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22–285 PDF 2016

UPDATE: PATENT DEMAND LETTER PRACTICES 

AND SOLUTIONS 

HEARING 

BEFORE THE

SUBCOMMITTEE ON COMMERCE, MANUFACTURING, 

AND TRADE 

OF THE

COMMITTEE ON ENERGY AND 

COMMERCE 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED FOURTEENTH CONGRESS 

FIRST SESSION 

FEBRUARY 26, 2015 

Serial No. 114–14 

( 

Printed for the use of the Committee on Energy and Commerce 

energycommerce.house.gov 

COMMITTEE ON ENERGY AND COMMERCE 

FRED UPTON, Michigan 

Chairman 

JOE BARTON, Texas 

Chairman Emeritus 

ED WHITFIELD, Kentucky 

JOHN SHIMKUS, Illinois 

JOSEPH R. PITTS, Pennsylvania 

GREG WALDEN, Oregon 

TIM MURPHY, Pennsylvania 

MICHAEL C. BURGESS, Texas 

MARSHA BLACKBURN, Tennessee 

Vice Chairman 

STEVE SCALISE, Louisiana 

ROBERT E. LATTA, Ohio 

CATHY MCMORRIS RODGERS, Washington 

GREGG HARPER, Mississippi 

LEONARD LANCE, New Jersey 

BRETT GUTHRIE, Kentucky 

PETE OLSON, Texas 

DAVID B. MCKINLEY, West Virginia 

MIKE POMPEO, Kansas 

ADAM KINZINGER, Illinois 

H. MORGAN GRIFFITH, Virginia 

GUS M. BILIRAKIS, Florida 

BILL JOHNSON, Ohio 

BILLY LONG, Missouri 

RENEE L. ELLMERS, North Carolina 

LARRY BUCSHON, Indiana 

BILL FLORES, Texas 

SUSAN W. BROOKS, Indiana 

MARKWAYNE MULLIN, Oklahoma 

RICHARD HUDSON, North Carolina 

CHRIS COLLINS, New York 

KEVIN CRAMER, North Dakota 

FRANK PALLONE, JR., New Jersey 

Ranking Member 

BOBBY L. RUSH, Illinois 

ANNA G. ESHOO, California 

ELIOT L. ENGEL, New York 

GENE GREEN, Texas 

DIANA DEGETTE, Colorado 

LOIS CAPPS, California 

MICHAEL F. DOYLE, Pennsylvania 

JANICE D. SCHAKOWSKY, Illinois 

G.K. BUTTERFIELD, North Carolina 

DORIS O. MATSUI, California 

KATHY CASTOR, Florida 

JOHN P. SARBANES, Maryland 

JERRY MCNERNEY, California 

PETER WELCH, Vermont 

BEN RAY LUJA ́ N, New Mexico 

PAUL TONKO, New York 

JOHN A. YARMUTH, Kentucky 

YVETTE D. CLARKE, New York 

DAVID LOEBSACK, Iowa 

KURT SCHRADER, Oregon 

JOSEPH P. KENNEDY, III, Massachusetts 

TONY CA ́ RDENAS, California 

SUBCOMMITTEE ON COMMERCE, MANUFACTURING, AND TRADE

MICHAEL C. BURGESS, Texas 

Chairman 

LEONARD LANCE, New Jersey 

Vice Chairman 

MARSHA BLACKBURN, Tennessee 

GREGG HARPER, Mississippi 

BRETT GUTHRIE, Kentucky 

PETE OLSON, Texas 

MIKE POMPEO, Kansas 

ADAM KINZINGER, Illinois 

GUS M. BILIRAKIS, Florida 

SUSAN W. BROOKS, Indiana 

MARKWAYNE MULLIN, Oklahoma 

FRED UPTON, Michigan (ex officio) 

JANICE D. SCHAKOWSKY, Illinois 

Ranking Member 

YVETTE D. CLARKE, New York 

JOSEPH P. KENNEDY, III, Massachusetts 

TONY CA ́ RDENAS, California 

BOBBY L. RUSH, Illinois 

G.K. BUTTERFIELD, North Carolina 

PETER WELCH, Vermont 

FRANK PALLONE, JR., New Jersey (ex 

officio) 

(II) 

(III) 

C O N T E N T S 

Page 

Hon. Michael C. Burgess, a Representative in Congress from the State of 

Texas, opening statement .................................................................................... 1 

Prepared statement .......................................................................................... 3 

Hon. Janice D. Schakowsky, a Representative in Congress from the State 

of Illinois, opening statement .............................................................................. 4 

Hon. Frank Pallone, Jr., a Representative in Congress from the State of 

New Jersey, opening statement .......................................................................... 5 

WITNESSES

Laurie Self, Vice President and Counsel, Government Affairs, Qualcomm ........ 7 

Prepared statement .......................................................................................... 9 

Vince Malta, 2015 Law and Policy Liaison, National Association of Realtors ... 16 

Prepared statement .......................................................................................... 18 

Paul R. Gugliuzza, Associate Professor of Law, Boston University School 

of Law .................................................................................................................... 31 

Prepared statement .......................................................................................... 33 

Vera Ranieri, Staff Attorney, Electronic Frontier Foundation ............................ 58 

Prepared statement .......................................................................................... 60 

SUBMITTED MATERIAL

Letter of February 24, 2015, from Carrie R. Hunt, Senior Vice President 

of Government Affairs and General Counsel, National Association of Federal Credit Unions, to Mr. Burgess and Ms. Schakowsky, submitted by 

Mr. Burgess .......................................................................................................... 103 

Statement of American Bankers Association, et al., February 25, 2015, to 

Mr. Burgess and Ms. Schakowsky, submitted by Mr. Burgess ........................ 104 

Statement of National Retail Federation, et al., February 26, 2015, by David 

French, Senior Vice President, Government Relations, National Retail Federation, submitted by Mr. Burgess ..................................................................... 109 

(1) 

UPDATE: PATENT DEMAND LETTER 

PRACTICES AND SOLUTIONS 

THURSDAY, FEBRUARY 26, 2015 

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON COMMERCE, MANUFACTURING, AND

TRADE, COMMITTEE ON ENERGY AND COMMERCE, Washington, DC. 

The subcommittee met, pursuant to call, at 10:17 a.m., in room 

2322 of the Rayburn House Office Building, Hon. Michael C. Burgess (chairman of the subcommittee) presiding. 

Members present: Representatives Burgess, Lance, Harper, 

Guthrie, Olson, Kinzinger, Bilirakis, Brooks, Mullin, Schakowsky, 

Clarke, Kennedy, Ca ́ rdenas, and Pallone (ex officio). 

Also present: Mr. Massie. 

Staff present: Charlotte Baker, Deputy Communications Director; 

Leighton Brown, Press Assistant; James Decker, Policy Coordinator, Commerce, Manufacturing and Trade; Graham Dufault, 

Counsel, Commerce, Manufacturing and Trade; Melissa Froelich, 

Counsel, Commerce, Manufacturing and Trade; Kirby Howard, 

Legislative Clerk; Paul Nagle, Chief Counsel, Commerce, Manufacturing and Trade; Olivia Trusty, Professional Staff, Commerce, 

Manufacturing and Trade; Michelle Ash, Democratic Chief Counsel, 

Commerce, Manufacturing and Trade; Lisa Goldman, Democratic 

Counsel, Commerce, Manufacturing and Trade; Tiffany Guarascio, 

Democratic Deputy Staff Director; and Jeff Carroll, Democratic 

Staff Director. 

Mr. BURGESS. The Subcommittee on Commerce, Manufacturing, 

and Trade will now come to order. 

The Chair recognizes himself for 5 minutes for the purposes of 

an opening statement. And I certainly want to welcome everyone 

on our panel to the hearing, to provide an update on patent demand letters, the practices and possible solutions. 

OPENING STATEMENT OF HON. MICHAEL C. BURGESS, A 

REPRESENTATIVE IN CONGRESS FROM THE STATE OF TEXAS 

Unfortunately, abusive patent demand letters are not a new 

problem, and they are not new to this subcommittee. Patent trolls 

continue to send demand letters in bulk to induce victims to pay 

unjustified license fees rather than fight back. Last year, under 

Subcommittee Chairman Terry, this subcommittee held an oversight hearing, a legislative hearing, and eventually produced and 

marked up draft legislation targeting bad-faith demand letters. As 

this subcommittee learned through its process, the act of defining 

2 

a so-called troll is a difficult task. In protecting companies from 

trolls, legislation must also not prevent legitimate patent holders 

from protecting their rights from being infringed upon by other actors. But a task that is difficult is not a task that is impossible, 

and I have a sincere belief that in the realm of patent demand letters, like so many other areas under the jurisdiction of this subcommittee, can effect a bipartisan agreement and legislation. 

So here we are in the new year, in a new Congress, and we 

renew the effort to forge ahead to achieve this goal. We again take 

aim to solve a small piece of the patent world that has caused some 

of the greatest consternation. I sincerely believe that a targeted solution to this problem is the best one, and I hope that our hearing 

today will restart the conversations on how best to stop this activity, yet allow legitimate patent holders to proceed. 

