costs. Those issues are best done in a
very tailored, measured fashion that the courts are in the best position to determine.
In addition, the SHIELD Act is something that I would advocate
Congress not pursue. It is wrong on a whole number of levels. But
it targets entities, not activities. And it would have a whole host
of unintended consequences.
If Company A buys Company B, the patents of Company B would
automatically be subject to the rules of the SHIELD Act. In addition, in the Alcatel-Lucent deal that we recently concluded, if something terrible were to happen to Alcatel-Lucent and it were to go
bankrupt and the lenders took control of that patent portfolio,
those patents would be subject to the SHIELD Act.
Finally, the SHIELD Act, if it helps anybody, it helps big nonpracticing entities. Those big, non-practicing entities, and you know
the names of them, have the money to post bonds for these litigations. It would basically eliminate the competition they have from
smaller non-practicing entities.
Finally, there has been talk about a straight loser pay system for
all patent cases. That would just aggravate the problem of small
and midsize companies being able to enforce their own patents.
Thank you very much.
[The prepared statement of Mr. Gerst follows:]

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Mr. MARINO. Thank you, Mr. Gerst.
The Chair recognizes Mr. Johnson, please.
TESTIMONY OF PHILIP S. JOHNSON, CHIEF INTELLECTUAL
PROPERTY COUNSEL, JOHNSON & JOHNSON

Mr. JOHNSON. Thank you, Mr. Chairman, Ranking Member

Watt, and Members of the Subcommittee. I appreciate being invited here today to give the views of the Coalition for the 21st Century Patent Reform, a broad and diverse group of nearly 50 corporations, including 3M, Caterpillar, Eli Lilly, General Electric,
Procter & Gamble, and my company, Johnson & Johnson.
Our coalition advocates for patent reforms that foster investment, innovation, and job creation, and that promote vigorous competition in bringing new products and services to American consumers.
The issue of patent litigation abuse is simply not a new one.
Over the last 6 years, both the Supreme Court and the Federal Circuit have issued important decisions addressing the criticism that
our courts unduly favor of the assertion of vague or overbroad patents by non-practicing entities.
These decisions restrict the availability of patent injunctions to
NPEs, mandate transfer of patent cases to more convenient and
less NPE-friendly jurisdictions, clarify the damages may be awarded based only on the value of the invention rather than on the entire system on which the invention is only a small component, clarify that innocent infringers may not be subjected to treble damages,
and strengthen existing patentable subject matter, written description, and enablement requirements to ensure that overly vague and
ambiguous patents will not be upheld.
In early 2011, Congress passed the pilot patent court bill to establish a 10-year pilot program to test the concept that patent
cases can be better handled and abuses deterred by District Court
judges specializing in them.
This initiative is now being implemented and is already yielding
fruit in the form of a number of proposals for courts to limit the
amount and cost of discovery in patent cases, and to actively deter
and punish litigation abuse.
Congress acted again later in 2011 by passing the AIA, which included many additional provisions now going into effect to lessen
the opportunity for abusive patent litigation. The AIA revamped
the criteria for patentability, authorized the public to participate in
the patent examination process, and increased patent office funding, all to ensure that future issued patents will be of the highest
possible quality.
The AIA also created several new procedures to allow members
of the public, including those who are being sued for infringement,
to quickly and inexpensively challenge a patents validity before a
panel of administrative law judges in the patent office.
It also eliminated NPE marking suits, mandated that patent
plaintiffs could no longer indiscriminately join unrelated parties in
a single lawsuit, and provided for further as of yet uncompleted
study of issues relating to NPE patent assertions.
As Congress recognized in authorizing a study into NPE litigation, little empirical evidence existed to confirm or refute claims

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that NPEs bring a disproportionate percentage of specious patent
suits.
Unfortunately, specious claims and specious defenses have always been a part of patent litigations and can be perpetrated by
any party, if so inclined. Fortunately, courts already have the
power to award attorneys fees in exceptional patent cases, and in
our experience are willing to do so when a party engages in reprehensible litigation conduct.
This does not mean that everything that could be done to deter
patent litigation misconduct has been done. Other remedies have
been suggested during the consideration of the AIA that include
lowering the standard for fee shifting, so it is easier for judges to
award fees to the prevailing party, and automatically staying suits
against customers and users where the original provider of the
product or service accused of infringement elects to bring a suit to
resolve the issue with the patentee.
Our coalition continues to view these approaches as having
merit. In my written testimony, we make specific legislative recommendations for the Subcommittee to consider.
Otherwise, our coalition believes that Congress should monitor
the effects of these numerous remedies, which have already been
enacted, to see how they do. Congress has already gone a long way
toward fixing the problem of patent litigation abuse. To further
modify the system at this time would run the risk of chilling innovation and the jobs that flow from it by making reliable patent import enforcement substantially less certain.
I thank you for the opportunity to testify here today, and I would
be happy to answer any of your questions.
Thank you.
[The prepared statement of Mr. Johnson follows:]

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Mr. MARINO. Thank you, Mr. Johnson.
The Chair recognizes Mr. Rao, please.
TESTIMONY OF DANA RAO, VICE PRESIDENT OF
INTELLECTUAL PROPERTY AND LITIGATION, ADOBE SYSTEMS

Mr. RAO. Mr. Chairman, Ranking Member Watt, and other distinguished Members of the Subcommittee, thank you for inviting
me to testify on this important issue.
I am appearing before you on behalf of Adobe and BSA, the Business Software Alliance. I oversee all aspects of Adobes intellectual
property and litigation matters.
The focus of this hearing is very important, enhancing our patent
system to promote innovation and make sure patents are not used
opportunistically in ways that disrupt the marketplace. Some may
say that the problems in PAEs today are software patents, and
that the solution is to stop granting patents on software or to make
it harder to get such patents. I do not agree with those proposals
and believe they do not appreciate or address the actual nature of
the litigation that our industry faces today.
There are important steps we can take. We do need to address
the asymmetry of incentives in our patent litigation framework,
and we have to improve the quality of our already strong patent
system.
For 30 years, Adobe has pushed the boundaries of computing,
publishing, and printing. With over 11,000 employees and over
3,000 patents and pending applications, it should come as no surprise that Adobe is a strong supporter of the patent system.
Congress and the courts have acted with vision and foresight by
protecting software with intellectual property rights. The creation
of these rights has led America to have the leading software companies in the world, companies that contribute over $400 billion to
our gross domestic product. And patents help protect that investment.
Recent trends in patent litigation have created a serious problem
for Adobe. This is a new problem. Lawsuits by patent assertion entities, or PAES, take advantage of the lopsidedness in our litigation
system, where it is more expensive to win than lose.
We recently took a case from a PAE to trial. We won. There is
no infringement, no damages. But it cost us $4 million to prove
that point.
Studies show that PAEs lose at trial 90 percent of the time, but
who can afford to prove it? Adobes customers are now the targets
of PAEs.
Since 2009, Adobe has received more than 100 indemnification
requests from our customers. The PAEs target the end-users, small
retailers all across the country.
One of our customers was recently sued. The PAE immediately,
after filing the complaint, offered to settle for just a few thousand
dollars. There is no way our customer could answer that complaint
for less money than that.
The nature of the patent is irrelevant. After reaching a few lowcost settlements, the PAEs acquire a new asset and repeat the
process all over again. These repeat serial patent aggregators are

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manipulating our patent system, but they are only adding cost, not
innovation, to our economy.
We recommend the following actions. We believe Congress can
make important changes that will help curb abusive litigation. I
note that patent law already permits shifting fees to address abuse
of process, as was mentioned before. If there is an exceptional case,
a court can shift fees under 35 USC 285. However, the way it is
currently applied, it is a high standard rarely met.
Lets clarify this law. When a court sees litigation with these telltale signshigh demands, low settlements, no practice in the field
of the patentthe court can act.
Similarly, strengthening Rule 11 of the Federal Rules of Civil
Procedure would also help. Rule 11 serves a similar purpose. Unfortunately, it suffers the same problems.
We can also look at more focused fee shifting, such as being proposed in the SHIELD Act or the SAS proposal around discovery
costs that was mentioned earlier.
SHIELD focuses on shifting fees if there is an assertion without
any exploitation. That is a good focus: Is the plaintiff really using
the patent system to validate a property interest, or are they taking advantage of issues inherent in our litigation system?
In any solution, it is imperative that the PAEs face significant
financial exposure if they are found to violate the standard. Preferably, this determination is made as early as possible in the litigation. Otherwise, the defendants will still settle in the face of a lowcost offer.
And the approach also has to protect the rights of those seeking
legitimate access to the courts. We note the SHIELD Act does have
provisions in place explicitly protecting the original inventors of the
patent and universities. We applaud that approach and look for
such protections in any bill that is passed.
Finally, we can also continue to improve the quality of patents.
A clear patent is a good patent for the public and the public interest. Using the new tools in the AIA, patent quality is on the rise,
and we commend PTO leadership. They have offered various proposals now on increasing the clarity of claims, and Adobe supports
those.
The AIA also established mechanisms for challenging recently
granted patents through procedures of the U.S. PTO. These have
a real chance in helping address the questionable patents before
they even enter the marketplace.
We need to continue to focus on improving examiner access to
prior art, especially in the software area where it difficult to find
the best prior art merely by searching the patent database. The
crowdsourcing efforts they have introduced go a long way in helping that problem.
Mr. Chairman, Ranking Member Watt, and Members of the Subcommittee, I thank you again for giving me the opportunity to testify before you, and I look forward to answering your questions.
[The prepared statement of Mr. Rao follows:]

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Mr. MARINO. Thank you, sir.
We are now going to move to the questioning from the panel. I
ask my colleagues to do their best to keep those statements and
questions at 5 minutes.
And the Chair now recognizes the Ranking Member of the Subcommittee, Congressman Watt.
Mr. WATT. Mr. Chairman, I think I am going to pass and go last.
So if Mr. Johnson is ready, I will defer to him.
Mr. MARINO. The Chair recognizes Mr. Johnson, Congressman
Johnson.
Mr. JOHNSON OF GEORGIA. Thank you, sir.
Mr. MARINO. My traveling companion.
Mr. JOHNSON OF GEORGIA. Yes.
At this time, I would like to, while reserving my 5 minutes, yield
to the lady from California, Congresswoman Lofgren, if that is acceptable.
Mr. MARINO. The Chair recognizes Congresswoman Lofgren.
Ms. LOFGREN. Thank you, all of you. I am sorry to be late. I was
meeting with John Chambers, so I know that Mr. Chandler will
forgive me for that.
And also, to have Adobe also in my district, represented here, is
awesome.
And, of course, Mr. Johnson. We have worked together.
I have this one question, if I can. Mr. Chandler, I read your testimony, which was excellent. You mentioned in the testimony that
there was a patent troll threatening small businesses with Wi-Fi
patents that have already been licensed. I am interested in this
case, the specifics of this case. Could you even tell us who is doing
this?
And I will end very promptly, because I do not want to abuse Mr.
Johnsons courtesy to me.
Mr. CHANDLER. Sure. Thank you very much.
The company involved is called Innovatio, but it is one individual
who is a former intellectual property counsel at a chip manufacturer called Broadcom who bought 31 patents that were nearing
expiration. They were no longer useful for protecting in the marketplace that Broadcom was in. Broadcom had broadly cross licensed them to other chip companiesQualcomm, STMicro, Agere,
and others.
And the Wi-Fi chips involved sell for a few dollars apiece and are
used by manufacturers to create devices that allow people to use
wireless Internet. Many of the patents had been declared by
Broadcom to be standards essential and had been given to standards bodies on that basis.
Because they could not go to the chipmakers or did not want to
go to the chipmakers, because they would have gotten a royalty of
a few cents apiece, and manufacturers like us or Motorola Solutions or Netgear would have said go talk to the chip people, they
decided to try to intimidated 13,000 small businesses around the
country, similar to a scheme of telling people that they cant collect
their Social Security benefits unless they sign up for a certain service. That type of scam has been well known for a long time.
By offering a license, in many cases, for products that were already licensedbut if you run a cafe, and Caribou Coffee was one

