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The House Hearing on Abusive Patent Litigation: Webster's Report ~pj Update
Sunday, March 17 2013 @ 04:40 AM EDT

Thursday was the hearing on abusive patent litigation by the House Judiciary Committee's Subcommittee on Courts, Intellectual Property and the Internet. By abusive patent litagation, they mean trolls -- or as one calls them when one holds one's pinky genteelly in the air, NPEs, nonpracticing entities. I put out a call for one of Groklaw's own to attend and let us know what happened. Webster was able to attend, and he has provided an eyewitness account for us in his own inimitable style.

The chairman of the hearing, US Representative Bob Goodlatte, opened with a statement, as did several members of the subcommittee with a little speechifying of their own, and then the invited witnesses of the day each told about their company's experiences with abusive litigation, except for one, a lawyer whose firm represents trolls and who opined that the patent system is working well overall. If you click each of the following names of the witnesses, you can download as a PDF the written testimony each provided in advance:

Imagine how it is out there in the patent universe, when a company needs to have a specializing General Cousel for Intellectual Property Litigation. That's all he does, day in and day out. Assistant Professor Colleen Chien of Santa Clara University Law School has a recent study of patent trolls, with some sufficiently horrifying numbers, which should disabuse anyone of the notion that the patent system is working well overall, and she has an article, Patent Trolls by the Numbers on Patently O, which will provide the same effect on its readers. One of the witnesses, the lawyer from Cisco, tells about a recent attempt by Cisco, Motorola and NetGear to push back against a PAE, Innovatio, which was going against end users. You need to read the judge's dismissal [PDF] of the RICO claims they tried to bring, if you want to understand how PAEs operate and how the courts protect them.

There is now a video on this page for those with the stomach for to watch the entire hearing and who have the ability to view something in .wvx format, which doesn't include me.

I think Congress is stuck in the 80s, when Microsoft ruled the world. They don't realize most of us moved on a long time ago, and if they want a lot of citizens to watch these hearings, they need to provide it in the formats that most of us now use. And that very much isn't .wvx. I haven't used Windows Media for almost a decade, and I'm not starting again now. There really is no excuse for any government to force its citizens to use a proprietary format from a private company in order to participate in civic life, and that's especially true when you consider that you have to pay for Windows Media.

And with that sad detail aside, here's Webster's account of the day.

[Update: The report includes discussion of two scholarly papers on the costs of NPEs to the US economy. Here they are, first the Boston study, Boston University School of Law's James Bessen and Michael J. Meurer's paper, "The Direct Costs from NPE Disputes", which found "We estimate that firms accrued $29 billion of direct costs in 2011. Moreover, although large firms accrued over half of direct costs, most of the defendants were small or medium-sized firms, indicating that NPEs are not just a problem for large firms." And then a rebuttal study mentioned by C. Graham Gerst, the lawyer whose firm represents NPEs, David L. Schwartz and Jay P. Kesan's paper, "Analyzing the Role of Non-Practicing Entities in the Patent System," which argues that there are deficiencies in the methodology of the Boston study and that "The debate should be reframed to focus on the merits of the lawsuits, including patent system changes focusing on reducing transaction costs (e.g., lawyers’ fees) in patent litigation, instead of focusing solely on whether the patent holder is a non-practicing entity."]

**********************

The Hearing on Abusive Patent Litigation:
The Impact on American Innovation & Jobs, and Potential Solutions

by Webster

Preface

 This is not going to be a blow by blow account of the hearing.  It was bloodless.  That would take too long to correct the spelling and expand the fifteen pages of notes.  The hearing was recorded for a more perfect account than will be reproduced here.  What’s more the hearing for those in the know was predictable.  The important point is that it is even being held at all.

A freestyle account should follow, with the reader’s patience.