The truth is that the destructive business model of the so-called 

patent troll has largely skated just beyond the reach of law, and 

as a result, crime pays. And because Federal law has been slow to 

keep up with the evolving world of patent trolls, even in a subject 

area where Federal jurisdiction is clearly delineated in the Constitution’s Article I enumerated powers of Congress, the States now 

have felt an obligation to begin looking at ways to protect their constituent companies. Protection of intellectual property rights is a 

Federal issue. Indeed, Article I, Section 8, clause 8 clearly envisions Congress as having both the power and the duty to promote 

the Progress of Science and useful Arts, by securing for limited 

Times to authors and inventors the exclusive rights to their respective writings and Discoveries. It would appear from the stories we 

have all heard about patent trolls that the protection of these 

rights is not being considered. This committee wishes to change 

that equation. 

I am especially concerned about the effects these fraud schemes 

have on small businesses. When a business receives a demand letter, especially one that is intentionally vague or misleading, many 

small business owners simply lack the tools necessary to distinguish a bogus assertion from a legitimate infringement claim. However, the United States Patent Office lists three Web sites; Stand 

Up To the Demand, ThatPatentTool, and Trolling Effects, as resources that companies can use to protect themselves. There is 

work going on beyond this subcommittee to address some of this— 

these issues. For example, a number of Web sites have popped up 

for demand letter recipients to verify the legitimacy of infringement 

claims against them. Eighteen States have also enacted legislation, 

and a handful of State attorneys general have brought cases under 

their consumer protection laws. 

As we will discuss today, it may be that State efforts to curb patent abuses are on uncertain legal footing due to preemption of the 

First Amendment doctrines that were developed by the Federal 

courts. These doctrines are designed to protect the fair assertion of 

patent rights, and any legislation this subcommittee produces must 

allow legitimate assertions. It is my intention that this committee 

can work with companies who own large patent holdings to address 

this issue. As many companies have seen, illegitimate claims could 

ultimately undercut the value of legitimate patents. To help us 

strike the proper balance, we will hear from experts in the field as 

3 

well as representatives from both abusive demand letter victims 

and a large patent holder. We hope this information—this will inform the direction of whatever legislation this subcommittee ultimately produces. I hope that we may use last year’s draft, the Targeting Rogue and Opaque Letters Act, as a place to begin the discussion. One area where we will need to focus on is how the bad 

faith standard in that legislation would work with the required disclosures in the Act. Further, how those required disclosures fit with 

the prohibited bad acts included in the draft legislation, and I hope 

that is an area we can examine closely. The subcommittee is eager 

to work with the panelists before us and others to address this 

problem. 

I thank the witnesses for their testimonies, and I certainly look 

forward to the discussion today. 

[The prepared statement of Mr. Burgess follows:] 

PREPARED STATEMENT OF HON. MICHAEL C. BURGESS

I want to welcome everyone to our hearing to provide an update on patent demand letter practices and solutions. Unfortunately, abusive patent demand letters 

are not a new problem, and they are not new to this committee. Patent trolls continue to send demand letters in bulk to induce victims to pay unjustified license fees 

rather than fight back. 

Last year, this subcommittee held an oversight hearing, a legislative hearing, and 

eventually produced and marked up draft legislation targeting bad-faith demand letters. As this committee learned through its process, the act of defining a ‘‘troll’’ is 

a difficult task. In protecting companies from trolls, legislation must also not prevent legitimate patent holders from protecting their rights from being infringed by 

other actors. But a task that is difficult is not a task that is impossible. I have a 

sincere belief that the realm of patent demand letters, like so many other areas 

under the jurisdiction of this committee, can result in bipartisan agreement and legislation. 

Thus, in a new year, in a new Congress, we renew the effort to forge ahead to 

achieve such a goal. We again take aim to solve a small piece of the patent world 

that has caused some of the greatest consternation—patent trolls. I sincerely believe 

that a targeted solution to this problem is the best one, and hope that our hearing 

today will restart the conversations on how to best to stop patent trolls yet allow 

legitimate patent holders to proceed. 

The truth is that the destructive business model of the trolls has largely skated 

just beyond the reach of law-and as a result, it still pays to be a patent troll. And 

because Federal law has been slow to keep up with the evolving world of patent 

trolls—even in a subject area where Federal jurisdiction is clearly delineated in the 

Constitution’s Article I enumerated powers of Congress—the States have felt an obligation to begin looking at ways to protect their constituent companies. 

Protection of intellectual property rights is a Federal issue. Indeed, Article I, Section 8, clause 8 clearly envisions Congress as having both the power and the duty 

to ‘‘promote the Progress of Science and useful Arts, by securing for limited Times 

to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.’’ It would appear from the stories we have all heard of patent trolls that 

the protection of these rights is being abused. This committee wishes to change that 

equation. 

I am especially concerned about the effects these fraud schemes have on small 

businesses. When a business receives a demand letter—especially one that is intentionally vague or misleading—many small business owners lack the tools necessary 

to distinguish a bogus assertion from a legitimate infringement claim. However, the 

U.S. Patent and Trade Office lists three Web sites—Stand Up To the Demand, 

ThatPatentTool, and Trolling Effects—as resources companies can use to protect 

themselves. 

There is work going on beyond this subcommittee to address some of these issues. 

For example, a number of Web sites have popped up for demand letter recipients 

to verify the legitimacy of infringement claims against them. Eighteen States have 

also enacted legislation and a handful of State attorneys general have brought cases 

under their consumer protection laws. As we will discuss today, however, it may be 

4 

that State efforts to curb patent abuses are on uncertain legal footing due to preemption and First Amendment doctrines developed in Federal courts. 

These doctrines are designed to protect the fair assertion of patent rights, and any 

legislation this subcommittee produces must allow legitimate assertions. It is my intent that this committee can work with companies who own large patent holdings 

to address this issue. As many companies have seen, illegitimate claims could ultimately undercut the value of legitimate patents. 

To help us strike the proper balance, we will hear from experts in the field as 

well as representatives from both abusive demand letter victims and a large patent 

holder. We hope this will inform the direction of whatever legislation this subcommittee ultimately produces. I hope that we may use last year’s draft, the Targeting Rogue and Opaque Letters—or ‘‘TROL’’—Act, as a place to begin these discussions. 

One area we will need to focus on is how the ‘‘bad faith’’ standard in that legislation would work with the required disclosures in the Act. Further, how those required disclosures fit with the prohibited bad acts included in the draft legislation 

is also an area I hope people will look at closely. 

This subcommittee is eager to work with the panelists before us and others to address this problem. I thank the witnesses for their testimonies and I look forward 

to our discussion today. 

Mr. BURGESS. And the Chair now recognizes the subcommittee 

ranking member, Ms. Schakowsky, from Illinois for 5 minutes for 

the purpose of an opening statement. 

OPENING STATEMENT OF HON. JANICE D. SCHAKOWSKY, A 

REPRESENTATIVE IN CONGRESS FROM THE STATE OF ILLINOIS 

Ms. SCHAKOWSKY. Thank you, Mr. Chairman. And much of what 

I will say will echo the things that you have said. The—along the 

lines of the problems of patent trolls. I see the rise of these entities 

as a serious threat to consumers and businesses all across the 

country, and I want to explore whether we can strengthen existing 

protections against them as well. 

Patent assertion entities typically purchase patents and then assert that those patents have been infringed, sending vague and 

threatening letters to hundreds or even thousands of end users, 

typically, small businesses or entrepreneurs. Those businesses are 

told that they can pay the patent troll to continue using the technology. And considering the cost and resources needed to vet and 

fight a patent infringement claim, although the chairman did point 

out some resources that are available, many small businesses do 

choose to settle the claim by paying the troll. Others investigate 

and fight the claims, draining precious resources and stunting the 

growth of their businesses. 

It costs patent trolls virtually nothing to send patent demand letters, but they have cost American businesses tens of billions of dollars in recent years. At best, patent trolls are misleading, and at 

worst, they are extortionists. 

This is fundamentally a fairness issue. As the subcommittee 

charged with protecting consumers and promoting fair business 

practices, we must work to reduce frivolous patent claims. I am 

glad that the FTC is using its existing authority to order injunctions on patent assertion entities that are determined to engage in 

unfair deceptive acts or practices. I believe that if we legislate on 

this issue, we should include new authority for the FTC to collect 

civil penalties for those abuses. 

5 

While we should also make sure that important consumer and 

business protections are guaranteed and enforced at the State 

level, including Illinois, remain in place. Federal legislation could 

also ensure the transparency and baseline standards are required 

for patent demand letters. 

There are many ideas about how to increase transparency, including proposals to require information in patent demand letters, 

about the patent-alleged infringement that—the patent that is allegedly infringed, and the technology used that allegedly infringes 

on the patent. 

As we consider acting on this issue, we must also recognize that 

many patent infringement claims are reasonable efforts, as the 

chairman mentioned, reasonable efforts to protect intellectual property. We also need to be careful to make sure that universities, research institutions, and others that develop and hold patents, but 

may not develop products for sale, are not unfairly labeled as patent trolls. We should not undermine the ability of innovators to develop and defend their patents. 

I look forward to hearing the ideas of the panel about how we 

could move forward with legislation, and how it should be structured to make sure that patent demand letters are more fair and 

transparent moving forward. 

And I thank you again, Mr. Chairman, for holding this hearing. 

I yield back. 

Mr. BURGESS. The gentlelady yields back. 

This is the point where the Chair would normally recognize the 

chair of the full committee, but seeing that—and I do want to explain to our witnesses, there is a concurrent subcommittee hearing 

downstairs, and we may well see Members come in and out today, 

and it is not a sign of disrespect, it is a sign of there is just a lot 

of work to be done this morning. 

