Senate Judiciary Committee Holds Hearing on "Protecting Small Businesses and Promoting Innovation by Limiting Patent Troll Abuse"

Senate Committee RoomOn Tuesday, December 17, 2013, the Senate Committee on the Judiciary took up the issue of abusive patent litigation.  In a hearing entitled "Protecting Small Businesses and Promoting Innovation by Limiting Patent Troll Abuse," the Committee heard from stakeholder witnesses on three pending bills.  The hearing focused on S. 1720 (the "Patent Transparency and Improvements Act of 2013"), a bill introduced by Sens. Leahy, Lee, and Whitehouse.  However, there are at least two other still-pending bills that were discussed:  S. 1612, introduced by Sen. Hatch (see "Trolls Better Watch Out This Halloween -- Senator Hatch Introduces Patent Litigation Integrity Act"), and S. 1013, introduced by Sen. Cornyn, which also has provisions related to fee-shifting and heightened pleading standards.

Sen. Leahy opened the proceedings by noting that the last session of Congress passed the historic America Invents Act ("AIA"), which, among other things, allowed outsiders easier access to challenge the validity of patents at the Patent Office.  Nevertheless, he believed that bad actors are still abusing the patent system.  Sen. Leahy highlighted the practice of targeting small businesses by "so-called Patent Trolls" by using his own state of Vermont as an example.  Like most individuals that believe there is a problem with the patent system, he pointed to the aggressive demand letters sent by PAEs related to such practices as the scanning of documents and the offering of "wi-fi" in commercial establishments.  In fact, Sen. Leahy went as far as to say that this practice "is a close to robbery as you can think of."  He expressed his hope that meaningful and targeted reform could be achieved, reform that would strike a balance between protecting the rights of legitimate patent holders while at the same time stopping litigation abuses.

Senate SealThe ranking minority member of the Committee, Sen. Grassley, also pointed out in his opening statement that the patent system is important, but that innovation is being harmed by abusive demand letters and litigation practices.  He provided statistics related to the extent of the problem, but it was unclear from where these statistics were obtained, or just how accurate they are.  Sen. Grassley focused on personal accounts from constituents in his state of Iowa.  He made the interesting observation that contracts between suppliers or manufacturers and their customers are now beginning to include an allocation of liability for patent trolls.  This would appear to be one way to overcome the end-user issue, provided of course that the customer has bargaining power.  The two parties could therefore take into account the risk posed by a potential blocking patent, and reflect it in the agreed-upon price between the parties.  Ultimately, the content and tone of the comments of Sens. Leahy and Grassley were very similar to each other, as opposed to the differences seen between the senior Republicans and Democrats on the equivalent House committee.

The witnesses testifying before this committee were divided into two panels.  The first panel consisted of four witnesses, two of which represented groups targeted by so-called trolls, and two of which represented companies or coalitions that utilize the patent system, but who nevertheless recognize that some reform is necessary.  The first witness was John J. Dwyer, Jr., President and CEO of the New England Federal Credit Union of Vermont.  He told the personal account of troll victimization -- his receipt of demand letters related to ATM technology.  He complained that these demand letters were vague, misleading, and lacked specificity.  To bring home the point that these patent trolls were randomly sending these letters, he pointed out that one of the credit unions targeted did not even own any ATMs.  Mr. Dwyer stressed the need for demand letter reform, and encouraged the use of the Federal Trade Commission ("FTC") to enforce any enacted laws.  Also, he noted that a registry should be created for any entity that sends more than 10 demand letters a year.  According to Mr. Dwyer, this would assist accused infringers in forming joint defense coalitions.

Mr. Dwyer's testimony was followed by Micheal Makin, President and CEO of the Printing Industries of America.  Mr. Makin provided the most vitriolic testimony of the hearing.  He suggested that, before 2013, it was "unheard of" for someone in the printing industry to be sued for patent infringement.  Now, because of the "thuggish" acts of patent trolls, Mr. Makin pointed out that people in the printing industry must expend tens of thousands of dollars to ward them off.  However, it is more likely that he just was not aware of any such patent suits -- it seems unlikely that the printing industry has not benefited from the patent system.  Mr. Makin warned that "patent trolls do not innovate, they do not promote economic growth, they do not contribute to the good of education or scientific research, and most importantly, patent trolls do not create jobs -- our businesses do."  Mr. Makin concluded by hoping that a common sense, practical solution could be found, but he urged the committee to take definitive action now.