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of the companies they want to. Caribou does not know what chips
are in the boxes that are in their closets that offer Wi-Fi.
And the choice was pay $2,000 or $3,000 per location, or we will
sue you. And if you want to defend it, you can. Here are the documents you need to review, and it listed the length of each document, adding up to thousands of pages. And it told people what it
would cost to litigate a patent case. So many of them just paid up.
Now, we were pretty outraged that our customers were being
treated that way. My first job as general counsel really is to make
sure our customers get taken care of. So we brought an action
against them for breach of contract, because they did not fulfill the
obligations to the standards bodies that Broadcom had put out, and
also for racketeering.
The breach of contract claims are moving forward. The judge in
the case decided that they were petitioning the government by
bringing this patent litigation or by preparing for litigation. And
since Innovatio did not know for sure whether a particular customers Wi-Fi device included a licensed chip or not, he did not
view it as enough of a sham to allow the racketeering claim to go
forward.
But I think the case illustrates well the way a financially driven
operator will use the procedural opportunities in the patent system
to try to shake down people who really do not owe any money. And
that is where I think the focus of the Committee should be, on how
to fix these procedural abuses so that companies that are really
aiming only at litigationit is their only businesscannot establish the value of a patent, as Mr. Gertz described, because of the
litigation value, but to get that value tied back not to procedural
abuse, but tied back to what the value of the invention is.
Ms. LOFGREN. Thank you very much. I was just listening, and
the testimony was uniformly excellent.
I do not know what the remedies are. But as I am listening to
you, I am thinking maybe we ought to have a vexatious litigant
statute, as we do in California, as an additional part of our arsenal
in the Federal system.
And with that, I yield back, Mr. Chairman. Thank you for letting
me go out of order.
Mr. MARINO. Thank you, Congresswoman.
The Chair now recognizes Mr. Chaffetz.
Mr. CHAFFETZ. Thank you, Mr. Chairman. And I appreciate the
panel and all the expertise that has come here before us.
I think, clearly, with the one example of Mr. Gersts testimony,
we have exemplified the idea that there is a major problem here.
It is a Federal problem. It is something that can be remedied. It
is something that must be addressed.
I thought, actually, Ranking Member Conyers made an important point that I want to respond to. One of the assertions that he
said is that we have to be careful that we are protecting the little
guy so that they have some resources and the ability to go after
some of the big boys. But then we also have to make sure that
there is some balance there.
There is a statistic that I think is particularly pertinent here.
Look, I introduced the SHIELD Act with Congressman DeFazio in
a bipartisan way. I think it is a great piece of legislation. If it

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needs further perfection or input, we are totally open to that. But
we want to help solve this problem.
But interestingly, statistically, 55 percent of unique troll defendants made $10 million or less. Now, I appreciate, we have some big
companies here, from Adobe to Cisco and others, that are very important. They are part of the growth of this country. They are a
success in our economy that is thriving. We have to make sure that
they continue to thrive globally.
But think about that: 55 percent of the defendants are making
less than $10 million. And they need to be able to defend themselves.
So, Mr. Gerst, to suggest that everything is fine. Your quote was
that it is working well. It is not working well for those people. They
do not have the resources that Cisco has.
And the SHIELD Act, if a company inventor does at least one of
the following things, nothing changes: They are the original inventor or assignee; they are involved in exploitation of the patent; they
are a university or tech transfer organization. It does not affect
them.
But there are trolls out there. There are problems out there.
Sixty trolls brought 62 percent of the 2012 patent litigations62
percent. That is what is going on in our courts.
A Boston University study found that NPE litigation is growing
rapidly, affecting 5,842 defendants in 2011. The direct costs of NPE
patent assertions are substantial, totaling about $29 billion. And
55 percent of those defendants are making less than $10 million.
There is a huge, massive problem that we can solve with a very
simple, straightforward approach.
I think I would go first, actually, to Mr. Chandler. Again, there
are some that doubt that there is a problem. If you could, in your
own way, because you are dealing with lots of vendors, you have
a lot of suppliers, people contracted, give us a perspective, if you
can, also, on what the little guys are going through, because I
think Mr. Conyers brings up an important point, but I think that
is an argument actually in favor of the SHIELD Act, not in opposition to it.
Mr. CHANDLER. Well, I agree with you. Just to add to the information you just shared, from 2005 to 2011, 82 percent of the targets of the non-practicing entities, the PAEs, had less than $100
million of revenue, as opposed to Cisco.
You are right. We have the resources to defend ourselves. I was
able to spend a third of a billion dollars on legal fees in the last
6 years on suits with companies that do not produce products.
I think the key focus ought to be on the procedural abuses that
run up the costs. I think Mr. Boswell spoke very effectively about
the discovery costs and the imbalance in discovery.
In that ITC case I referred to, we produced over 3 million documents, had to provide over 20 of our employees as witnesses, all
before the ITC ever even looked at the issue of domestic industry
and threw them out.
I had $13 million of expense there.
So I think you find a situation whereI have one case that is
in trial right now, as a matter of fact, where all of the patents in

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suit have been subject to reexam and at least partially declared invalid. And yet, the case is proceeding.
Those reexams are moving much more quickly, thanks to the
America Invents Act. I think that when a party makes a decision
they want to go ahead, even though a case is in reexam, they ought
to be bearing the cost of the litigation. The same with the discovery
approach that Mr. Boswell referred to.
Mr. CHAFFETZ. And, Mr. Boswell, you gave a very vivid explanation of the problem and challenges that you are facing.
I want to have, given the remaining seconds that I have, the gentlewoman from JCPenney to give us her perspective, because this
is not a problem that is just in the tech sector. Again, tech is one
of the most important, thriving parts of our economy. Lets talk
about outside of tech, because it is also affecting them.
Ms. DHILLON. Thank you. And I do agree with your comments.
As I indicated, retailers and other businesses that are not typically what you would think of as high-tech companies are being seriously affected by the menace of the patent trolls.
I think that a number of the proposals that have been put forward here today could definitely help retailers like JCPenney and
other companies that are similarly situated. And I think, in particular, what is important is looking at limitations around suits
against downstream users before the litigation against the licensor
has been fully exhausted.
Mr. CHAFFETZ. Thank you.
Thank you, Mr. Chairman. I yield back.
Mr. MARINO. Thank you. The Chair will now recognize Congresswoman Chu from California.
Ms. CHU. Thank you, Mr. Chair.
Mr. Chandler, I am concerned and outraged by these frivolous
suits that are filed against the end-users of products, these 13,000
demand letters that were levied against those who rightfully purchased your products, such as wireless routers.
My question is, do the patent trolls have an actual legal claim
against the customers? Would it actually even stand up in court?
Mr. CHANDLER. Well, certainly not if they are already licensed.
But the patent statutes, I think, appropriately, will allow anyone
who makes, uses, or sells, a product that infringes to be subject to
suit, and so that can include anyone in the chain of distribution.
But what the assertion entities want to do is sue the people as
far down the user chain as possible, because they have a bigger
revenue base.
Why sue the maker of the chip that is a $5 chip that Broadcom
might have licensed to get a royalty that is $.50 when you can sue
a Cisco that sells a box for $100 that allows Wi-Fi.
But why stop there? Why not sue the coffee shop and try to get
some of their revenue?
That is an issue of how damages are calculated. And what we
need to do is move toward much more clear standards, so that, in
advance, it is known what that revenue base is that will be subject
to the patent infringement claim. Even if you sue Caribou Coffee,
the damages should still be based on the value of that chip. That
is the unit that includes the patented invention.

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And until the courts or the Congress make clear that that is the
only way that the damages will be calculated, there will still be an
incentive for these assertion entities to go for the biggest possible
revenue base and to be suing innocent end-users who have very little means to defend themselves.
Ms. CHU. Should there be a test case in court?
Mr. CHANDLER. Well, there are cases moving forward. Chief
Judge Rader at the Federal Circuit helped with this a few years
ago. Judge Posner of the Court of Appeals, sitting by designation
on a District Court case, made this clear.
But at the moment, the law of the land is a case called GeorgiaPacific that gives the jury very wide latitude in looking at 15 different factors. Because of the uncertainty that that causes, at this
point, it is a casino when you walk into litigation. You have no idea
how those damages will be calculated, and that creates a huge incentive to settle, especially when you look at the cost of litigation.
So there are cases out there. I think that is one that courts are
going to work through. We tried very hard with the Congress for
over 7 years to work on it, and very hard to balance the various
interest groups. Our hope is the courts will fix that in years to
come, if Congress does not.
Ms. CHU. And is there a way that the end-user could protect
themselves?
Mr. CHANDLER. Well, I think Mr. Johnson made some very helpful observations on that. One thing that Congress could perhaps
provide is that the end-users could force the cases to be stayed, so
that the litigation would be with the manufacturer of the device.
And we would certainly be open to working with Mr. Johnson on
a proposal that could work for all industries, that maybe Congress
could enact.
Ms. CHU. Yes, sir, in fact, I do want to pursue that with Mr.
Johnson.
You said that a solution would be allowing suits against manufacturers of the allegedly infringing products to take precedence
over suits against the customers, and that then a manufacturer
would have the right to pursue a separate suit, or intervene in an
existing suit.
If your solution is enacted, do you foresee companies willingly intervening in an existing suit or pursuing suits on their own? And
what would be the incentive for them to intervene?
Mr. JOHNSON. Well, I think whether they institute new suits or
choose to intervene may depend a lot on the venue of the original
suit, and their view of the convenience of the forum.
I think quite frequently the manufacturers would bring suits,
probably declaratory judgment (DJ) suits, and their home jurisdictions, where it would be convenient to pursue them. And if that
would result in the automatic stay of the customer suits, then I
think it would be an expeditious way and a less expensive way to
resolve the litigation.
And Mr. Chandler and our other witnesses point out, it would
avoid large numbers of litigations against very small users who are
not in a position to join the issue, and it would allow one lawsuit
to resolve the matter once and for all.