Introduction - The Suspense of Attending

In order to get to the hearing, counsel had the prospect of a criminal case with a recidivist with more than one case and, accidently, more than one lawyer.  One may be obliged to come to court on a particular day, but one is not obliged to leave it.  There are actually times when it would be better for a client not to come to court -- but his lawyer can not tell him that.  Many clients can figure this out from osmosis or bitter experience.  It is sometimes more efficient to leave the next court date to the next arrest, whenever that would be.  So counsel was free to attend the hearing by taking a tag team approach with sister counsel and by the client’s reluctance to risk stepping into custody when he could possibly avoid it.  For whatever reason he failed to appear -- bench warrant.  All counsel could move on.

The Rayburn House Office building is seven blocks away across the mall, and it is two and a half blocks walking to and from the Metro stations, or two to four blocks underground.  Counsel opted for a walk, some of it as the crow flies, across the mall.  He was rewarded with crisp, breezy walk during which the hip and knee merely grumbled.  Some joggers passed, looking him in the eye as if recognition was possible.  Were they Congressmen?  Counsel walked in with a woman who pranced past security.

 “Are your with her?”

“No” was the wrong answer.

 The guard barked at counsel to get in line, and others to wait outside.  She was a Congresswoman.  

Counsel fortified himself with a visit to a palatial comfort station before he found the hearing room and an expected line.  He was right to do so.  There was already a line of about twenty, almost an hour before the hearing.  There were papers with names on the floor.

 This is rarefied air up on Capitol Hill.  Everyone is well-paid or post-election secure.  There were many suited nerds or wonks waiting and passing by.  Some in casual clothes were standing in line for others whose time and clothes were more valuable.  It appeared a wait was necessary to get into a popular hearing, but by hearing time it was clear there was space in the room.

 There was a technical director in the corner who had controls for sound, light and TV.  He provided the password for the free House Public WiFi.  Counsel ventured a few tweets with no public censure.  This was ideal for the Chromebook.  The woman to the left was reading letters from the Electronic Frontier Foundation.  Counsel asked if she was from EFF.  Her “No” was the end of the conversation.

The Hearing:
Abusive Patent Litigation: The Impact on American Innovation & Jobs, and Potential Solutions

For one who is used to going to court, this hearing held absolutely no suspense.  Nothing was going to be decided, not even the next date, no one judged, no one searched and shackled.  The written testimony of the witnesses had already been collected.  Indeed, these very witnesses had already been collected, significantly some from North Carolina, the Chairman’s and other committeemen’s state, from both parties.  

The very senior Chairman of the subcommittee, Congressman Howard Coble (R-NC) opened the hearing with remarks about the problem the committee would address.  He declared that frivolous patent litigation was stifling innovation and business.  He noted that patent trolls were gaming the system and using old patents granted long ago to threaten and engage in litigation.  The system being gamed is the Federal courts.  They are looking at various remedies.  One is the Shield Act; one is making the party seeking discovery bear some of the cost; another is to stay litigation pending patent review when it involves a non-manufacturing party.  All options are on the table.  There are even instances of patent litigation involving Federally mandated services like wireless security technology.

The Chairman then announced that the witnesses would give five-minute summaries before the light on their table turned red.  He then swore them in and graciously yielded to another gentleman from North Carolina, Congressman Watt.  He greeted a familiar witness, Mr. Boswell from the SAS software company of North Carolina and noted his work on a previous amendment.

Watt gave a little speech highlighting the ambivalence of the situation.  He bashed the trolls who rely on poor quality patents to waste the resources of viable businesses.  But the trolls say licensing is a historical and standard practice to benefit from patents.  "What is a patent troll?" he posits.  He listed actions that have been taken in reaction to the troll problem: in 2006 the Supreme Court in the "eBay" decision (Ebay Inc. v. MercExchange LLC [PDF]) made it more difficult to get injunctions; the Federal Circuit issued venue abuse orders; The America Invents Act (AIA) enhances the quality of patents by the post-grant review procedures.  Chief Judge Randal Radar of the Federal Circuit notes that anyone can assert a patent beyond one's contribution.  Anyone can be a troll.

What is a troll?  He then explained that twelve companies and a troll purchased Kodak's patents.  This saved Kodak and thousands of jobs.  It immunized the twelve companies from the troll, but it enabled the troll to attack others.  This situation ought to be scrutinized from various perspectives including the antitrust angle.  Anyone can be a troll, so it is elusive to get to a true troll.