Mr. Mullin, would you seek time for an opening statement? 

Mr. MULLIN. No, thank you. 

Mr. BURGESS. Gentleman does not seek time. 

Chair recognizes the ranking member of the full committee, Mr. 

Pallone, for purposes of an opening statement, 5 minutes. 

OPENING STATEMENT OF HON. FRANK PALLONE, JR., A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NEW JERSEY 

Mr. PALLONE. Thank you, Mr. Chairman. 

The patent system plays a crucial role in promoting innovation. 

It provides an incentive to inventors to make costly and time-consuming investments in research and development of new inventions. At the same time, the system requires that the inventions be 

disclosed so that others can build upon the inventions. Unfortunately, there are a number of problems with the patent system, 

and reforms are needed. 

I have long pushed to reduce the backlog of patent applications 

at the Patent and Trade Office, but we also need to work to address the concerns that some applications are being approved for 

inventions that are not truly new or non-obvious. In addition, the 

patent litigation system must be streamlined. 

6 

While most patent-related issues are under the purview of the 

Judiciary Committee, and I look forward to its action on patent 

system reform, the Energy and Commerce Committee is responsible for efforts to curb fraud. And one part of the patent litigation 

area in need of attention is the rise of so-called patent trolls, and 

the sometimes fraudulent demand letters they send to small businesses. This trolling activity is a problem. Patent trolls do not invent, make or sell anything. Instead, they buy up large numbers 

of patents, often of suspect validity, and then send demand letters 

or bring law suits using the complexity of the patent system and 

the high cost of litigation as leverage to force licensing fees or settlements. It is not fair to the targets of these predatory tactics, nor 

does it serve the interests of true innovators. 

And efforts to combat abusive demand letters have already 

begun. Some State attorneys general have taken legal action to 

protect their citizens from unfair and deceptive demand letters. In 

addition, 18 States have already enacted legislation to tackle this 

abusive activity. Furthermore, the FTC brought an administrative 

complaint against MPH Technologies, a well-known patent troll. 

That case was recently settled through a consent order that prohibits MPHJ from making deceptive statements in its demand letters. 

Last Congress, this committee held three hearings, and the subcommittee marked up a bill which I believe included problematic 

language. Among other things, it created a knowledge standard, 

one not typically needed to prove fraud, and it preempted stronger 

State laws. I am happy that this issue is being given a fresh review 

this Congress in an effort to get the language right and work in 

a bipartisan fashion. If we as a Congress choose to legislate in this 

area, we need to make sure that we are furthering the interests of 

the consumer, end users and small businesses, while protecting the 

vitality of the patent system. 

So today’s hearing presents an opportunity to hear from witnesses about how big is the problem of fraudulent demand letters, 

and whether there is an appropriate legislative fix. And I look forward to hearing the witnesses’ thoughts on this issue, and their 

ideas for possible solutions. 

I yield back. 

Mr. BURGESS. The gentleman yields back. 

This concludes opening statements. 

We want to welcome all of our witnesses, and thank you for 

agreeing to testify before the subcommittee today. Our witness 

panel for today’s hearing will include Ms. Laurie Self, the Vice 

President and Counsel of Government Relations, will be testifying 

on behalf of Qualcomm; Mr. Vince Malta, Liaison for Law Policy at 

the National Association of Realtors; Mr. Paul Gugliuzza, close 

enough, Associate Professor at Boston University School of Law; 

and Ms. Vera Ranieri, Staff Attorney for the Electronic Frontier 

Foundation. We welcome you all to the committee. 

And, Ms. Self, we will start with you. You are recognized 5 minutes for the purpose of an opening statement. 

7 

STATEMENTS OF LAURIE SELF, VICE PRESIDENT AND COUNSEL, GOVERNMENT AFFAIRS, QUALCOMM; VINCE MALTA, 

2015 LAW AND POLICY LIAISON, NATIONAL ASSOCIATION OF 

REALTORS; PAUL R. GUGLIUZZA, ASSOCIATE PROFESSOR OF 

LAW, BOSTON UNIVERSITY SCHOOL OF LAW; AND VERA 

RANIERI, STAFF ATTORNEY, ELECTRONIC FRONTIER FOUNDATION 

STATEMENT OF LAURIE SELF 

Ms. SELF. Thank you. Chairman Burgess, Ranking Member 

Schakowsky and Members of the subcommittee, thank you for the 

opportunity to appear today to discuss patent demand letters. My 

name is Laurie Self, and I am Vice President and Counsel, Government Affairs for Qualcomm. Qualcomm is a member of the Innovation Alliance, a coalition of research and development focused companies that believe in the critical importance of maintaining a 

strong patent system. 

Qualcomm is a major innovator in the wireless communications 

industry, and the world’s leading supplier of chipsets that enable 

3G and 4G smartphones, tablets and other devices. Qualcomm’s 

founders are the quintessential example of American inventors in 

the garage who build one of the world’s foremost technology companies. Today, the technologies invented by our engineers help make 

nearly everything you do with your smartphone—help everything 

you do with your smartphone, from browsing the internet, to sharing videos, to using GPS navigation. We are an invention hub for 

the mobile age, having spent more than $34 billion on R and D 

since the company was founded in 1985. Through the broad licensing of our patented technologies, Qualcomm has helped foster a 

thriving mobile industry that accounts for more than one million 

jobs, and $548 billion of U.S. gross domestic product. Qualcomm 

itself has more than 31,000 employees, the vast majority of whom 

are engineers based in the United States. 

It is worth noting that Qualcomm is not a plaintiff in any pending patent litigation, but we are a defendant in several patent infringement law suits, some of which were brought by so-called patent assertion entities. However, I am not here to criticize or defend 

PAEs, but instead to address what we believe should be the proper 

focus of any patent demand letter legislation; namely, targeting 

abusive demand letter activities without unintentionally damaging 

important patent rights. 

Notice letters play an important role in the patent system for 

both patent holders and accused infringers. Patent law encourages, 

and sometimes requires patent holders to take reasonable steps to 

notify others of possible infringement. Meaningful patent protection 

including the ability to provide notice is a key factor for companies 

like Qualcomm in deciding whether to invest in new products and 

technologies. Qualcomm appreciates the committee’s interest in 

curtailing abusive demand letter activities. At the same time, we 

urge the committee to be cautious so as to not inadvertently hinder 

legitimate patent enforcement practices. A demand letter law that 

makes patent notification or enforcement too burdensome, too costly or too risky may deter appropriate notice activity. If valid patent 

owners are afraid to seek compensation for use of their inventions, 

8 

the whole patent-based system of incentivizing innovation is undermined. 

Qualcomm supports the Demand Letter Bill that passed this 

committee in July 2014, the Targeting Rogue and Opaque Letters 

Act. The TROL Act includes several key features that are necessary to strike the appropriate balance. First, the bill clarifies 

rather than expands the FTC’s existing authority under Section 5 

to address abusive demand letters. 

Second, the bill is limited to situations in which the sender has 

engaged in a pattern or practice of mailing bad faith demand letters to consumers. The pattern or practice requirement appropriately targets the mass mailing of deceptive demand letters, and 

it is consistent with the FTC’s Section 5 authority. An explicit bad 

faith requirement is necessary to protect patent holders’ constitutional rights. Patent property rights are rooted in Article I of the 

Constitution, and the First Amendment provides strong protections 

for patent demand letters. As courts across the country have recognized, pre-law suit communications implicate both the freedom of 

speech and the constitutional right to petition the Government. To 

conform with the constitution, legislation must avoid punishing 

patent holders for good faith conduct. By clarifying the FTC’s enforcement authority under Section 5, the bill is limited to communications sent to consumers, including mom and pop retailers, 

which protects those most vulnerable to abusive demand letters, 

while reducing the risk that the FTC will be drawn into businessto-business disputes. 

Third, the bill clearly describes the conduct that will be considered unfair and deceptive, and does not impose overly burdensome 

disclosure requirements. 

Fourth, the bill preempts State demand letter laws that allow 

State attorneys general to bring enforcement actions under the 

Federal statute. 

With nearly 20 State legislatures having passed such bills over 

the past 2 years, and another dozen considering such a bill now, 

it would be extremely burdensome to subject patent owners to a 

patchwork of different demand letter requirements in every State. 

Preemption is appropriate and necessary in the demand letter context because unlike the TROL Act, many of these State demand letter laws are overly broad in scope, highly burdensome to patent 

owners, and risk penalizing ordinary commercial and pre-litigation 

communications, which are protected under the First Amendment. 

These four features are critical to Qualcomm’s support, and we 

urge the committee to retain these requirements and limitations in 

the bill. Qualcomm looks forward to working with the committee in 

its efforts to achieve a balanced and narrowed-tailored bill. 

Thank you for allowing me to testify today, and I look forward 

to answering your questions. 

[The prepared statement of Ms. Self follows:] 

9 


Statement of 

Laurie Self 

Vice President and Counsel, Government Affairs 

Qualcomm Incorporated 

Before the 

Subcommittee on Commerce, Manufacturing, and Trade 

Committee on Energy and Commerce 

United States House of Representatives 

1141

h Congress, 1st Session 

February 26, 2015 
10 


Introduction 

Chairman Burgess, Ranking Member Schakowsky and Members of the Subcommittee, thank 

you for the opportunity to appear today to discuss patent demand letters. My name is Laurie Self, 

and I am Vice President and Counsel, Government Affairs for Qualcomm Incorporated. 