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Ms. CHU. And would companies even know about these demand
letters?
Mr. JOHNSON. Excuse me?
Ms. CHU. Would companies even know about the demand letters
being sent to the end-users?
Mr. JOHNSON. Yes. Usually, I think most of us who make and
sell products find that our customers are pretty quick to let us
know when they have been sued.
Ms. CHU. Thank you. I yield back.
Mr. MARINO. Thank you.
The Chair now recognizes Congressman Issa from California.
Mr. ISSA. Thank you. I will follow up with Mr. Johnson.
Do you envision any kind of test for the question of whether a
DJ would take precedent? For example, would there have to be a
relationship between the retailer which you have a responsibility
to indemnify him? And could that be a test, if we were to enact it
into law, that could codify that?
Mr. JOHNSON. I do think we would have to look closely as we
move forward in developing legislation, because there are a variety
of relationships between suppliers and their customers, and there
may, as you point out, be indemnities. There may be UCC implied
indemnities. And there may be some situations where the components have been supplied pursuant to the specifications of the customer where it would not be appropriate.
Mr. ISSA. Well, I want to thank you for that answer, because that
begs the point for us in legislation.
I would not want to see an automatic stay, based on the manufacturers DJ. In fact, there could be a material difference in the
two cases, and if I were a retailer, or someone else in the supply
chain, I wouldnt want to be prejudiced by a case being argued
somewhere else. On the other hand, you do not be prejudiced by
it.
But I do think you are onto something very important. As a manufacturer, they never shopped my venue. As a patent holder, I have
to be honest, when I found myself with Chrysler in a DJ in Detroit,
I was not happy, so I am well-aware why each of us would look at
that.
Let me go back to Mr. Chandler. Currently, we do have this dilemma that the ITC is where you go for an exclusion/injunction.
And you go to District Court for damages and you use one against
another.
It is an oddity of Congress that we have jurisdiction over one
part. Another Committee has primary jurisdiction over another.
The two questions I have for you are, should we as a Congress actively take on to resolve this, so that never again could somebody
essentially shop both to the detriment of, to be honest, cost to the
government, and for a resolution not envisioned post-eBay?
Mr. CHANDLER. Certainly, there has been a trend in the last 5
years, since the eBay decision, to a very significant increase in the
caseload in the ITC, both in terms of the number cases and the
number of defendants involving nonpracticing patent industries.
Mr. ISSA. And I do not want to limit it to nonpracticing. If you
take the Qualcomm-Broadcom suit, you had two largeand there
were others. There was Kodak. There were others. You have large

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domestic entities in which they clearly both are domestic, and importation is simply a matter of a portion of the supply chain in
America today, including for your company.
Those are really the cases where I want to know, because we can
talk about trolls. We can talk about people who do not manufacture. The ITC requires there be a domestic entity in order to get
standing.
But lets assume that you are talking about two S&P 500 companies, substantial assets, more than enough to pay any damages.
And yet one of them goes to the ITC in order to, essentially, twist
the knife and get a settlement. It could be your company doing it
to somebody else, on occasions.
Mr. CHANDLER. The ITC has a specific mandate to move quickly
to stop foreign knockoffs from coming in. Now, some parts of the
supply chain, as you alluded to, there simply are no domestic
sources of components. And the fact that a very small component
of an essentially domestic product comes from abroad, and is alleged to infringe, can subject you to the ITC.
I wouldnt say that the ITCs reason for existence is obsolete.
And, certainly
Mr. ISSA. No, and Im not suggesting.
And my time is very limited. What I am suggesting is that, currently, in some of the cases I mentioned, the ITC told us they were
without power to do anything other than to use the sledgehammer
they were given. And we, in the Congress, have the ability to give
them an additional tool.
For example, the ITC finding that there is substantial domestic
assets sufficient to pay any damages could choose to stay their
case, and recognize that their need is only when, if you will, there
is an import situation in which money is not going to be paid because there is not as substantial import.
And to be honest, the Open Act, something that I sponsored in
the last Congress, and will re-drop in this Congress, envisions that,
in the case of intellectual propertyclassic movies, musicthat the
ITC may have a greater role, because it is, by definition, coming
from entities that you cant touch other than through exclusion.
Mr. CHANDLER. I agree with you completely that rationalization
of the dual jurisdiction and duplicative litigation would make an
awful lot of sense. There is no reason that these cases need to be
carried out in two different fora simultaneously.
Mr. ISSA. Thank you, Mr. Chairman.
Mr. MARINO. Thank you.
The Chair recognizes Congressman Deutch from Florida.
Mr. DEUTCH. Thank you, Mr. Chairman.
Mr. Chairman, I want to thank all the witnesses for appearing
today. It is actually very helpful hearing.
And I understand there are a number of elements in our patent
system that have contributed to the troll problem that so many of
you have already discussed. And patent quality, particularly in
emerging technologies, has been a problem with PTO. That has
come up, today, as well. And I know it is an issue that they have
been working on to remedy.
But even if we assume that, going forward, the quality of all new
patents is unimpeachable, there is still a question of what to do in

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the interim to deal with vague patents, overbroad patents that
have already been issued.
So there are lots of proposals, lots of ideas. You have laid out
some. The SHIELD Act has been introduced by my colleagues as
a way to, in that case, limit litigation using the questionable patents.
I remember the discussions that we had during the America Invents Act about reexamination of limited types of patents. Everyone that I have talked to about this troll problem, all the folks who
have been in office, people that we have met with, seem to agree
that there is no silver bullet here. There is no one thing that can
be done.
We have to look at all the options to minimize abuses. But there
would also be unintended consequences, if we are not careful.
Mr. Gerst, you spoke about the unintended consequences that
would stem from the SHIELD Act. If we had this fee-shifting provision, the impact that that would have on small and medium-size
businesses would be exactly the opposite of what we would want
to encourage and the kind of innovation that we are actually trying
to encourage, by having these discussions to begin with.
Mr. Rao, I wanted to ask you about one small aspect of the entire
ecosystem. I understand it is not a significant issue in this whole
broad discussion. But I think the troll problem in the patent system as a whole would benefit from greater transparency, significantly greater transparency.
And in my background, coming from real estate law, there was
always very obvious title for all property. Records were kept up to
date. They were easily searchable. And similarly, I understand the
copyright has diminished remedy for failure to register in a timely
manner.
But in the patent world, in the patent universe, the records seem
woefully lacking.
Why cant welet me phrase it more positively. Is there a way
to have a more transparent system to record patents, so we know
who it is who we are talking about, we know who these trolls are,
and theres a clear line, and that we dont simplythey dont simply wait until there is a lawsuit to go ahead and record an order
for them, to proceed?
Mr. RAO. Thank you for the question.
Absolutely, I think there is a way to address this problem. And
we think it is a problem.
We think that the large patent aggregation entities are typically
holding the patents in other names or shell companies, because
they dont want to draw attention to the size of their portfolio. And
they also want to ensure that there is not declaratory judgment actions are reexamination proceedings initiated against them. And by
hiding the true ownership of the patents, that is their way of avoiding that problem.
The PTO has suggested some process for identifying the real
party of interest. For example, having the patent holders record the
current assignee status at the time of maintenance fee renewal.
That seems to be a very low-cost way of providing up-to-date information about who the true owner of the patent is, because you already have to interact with the patent office at that time.

99
There has been some concern about real party in interest causing
a burden on patent holders, but I think that if you take the PTOs
approach, I think the burden is low, and I think the benefit to the
public is pretty high.
And not only do we want that transparency at the time of when
they own the patent. We would also like to have a little more
transparency when we are being sued. We find that our discovery
is also limited into finding out who is suing us.
And we feel that, as defendants, we should know who is getting
the ultimate economic benefit from the patents that are being asserted against us.
Mr. DEUTCH. Also, what is the best way to do that? What would
that look like?
Mr. RAO. Right now, there is a corporate disclosure statement
you have to file, Rule 7.1. It is fairly nominal, the information you
have to provide.
So we could strengthen that and require disclosure of all the entities that are getting an economic interest in the pattern that is
being asserted. That would really help us understand who is asserting the patents against us.
Mr. DEUTCH. What about the idea of diminished remedies for
failure to provide the necessary transparency?
Mr. RAO. What the remedies would be for failing to disclose it?
Mr. DEUTCH. Limiting the remedies in the event that they dont
disclose?
Mr. RAO. I think that is a solution that has merit. I think that
if you are unwilling to state that you own the patent, I think, like
you mentioned in real estate law, there should be a prohibition or
limitation on your ability to assert the patent, just like it is in
copyright.
Mr. DEUTCH. Thank you.
Thank you, Mr. Chairman.
Mr. MARINO. Thank you. The Chair now recognizes Mr. Holding
from North Carolina.
Mr. HOLDING. Thank you, Mr. Chairman.
Mr. Boswell, you used some pretty strong language referring to
patent trolls as business terrorists. Perhaps that might be a bit
strong.
But I will say that you look at their activity, and it doesnt take
too much imagination to imagine it as criminal activity. Perhaps I
have spent too much time with criminals over the past 10 years,
and I am thinking about it in that context. But a protection racket
where we wont sue you if you just give us a little bit of money
isnt too far removed from we wont burn down your business if
you just give us a little bit of money this week.
It is one of the oldest criminal activities in the businessthe protection racket.
You were talking about discovery and the cost of discovery, and
that being a weapon, an instrument of terror.
Other than the cost of discovery, the AIA looked at the issue of
joinder and at the issue of what was driving venue. How has that
been working? How has that solution been received? And how is it
working?