Mr. Watt then abruptly took another tack.  Software patent litigation and grotesque legal fees are a problem but be cautious of remedies that disincentivize true inventors.  You don't want today's prey to become tomorrow's predators.  Do not devalue patents.  The system encourages the buying and selling of patents and is a career path for thousands of technically creative citizens.  Adopt meaningful reforms with caution.  

He then graciously yielded to another most senior member, John Conyers, a Democrat from Michigan.

 Mr. Conyers apologized to the witnesses for having to listen to "us" and then made his little speech.  To fix the system they have to improve the patent quality and reveal the true ownership of the patents.  The AIA will soon produce reports and recommendations.  There are improvements already ongoing.  

He yielded the spotlight back to the Chairman of the Judiciary Committee, Mr. Goodlatte.

 Mr. Goodlatte declared the AIA, his product, good for decades to come.  The patent system has to work, rather than the courts.  We have to recognize inventions that are truly novel and innovative and cut out the legal gamesmanship.  There is a problem with business method patents.  They are also abstract and broad.  The abusive patent litigation that they produce is a drag on the economy.  The tens of billions of dollars spent on settlements is wasted capital.  The Non-Producing-Entities send blanket demand letters and file numerous lawsuits that attack basic ideas like "shopping carts" and "podcasting" -- it is a playground for trial lawyers.  Abusive patent trolls strike at the very heart ..."  He declared himself pro-reform.  

The hearing room focuses on the congressmen.  They sit up high on two rows of benches like a few dozen judges.  They come and go; there are many vacancies.  Aides come and go and whisper and sit behind them.  They are conducting other business.  The witnesses sit at a table in the first row of the public's rows of chairs.  There are monitors on the wall for all to see the action, or the speaker of the moment.  The congressmen are almost all intelligent and articulate.  There is a reason they are there.  They each get a few minutes but seniority and party rule, and they all know their places.  Anyone for patent reform has to be encouraged that they are taking patent reform up.  Something is amiss in the land.  Businesses, their employees, voters and campaign contributors are up in arms.  This the witnesses will show.  Both parties have to pay attention and they are.  This hearing will delve into why.

Congressman Tom Marino subbing for Chairman Coble now introduces all the witnesses.  He gives their companies, positions with references to size of departments or number of lawyers and their graduate and undergraduate schools.  Congressman are wont not to skip any reference or association to a voting jurisdiction or bloc.  

The six witnesses have long ago submitted their testimony to the subcommittee staff.  They will get five minutes each to summarize.  They may be asked to comment further by Congressmen later.  This report may recompile to present every witness as if they testified 'seriatim.'  So when a Congressman inquires, he does so for emphasis; he knows what the witness has to say.  Trolls are not unrepresented.  There is, to be sure, a troll in sheep's clothing on the panel of witnesses.  How better to fight reform than to help it to lengthy due process and then shape it.

Witness one is Mark Chandler, Vice President and Counsel for Cisco Systems with 250 professionals on his team.  Surely CISCO both has and defends against patents.  

He expressed his eagerness to testify and graciously praised the bipartisan leadership shown by the committee.  He noted how his company has spent one-third billion on abusive patents since his last testiony in 2006!

 The plague has now spread to Cisco customers on Main Street, he said.  He referred to the Shield Act and the AIA, a tech fix that will take time.  The ITC [International Trade Commission] has become a "shakedown mechanism" used by Patent Assertion Entities [PAE] to extract larger settlements due to the ITC's power to issue injunctions.  Cisco used to spend $6 billion on research and development.  It must divert tens of millions a year to patent defense now. Cisco's litigation is with PAE's only.  Cisco has almost no litigation with ongoing businesses.  

He tells the story of a PAE, Innovatio, who targeted CISCO end users.  Innovatio was aware that end users had licenses to the patents in question through exhaustion.  Cisco, with Motorola and NetGear, brought powerful RICO claims (like racketeering, see complaint [PDF]), but Judge James F. Holder, in the US District Court for the Northern District of Illinois, summarily dismissed [PDF] their RICO claims because it was possible that a few of the 13,000 users of their products might not have licenses.  He didn't find it enough of a sham based on this mere possibility.