Qualcomm is a member of the Innovation Alliance, a coalition of research and developmentfocused companies that believe in the critical importance of maintaining a strong patent system 

that supports innovative enterprises of all sizes. 

Qualcomm and the Innovation Alliance applaud the House Energy and Commerce Committee 

for their work last year to achieve a meaningful, balanced bill on the issue of demand letters that 

will address the abusive behavior that small businesses and retail interests face. We support the 

approach taken in the Targeting Rogue and Opaque Letters Act, which passed this Subcommittee 

on July I 0, 2014. We believe the Act appropriately targets abusive behavior rather than 

particular types of patent owners, while maintaining the integrity of legitimate patent 

enforcement practices for all patent holders. 

Qualcomm, Patents and Innovation 

Qualcomm 's founders are the quintessential example of the storied American "inventors in the 

garage" who built one of the world's foremost technology companies on the foundation of highly 

innovative technology and strong patent rights. Since our founding in 1985, Qualcomm has 

evolved into a leading innovator in the wireless communications industry, and a recognized 

pioneer in the development of 3G and 4G wireless technology. 

Qualcomm designs, has manufactured on its behalf, markets, and sells products and services 

based on these and other digital communications technologies. Our products consist principally 

of integrated circuits (also known as chips or chipsets) and system software used in mobile 

devices and in wireless networks. Seventy percent of our 31,000 employees (65 percent of whom 

are engineers) are based in the United States. Qualcomm invests about 20% of its annual revenue 

in research and development. Since the company was founded in 1985, Qualcomm has spent 

more than $34.2 billion on R&D. For the 2013 fiscal year alone, R&D expenditures totaled 

approximately $5 billion. As we develop new technologies, we patent them to protect that 

investment. In the United States alone, Qualcomm has approximately 13,000 issued patents and 

approximately I 0,000 pending patent applications. 

Through ongoing investments in research and development (R&D) and broad licensing of our 

patented technologies, Qualcomm facilitates billions of dollars in exports, while creating 

thousands of well-paying jobs for U.S. workers. Moreover, through our R&D investments and 

licensing program, Qualcomm has helped create a thriving mobile ecosystem. Qualcomm's core 

wireless technologies are integral to 3G and 4G mobile phones, tablets, e-readers, mobile 

applications, and a host of other wireless devices and services. Qualcomm is the world's leading 

supplier of chipsets that enable these 3G and 4G devices. 
11 


Qualcomm is not a plaintiff in any currently pending patent litigation. At present, we are a 

defendant in several patent infringement lawsuits, some of which were brought by so-called 

patent assertion entities (PAEs) asserting questionable infringement claims based on patents of 

dubious validity. However, the objective of my testimony is neither to criticize nor defend PAEs. 

Rather, I am here today to testify regarding what Qualcomm believes should be the proper focus 

of the Committee's legislation-abusive demand letter conduct-and the best way to target such 

conduct without unintentionally damaging important patent protections. 

Qualcomm is pleased that the bill previously proposed by this Committee has a number of 

strengths that other proposed measures relating to demand letters do not have. For example, the 

TROL Act focuses on those engaged in a pattern or practice of sending unfair and deceptive 

demand letters to consumers or end users. Additionally, the bill contains reasonable disclosure 

requirements, specifically sets forth the conduct that would be considered unfair and deceptive, 

and does not give the Federal Trade Commission discretion to regulate demand letter content. As 

drafted, the bill successfully focuses on the bad faith actors that are the cause of the problem and 

does not contain broad provisions that undermine the appropriate exercise of patent rights. 

Notice letters and licensing communications are an important part of the U.S. patent 

system 

A strong patent system, which has its roots in Article I, Section 8 of the U.S. Constitution, is an 

essential part of America's economic success, contributing to economic growth, higher income, 

and more jobs. Strong patent rights incentivize investments in technological innovation. IPintensive industries account for more than one third of U.S. GOP, and directly or indirectly 

support approximately 40 million jobs. It is critically important to maintain a strong patent 

system that promotes innovative enterprises of all sizes. 

Notice letters play an important role in the patent system. Indeed, as the Supreme Court has 

explained, "[p]atents would be of little value if infringers ofthem could not be notified ofthe 

consequences of infringement." Virtue v. Creamery Package Mfg., Co., 227 U.S. 8, 37-38 

(1913). 

Patent law encourages patent holders to take reasonable steps to notify others of existing or 

pending patent rights and their possible infringement. In some instances, federal patent law 

requires patent holders to send notice letters to accused infringers to preserve their patent 

enforcement rights and ability to collect damages. Notice letters and licensing communications 

can also serve the interests of accused infringers. Once a patent holder has made its rights 

known, the accused infringer can determine whether to cease the allegedly infringing activities, 

negotiate a license, or decide to continue its activities based on an assessment of noninfringement or invalidity. Moreover, knowledge that new products or products in development 

may practice the patent or patents of another allows potential infringers an opportunity to design 

around existing intellectual property while still producing a product that is socially and 

economically beneficial, or even perhaps improve upon the invention or invent an alternative. 

2 
12 


Any demand letter legislation must be careful not to discourage legitimate patent-related 

communications, which are integral to the functioning of the patent system and the resolution of 

patent disputes, including possible resolution without resorting to litigation. 

Abusive demand letters 

We have all heard stories of the mass mailing of bad faith patent demand letters by PAEs or 

"patent trolls" to small businesses, consumers, and technology end users. Through the 

indiscriminate sending of bad faith demand letters, some bad actors have co-opted and distorted 

an otherwise legitimate patent enforcement practice in an attempt to extract payment from 

groups of people who are generally unfamiliar with the patent system. 

Qualcomm understands and appreciates the Committee's interest in curtailing the abusive 

activities of these bad actors. At the same time, we urge caution and balance to ensure that 

efforts to address this problem do not inadvertently harm legitimate patent enforcement 

practices. 

Unnecessarily broad legislation will cause unwanted "collateral damage" 

A demand letter law that is too broad or too punitive may deter appropriate and useful efforts to 

provide notice of patent infringement activity and runs the risk of undermining incentives to 

innovate. The value of a patent rests in the patent holder's ability to enforce it in a meaningful 

way. Innovators must assess their ability to enforce and license the intellectual property relating 

to their inventions when deciding whether to make the significant investments necessary to 

develop and/or commercialize new products and technologies. The availability of meaningful 

patent protection is also key to the development of business partnerships and cooperative 

relationships in key technology areas. Making notification obligations or enforcement of patent 

rights too burdensome, too costly, or too risky will adversely affect the dynamics of innovation 

investment. Accordingly, any legislation should target remedying the problem of abusive mass 

demand letter campaigns, without harming patent holders engaged in legitimate patent 

enforcement activities. 

An effective solution does not require sweeping legislation or an expansion of the FTC's 

authority to police the enforcement-related communications of all patent holders. Indeed, the 

FTC already has the authority to protect consumers from unscrupulous actors who engage in the 

mass mailing of blatantly unfair or deceptive demand letters. Indeed, the FTC has taken action 

against such bad actors under its existing authority. Last year, the FTC investigated and charged 

a PAE, MPHJ Technology Investments, with making deceptive representations when asserting 

its patent rights. A bill that injects the FTC into private disputes over the validity or worth of 

patents would adversely affect both patent holders and accused infringers. Private disputes and 

negotiations do not need to be regulated in this manner. 

The TROL Act properly clarifies, rather than expands, FTC authority. The proposed legislation 

draws a clear line between deceptive shakedown scenarios warranting FTC enforcement and 

3 
13 


routine individualized patent correspondence between companies, the vast majority of which is 

legitimate. FTC enforcement authority granted by the bill is limited to those situations in which 

the sender has engaged in a pattern or practice of mailing bad faith demand letters to recipients 

likely to lack a familiarity with patent law or the resources necessary to evaluate and respond to a 

demand letter. 

By clarifying that certain practices are unfair or deceptive under the Federal Trade Commission 

Act, the bill furthers the goal of protecting those most vulnerable to abusive demand letters while 

reducing the risk that the FTC will be drawn into individual disputes between patent owners and 

potential licensees or alleged infringers. The "pattern or practice" requirement is appropriate 

because the purported need for demand letter legislation stems from just this kind of activitythe mass mailing of demand letters by patent trolls. The "bad faith" requirement is necessary to 

capture the requirements of current case law and protect patent holders' First Amendment rights. 

These requirements are consistent with the requirements imposed on the FTC by Section 5 of the 

Federal Trade Commission Act and existing case law. Indeed, limiting the bill to instances in 

which there is a "pattern or practice" of behavior is not only consistent with the FTC's Section 5 

authority, but similar provisions can also be found in other specific FTC statutes. Inclusion of 

these requirements will help to strike the correct balance between identifying the situations in 

which FTC can and should take action, and protecting the rights of patent holders. 

Furthermore, if Congress is going to legislate in the area of demand letters, Congress should 

specifically describe the conduct that would be considered unfair and deceptive. This clarity is 

necessary to prevent the bill from being misinterpreted and to put patent holders on notice of 

what type of conduct is prohibited. 