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Mr. BOSWELL. Well, I believe when Congress passed the joinder
position, the intent was to allow the traditional venue rules to operate. Prior to that, patent trolls would sue 20 or 30 defendants in
a favorable jurisdiction, because venue wasnt appropriate anywhere, so they would sue them wherever they wanted to, which
would be the best venue for the patent troll.
The idea, I believe, behind the joinder provision was to allow the
traditional rules of venue selection to operate. You had to sue the
defendant where it was appropriate to sue the defendant.
Unfortunately, that hasnt been our experience. We have no connection to the Eastern District of Texas. And in the last case we
were sued, we were sued in the Eastern District of Texas. We made
a motion to transfer. But unfortunately, that motion sat, but discovery had to start.
And so, if what happens is a motion to transfer doesnt get heard
until so much discovery has happened that, in the interest of judicial economy, the case should stay there, then I think that the
courts are thwarting what the America Invents Act intended to
have happen. And I know that that issue was just looked at in an
EMC case that went up to the Federal Circuit Court of Appeals.
So without requiring that motions to transfer be heard first before the burden of discovery attaches, then I think one of the main
provisions that the America Invents Act hoped to accomplish didnt
get accomplished.
Mr. HOLDING. It seems like the Eastern District of Texas is the
most popular venue. And I think I read somewhere in the materials that the number of cases being filed in the Eastern District
of Texas is up 104 percent in the last 2 years. Is that correct?
Does anyone know that statistic?
Mr. BOSWELL. I didnt see that statistic. I know the greatest patent filing day in the history of the world was the day before the
America Invents Act went into effect. And that happened in the
Eastern District of Texas.
Mr. HOLDING. Mr. Gerst, I assume you practice in the Eastern
District of Texas. You take cases there, and so forth.
Mr. GERST. I have, Congressman.
Mr. HOLDING. What makes the Eastern District of Texas so different from everywhere else? Why is it such a favorite jurisdiction?
Mr. GERST. That is a great question.
I think there are a few reasons, and the reasons have evolved
over time. I think, first, early on, you had some jury verdicts there
that were very pro-plaintiff, and so you started to see more activity
taking place there. You also had a court that issued local patent
rules that made it more straightforward, and you had a very patent
sophisticated set of judges down there, who knew patent law
and
Mr. HOLDING. Let me interrupt. Do they have different local
rules in the Eastern District of Texas than they have in the other
Federal districts of Texas? Are they much different from Federal
districts in general?
Mr. GERST. At this point, I havent compared them. But the Eastern District of Texas was one of the first jurisdictions to institute

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Mr. HOLDING. How many judges are there in the Eastern District
of Texas?
Mr. GERST. I believe there are two.
Mr. HOLDING. And is there anyone that is particularly inviting
to plaintiffs?
Mr. GERST. Now that I am aware of. I havent looked into that.
Mr. HOLDING. So two judges in one Federal district are attracting
all of the patent troll litigation that can possibly be attracted.
Doesnt that seem a bit odd?
Mr. GERST. One of the big reasons, that I didnt get a chance to
get to about why so many of the cases go there, is that the Eastern
District of Texas has tended not to stay patent cases pending reexamination.
So a standard tactic employed by a lot of defendants is to put the
patent in for reexamination and you move for a stay. Under the old
rules, it would stay the case for, essentially, 2 years. The Eastern
District of Texas did not do that.
I know I filed a motion to stay a case pending reexamination that
I thought should have been granted, and it was not. It was very
difficult to do in the Eastern District of Texas.
That is why there are so many patent cases there.
Mr. HOLDING. Thank you.
Thank you, Mr. Chairman.
Mr. MARINO. Thank you. The Chair now recognizes Mr. Richmond from Louisiana.
Mr. RICHMOND. Thank you, Mr. Chairman.
I would just say, before I start, that I thought Congress, that we
get called some bad names, but today I have heard rats, terrorists,
criminals, and now we have added arsonists and protectionists to
the list. So it kind of makes me feel good up here. [Laughter.]
I will start with you, Mr. Chandler, because in the beginning,
you mentioned the case in which the judge ruled that the First
Amendment protected the action. And we are here today to talk
about maybe remedying that.
But if the judge is ruling that the Constitution trumps, what can
we do beside a constitutional amendment to affect his ruling, if he
is ruling that it is protected by the First Amendment?
Mr. CHANDLER. Yes, I will say that I said lab mice and not rats,
and it was an analogy.
In that particular case, we were dealing with a set of facts that
we thought constituted racketeering. And I think access to justice
is an extremely important principle and the right to petition the
government is as well. And the legal doctrine applicable to that is
called Noerr-Pennington, that allows people to bring litigation and
have that be a petitioning activity.
There is an exception to that, if litigation is sham, if the only
purpose of it is to use the litigation process to extract some benefits.
In this particular case, because some of the customers that these
people were suing or threatening to sue might have had equipment
that wasnt licensed, the judge said it wasnt a complete sham, and,
therefore, he wouldnt apply the racketeering statute to the activity
that these people had undertaken.

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At the same time, the range of procedural games that are played
by these financial operatorsand you have to understand, many of
these patent assertion entities are funded by hedge funds or other
private equity groups at this point. MOSAID, for instance, is private equity owned, the one that we spent $13 million with at the
ITC.
And they are really in the business of only litigating. And so the
only thing they care about is how they can manipulate the procedures.
So we certainly dont propose a constitutional amendment, or
anything that would limit access to justice. But we do think some
of the procedural games that are played in the patent world can
be remedied effectively by Congress.
I think Mr. Johnson and I agree on at least one of them. And
we also support what Congressman Chaffetz is undertaking and
look at ways that the SHIELD Act could be used to address some
of these procedural problems.
Mr. RICHMOND. Ms. Dhillon, two questions for you. I will start
with the first one, which is, in your testimony you discussed the
range of areas in which you have been sueddisplaying catalog images, dropdown menus, and all those things. At the end of it, you
mentioned that patents date back to the late 80s, mid-90s. They
have had multiple owners with no continuing involvement of the
actual inventor.
But when you mention that, I guess what stood out to me, and
I wanted to give you a chance to elaborate, was that you didnt deal
with the merits of the litigation. And I am trying to figure out, if
the fact that they are old and they are not very active, and the person who created it has no involvement, should that be pertinent to
the lawsuit?
Ms. DHILLON. Absolutely. And please understand, whenever we
receive one of these suits, we do an analysis to determine, do we
think we are actually infringing on the patent? And if we do, as
I indicated, we and most companies are responsible utilizers of
technology. If we have overlooked something, and we are infringing, we will compensate to make up for that infringement.
But in the cases I described, our conclusion was that we were not
infringing on these patents, but the difficulty, particularly when
the patents are that old and when the owners of the patents have
transferred ownership so much, is to be able to develop the evidence to establish the prior art defense. Going back that far in time
it is extremely difficult for companies like mine, and very expensive.
Mr. RICHMOND. Which leads me to the question of do you think
there should be a different standard, not a carve out, but a specific
issues or legislation to address retailers?
Ms. DHILLON. Well, I think that it would be helpful to have reforms around end-users. So I am most familiar with retailers, but
other witnesses have referenced, for example, restaurants and the
like, and I think that they are in a similar situation to ours.
Limitations around suits against end-users, until there has been
a resolution, vis-a-vis the vendor or the licensor, in the first instance, would do a lot to protect end-users like JCPenney.

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Mr. RICHMOND. I see that my time has expired, Mr. Chairman.
I yield back.
Mr. MARINO. Thank you.
The Chair recognizes Congressman Farenthold from Texas.
Mr. FARENTHOLD. Thank you, Mr. Chairman.
I apologize if I re-ask a question. The Governor of Texas was in
for lunch, and you dont upset Mr. Perry by no-showing on him.
I did want to talk a little bit about the patent assertion entities.
In Texas, if you buy groceries, theres a pretty good chance you buy
them from HEB. It is a big grocery store chain in Texas. And believe me, they get plenty of my money.
But one of the reasons the prices might be so high is they tell
me that they were approached by one of these entities for a device
that reads checks. They bought it off the shelf and plugged it into
their system. And they are basically saying settle with us now, or
we will run this through litigation, and it will be 10 times the cost.
JCPenney has mentioned that it is happened to them.
My fear is I have a lot of electronics. I have Adobe Photoshop
Touch on my iPad. If you guys unintentionally have something in
there that is infringing, you would expect the patents to be asserted against you. But if I take this to its logical conclusion, they
can come sue me for more than I paid for my iPad, more than I
paid for the software on my iPad, and potentially more than I
made this month. Do you think that is accurate statement?
Mr. RAO. Unfortunately, they are allowed to sue you. That is correct.
They are allowed, as Mr. Chandler mentioned earlier, they are
allowed to sue the user of technology, if that method is patented.
That is the law today.
I think the question, of course for you, particularly, is damages.
But I think Adobe, generally, we stand behind our software, as
mentioned before. We work with our suppliers and our customers,
and when we find that someone is accusing Photoshop of infringing
a patent, we will step in and intervene.
Mr. FARENTHOLD. And you have been approached by customers
to do this?
Mr. RAO. We have. Safeway, another grocery store, has asked us
to do this. REI has asked us to do this. L.L. Bean has asked us
to do this. Pacific Sunwear has asked us to do this. Small retailers
are asking Adobe to step in.
Mr. FARENTHOLD. So, what percentage of your patent litigation
comes from these patent assertion entities?
Mr. RAO. About 85 percent of our patent litigation.
Mr. FARENTHOLD. Eighty-five percent.
I am a little bit concerned. I guess it is enlightened self-interest,
because I am an early adopter of technologies. But would a solution
be legislatively create an end-user exemption where, if I go buy
something off the shelf and dont modify it and use it the way it
was intended and just plug it into the USB port of my computer,
or plug it into the wall, or whatever I do, I will go down the line,
does anybody see any problems with that? Would that be at least
a stopgap solution? Anybody want to take a stab at that?
Mr. Johnson.

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Mr. JOHNSON. Under the Uniform Commercial Code, there is already an implied obligation, implied indemnity against noninfringement from a manufacturer to a customer.
And the prevailing jurisprudence is that customer suits like
those we are talking about should be stayed in favor of a manufacturer resolving the issue.
Mr. FARENTHOLD. I guess my fear is, and I practiced law for a
while, and one of my lines to my clientyou can beat the rap, but
you cant beat the ride.
Mr. JOHNSON. Well, that is exactly the problem, that some courts
have ignored that jurisprudence, which is why a statutory fix may
be required in order to get rid of this problem.
But I dont think that you have to wholesale deprive a patent
owner of a right where there really is an infringement in order to
do that. It may be that you have unintended consequences, because
the only person who could be sued might be the one you would exempt, and you wouldnt want to do that.
Mr. GERST. Congressman, if I could just echo that? There are certain patent claims that are called method claims that are only infringed, in some cases, by the end-user. And so that is the issue
that Mr. Johnson is speaking of. So that adds complexity to what
you are trying to achieve.
Mr. FARENTHOLD. All right, well, I appreciate it. I see I am just
about out of time, so I will yield back.
Mr. MARINO. Thank you.
The Chair now recognizes Mr. Jeffries from New York.
Mr. JEFFRIES. Thank you, Mr. Chairman.
I want to express appreciation for the presence of the witnesses
to speak on such a very significant issue. I share their concern, as
I think all of my colleagues do, with making sure that unnecessary
or unjustified litigation doesnt stifle innovation and entrepreneurship. And I think this is something that we have to confront.
Obviously, there are various ways to get at the problem, and the
remedy here is going to be what we all need to find common
ground on, to determine the best way to address what I think is
universally or almost universally recognized as a legitimate problem.
And there seems to be at least five different potential remedies,
and I want to get into the details related to a few of those.
But you have the loser pay. You have expedited discovery. You
have the possibility of shifting burdens. You have enhanced standing as a possibility. And then lastly, I guess, improving or strengthening the Rule 11 requirements.
But I want to hone in on the notion, and I guess the proper expression is patent assertion entities. I was hesitant at the very beginning of this hearing to use the word patent trolls, thinking that
perhaps it was an unnecessarily aggressive expression. But, as my
good colleague from New Orleans has catalogued so thoroughly, apparently, that may be the kinder, gentler way to approach these individuals.
But I guess, Mr. Rao, from the standpoint of the subset of individuals who fall within this category as plaintiffs, who are bringing
litigation, how many of those matters eventually go to trial? I understand that many dont, because of the cost of litigation resulting