Dana Rao, vice-president and associate general counsel for intellectual property litigation at Adobe Systems, Inc., testified next, expressing his views representing a company on both sides of the issue.  On the one hand, Adobe is an innovative company that has around 3,000 patents and application to protect its technology.  On the other hand, Adobe has been the victim of these so-called patent trolls.  When it came to defining a patent troll, Mr. Rao simply suggested that they were "bad actors" in the system.  In his view, the most important provision being considered was fee shifting.  Currently, the standards of § 285 are too high for many parties to meet it.  Instead, he urged Congress to give Courts the clarity to solve problems.  He believes that this can be done by shifting fees unless the loser has a substantially justified position.  Interesting, Mr. Rao specifically pointed out that software patents were not the issue, contrary to the position taken by many in the community.  He pointed out how such patents were essential for companies such as his.  Instead, he urged that any legislation should focus the bad actors, not on the types of applications or patents.

The last witness of the first panel was Philip S. Johnson, senior vice president and chief intellectual property counsel at Johnson & Johnson.  Even though he often represents or is involved with several different organizations, including IPO and BIO, Mr. Johnson was representing the Coalition for 21st Century Patent Reform at the hearing.  During the course of his testimony, he provided one of the best definitions of "patent troll" to date:  "troll abuse is the misuse of a court proceeding or the threat thereof to press specific patent claims or defenses for the sole purpose of coercing an opponent to settle a dispute to avoid otherwise inevitable litigation cost."  Interestingly, this definition applies to any litigant, and is therefore based less on who the party is and more on how they behave.  Mr. Johnson expressed support for several provisions, including the customer stay provisions, the change in the claim construction standard for post-issuance review of patents, and providing the FTC with power to enforce demand letter reform (because providing authority to the FTC will circumvent a lot of the free-speech concerns expressed by opponents of this provision).  However, Mr. Johnson urged caution when it came to the fee-shifting provision and software patent reform, because both of these issues are currently being considered by the Supreme Court.  Finally, he expressed concern about dictating actions to Federal Court or to the Federal Judicial Conference, because any such reforms will only serve to encourage copyists.

The second panel began with the testimony of Steve Bossone, vice president for intellectual property for Alnylam Pharmaceuticals in Boston, MA.  He expressed the point of view of the biotech industry, which he described as an investment-intensive sector.  Because drug development is high risk, he urged caution related to the interplay of various proposed reforms with the currently delicate patent ecosystem.  Any small perturbation, he warned, could have real health consequences.  As such, Dr. Bossone was neither defending nor attacking trolls, but rather he was urging caution to consider the consequences of the changes for which everyone is clamoring.  Particularly alarming for the biotech industry is any change that would strip courts of their discretion.  Dr. Bossone did express approval for the customer stay provisions, but only if the Senate considers the views of universities and the venture capital community before enacted them.  He concluded by pointing out that the long term cost of these reforms might be greater than the short term impact they will have on only a few sectors.

The next witness was Harry Wolin, Senior Vice President, General Counsel, and Secretary of Advanced Micro Devices, Inc.  He also expressed the point of view of a company that relies heavily on research and development and the patent system, but one that has also found itself defending against abusive patent litigation.  He was of the opinion that the courts do not have the tools to address this problem.  That is why he urged the committee to include in the Leahy bill provisions on heightened pleading standards, discovery reform, and fee shifting.  It is these, he suggested, that distinguishes the Leahy bill from the Innovation Act that recently passed the House.  He concluded by urging quick and decisive action.

Finally, the Honorable Q. Todd Dickinson testified on behalf of the AIPLA as its executive director.  As time was running short, he sped through his opening statement.  Nevertheless, his testimony was well focused.  After all, Mr. Dickinson was involved in helping develop the AIA.  In general, he believed that it was too soon to begin experimenting again.  Mr. Dickinson provided three suggestions.  First, the Senate should allow more time to let the AIA work as intended.  The results of the first post-issuance review procedures are just beginning to come it.  Also, any attempt at judicial reform should be surgical and deliberate.  In fact, Mr. Dickinson noted that the judicial conference have already gotten the message.  Finally, he pointed out that more reliable data is need before any real change is enacted.  More empirically based studies are needed to understand the scope of the problem.  In concluding, he echoed the concerns of many others that these changes will impact all patent holders, not just the bad actors.  It is the unintended consequences that we need to be concerned about, he stated.

In all, the tenor of this Senate hearing was much more measured than the hearings held in the House on the same subject.  Even though there were some passionate witnesses that urged immediate reform, many of the witnesses suggested that caution was more appropriate.  It will be interesting to see what legislative efforts move forward from this committee after this hearing.  We will, of course, continue to monitor the efforts of Congress, and report any significant activity in the future.