Legislation should avoid overly burdensome disclosure requirements 

The TROL Act avoids imposing overly burdensome disclosure requirements that fail to account 

for the realities of patent enforcement and licensing negotiations. Not all licensing 

communications involve a handful of patents and a small number of commercially available 

accused products. Often, licensing negotiations involve a portfolio of hundreds or thousands of 

patents and numerous different devices, product models, or manufacturing processes. Some or all 

of these potentially infringing devices, product models, or processes may not be available to the 

patent holder. Even assuming such information is readily available to a patent holder, requiring 

disclosure of highly detailed information in a demand letter (such as an identification of each 

asserted claim and each accused product model or process, and a detailed explanation of how 

each claim is infringed) would impose an undue burden on patent owners and could result in 

voluminous communications. For some patent holders, particularly small inventors, start-ups and 

those lacking extensive resources to devote to patent enforcement, such a burden would be 

enormous, expensive and impractical, and could impair their ability to enforce their intellectual 

property rights. 

4 
14 


Legislation should protect good faith conduct and the constitutional rights of patent 

holders 

We ask that the Committee refrain from creating a framework under which a patent holder could 

be punished for good faith conduct. Indeed, the First Amendment affords broad protection for 

activities relating to the enforcement and communication of patent rights, and courts have 

repeatedly held that a patent holder should not be penalized for communicating its patent rights 

or an allegation of infringement in good faith. The proposed legislation accomplishes this goal 

through the inclusion of an affirmative defense for mistakes made in good faith. 

The real consumer protection threat posed by demand letters results from the sending of bad faith 

communications to unsophisticated recipients. The appropriate goal of the legislation should be 

to identify, and empower the FTC to address, only those demand letters that are sent in bad faith. 

Federal preemption of state demand letter laws is necessary for clarity and uniformity 

Congressional demand letter legislation must preempt state demand letter bills. Patent law has 

long been the exclusive province of the federal government. However, over the past two years, 

almost twenty states have passed legislation relating to patent demand letters. At least a dozen 

others are considering legislation this year. These state bills contain disparate requirements and 

prescriptions. Ensuring compliance with federal legislation, as well as a patchwork of state laws, 

will make enforcement of patent rights extremely burdensome and, for some patent holders, 

prohibitively expensive, which in turn will chill the sending of patent-related communications, 

even those communications which are entirely legitimate and made in good faith. 

Furthermore, some of the recently passed state bills contain provisions that could be subject to 

abuse by accused infringers. For example, many state bills allow the recipient of a demand letter 

to pursue a private cause of action against a patent holder and seek tens of thousands of dollars in 

punitive damages. As a result, patent holders may find themselves the target of private plaintiffs 

threatening or instituting litigation in order to extract nuisance settlements. Provisions of this 

nature are likely to incentivize, rather than prevent, vexatious litigation. The federal government 

is best positioned to address the problem through balanced legislation that will be applied 

uniformly throughout the nation. 

Conclusion 

Qualcomm respects the Committee's efforts to find a sensible solution to the problem of abusive 

demand letters. As noted, the TROL Act has a number of strengths. For example, the bill 

appropriately focuses on those engaged in a pattern or practice of sending unfair and deceptive 

demand letters. It correctly focuses on letters sent to consumers. The bill sets forth reasonable, 

but not unduly burdensome, disclosure requirements. It specifically describes the conduct that 

would be considered unfair and deceptive, and does not give the FTC discretion to regulate 

demand letter content. 
15 


It is critical to retain these requirements and limitations. Qualcomm could not support a bill that 

expands the FTC's authority, punishes good faith conduct, imposes onerous disclosure 

requirements, or fails to preempt the litany of state laws that impose an assortment of differing 

rules on patent owners. 

Qualcomm looks forward to working with the Committee in its efforts to achieve a balanced and 

narrowly tailored bill. Thank you for allowing me to testify today, and !look forward to 

answering your questions. 

6 
16 

Mr. BURGESS. Gentlelady yields back. Thank you for your testimony. 

The Chair recognizes Mr. Malta 5 minutes for the purposes of an 

opening statement please. 

STATEMENT OF VINCE MALTA 

Mr. MALTA. Chairman Burgess, Ranking Member Schakowsky, 

and Members of the subcommittee, my name is Vincent Malta. I 

am the broker of record for Malta and Company in San Francisco, 

California. I serve as the 2015 National Association of Realtors’ Liaison for Law and Policy, and I am here to testify on behalf of the 

one million members of NAR. 

I am also here representing United for Patent Reform Coalition, 

a broad and diverse group of Main Street, high tech and manufacturing companies that have united to urge the passing of strong, 

commonsense patent reform. 

In the real estate industry, patent trolls have targeted Realtor 

brokers, agents and multiple listing services for implementing simple Web site technologies. Here are 5 examples where patent trolls 

have alleged infringement. First, the Real Estate Alliance Ltd. 

Filed an infringement law suit against a broker and other 

unnamed defendants, charging that zooming in to locate points on 

a map was an infringement. The case was eventually dropped after 

2 years. 

Second, a company called Civix-Ddi LLC charged that providing 

a searchable data base of property listings infringes its patents. 

Civix have targeted not only multiple listing services in the real estate industry, but Microsoft, Expedia, Move and other companies. 

NAR decided to settle this case for $7.5 million, fearing that the 

cost of letting the case go to trial would be exponentially more expensive. 

Third, Data Distribution Technologies charged that a number of 

real estate firms were in patent violation by providing updates to 

consumers when properties matched their search criteria are coming on the market. This patent is undeniably abstract because it 

describes what any real estate professional already does. The real 

estate companies had to expend time and money to challenge the 

validity of this abstract patent, finally settling after 2 years. 

The Austin Board of Realtors received a demand letter alleging 

patent infringement for having a drop-down menu on their Web 

site. 

And finally, NAR members received abusive demand letters from 

the MPHJ Technologies troll that notoriously sent over 16,000 demand letters to businesses, demanding payment for using basic 

scan-to-mail technology. 

Simply put, these patent trolls make everyday business practices 

potential law suits. Patent trolls typically start by sending form demand letters to dozens, hundreds, or even thousands of businesses 

at a time. They claim these businesses are infringing on patents, 

but provide little to no evidence. Typically, the sender will list a 

patent number only, with no reference to which claim within the 

patent is alleged to have been infringed. The letters are often intentionally vague, and demand a licensing fee or threaten litigation. If the business does speak with a lawyer, they are often adVerDate Mar 15 2010 10:40 Nov 10, 2016 Jkt 037690 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 F:\114THCONGRESS\114X14PATENTLETTERSOKTOPRINT\114X14PATENTLETTERSPD
17 

vised to pay the fee rather than risk very costly infringement law 

suits. This essentially is a junk mail approach that is clogging up 

our legal system. NAR members and other small businesses rightfully feel extorted by this process. 

In 2013, more than 2,600 companies were sued by patent trolls, 

representing 60 percent of all patent infringement cases brought 

that year. Small and medium-sized companies paid on average $1 

1⁄3 million dollars to settle patent troll cases, and $1.7 million on 

average in court defense costs for patent troll litigation. Economists 

estimate that in 2011, patent trolls cost operating companies $80 

billion in direct and indirect costs. That is more than the $66 billion State budget of Illinois, and in 2013, almost reaches the $96 

billion State budget in Texas. This is a serious problem for the 

American business community, in particular, small businesses who 

lack the resources to fight these pointless battles. NAR’s most recent surveys indicate that more than half of all realty firms have 

less than 25 agents. 

In the last Congress, this subcommittee passed legislation aimed 

at addressing demand letter abuse. NAR and the Coalition appreciated the subcommittee’s work on the Targeting Rogue and 

Opaque Letters Act. As the subcommittee considers legislation in 

this Congress, we ask that you consider a few essential guidelines. 

Fundamentally, patent demand letters must be held to a practical 

standard of transparency. They must specify the relevant patent 

claim at issue, they must detail all businesses allegedly infringed, 

they must include a description of the patent troll’s investigation 

of the alleged infringing activity, and they must disclose the real 

parties and interest to the dispute. This minimum information will 

help recipients to thoughtfully review whether infringement allegations merit an agreement to license. 

In conclusion, NAR and the United for Patent Reform Coalition 

urge Congress to act swiftly to enact meaningful demand letter reform for the good of our Nation’s small business community, and 

while demand letter reform is crucial, as an important first step towards broader patent reform, it requires comprehensive and multifaceted reforms. 

Thank you for your consideration of our views. 

[The prepared statement of Mr. Malta follows:] 

18 


[B NATIONAL 

ASSOCIATION of REALTORS~ 

Clms Polychron 

2015 President 

Dak i\. Stinton 

Chief Hxccutwc Off,ccr 

REALTOR' 

GOVERJ"\MENT t\PFi\IRS 

500 New Jersey t\\'Cnuc, N.\~'. 

\Vashmgron, DC 20001 2020 

TESTIMONY OF 

VINCE MALTA 

2015 LAW & POLICY LIAISON 

NATIONAL ASSOCIATION OF REALTORS® 

ON BEHALF OF 

THE NATIONAL ASSOCIATION OF REALTORS® 

AND 

THE UNITED FOR PATENT REFORM COALITION 

BEFORE THE 

UNITED STATES HOUSE ENERGY AND COMMERCE 

COMMITTEE 

COMMERCE, MANUFACTURING AND TRADE SUBCOMMITTEE 

HEARING TITLED 

UPDATE: PATENT DEMAND LETTER PRACTICES AND 

SOLUTIONS 

FEBRUARY 26, 2015 

and sub~cnbc tort~ ~tnct Code of Ethtes 

lOU#ILttQ<J!.l!IIG 

O,OUUN!ll 
19 


Summary 

The National Association of REALTORS® (NAR) and the United for Patent Reform Coalition wish 

to see Congress pass strong, common sense patent reform legislation that addresses crucial issues to 

the American business community. 