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in settlement. but how many of those mattersand anyone else
can answerbut how many of those matters go to trial?
Mr. RAO. As a whole, very few patent litigations go to trial. They
settle. In the NPE cases, at least in Adobes experience, very few
historically have gone to trial. So I would say the vast majority end
up being settled.
And that is part of the problem, that you have highlighted, that
the cost of defense is higher than the money they are asking for.
And the current group of patent plaintiffs, they are not looking to
have the patents scrutinized. They are merely hoping to get you to
pay.
Mr. JEFFRIES. I gather you support a strengthened Rule 11 requirement. Is that correct?
Mr. RAO. That is correct.
Mr. JEFFRIES. So the reason I asked the question, and I gather
in other words, in order for the Rule 11 sanctions to kick in, there
has to be some decision along the way, in the litigation, whether
that was a motion to dismiss that was granted, summary judgment
granted, or withdrawal perhaps, or a decision at trial.
And so the question for me is, how do you get to the point, if you
are going to enhance the Rule 11 requirements, you are still going
to have to arrive at the decision. And so it seems like you cant simply enhance the Rule 11 requirements. Perhaps we need to look at
either enhanced standing to make sure that those who were bringing the litigation legitimately have an issue, or you shift the burdens, which then perhaps make it substantively more difficult to
achieve a result, but design to shift the burden so that those with
legitimate claims can make it through the litigation.
And if you strengthen either of those two requirements, or perhaps both, then those who are bringing the litigation, it is just a
lot easier to determine who is bringing the frivolous litigations and
then the sanctions can apply.
If you or any of the other general counsels might comment on
that?
Mr. BOSWELL. Mr. Jeffries, may I respond to that?
Mr. JEFFRIES. Yes
Mr. BOSWELL. If at the end of the process, the defendants had
a way to just not lose more. In other words, even if we win a case,
we have lost, where these cases are filed, we are never going to get
Rule 11 sanctions. We are never going to cost shifting.
If Congress did something to change that, then we would have
less incentive to settle. We would be inclined to take the cases until
you got a decision. And as soon as you do that, the entire business
model of the patent trolls changes, because they use early settlements to fund litigation. And as soon as people stop settling, the
whole paradigm shifts.
Mr. JEFFRIES. Yes, I would suggest that we explore that. But to
that point, and I am not sure where I am at. I wasnt in the institution when CongressI think it was in 1995passed the Private
Securities Litigation Reform Act. But it was an act of Congress
that was designed to get at this very problem, that there was at
least a perception that there was excessive litigation being brought
by individual plaintiffs, not all of whom were legitimate.

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Again, I dont know where I fall on this litigation. I have been
on both sides, on the defendant side and on the plaintiffs side, in
my prior practice. But it does seem to me that it would be helpful
for us, for you guys and the gentlelady to take a look at its success,
what Congress may have done right with that litigation, what perhaps hasnt worked. And then use that as a basis for perhaps coming up with some creative suggestions to get at how to stop the excessive litigation.
Mr. MARINO. The gentlemans time has expired. I think he is
through.
Mr. JEFFRIES. Yes. Thank you, Mr. Chairman.
Mr. MARINO. The Chair now recognizes the Chairman of the Subcommittee, Chairman Coble from North Carolina.
Mr. COBLE. The late Howard Coble has returned. I thank all of
you.
Mel, I want to thank you, and, Tom, for manning the ship.
Mr. Boswell, good to have you up from Carolina, as Mel mentioned earlier.
Mr. BOSWELL. It is good to be here.
Mr. COBLE. Curtailing abusive discovery practices could be one
way to deal with abusive patent litigation. Speak a little more specifically to that.
Mr. BOSWELL. As I was mentioning just a minute ago, one of the
challenges is patent trolls have the ability to make it so expensive
that even if you are sure you are going to win, you are going to
lose.
I actually had a conversation with a patent troll where we demonstrated without question that there is no way our product that
they accused could violate their patent. His answer was, I dont
care.
Mr. COBLE. He just wants to buy his piece, I presume.
Mr. BOSWELL. Well, he wanted us to pay him money, so we could
prevent ourselves of having to go through the expense of going
through litigating. And he knew and I knew that even if we won
on all counts, we werent going to get any of our money back, and
we were still going to have to pay the cost of discovery.
So I am trying to change the paradigm, so that defendants do not
have to settle, so they cant be extorted, basically. And that is, if
you can afford to litigate, then you dont have to settle. And that
is really the point.
And as soon as we do that, I think the paradigm shifts in the
patent troll world.
Mr. COBLE. Thank you, Mr. Boswell.
I will put this to either or all of the witnesses. Do you believe
that patent assertion entities are those that accumulate large numbers of patents for purely offensive purposes should be subject to
antitrust scrutiny?
And we will start with Mr. Chandler.
Mr. CHANDLER. I think the patent grant is a monopoly in order
to encourage progress in science and the useful arts. And patent
holders try to find various ways to extend the scope of that monopoly beyond what the patent grant intends.
And I think that patent aggregation efforts deserve very close
antitrust scrutiny for that reason. I think they have the impact

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across whole industries of forcing settlements and suppressing competition in ways that are not intended as part of the patent grant.
Ms. DHILLON. I would concur with Mr. Chandlers remarks. I
know the Department of Justice and the FTC have been looking at
this very question, and we support that effort, because I think that
it does raise legitimate issues.
Mr. BOSWELL. Yes.
Mr. COBLE. Thank you for your brevity, Mr. Boswell.
Mr. GERST. Congressman, I am not an antitrust lawyer. It does
seem to me, though, that it is hard to conceive that these patent
assertion entities, non-practicing entities, have anything approaching market power, but I am not an antitrust lawyer.
Mr. COBLE. Thank you, sir.
Mr. JOHNSON. The mere aggregation of patents may have very
beneficial effects, especially, for example, if it brings together conflicting technologies, patents that would conflict with each other, to
make them available for competitive purposes. It could be very beneficial. Or you could aggregate patents as we have seen in the
Hartford Empire case years ago for anticompetitive purposes.
So I would say its not the fact of the aggregation, but you have
to look at what the use and effect is under the antitrust laws.
Mr. COBLE. Thank you, sir.
Mr. RAO. I would agree with that. There are definitely
proconsumer aspects to patent pooling, for example, for standards.
But I think the larger point that Mr. Chandler mentioned about
a patent assertion entity who is just aggregating lots of patents
and using that volume to demand fees I think is worth looking at
a little more closely.
Mr. COBLE. Thank you, sir.
Mr. Chairman, I hope you will take note that the red light has
not illuminated, and I am yielding back.
Thank you, ladies and gentlemen.
Mr. MARINO. We will give you credit for that in the future, Chairman.
Mr. COBLE. Thank you.
Mr. MARINO. You are welcome.
The Chair now recognizes Congressman Nadler from New York.
Mr. NADLER. Thank you, Mr. Chairman.
Mr. Chairman, I have sat here through this hearing. It has been
very illuminating.
I have a couple questions.
Mr. Chandler, getting back to this question, and maybe Ms.
Dhillon, getting back to this question of end-users. It certainly
seems unfair to have the end-users, to have the Starbucks or whoever, sued.
What about simply a rule or statute that said that they cannot
be sued. It goes right up the chain to whoever first used to the patent in a productive way? You just implead the first user, and it is
their problem, and they just get right out of the suit?
Mr. CHANDLER. Well, I think that Mr. Johnsons proposal in that
regard, regarding staying of suits with end-users and permitting
the manufacturers to intervene
Mr. NADLER. Why stay it? Why not just dissolve it, eliminate it?

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Mr. CHANDLER. I think that there may be cases where the only
way to assert a patent would be against the end-user for various
reasons. And so an automatic elimination of that right I think
would be a significant change.
Mr. NADLER. If you gave the plaintiff the right to go against whoever originally used it, he could initially sue Starbucks. They just
get out and say here, and go up the chain. They have a right to
sue. Even if the original complaint was against Starbucks, just get
rid of them and give them the right to sue whoever first used that
technology.
Mr. CHANDLER. I think that having patent litigation focused on
the technology that is described in the patent is the right result.
And there are going to be a number of different ways to skin the
cat, and I think the proposal you are laying out is one that ought
to be in the mix, in figuring out how to do that.
Mr. NADLER. Okay. Thank you.
Mr. Boswell, in his testimony, Mr. Boswell says essentially says,
talking about shifting the cost, and the cost here is overwhelmingly
discovery. And he says the critical discovery relates to certain core
documents. These core documents include the patent at issue, the
technical specifications of the allegedly infringing product or feature, and the prior art.
He proposes that in any patent lawsuit, normal rules of discovery
apply with respect to these core documents; that is, the person producing the documents pays the cost of production.
But he would go one step further. We would propose additional
discovery is permissible, and that parties could ask for whatever
documents they need. The difference is that the party requesting
such other discovery bears the cost of that discovery.
Does anybody object to that? And if so, why? Yes?
Mr. JOHNSON. I object to it, or we object to it, the extent that it
removes the discretion from the courts. Right now, the courts have
that authority. They have the authority to condition the provision
of discovery based on whatever conditions are appropriate, including paying for the discovery. They are the best positioned to get in
and figure it out
Mr. NADLER. Given the nature of the problem that we have, if
we define the classes of core documents and said that is where the
plaintiff pays for the discovery. Beyond that, it is different. Or that
is where the defendant pays for the discovery. Beyond that, it is
different.
What is wrong with saying that to the courts? Why do they need
further discussion?
Mr. JOHNSON. There are all manner of different plaintiffsuniversities, individual inventors, and the likeand all manners of
lawsuits. The core discovery concept was originated by Judge
Rader. And the pilot patent courts program is looking at that very
closely. And they have other management techniques as well, to try
to avoid excessive discovery.
Mr. NADLER. But that hasnt worked, obviously.
Mr. JOHNSON. Well, it is just getting going. Congress just passed
the bill in January 2011, and it is now being implemented. And
they are very active, and we should wait to see how they are doing
before we try to give them a blunt or one-size-fits-all rule.