 Cisco will push back.  Judges are reluctant to be drastic.  These attacks are driven by procedural opportunity that didn't exist ten years ago.  The courts are reluctant to impose sanctions.  Patent predators have an ability to extract unknown rents.            

Our customers, he said, are given two weeks to pay two thousand dollars or get sued.  It is like lab mice in a maze.  They have to pay to avoid litigation which they could very expensively win.

 Congresswoman Zoe Lofgren of California further addressed him about this.  He explained that an ex-Broadcom official bought some old patents, some Standard Essential Patents or SEPs, and went after WiFi chips used by small businesses.  One was Caribou coffee, from whom they demanded $2,000 per location.  This is the RICO case referenced above.  The judge is not sure, so the case proceeded.  Congressman Nadler noted that attacking end-users like Starbucks is a shame; what about a rule to go right up the chain?  Chandler replied that that would focus on the technology and not the end-user.

When queried by Congressman Holding he referred to patent abuse as a protection racket, with the discovery cost as an instrument of terror.  A patent is a monopoly.  Patents suppress much, and industry is not part of that grant.  

Litigation is their only business.  Congresswoman Lofgren suggested they needed the California vexatious litigant law.

Remedies are to make PAEs pay for weak patents and discovery abuse.  Also grant stays for patent reexamination.  The AIA speeds up re-exams.

 In later discussion he noted that even with the AIA, there is a 20-year backlog of patents.  There is still no automatic stay for preliminarily invalid patents or patents in re-examination.  

The PAEs lose 92% of the time in court.  The PAEs have a great advantage due to the lack of clarity for damages.  They are vague and large.   The damages should be related to their true cost in the product.  Cisco is faced with the trade-off decision:  get the patents or use the money for patent defense.  It has become a casino run by the PAEs unrelated to invention.

In response to Congressman Richmond, a Democrat from this reporter's home town district of New Orleans and the great state that is the only foreign country of the union, Louisiana, Mr. Chandler explained that the PAEs are funded by hedge funds and private equity entities.  They only litigate, manipulate, and play procedural games.  Only Congress can remedy this.

Witness Two  was Janet Dillon, Executive Vice President and General Counsel for the retailer JC Penney.  They have 1,100 stores in 49 states.  She represented Main Street, or, better, the mall.  JC Penney is not in the technology or patent business.  Shoppers expect WiFi, mobile apps, and online shopping.  Four years ago JC Peny had no patent cases.  Now they have two dozen suits.  Hiring counsel to defend is very expensive.  

They are a target because their headquarters is in the Eastern District of Texas, which is patent troll heaven due to the courts there.  This patent-friendly jurisdiction has set precedents.  NPEs got traction there, and more have jumped on the bandwagon.  The courts can't stop it.  They don't have the tools.  Penny pays patent fees, but the trolls get an old patent and enforce it.  We have been sued for drop-down menus, browsing on a phone, electric shopping bags, store locations on a phone ...  We have never been sued by the actual inventor, she said.  It is difficult to defend against old patents because the witnesses are dead.  It is expensive, so they have to settle due to the costs.  We settle without actual infringement, she said.  That is because it costs $5 million for discovery alone.  We have to weigh conducting business against litigating a bad patent.  The PAE doesn't make products or jobs, which JC Penny does.  So do they settle or invalidate junk patents that we do not violate?  It is hard to fight abusive suits and maintain your business.  

In response to Congressman Desantis of Florida, she explained how patent issues take up half her work, when it didn't exist four years ago.  Penny has not changed business practices, but it has changed dealing with vendors.  They try and deal with large vendors who can indemnify them if their products become entangled with patent litigation.  They are much less likely to deal with small vendors who can't indemnify.  This is unfortunate for the small vendors and innovation in general.  

She told Congressman Marino that they as a defendant are and can be dismissed from patent suits, but only after great costs.