Patent trolls have targeted REALTOR® brokers, agents and multiple listing services for 

implementing technologies on their websites that simply provide a computerized means for 

delivering real estate services that consumers have always received from our members. For example, 

patent trolls have alleged infringement of a method of providing a searchable database of property 

listings, locating points of interest on a map, and providing updates to consumers when properties 

matching their search criteria come on the market. Our members also receive demand letters from 

the .MPHJ Technologies troll that notoriously sent over 16,000 demand letters to businesses 

demanding payment for using basic "scan to email" technology. 

Patent trolls typically operate through an opaque and interconnected network of shell companies; 

they send form demands to hundreds or even thousands of businesses at a time claiming with little 

to no evidence that they are "infringing" their patents. Very often, the sender has conducted no 

prior investigation as to whether the recipient of the demand is actually using the method or 

technology in question. 

Congress should require that patent demand letters include truthful, basic information including the 

relevant patent claims at issue; how the business has allegedly infringed, including a description of 

the patent trolls investigation into the alleged infringing activity, and the real parties in interest to the 

dispute. Legislation should ensure that it does not limit Federal Trade Commission authority to 

enforce against deceptive and unfair trade practices and should clearly state that false statements in 

demand letters violate the FTC Act. 

2 
20 


Introduction 

Chairman Burgess, Ranking Member Schakowsky, and members of the subcommittee; my name is 

Vincent Malta. I am the broker of record for Malta & Company in San Francisco California. I serve 

as the 2015 National Association of REALTORS® Liaison for Law and Policy. I am here today to 

testify on behalf of the over one million members of the National Association of REALTORS® who 

were each impacted by a patent troll in 2007 and many of whom continue to be targeted today. I'm 

also here on behalf of the United for Patent Reform Coalition. United for Patent Reform is the 

preeminent national voice for the strongest possible patent litigation reform legislation. The 

members of United for Patent Reform are a broad and diverse group of Main Street, high tech, and 

manufacturing companies-from brick-and-mortar retail stores to \l(!i-Fi technology providers from 

automobile manufacturers to home builders and real estate professionals-that have united in 

making sure Congress passes strong, common sense patent reform. 

Last year's efforts on patent litigation reform were a good start and we thank Congress for its work 

on this matter. Now we have another opportunity to get it done. We need this subcommittee, 

together with your Congressional colleagues, to pass multi-faceted patent reform that addresses 

crucial issues to America's businesses. \Vc believe any bill passed by Congress must address seven 

key issues: refornUng abusive demand letters; making trolls explain their claims; protecting innocent 

customets; making patent litigation more efficient; stopping discovery abuses; making abusive trolls 

pay; and providing less expensive alternatives to litigation. Today we will focus on addressing 

abusive demand letters. 

3 
21 


PATENT TROLLS HARM BUSINESS AND THE ECONOMY 

Abusive patent litigation remains a serious threat for REALTORS® and main street businesses of all 

sizes across the country. REALTORS® are often end users of technology and, as a result, have been 

inundated by abusive and deceptive patent demand letters by patent assertion entities (PAEs), 

commonly referred to as "patent trolls." These patent trolls use vague allegations of infringement 

and overly broad patents, threats of litigation, and licensing fee demands in an effort to extort 

payments from real estate businesses across the country. Real estate firms vary widely in size, but the 

overwhelming majority of realty firms are very small entities. NAR's most recent surveys indicate 

that more than half of all realty firms have less than twenty-five agents and that the typical 

REALTOR® is affiliated with an independent realty firm \vith only one office. 

Patent trolls often prey on small businesses of all kinds, which do not have the resources to fight 

such false claims. Fighting these claims has a real cost: for REALTORS® it means less capital and 

fewer resources available for investing back into our businesses that in tum drive economic growth. 

In 2013, more than 2,600 companies were sued by patent trolls representing 67 percent of all patent 

infringement cases brought that year.' Small and medium sized companies paid on average $1.33 

million to settle patent troll cases and$ 1.75 million in average in court defense costs for patent troll 

litigation2 Economists estimate that in 2011, patent trolls cost operating companies $80 billion in 

direct and indirect costs.' The numbers show that the patent troll problem for American business is 

real and a solution is urgently needed. 

American businesses of all sizes and from all industry sectors are being held hostage by frivolous 

lawsuits and overly broad allegations made by patent trolls. This must change. The time is now to 

1 RPX Litigation Report 2013 

'Colleen V. Chien, Santa Clara University School of Law Startups and Patent Trolls 3 James Besson & Michael J. Meurer, Boston University Study "The Direct Costs from NPE Disputes" 

4 
22 


take back the patent litigation system and return it to its original purpose: fostering innovation and 

investment that benefits the entire economy. 

Nf\R and the United for Patent Reform coalition seek the following reforms: 

Reform abusive demand letters: Require that patent demand letters include truthful, basic 

information that describes the allegations and the patent owner with specificity. Patent trolls send 

vague and deceptive letters alleging patent infringement to demand unjustified payments from 

innocent individuals and businesses. Vague demand letters should not be used to bully innocent 

businesses into paying what amounts to protection money. 

Make trolls explain their claims: Require patent owners to explain in detail the basis for the 

alleged infringement when they file a complaint. Current law does not require that a patent holder 

explain how a patent is infringed, or even identifY the product involved, which makes it nearly 

impossible someone who has been sued to evaluate the case and decide how to proceed. 

Protect innocent customers: Ensure that claims between a patent owner and a manufacturer 

proceed before claims between the patent owner and the manufacturer's end users. Under current 

law, anyone can be sued for infringement for simply using a product, system or method. We don't 

want to change that. Instead, it simply makes sense for cases against end users to be stayed in favor 

of cases involving the manufacturer. 

Make patent litigation more efficient: Make patent litigation more efficient so that weak cases 

can be dismissed before expensive discovery. Requiring patentees to explain and judges to decide 

what a patent means at the beginning of a case-the Markman hearing-narrows the case to the 

actual legal issues in question, drives early resolutions and avoids unnecessary and expensive 

discovery. 

5 
23 


Stop discovery abuses: Require trolls to pay for the discovery they request beyond core documents 

so that they cannot run up costs just to force a settlement. Since trolls don't actually make or create 

anything, they have few documents to produce and no incentive to be reasonable in their discovery 

requests. Making trolls responsible for the costs of their discovery requests that go beyond the core 

documents needed to decide most patent issues will stop unreasonable demands made for 

negotiation leverage. 

Make abusive trolls pay: Require that a losing parry who brings a frivolous case pay the other 

side's attorney's fees-and make sure the troll can pay. Trolls currently have few barriers to litigation 

with no significant costs. A stronger presumptive fee-shifting statute and a mechanism to ensure 

court ordered fee shifting is enforceable will deter nuisance suits. 

Provide less expensive alternatives: Maintain and improve administrative alternatives to litigation. 

Ensuring access to efficient and fair mechanisms to re-examine questionable patents will reduce 

litigation abuses and strengthen the patent system. 

PATENT DEMAND LETTERS TARGET MAIN STREET BUSINESSES 

Patent trolls continuously expand their reach to small businesses, which are unfamiliar to the 

complex world of patent litigation and lack the resources and expertise to properly defend 

themselves. Businesses facing the daunting and costly prospect of litigation are left to either take 

time away from their work priorities to research and respond to a typically vague demand letter or 

simply succumb to the demand to avoid being sued. Unfortunately, due to the intentionally vague 

nature of these letters along with the calculated demands, many businesses view settlement as the 

only rational business decision. 

6 
24 


In the real estate industry, patent trolls have targeted REALTOR® brokers, agents and multiple 

listing services for implementing technologies on their websites that simply provide a computerized 

means for delivering real estate services that consumers have always received from our members. 

For example, patent trolls have alleged infringement of a method of providing a searchable database 

of property listings, locating points of interest on a map, and providing updates to consumers when 

properties matching their search criteria come on the market. Our members also received demand 

letters from the MPBJ Technologies troll that notoriously sent over 16,000 demand letters to 

businesses demanding payment for using basic "scan to email" technology. 

Homebuilders have received demand letters from a company alleging to own a patent on a moisture 

removal process used in home construction. Unfortunately, the process described in the patent is 

one that anyone using a dehumidifier, fan, heater or dryer could unintentionally run afoul of while 

attempting to remove water from a construction site. 

Mr. Jim's Pizza based in Farmers Branch, Texas was sued alongside 50 others in the restaurant 

industry for allegedly violating a patent that relates to online search engines featuring their store 

information on a map. Again, all of these patent trolls provided businesses with over broad 

descriptions of the patents at issue and vague allegations of infringement. 

Numerous other examples like these exist in nearly every sector of our economy. America's patent 

system has long served to foster innovation while rewarding inventors for their contributions to 

progress and innovation. Unfortunately today, the actions of rogue actors increasingly undermine 

the patent system and unduly burden many of our country's small businesses. 