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Mr. NADLER. Can anyone tell me why they disagree with Mr.
Johnson on this point?
Mr. Boswell.
Mr. BOSWELL. Because although the courts have that power now,
I dont think any of us will have ever seen a court that has used
it.
Mr. NADLER. Even though it is a brand-new power?
Mr. BOSWELL. No, I mean he was saying the courts could do that
now. But the patent trolls are not filing in any court where any
judge would do that.
And I disagree that there would be any problem with our proposal. Obviously, I like our proposal.
And the other point I need to make here is that the idea of, well,
we are going to study this problem and we have to give it time, if
we were standing there and someone was drowning, we wouldnt
say, well, we are going to study the problem.
Mr. NADLER. Congress might.
Mr. BOSWELL. We would jump in and save them.
Mr. NADLER. I said Congress might have a study completed.
Most people wouldnt. [Laughter.]
Mr. BOSWELL. I hope not.
Mr. NADLER. Thank you. I yield back.
Mr. MARINO. Thank you.
We are going to go a little bit out of rules procedure here. President Obama will be meeting with the Democrat Caucus about 2:15
today, as he met with the Republican Caucus yesterday.
So, my colleagues, my Republican colleagues, have graciously
agreed to allow the rest of the Democrat side to get their questions
in, so they can get to the meeting. And then we will follow up later.
So I think the next person to have questions is Congressman
Johnson from Georgia.
Mr. JOHNSON OF GEORGIA. Thank you, Mr. Chairman. And thank
you Members on the other side of the dais here for your generosity
and graciousness.
I hearken back to the days when I was growing up. My aunt in
the backyard, just past the backyard was a bridge that then
emptied onto the street behind her property. And she would always
tell us, do not go out there on that bridge, because the three little
billy goats. The three billy goats, she told us that story about the
three billy goats and the big, bad troll waiting under there.
And so I understand what a troll is, but I also know that every
person or entity that files a patent infringement suit is not a troll.
And I also know that while software is a product that can easily
be broadened, or expanded, in so far as claims are concerned, by
those who would file patent lawsuits, this legislation that we are
looking at, the SHIELD Act, would apply to all types of patents,
not just those patents.
And I know that there is abusive behavior occurring in patent
litigation cases. Many examples of that, even in the northern district of Georgia, scanner trolls targeted BlueWave Computing and
other Atlanta-based businesses for merely using an office scanner
to scan documents to email.
BlueWave reportedly received a demand from Project Paperless,
a patent assertion entity, stating that BlueWave had to pay $1,000

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per employee for a license to distribute its computer architecture,
or they would face a lawsuit.
In this case, BlueWave fought the lawsuit and won in court after
spending millions of dollars to defend itself. And that is something
that they should not have to be subject to.
Finding solutions to this problem is incumbent on the courts,
businesses, the Patent and Trademark Office, and on this Congress. These solutions should both address immediate concerns and
also be forward-looking to enable the breadth of patent claims to
be included.
But we should also be careful to avoid solutions that create barriers to the courthouse for some litigants and not others.
I also have concerns with fee shifting and bonding rules that
would make it prohibitively expensive to enforce a valid patent for
parties that do not produce materials associated with the patent.
Lastly, although this is, indeed, a worthy issue for our consideration, we have to be careful that any legislation in this area that
we may pass could open the door for other alleged reforms that
would deny plaintiffs their rights to go to court in other tort situations, so-called tort reform.
We must consider the implications of our solutions in other
areas, even ones as close as copyright.
Although we are not considering these questions today, these are
important issues that we must be mindful of as we move forward.
Lastly, I will say that a patent holder who files a lawsuit against
a deep-pocketed predator corporation, making money off that persons or entitys patents would be covered by this legislation, would
it not, Mr. Gerst?
Mr. GERST. Your question, Congressman, is whether or not a
company
Mr. JOHNSON OF GEORGIA. Well, whether or not a person or an
entity filing a claim for patent infringement, they would be covered
by this act?
Mr. GERST. By the SHIELD Act?
Mr. JOHNSON OF GEORGIA. Yes.
Mr. GERST. Well, if an individual is the inventor, the person
would be excluded from the SHIELD Act. But if the person is not
the inventor or one of the other exclusions, that person or entity
would be affected by the SHIELD Act, yes, Congressman.
Mr. JOHNSON OF GEORGIA. Thank you.
Mr. MARINO. Thank you.
The Chair now recognizes Congresswoman Jackson Lee from
Texas.
Ms. JACKSON LEE. Let me thank the Chairman and the Ranking
Member. And I do want to thank our colleagues, again, for their
generosity.
I remain open on this question. I think the witnesses have laid
out an able case for both perspectives. And I just want to cite some
language into the record.
A Boston University study suggested that NPE litigation has had
5,842 defendants in the litigation in 2011, costing about $29 billion.
And the Boston University study represents that it impacts diversion of resources; it delays new products; and there is a loss of market share.

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But I think the salient point by Chief Judge Rader out of the
Fifth Circuit makes the point that really provides sufficient shock
value, that we all understand that there are entities that are created solely for the purpose of litigating patents.
And he follows by saying, which is intrinsically not necessarily
bad, but that there is an entity or an industry.
I have a series of questions that, hopefully, will allow for some
give-and-take. And I think one just factual question to Mr. Chandler is to find out what the status of the case was that was with
Judge Holderman, where you attempted to have a rebuttal action.
Where is that case at now?
Mr. CHANDLER. That is the Innovatio case that I was describing
to Congressman Lofgren.
The claims that we asserted against Innovatio for the way they
have targeted these 13,000 end-users, the breach of contract claims
related to their refusal to fulfill the obligations that attached to
those patents that were declared to standards bodies are proceeding.
Judge Holderman granted a motion to dismiss the RICO claims
that we brought, and we are determining now how to proceed with
that.
I understand his decision and respect the reasoning that went
into it, because of the importance of access to justice and the petition right. In that case, we felt that this particular plaintiff was
well aware that many, many, many of the people they were sending letters to were already licensed. This guy is an expert on his
patents. He used to work on for the company he bought them from.
And we felt he should have been held to account for the tactics
he was undertaking with innocent, unsophisticated end-users that
he knew many of whom were licensed.
Ms. JACKSON LEE. And you decided not to appeal the dismissal
proceeding now in the District Court?
Mr. CHANDLER. Well, we are in a process of determining what
the right way is to proceed on that. I do understand the judges
opinion. I respect him.
Ms. JACKSON LEE. All right, let me try again to proceed with
some give-and-take.
Mr. Gerst and Mr. Johnson seem to be opposed to some form of
a SHIELD Act legislatively. And so let me try to juxtapose Ms.
Dhillon and Mr. Chandler.
Mr. Gerst, what is your answer, then? Would you see this as a
court solution or a patent office solution, because obviously the
SHIELD Act is a legislative initiative? What would be your solution to a sizable amount of money being spent on this litigation?
Mr. Gerst? And Mr. Johnson as well.
Mr. GERST. Yes, Congresswoman, and first, I would say that the
$27 billion number that you cited in the Boston University study,
that has been widely refuted. I would recommend that you read
something by David Schwartz who has written an analysis of it
that really disposes of that number.
Unquestionably, as I said during the testimony, the high litigation costs pose a problem. And I think a lot of, for example, Mr.
Boswells recommendations about trying to get to the bottom of
that makes sense. I think both Mr. Johnson and I posit that the

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best place to do that, the best place to tailor those remedies, are
at the courts. And it is being done now at the District Court level.
The Federal circuit has issued guidelines. So, it takes little bit of
time.
Ms. JACKSON LEE. My time is short, and I think I got the gist
of it.
If Mr. Johnson could be quick, as you get ready to answer, let
me just pose this question to all of you who have a different perspective: For those who are in the high-tech industry, the question
will be, can you not protect your software, do nonobvious inventions that would lead to less trolls being able to provide these lawsuits? Are there other ways to protect what you have or to define
what you have?
I am going to let Mr. Johnson answer, but with the indulgence
of the Chair, I hope I can get answers by Ms. Dhillon, at least, to
tell me why it does not work the way Mr. Gerst wants it.
Mr. JOHNSON. Would you like an answer to the high-tech question?
Ms. JACKSON LEE. No, if you have a quick response to what Mr.
Gerst just said, because I want to hear from Ms. Dhillon and Mr.
Rao.
Mr. JOHNSON. Congress needs to provide the courts the authority
to act to take care of the problem, but the courts are the best place
to take care the problem, in my view, with the assistance of the
patent office by allowing the return of the patent to the patent office, under the America Invents Act, to challenge validity when
that is appropriate.
Mr. MARINO. The Congresswomans time has expired and you are
going to have to be in that caucus, I think before the President gets
there, or else you do not get in.
Ms. JACKSON LEE. Can I get my answers in writing? Ms. Dhillon
was supposed to answer quickly.
Mr. MARINO. Yes, we just expect you to give them in writing and
send them to us.
Ms. JACKSON LEE. Thank you very much.
Mr. MARINO. The Chair now recognizes the Ranking Member of
the Subcommittee, Congressman Watt from North Carolina.
Mr. WATT. Thank you, Mr. Chairman. And I thank all of the witnesses. It has been an exceptionally good hearing, very balanced
presentation. I think that is the kind of hearing we need on this,
to really try to get to the brunt of it.
Before I forget, I want to ask unanimous consent to submit for
the record written statements from the Electronic Frontier Foundation, the National Retail Federation, Professor Arthur Miller, and
Professor Christal Sheppard.
Mr. MARINO. Without objection, so ordered.
[The information referred to follows:]

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Mr. WATT. I want to thank my colleagues who have deferred, to
allow us to get through in time to go see the President.
And I want to ask a question, which I will really just ask all of
the witnesses to address in writing, if you do not mind, because I
think unless we get to some definition of what a patent assertion
entity is, we are never goingif we define it too broadly, we are
going to impact adversely a bunch of people who we should not be
impacting.
And a lot of what I have heard today, well, not a lot, but some
of what I heard today, might suggest that the troll or patent assertion entity is anybody that we do not like. And we obviously have
to be very tailored if we are going to craft legislation to deal with
this. And I am not sure doing it by exclusion, which is what Mr.
Chaffetzs bill does, and Mr. DeFazios bill does, does it inversely.
I am not sure that I am comfortable with that.
So just give me a definition that you think would be workable,
for legislative purposes, of what a patent assertion entity that
would be covered by preventing them from proceeding in a lawsuit
would consist of.
Because if we cannot define what a troll is for this purpose, I do
not think we are ever going to be able to pass a piece of legislation.
And I think we have to limit this to patent litigation, because,
otherwise, we are going to be over into a whole area that has been
a lightning rod for a number of years. We will be back in tort reform and litigation reform. And we have done a lot of that.
But I think this may be unique to the patent area of the law.
And if we started by having a good definition that we could work
from, I think we would all be serving ourselves very well.
So with that, Mr. Chairman, I know my green light is still on,
but the Presidents red light is approaching quickly, because if they
are not going to let me in after 2 oclock, I am already in trouble.
So as important as everybody here is, sometimes the President
of the United States takes precedence over whatever else we are
doing. So I hope you all will forgive me.
That does not mean I think he is more important than you all.
It just means that I would like to hear what he has to say, particularly since there is, charm offensive going on. [Laughter.]
So I thank you all, and have a great day, and thank you for
being here, and thank you all for deferring to us.
Mr. MARINO. Thank you, Congressman, for your help today.
What an appropriate word.
But the Chair now recognizes the Chairman of the full Judiciary
Committee, Chairman Goodlatte from Virginia.
Mr. GOODLATTE. Thank you, Mr. Chairman. I know I was
charmed by Mr. Watt and not at all offended.
I apologize to the panel for not being here for all of your testimony, and I very much appreciate your participation today in this
important issue, and I do some questions I would like to address
first, to Mr. Gerst, and then I will ask some of the rest of you to
comment as well.
When it comes to the patent system, especially patent ownership,
do you believe that it is appropriate for entities to assert a patent
far beyond the value of its contribution to the art? Are there or
should there be limits to asserting patents in litigation?