Witness Three was Mr. Boswell of the SAS company.  He is General Counsel and leads 40 attorneys globally.  He was a key witness often addressed and volunteering a response.  The SAS Company has made software since 1976 in North Carolina.  They have been sued by trolls only, and he considers them business terrorists.  When they sue you, you have lost already.  This is a point he made throughout the hearing, "You have already lost."  The NPEs bear no cost; they have no employees, no witnesses.  They are immune from the discovery burden.  They make your discovery obligations as broad and expensive as possible.  Courts permit this broad discovery.  One recent case cost them $8 million in discovery.  They won a summary judgment.  There were only eight inches of relevant documents, yet they had to produce what would have been documents that piled up on top of each other would tower over the height of the Washington Monument.  

This abusive discovery tactic takes advantages of the weaknesses in the system, he said.  It is extorting money.  This process is completely in the hands of the Federal government.  Many of the patents shouldn't have been issued.  It has been going on for some time.  The courts haven't fixed this.

 Chief Judge Rader [Federal Circuit] suggests making the patents say what they do.  They can also make those who want more discovery pay for it.  It is hard to determine who is the real party in interest.  Only you, Congress, can help us, he said.

At the prompting of Chairman Coble, he explained how his company is sure they would win but by being targeted, they have already lost.  The troll says, "I don't care if we lose.  If you don't want to lose, pay us."

 Congress has to make it so defendants don't have to settle.  The paradigm must shift.   One way is to shift the cost of discovery.  Make the demanding party bear the cost.  

When someone suggested that the judge should decide, Mr. Boswell pointed out that the trolls would never file in a jurisdiction where a judge would order a troll to pay for discovery.  "The courts never do it."  

Mr. Boswell explained that his company had no connection to the Eastern District [ED] of Texas.  The AIA is supposed to help.  Even with a motion to transfer from the ED, it thwarts the AIA, because the courts there sit on the transfer motion until too much discovery has passed.  If you have to go to discovery, you have lost.  ED of Texas cases are up greatly.

Boswell insists Congress has to take the ball out of the judges' hands.  Make the patent trolls have to consider possible consequences before they file suit.  As it now stands, they have nothing to lose if they lose.  There is no balance.  Judges never order sanctions.

 When Congressman Marino asked about the courts dismissing defendants, Mr. Boswell again explained that the issue was not getting out of the suit.  You have already lost because you are in the suit.  Motions to dismiss are not going to be addressed until after motions and discovery.  The loss occurs at the discovery stage.  With the expense of discovery, you lose even if you win summary judgment or the trial.   If the defendant could get something, then we would try a case instead of settle.

Witness four is probably the troll in sheep's clothing, Mr. Grant Gerst of Global IP, a law firm that represents "patent assertion entities" and patent defendants.  His firm represents many tech companies, medium and small ones, as well as start ups.  He also represents NPEs so he is therefore pro-patent.

 He warned the room to beware of unintended consequences.  The system overall is working well by encouraging innovation.  We have the strongest patent system in the world and the world's most innovative country.  He recognized that NPEs could be a nuisance, but it is often better to settle rather than to defend.  But beware of shifting costs of litigation and weakened remedies.  You will make it so that companies can't use their patents due to rules against NPEs.

 NPEs play a valuable role.  They reward innovators.  The innovators sell their patents to the NPEs who are often the only ones interested.  The aggregation of patents has benefits.  This rewards the innovators.  The NPE keep the value of the patents up by acquiring them.  He urges Congress to act but minimize risk to the system.  Careful messing with the ITC.  Maintain consistent reform.  Do not dictate Rule 11 sanctions and discovery reform.  Be careful of unintended consequences.  The Shield Act could help big NPEs, who have money to pay bonds, and eliminate the smaller ones.  What you do against the troll, you might do against the garage innovator. If you make the loser pay, you make it harder for anyone to assert their patents, the small patent holders especially.

When Congresswoman Jackson Lee ran down the trolls and cited a Boston University study indicating that in 2011 NPEs garnered $29 billion from over 500 defendants, thus squandering vast resources, he was ready to refute the study with one by David Schwartz.    