7 
25 


DEMAND LETTERS ARE VAGUE UNFAIR AND DECEPTIVE 

Patent trolls typically operate through an opaque and interconnected network of shell companies, 

send form demand letters to dozens, hundreds, or even thousands of businesses at a time claiming 

with little or no evidence that they are "infringing" the troll's patents. Typically, the sender will list a 

patent number only-with no reference to which claim within the patent is alleged to infringe. The 

letters are often intentionally vague, providing little in the way of factual allegations as to how the 

business has infringed the patent in question. Very often the sender has conducted no prior 

investigation as to whether the recipient of the demand is actually using the method or technology 

that is alleged to infringe. The letters go on to demand a "licensing fee" or threaten litigation. 

Patent trolls are notoriously savvy. The license demand is often calculated to be an amount that is 

more advantageous for the demand letter recipient to pay rather than incur the expenses of 

investigating the vague allegations or consulting with a lawyer. If the business does take the step to 

speak \Vith a lawyer, they are often advised to pay the fee rather than risk a ruinous patent 

infringement lawsuit. When discussing the matter with the business, patent trolls typically 

emphasize the threat of litigation and future cost burdens to the business and not the merits of the 

patent or alleged infringement. NJ\R members and other small businesses rightfully feel extorted by 

this process. 

DEMAND LETTER REFORM MUST WORK FOR THOSE TARGETED BY ABUSE 

In the last Congress this Subcommittee passed legislation aimed at addressing demand letter abuse. 

NJ\R and the Coalition appreciates the Subcommittee's work on the Targeting Rogue and Opaque 

Letters Act ("TROL Act"), a bill aimed at strengthening enforcement and reducing the number of 

bad faith demand letters that our businesses receive. As the subcommittee considers legislation in 

8 
26 


this Congress we ask that you consider the following three priorities: 1) require specificity and 

transparency in patent demand letters 2) take care not to limit the Federal Trade Commission's 

(FTC) enforcement authority and 3) Make clear that false statements are FTC Act violations. 

Patent Demand Letters Must be Made More Transparent 

Fundamentally, patent demand letters must specify the relevant patent claims at issue; how the 

business has allegedly infringed, including a description of the patent troll's investigation of the 

alleged infringing activity, and the real parties in interest to the dispute. This minimum information 

will help recipients to thoughtfully review whether infringement allegations merit an agreement to 

license. 

As detailed earlier in this testimony, patent trolls send vague and deceptive letters alleging patent 

infringement to demand unjustified payments from individuals and businesses. Vague demand 

letters should not be used for extortion. 

Do Not Limit Enforcement Authority 

The Subcommittee should ensure that legislation does not limit Federal Trade Commission authority 

to enforce against deceptive and unfair practices in any way whatsoever. Instead, legislation should 

clarify and sharpen FTC authority, but should not expand or contract its authority. This is especially 

important since the TROL Act from last Congress preempted state action. 

False Statements Are FTC Act Violations 

False statements in demand letters are inherently unfair and deceptive. Legislation addressing 

abusive demand letters should clearly state that false statements violate the FTC Act. 

9 
27 


CONCLUSION 

Deceptive demand letters alleging patent infringement represent a real and significant threat to 

American businesses. Patent trolls intentionally target small businesses and end user customers of 

technology precisely because the lack the resources and expertise to defend against the intentionally 

vague claims of infringement contained in many demand letters. Policymakers can have a positive 

and important impact on reducing patent litigation abuse, thus redirecting billions of dollars to 

productive use to grow the American economy, all without compromising the rights oflegitimate 

patent holders. NAR and the United for Patent Reform Coalition urge Congress to act swiftly to 

enact meaningful demand letter reform, which will deter the patent troll business model of 

extracting settlements by sending deceptive settlement demands. Thank you for your consideration 

of our views. 

10 
28 


A diverse group of American busin~:>St'S have united in making sure Congress passes strong, cormnon sense 

patent reform. It's time we take back our patent system from trolls. Learn more at Unitedf(lrPatentRcl(rrm.com or 

fi:lilow on Twitter. 

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29 


General Counsel 

600 SOUTH AVENUE WEST • WeSTFIELD, NEW }ERSRY 07090 

T: 908.654.5000 • F: 908.654.7866 • www.LoLKM.coM 

3405A • TEEM TOWER • 208 TMWHE ROAD • T!AN!t£ DISTRICT 

GUANGlfiOU, GUANGDONO S10620 • CHINA • 1': +86 20 3810.3788 • F: +86 20 3810-3789 

INTElLECTUAL PROPERTY LAW 

---2013 Alexander Solo 

918.518.6388 

ASolo@ldllan.ccm 

Re: 

Notice of Infringement of United States Patent No.-

Dear Sir or Madam: 

By way of background, the -Patent relates to a system that provides agents 

and/or users with an online searchable real estate database where the agents and/or users 

can save their searches, their favorite properties, and their notes and receive update 

messages when new properties matching their criteria come on the market or the status of 

properties that they are monitoring changes. This invention is very valuable in the real 

estate industry because a vast portion of new real estate buyers begin their searches for a 

new home online. These users also rely on message updates to keep abreast of new 

listings or changes to the properties they are interested in. 

It is our belief that the websites and services offered and 

...... namely the system found on the use, 

induce others, or contribute to the performance of one or more of the claims ofthe patent. 

i

Aiiicilicliloriidlinlgllyl,libillylthiiiJiisilllletter, we are putting you on notice that we and- believe that • • • directly and indirectly infringes the -Patent. 

A non-exclusive license under the-Patent is available on fair and reasonable 

terms. We invite you to schedule a meetmg to open discussions regarding licensing the 

-Patent. 
30 


General Counsel ---2013 Page2 

In the meantime, if you have any questions about the-Patent, the technology 

covered by the-Patent, and terms for resolution, please do not hesitate to contact us. 

AS 

Enclosure- Patent No .•••• 

cc:--1 

Sincerely yours, 

LERNER, DAVID, LITTENBERG, 

KRUMHOLZ & MENTLIK, LLP 

ALEXANDER SOLO 
31 

Mr. BURGESS. Gentleman yields back. Chair thanks the gentleman for his testimony. 

Professor Gugliuzza, you are now recognized for 5 minutes for 

the purposes of an opening statement. 

STATEMENT OF PAUL R. GUGLIUZZA 

Mr. GUGLIUZZA. Chairman Burgess, Ranking Member Schakowsky, Members of the subcommittee, thank you for inviting me 

to testify. My name is Paul Gugliuzza, and I am an associate professor of law at Boston University School of Law. 

My research focuses on patent law and patent litigation. Most 

relevant to this hearing, I have spent the past 2 years studying the 

issue of patent demand letters, focusing in particular on efforts by 

both State governments and the Federal Government to address 

the problem of unfair and deceptive conduct in patent enforcement. 

To briefly summarize my conclusions, a small number of patent 

holders, often called bottom feeder patent trolls, have been abusing 

the patent system. These patent holders blanket the country with 

thousands of letters demanding that the recipients purchase a license for a few thousand dollars, or else face an infringement suit. 

The letters are usually sent to small businesses, nonprofits that do 

not have the resources to defend against claims of patent infringement. And the letters often contain false or misleading statements, 

calculated to scare the recipient into purchasing a license without 

investigating the merits of the allegations. 

In response to this troubling behavior, legislatures in 18 States 

have adopted statutes that, generally speaking, outlawed bad faith 

assertions of patent infringement. These statutes, however, may be 

unconstitutional. The U.S. Court of Common Pleas Appeals for the 

Federal Circuit, which hears all appeals in patent cases nationwide, has held that patent holders are immune from civil claims 

challenging their acts of enforcement unless the patent holder 

knew that its infringement allegations were objectively baseless. 

This rule could provide patent holders with nearly absolutely immunity from liability under the new statutes. In fact, the rules already immunize two notorious trolls; Innovatio IP Ventures and 

MPHJ Technology Investments, from legal challenges to their enforcement campaigns under State consumer protection laws. 

Although the Federal circuit has sometimes called this immunity 

rule a matter of the Federal Patent Acts’ preemption of State law, 

this rule could also limit the ability of the Federal Government to 

regulate patent enforcement behavior. This is because the Federal 

circuit’s decisions are not grounded in the Constitution’s Supremacy Clause, which is the usual source of preemption doctrine, but 

in the First Amendment right to petition the Government. Unlike 

the Supremacy Clause, the First Amendment limits the power of 

the Federal Government, not just State governments. Accordingly, 

patent holders may also be able to invoke this immunity to thwart 

Federal initiatives to fight patent trolls, including any legislation 

this committee might consider. 

To be clear, no court has yet addressed the constitutionality of 

the new State statutes. Moreover, as I discuss in more detail in my 

written statement, there is a strong argument that the Federal circuit’s immunity doctrine is wrong as a matter of law, policy and 

32 

historical practice. So it is entirely possible that the Federal circuit 

can revise its immunity doctrine to accommodate greater regulation 

of patent enforcement conduct. Indeed, the Federal circuit keeps 

close watch when Congress is considering amending patent law, 

and in the past decade, the court has repeatedly revised its case 

law to align with proposed legislation. 