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For example, is it appropriate for an entity to send out vague demand letters en masse without providing specificity as to how an
individual is infringing on a patent? Should there be limitations toward bringing cases against customers or end-users who are least
able to understand the patent system or meaningfully respond in
litigation?
Mr. GERST. Thank you, Congressman.
There are already limits on what litigants can do in litigation,
and these are Rule 11 sanctions. You cant make assertions that
are beyond the scope of the patent, unreasonably beyond the scope
of the patent.
And the problem is ex-ante. It is hard to tell exactly what that
limit is, so you do need to litigate the issue.
You are also talking about a
Mr. GOODLATTE. We could provide more specificity, could we not?
Mr. GERST. Again, Congressman, I think the courts are the best
place to tailor that and to allow the standard to evolve over time,
rather than having some standard one-size-fits-all that is very difficult to change.
On the demand letters point, that is a slightly different issue. I
mean, what you really have there is asymmetry of information,
right? You have, on the one side, very sophisticated patent dealers,
and they are approaching unsophisticated folks. And the answer
may be, then, to try to help out the symmetry of information by
perhaps giving some grant money to entities that will help coordinate and help these various targets of this activity coordinate their
defenses.
I will tell you those sort of broad-based campaigns, what they
fear most is coordinated activity. So you dont need, necessarily, to
change the law. You just provide a way for that coordination
among defendants who are targets to take place.
Mr. GOODLATTE. It seems an unusual thing for the government
to provide funds. We do not even know who we would be providing
it to, since the targets, when you are talking about end-users, and
companies like JCPenney, it could be anybody.
But, Mr. Chandler, do you have a view on this?
Mr. CHANDLER. Yes, I think that the issue of the broad attacks
by companies is really driven by procedural opportunity.
I think Ranking Member Watts question about the definition of
a patent assertion entity sort of begged the question of, why is this
activity happening? And it is happening because of procedural
weaknesses that allow it to go on with impunity.
And I think the courts have been reluctant to impose the sanctions that Mr. Johnson and Mr. Gerst have pointed out they have
the ability to do today.
And I think shifting some of the balance on that, so that when
you have these particular procedural opportunities that are being
exploited and that have driven the creation of a new industry that
none of us faced a decade ago, when you address those particular
procedural defects, there will be a self-correction.
I think Mr. Boswell described that as a paradigm shift where the
ability to, with impunity, extract unearned rents off of patents that
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Mr. GOODLATTE. Got it. Let me interrupt you, because I want to
get in a couple more questions.
Mr. CHANDLER. Sorry.
Mr. GOODLATTE. Ms. Dhillon, as a retailer, JCPenney is not sued
because of the products it sells, but for the technology that it uses.
Patent litigation, per se, is obviously not a new phenomenon, but
the type of abusive litigation that we are seeing today is new.
Why has there been such an exponential growth in these types
of cases? Is it a result of certain plaintiff-friendly judicial districts,
or are there other factors in play as well?
Ms. DHILLON. I think there are number of factors in play. I think
that there are certain plaintiff-friendly jurisdictions that have
fueled it. I think that there are, I mention in my testimony, some
older, more vague patents that have been exploited. And I think
that nothing translates into success like success.
So I think as NPEs started to gain some traction and others saw
this as a money-making activity. They essentially have jumped
onto the bandwagon, to the point where we find ourselves in the
situation that we are in.
I think that if the courts were in a position and had the ability
to remedy these abuses, they would have done so. And the fact that
we are all sitting here today, explaining the situation that we find
ourselves in, suggests that the courts do not have the tools that
they need to contain it.
Mr. GOODLATTE. Mr. Chandler, you recently brought a case for
you asserted that a PAE was violating RICO laws. I do not know
if you talk about that already here today, but could you speak more
about your theory?
Mr. CHANDLER. I described it a little bit earlier, but the RICO
statute was held by Judge Holderman in that case to not be usable
because he found that some of the 13,000 people might not have
already had licenses. And, therefore, the petitioning right of the
patent plaintiffs should be protected. It was not enough of a sham
to allow the RICO statute to apply.
But we are going to continue to try to find means to push back
on behalf of our customers, who are being wrongfully victimized in
that case.
Mr. GOODLATTE. Does anybody else want to comment on that?
Nope.
Thank you, Mr. Chairman.
Mr. MARINO. Thank you.
The Chair now recognizes Congressman Rothfus from Pennsylvania.
Mr. ROTHFUS. Thank you, Mr. Chairman.
And thank you, panel, for a great discussion this afternoon.
I am still trying to quantify the extent of the patent troll issue.
We have referenced or heard reference to the Boston University
study.
I think, Mr. Gerst, you mentioned a Schwartz study. Are any
panel members aware of any data on the number of patent troll
claims that have been filed over, say, the past 10 or 15 years, actual actions?
We heard Congressman Chaffetz cite some reference.
Mr. Johnson?

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Mr. JOHNSON. Cited in my written testimony is the Price
Waterhouse litigation study, which specifically focuses on the number and success rates of NPE suits that have been brought over the
last, I believe, 11 years, citing also the success rates by industry
over several time periods.
Mr. ROTHFUS. What are the success rates?
Mr. JOHNSON. The success rates, I believe overall for the 11-year
period, is about 24 percent, perhaps 23 percent, if my memory
serves, compared to 31 to 33 percent.
Mr. ROTHFUS. Is that for verdicts or is that for settlements?
Mr. JOHNSON. These are the percentage of these cases that are
ultimately successful.
Mr. ROTHFUS. That could either mean reaching a settlement or
verdict?
Mr. JOHNSON. I believe that settlements are not included, because that does not result in a win or a loss, so these are of the
decided cases, the cases that go through to final decision.
Mr. ROTHFUS. Do we have any data on the number of claims that
may have been subject to Rule 11 sanctions?
Mr. JOHNSON. The number of cases that have been subject to
Rule 11 sanctions, in my experience, is extraordinarily low. Mostly,
Rule 11 is thought of as a remedy against the attorneys rather
than against the party.
More relevant would be the percentage of cases which were
deemed exceptional, and where fees were awarded as a result of
that. That is also very low, somewhere, I think, under about 1 percent.
And of course, those fees are usually only awarded after the case
has gone completely through trial. So as to settled cases, you would
not expect someone with a frivolous case to push it through to trial,
because there would be no upside in doing that.
And so, therefore, the truly frivolous cases or the cases that are
brought out without regard to any merit at all are brought for the
reasons already discussed by many of the witnesses here, the plan
is to settle them out quickly. The last thing they want to do is go
on and go through trial.
Mr. ROTHFUS. Now, the Price Waterhouse study, would that just
include claims that were actually filed in court? So, for example,
they would not consider any number of demand letters that may
have been set out to various companies?
Mr. JOHNSON. No, the Price Waterhouse study does not address
demand letters. That becomes very problematic because there, of
course, is a very wide activity of patent licensing, very legitimate
patent licensing, as some of the witnesses have mentioned.
And so a demand letter could be, I have a patent I think you
might be interested in taking a license under. And that could be
seen as a threat, or it could be seen as a legitimate transactional
offer.
A company like ours enters 300 to 500 licenses a year, and are
happy to do so, because it gives us access to many technologies that
can be brought together and incorporated in a product in order to
provide the truly best solution possible.
Mr. ROTHFUS. I was wondering if Mr. Gerst or Mr. Johnson
would have any concerns with the statistics cited by Congressman

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Chaffetz, about 60 trolls having brought 62 percent of the patent
litigation.
Is that something we should be concerned about?
Mr. GERST. You said 60 trolls have brought?
Mr. ROTHFUS. Sixty trolls have brought 62 percent of the patent
litigation, is what Congressman Chaffetz stated earlier.
Mr. GERST. I do not know about the 60 trolls part. I have seen
data showing that 62 percent of patent cases are brought by nonpracticing entities.
And is that a concern? The bigger concern, from my perspective,
I mean, there is a lot that data does not show. We do not know
what the optimum level of that activity is. And the other issue that
I have a concern with is that such a high percentage of them are
against companies that make $10 million or less. That does suggest
that is more of the nuisance level activity, than otherwise.
Mr. ROTHFUS. Thank you. I yield back.
Mr. MARINO. Thank you. The Chair now recognizes Congressman
DeSantis from Florida.
Mr. DESANTIS. Thank you, Mr. Chairman. Thank you to the witnesses.
You know, I have looked at our litigation system generally, and
I think there is a big problem of cases being brought that really
are not patently frivolous, but they are not going to win at trial,
but it is usually just too expensive to try them. So there is just incentive to cut settlements.
In my view is, if you have been wronged, you should be able to
be made whole. But if you really do not have a case, I think that
this is a huge inefficiency in our system. I think people contort the
system for economic gain.
But I must say, even with that view coming in, I mean, I am a
little surprised at how abusive some of this patent litigation seems.
Some of it seems pretty grotesque.
Ms. Dhillon, you got to JCPenney 4 years ago. You guys didnt
have any patent cases at that time?
Ms. DHILLON. No, we did not.
Mr. DESANTIS. And obviously, any company of your size is going
to deal with litigation, but has the arrival of patent litigation been
a huge part of what you are now defending?
Ms. DHILLON. Yes. It represents now about half of my overall
legal budget.
Mr. DESANTIS. Did you change your business practices at
JCPenney from the time that you arrived when there were no patent cases to now, when you have patent cases, such that maybe
people would all of a sudden think that you are infringing patents?
Ms. DHILLON. We have not changed our business practices. I
think it is being driven by other factors than how we go about conducting our business.
I will say, however, that in response to it, we have changed. In
response to the wave of patent troll cases, we have changed our
business practices.
So for example, in the past, where we might have considered licensing technology from a small inventor, the kind of typical few
guys in a garage who are putting together a very exciting idea
about technology, but that do not necessarily have the wherewithal