In response to Congressman Goodlatte, he explained that Rule 11 exists for federal court sanctions for abuse.  He urged Congress to keep it that way and let the judges decide.  Don't change it.  Help the NPE targets coordinate their activity.  NPEs fear coordination.  

Witness five was Mr. Johnson, General Counsel of Johnson & Johnson of big pharma.  He was noteworthy for having case authority on the tip of his tongue.  This was no wonder in light of his vast experience.  His company is in the Coalition of 21st Century Patent Reform with many big companies.  The abuse of patents is not new.  However the courts favor the NPEs and vague patents and unlimited damages.  There can be treble damages.  Damages should be limited to the value of the product.  The courts uphold vague, trivial patents and then grant unreasonable damages.

 He suggests limits on discovery.  The AIA should lessen patent abuse.  There should be a process to quickly and inexpensively challenge patents.  The parties should be limited in a suit.  The courts have power.  More can be done like fee shifting.  He was a low key and effective witness.  He is also a careful reformer since his company relies on patents.

Congressman Darrell Issa addressed him about the ITC.  Johnson explained how a company went to the ITC to twist the knife and extract a greater settlement since their remedy was an injunction.  Johnson felt the ITC was not obsolete, but that it needed more remedies.  

In later discussion, he urged a remedy in the courts and invoked the Federal Circuit.  He pointed out that the Federal Circuit has no power of procedural matters.  Congress has not given them the authority to promulgate rules.  Therefore the local rules apply in patent suits.  He felt that customer suits should be stayed.  However he is cautious about shifting costs and feels the judge should decide.

In response to Congressman Rothfus about the extent of the problem, he cited a Price Waterhouse study of NPEs for the last 11 years.  They won only 24% of decided cases.  This is less than the average 33% of decided cases.  Rule 11 sanctions are low and are used against attorneys.  Less than 1% are awarded fees.  Frivolous cases settle.  The last thing trolls want is a trial.  Sixty trolls brought 62% of patent litigation. In most places in the world the loser pays.  The judges here don't want to get into that.

  Witness six was Dana Rowe of Adobe Systems.  He is general counsel now. but used to work for Microsoft.  Before that, he had a technical degree and worked for GE Astrospace.  He opened with a declaration that he did not want to stop software patents.  Adobe supports the patent system but wants to improve its quality.  As a leading software company of the world, patents protect their innovation.

 The new problem is that it has become more expensive to win than to lose.  NPEs lose over 90% of the time.  They are now attacking customers.  It is cheaper to settle for the customers than it is to hire lawyers and answer the complaint.  The NPEs add cost, not innovation.  The Shield Act tries to focus on the patent use of the plaintiff.  The PAE needs to face financial exposure.  

Improve the quality of patents.  A clear patent is a good patent.  The PTO must increase the clarity of claims.  The PTO is also not aware of much prior art for software.  

Congressman Richmond asked if there should be a different standard for retailers attacked in a patent suit.  To this Mr. Rowe explained that Adobe stands behind their customers and intervenes as they did for Safeway, Ikea, LL Bean and Pacific Software.  Small retailers ask Adobe to step in.  Eighty-five percent of our litigation, he said, is stepping in for our customers.

There are anticompetitive aspects to patents.  Big aggregators with thousands of patents say, "pay us, some of this will stick".    

Georgia Congressman Hank Johnson told a troll story, probably from his district.  A scanner troll wanted Blue Wave to pay $1,000 per employee for their project paperless.  Blue Wave fought and won, but they had to pay millions to do it.  They shouldn't have to.  At the same time we have to be careful of solutions that bar the courthouse door to litigants.  Bonding could lock out litigants.  We could open the door to tort reform, but we must consider the implications.  Is the patent holder who files against a deep-pocketed company affected?    

After three hours the presentation ended.  The patents on lip service lapsed long ago.  Congress presented themselves as concerned and involved.  With patent tumult in the land they can not help but be.  They call for action and balance and count the votes.


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