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to defend and indemnify us in the event that a troll came after the
technology, we are taking a second look at that. And there are
times when we do not license that technology, because we are concerned that that young inventor, that startup may not have the
wherewithal to defend and indemnify us in a patent troll case. And
I think that that is a very unfortunate thing for innovation in general.
Mr. DESANTIS. And to defend one of these cases, what is a ballpark figure price tag?
Ms. DHILLON. To take a case through trial can be upwards of $3
million or more. And that is hard dollar cost. That does not also
count the amount of time and internal resources that are diverted
to work on that case. And that is large, because those people, then,
are not spending time driving our business.
Mr. DESANTIS. And that actually was going to be my next question. So if you are having to defend these cases, it is not just your
legal department and outside counsel who deal with it. You actually have to have other folks who are involved with the company,
now all the sudden their time is diverted from trying to be productive and innovative to now having to participate in a lawsuit.
Ms. DHILLON. That is exactly right.
Mr. DESANTIS. Well, thank you, Mr. Chairman. I yield back the
balance of my time.
Mr. MARINO. Thank you.
The Chair now recognizes Congressman Collins from Georgia.
Mr. COLLINS. Thank you, Mr. Chairman.
I think what is interesting here in just listening, and I apologize
for missing some. I heard a lot by watching remotely.
But the concerns that I have heard so far is stifling innovation
and looking at the costs that are associated with some of these
issues of are we abusing a patent, taking a patent. And I want
to address several things as we go along here, because as I looked
through all of your testimony, and was reading, some of the things
that kept coming up were, lets go back to court.
And, Mr. Gerst and Mr. Johnson, especially, lets let the courts
handle this. Lets go to Rule 11. Lets look at issues of discovery.
Just yesterday in this room, we were having another hearing on
another issue that was not involved in this, and one of the issues
was changing discovery practices, changing this issue, and using
Rule 11. And my question was, why do not we use Rule 11 to fix
this?
A retired-now judge basically said, as judges, we do not like to
do this. It takes our time, and we do not haveit would consume
and also being the standard of also punishing litigants is too high.
Looking through all of your testimony, you come up to some type
at least of a discussion on procedure Rule 11 whether it be discovery or others.
Sort of real quickly, and sort of not feeding off of each other, but
if this is what we are hearing from judiciary, and this is court and
IP, so there is a court aspect here as well. If we are hearing this
problem, we can be saying this is a solution, but in the end, we
are putting judges in a position where they are going to throw their
hands up and say we have a problem with this anyway.

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So I would like to hear somebody talk about that. Feel free. Have
at it.
Mr. BOSWELL. Well, I believe, Congressman, I believe that while
it is important that judges maintain discretion, I think there are
some hard and fast rules that it would be appropriate for Congress
to implement, which takes the ball out of judges hands and gives
litigants certainty going in, so that they can put that into their decisionmaking as to whether they want to settle a case, whether
they want to sue at all to start with, whether they want to proceed
through trial. Because as it stands right now, particularly in the
case of patent trolls, they really have nothing to lose if they lose.
And we would like to see that changed in some way so that it
is more balanced, so there is not complete disincentive to take a
case to trial.
Mr. COLLINS. Mr. Johnson, do you disagree?
Mr. JOHNSON. No, I think we are in agreement. Most places in
the world, the loser pays. Here it is extraordinarily rare. There
may be a middle ground that the courts could be instructed to use.
I think you are right, though. My experience in dealing with the
judiciary is they are reluctant to want to get in to deciding whether
a defense that lost was meritorious or not.
Mr. COLLINS. Mr. Gerst?
Mr. GERST. Congressman, if I could just say one additional point.
Leaving aside the whole NPE issue, the risk that you do run
with these rules is it makes it much harder to assert patents for
anybody. And the issue I pointed to in my testimony about companies that everybody here lovesoperating companies, small and
midsizethey do not have the ability to assert their patents to
technology. And if you include in these rules things like loser pays
or shifting discovery costs, it is going to make it much harder for
those entities to assert their patents as well.
Mr. COLLINS. Okay, let me just change it a little bit. It has been
talked around a little bit, but I dont think its actually been discussed a good bit.
But one of the issues coming in here is the quality of patents.
And the issue of quality patents is saying it can be looked at in a
better way.
In your opinion, is a solution to curb some of the abusive litigation, could it be drawn back to a quality of patent issue? Is that
something that we have looked at and has there been enough time
to actually see that?
Mr. Chandler, why dont you start?
Mr. CHANDLER. Certainly, over time, the reforms enacted in the
America Invents Act will result in higher quality patents.
Mr. COLLINS. Let me stop you right there. Have we given it
enough time?
Mr. CHANDLER. No. There are steps that need to be taken. There
are 20 years worth of backlog of patents that need to be properly
subject to review.
And one of the things we could do is have plaintiffs encouraged
to stay litigation if the patent office found there was good cause to
reexamine their patents. Right now, they are able to push forward
with their cases, impose the costs, and extract settlements, even if
the patent office has preliminarily found the patents invalid.

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Mr. COLLINS. Legal extortion is what you are sort of getting at
there.
I will say it if you do not.
In a sense. And I am not saying they are all invalid.
And I think the problem, and I think Mr. Watt actually explained it, is actually getting to those that have valid claims, who
are they and who are they not, and then dealing with it in a format
in which we can move forward and not tie up companies hands
and not tie up these issues, and deal with the ones who actually
have a legitimate concern and complaint.
So there is a lot more to discuss here. I appreciate you being
here.
Mr. Chairman, I yield back.
Mr. MARINO. Thank you.
I am going to take advantage of my couple minutes to ask some
questions. I am in the habit of just waiting and going last, because
I have to be here or the Chairman has to be here.
But I think my colleague, it looks like he is going to sit there and
listen to me. Thank you.
Mr. COLLINS. I will be right here with you.
Mr. MARINO. We touched briefly on patent privateers, but I want
to go into it in a little more detail. And we know what that patent
privateers are companies that outsource their patent lawsuits.
They are PAEs.
What is the scope of this? And should such behavior be subject
to FTC and even, I think more importantly, because I was a former
United States attorney, DOJ antitrust scrutiny for anticompetitive
behavior?
Mr. Rao, would you please respond to that?
Mr. RAO. Thank you for the question.
So I think the question about whether or not there is a anticompetitive issue with outsourcing your patent enforcement, it is a
complicated one.
I think the first issue is patents by themselves is a monopoly,
and that is anticompetitive by its nature. But it is a constitutionally granted monopoly. So there is always an anticompetitive
aspect of patents.
And in the case where universities or small inventors want to
have licensing programs and have technology transfer licensing
programs, take their patents and license them and look to get rewards form that, that tends to seem of procompetitive way of getting their technology out there.
I think that when you stop and look at the bigger aggregators
who are just out there buying patents by the thousands, and then
basically walking into your office and saying we have 100,000 patents, and you probably infringe a couple of them, so pay us, I think
there is an aspect of that that we need to look at.
Mr. MARINO. Thank you.
Let us move to discovery, and anyone of you can respond to this.
What do we do about jurisdictions? And judges control their own
courtroom. They can actually hand out additional rules that one
has to follow, so if you are in another jurisdiction, you better do
some studying up on what the judge requires.

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But what we do about the situation that happens a great deal
of time where a judge allows unlimited discovery?
Does Congress address that? Or do we seriously say to the judicial system, you have to make some changes here.
Anyone or all of you?
Mr. Johnson?
Mr. JOHNSON. When the Federal Circuit Court of Appeals was
established in 1982, it is my understanding that the discussion was
had as to whether or not it should have the authority to mandate
rules of practice in patent cases, and the conclusion was that it
should not be able to disturb the rules of the regular circuits on
procedural matters.
So while Judge Rader has been very active and the patent pilot
courts program will be effective, Congress has not given the Federal Circuit the authority to promulgate local rules that would be
applicable across all districts.
So at this point, if you are in a place where you have a particular
local set of court rules, you are stuck with them. So the way litigants usually handle that is to try to get the case in a place where
they like the rules.
Mr. MARINO. My point exactly.
Anyone else want to address that matter, because I do have a
couple other questions?
Okay, so the next one, Ms. Dhillon, and of course anyone else,
how often do we see a court dismissing defendants in these types
of cases, if there is a litany of them?
So, Ms. Dhillon, could you respond to that, and anyone else?
Ms. DHILLON. That certainly does happen, and we have been successful in being dismissed from cases. But I think it goes to the
point you made previously, which is, unfortunately, that usually
happens after we have incurred a great deal of cost in the discovery
process.
Mr. MARINO. Right. Okay.
Anyone else? Mr. Boswell?
Mr. BOSWELL. As I highlighted earlier in my testimony, the issue
is not necessarily can you get out, but if you cannot get out until
the end, it is really somewhat of a moot point. You have already
lost.
If the judge will not hear dispositive motions until all the discovery is done, in some ways, it does not matter, because you have
already lost the case.
Mr. MARINO. I am going to ask you to look into a crystal ball
here.
We get this legislation passed. It is on the books. It is signed,
sealed, and delivered. What do you foresee out of this legislation
happening?
Do you understand my question?
Mr. GERST. Which legislation?
Mr. MARINO. Legislation where we improve what we have already done in the reform act. I mean, this is a never-ending process. At what point do we stop and draw the line and at what point
to we say enough is enough?
So, please, anyone want to respond to that?

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Mr. RAO. I think if we pass something like the SHIELD Act or
a fee-shifting bill, you would see a number of these patent assertion entities drop fairly dramatically.
I mean, it has been a new phenomenon. I feel like people have
found a litigation business model that works for them right now.
If we correct that behavior, they will leave this field and find some
other nonpatent-related field to employ themselves.
But I think if you change the incentivesit is an economic problemif you change the incentives, I think you will see the number
of litigations go down.
Mr. MARINO. Anyone else?
Well, ladies and gentlemen, I want to thank you. This concludes
todays hearing, and I want to thank all of the witnesses for being
here.
[Whereupon, at 2:26 p.m., the Subcommittee was adjourned.]

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APPENDIX

MATERIAL SUBMITTED

FOR THE

HEARING RECORD

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Material submitted by the Honorable Jason Chaffetz, a Representative in
Congress from the State of Utah, and Member, Subcommittee on Courts,
Intellectual Property, and the Internet

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Response to Questions for the Record from Mark Chandler,
Senior Vice President and General Counsel, Cisco Systems, Inc.

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Response to Questions for the Record from Janet L. Dhillon, Executive Vice
President, General Counsel and Corporate Secretary, JCPenney Company, Inc.

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Response to Questions for the Record from John Boswell,
Senior Vice President and General Counsel, SAS Institute, Inc.

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Response to Questions for the Record from C. Graham Gerst,
Partner, Global IP Law Group, LLC

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Response to Questions for the Record from Philip S. Johnson,
Chief Intellectual Property Counsel, Johnson & Johnson

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Response to Questions for the Record from Dana Rao,
Vice President of Intellectual Property and Litigation, Adobe Systems

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