This hearing provides a welcome occasion to discuss the innovative steps that State governments have taken to combat unfair and 

deceptive patent enforcement. Any bill advanced by this committee 

should, in my view, capitalize on the respective strengths of State 

governments and the Federal Government in this area. The 

strengths of State governments include, first, the quantity of law 

enforcement resources that could be provided by dozens of States 

attorneys general offices cooperating to fight abusive patent enforcement. And second, the accessibility of State governments to 

the small businesses, nonprofits and local governments most likely 

to be targeted by deceptive campaigns of patent enforcement. By 

contrast, Federal legislation on patent demand letters would provide the benefits of legal uniformity and predictability for patent 

holders about whether or not their enforcement actions are legal. 

In addition, as I explained in my written testimony, Federal legislation could clarify difficult jurisdictional issues that currently 

arise in cases challenging the lawfulness of patent enforcement 

conduct. 

If this committee determines that Federal legislation is warranted, that legislation should, in my view, specifically condemn 

bad faith assertions of patent infringement. Until the Federal circuit adopted its objective baselessness requirement, courts had applied a bad faith standard for nearly a century, striking an appropriate balance between the goals of punishing extortionate schemes 

of patent enforcement, and respecting patent holders’ rights to 

make legitimate allegations of infringement. 

Thank you again for inviting me to testify, and I would be 

pleased to answer any questions the committee might have for me. 

[The prepared statement of Mr. Gugliuzza follows:] 

33 


Statement of Paul R. Gugliuzza 

Associate Professor of Law 

Boston University School of Law 

Committee on Energy and Commerce 

Subcommittee on Commerce, Manufacturing, and Trade 

U.S. House of Representatives 

Hearing: "Update: Patent Demand Letter Practices and Solutions" 

February 26, 2015 
34 


Introduction 

Chairman Burgess, Ranking Member Schakowsky, and Members of the 

Subcommittee: Thank you for inviting me to testify. My name is Paul Gugliuzza. I am 

an associate professor of law at Boston University School of Law. I testify in my 

individual capacity, not representing my institution. 

My research focuses on patent law and patent litigation. Most relevant to this 

hearing, I have spent the past two years studying the issue of patent demand letters, 

focusing in particular on efforts by both state governments and the federal government 

to address the problem of unfair and deceptive conduct in patent enforcement.' 

To briefly summarize my conclusions: A small number of patent holders, often 

called "bottom feeder" patent trolls, have been abusing the patent system. These patent 

holders blanket the country with thousands of letters demanding that the recipients 

purchase a license for a few thousand dollars or else face an infringement suit. The 

letters are usually sent to small businesses and nonprofits that do not have the resources 

to defend against claims of patent infringement. And the letters often contain false or 

misleading statements designed to scare the recipient into purchasing a license without 

investigating the merits of the allegations. In response to this troubling behavior, 

legislatures in eighteen states have recently adopted statutes that, generally speaking, 

outlaw bad faith assertions of patent infringement. 

1 For an in-depth discussion of this research, see Paul R. Gugliuzza, Patent Trolls and Preemption, 

101 VA. L. REV. (forthcoming 2015), available at http://ssrn.com/abstract=2539280. 

1 
35 


These statutes, however, may be unconstitutional. The U.S. Court of Appeals for 

the Federal Circuit, which has exclusive jurisdiction over appeals in patent cases in the 

federal courts, has held that patent holders are immune from civil claims challenging 

acts of patent enforcement unless the patent holder knew that its infringement 

allegations were objectively baseless. This rule could provide patent holders with 

nearly absolute immunity from liability under the new statutes. In fact, as I discuss in 

more detail below, the rule has already immunized two notorious trolls, Innovatio IP 

Ventures and MPHJ Technology Investments, from legal challenges to their 

enforcement campaigns under state consumer protection and deceptive trade practices 

laws. 

Although the Federal Circuit has sometimes called this immunity rule a matter of 

the federal Patent Act's "preemption" of state law, the rule could also limit the ability of 

the federal government to regulate patent enforcement behavior. This is because the 

Federal Circuit's decisions are not grounded in the Constitution's Supremacy Clause, 

which is the usual source of preemption doctrine, but in the First Amendment right to 

petition the government. Unlike the Supremacy Clause, the First Amendment limits the 

power of the federal government, not just state governments. Accordingly, patent 

holders may also be able to invoke this immunity to thwart federal initiatives to fight 

patent trolls-including any legislation this Committee might consider. 

2 
36 


To be clear, no court has yet addressed the constitutionality of the new state 

statutes. Moreover, as I discuss in more detail below, there is a strong argument that 

the Federal Circuit's immunity doctrine is wrong as a matter of law, policy, and 

historical practice. So, it is entirely possible that the Federal Circuit could revise its 

immunity doctrine to accommodate greater regulation of patent enforcement conduct. 

Also, to the extent that cases challenging patent enforcement conduct proceed in state 

court, those state courts are not required to follow the Federal Circuit's expansive 

immunity doctrine. 

This hearing provides a welcome occasion to discuss the innovative steps that 

state governments have taken to combat unfair and deceptive patent enforcement. Any 

bill advanced by this Committee should, in my view, capitalize on the respective 

strengths of state governments and the federal government in this area. The strengths 

of state governments include: (1) the quantity of law enforcement resources that could 

be provided by dozens of states' attorneys general offices cooperating to fight abusive 

patent enforcement, (2) the accessibility of state governments to the small businesses, 

non profits, and local governments likely to be targeted by deceptive campaigns of 

patent enforcement, and (3) the ability of targeted organizations to act as private 

attorneys general under both the new state statutes and other state consumer protection 

and deceptive trade practices laws. By contrast, federal legislation on patent demand 

letters would provide the obvious benefits of legal uniformity and greater predictability 

3 
37 


for patent holders about whether or not their enforcement actions are legal. In addition, 

as I explain in more detail below, federal legislation could clarify difficult jurisdictional 

issues that currently arise in cases challenging the lawfulness of patent enforcement 

conduct. 

If this Committee determines that federal legislation is warranted, that legislation 

should, in my view, specifically condemn "bad faith" assertions of patent infringement. 

Until the Federal Circuit adopted its "objective baselessness" requirement, courts had 

applied a bad faith standard for nearly a century, striking an appropriate balance 

between the goals of punishing extortionate schemes of patent enforcement and 

respecting patent holders' rights to make legitimate allegations of infringement. 

I. The Problem: Bottom Feeder Patent Trolls 

In the past decade, scholars and policymakers have fixated on "patent trolls" or, 

less pejoratively, non practicing entities (NPEs). NPEs are often criticized because they 

do not manufacture products or provide services. Instead, they exist primarily to 

enforce patents. But the NPE business model is not inherently nefarious. Research 

universities, for example, usually cannot commercialize the patents obtained by their 

faculty, so they license the technology to others and sometimes sue for infringement. 

NPEs can also help monetize inventions by those who cannot afford to assert their 

patents in litigation, such as individual inventors and start-up companies. 

4 
38 


In the past few years, however, a species of "bottom feeder" trolls has emerged. 

These trolls send out hundreds or thousands of demand letters at one time, relying on 

the high cost of patent litigation in the hope of eliciting a nuisance-value settlement, that 

is, a settlement payment that is less that the amount it would cost to investigate the 

infringement allegations. 2 Bottom feeders target small businesses, nonprofits, and even 

local governments, knowing that those organizations are unfamiliar with patent 

litigation and likely cannot afford to defend against infringement claims.3 

One well-known bottom-feeder troll is the company MPHJ Technology 

Investments. In 2012 and 2013, MPHJ sent letters to over 16,000 small businesses 

throughout the United States.4 The letters accused the recipients of infringing a patent 

that covers the use of an office scanner to send documents via email. MPHJ demanded 

that each recipient purchase a license for about $1200 per employee or else face an 

infringement suit in federal court. 

Another bottom feeder who has engaged in a mass enforcement campaign is 

Innovatio IP Ventures. Beginning in 2011, Innovatio sent letters to over 8,000 businesses 

throughout the United States, including bakeries, hotels, and restaurants, claiming that 

2 See Mark A. Lemley & A. Douglas Melamed, Missing the Forest for the Trolls, 113 COLUM. L. REV. 

2117, 2126 (2013). 

3 See Colleen Chien & Edward Reines, Why Technology Customers Are Being Sued En Masse for 

Patent Infringement and What Can Be Done, 49 WAKE FOREST L. REV. 235, 235 (2014). 

4 Samples of these letters can be found in a complaint for unfair competition filed by the Federal 

Trade Commission, In re MPHJ Tech. Investments, LLC, No. 142-3003 (Nov. 6, 2014), available at 

http://www.ftc.gov/enforcement/cases-proceedings/142-3003/mphj-technology-investments-llc-matter, 

archived at http://perma.cc/T93Z-SVJL. 

5 
39 


those businesses infringed its patents by providing customers with wireless Internet 

access.5 Innovatio demanded that the recipients purchase licenses for about $2500 each 

or risk being sued for patent infringement. 

The demand letters sent in these mass enforcement campaigns are often rife with 

false or deceptive statements. MPHJ, for instance, obscured its identity by sending 

letters through eighty-one shell companies with nonsensical names such as DolVol, 

GanPan, and JitNom. To intimidate recipients into quickly purchasing a license, MPHJ 

threatened to sue if the recipient did not respond within two weeks. But, in fact, MPHJ 

never sued any of the targets of its mass enforcement campaign. Likewise, both 

Innovatio and MPHJ falsely claimed that many other businesses had already purchased 

licenses to their patents. 

II. State Governments Respond 

State legislatures across the country have responded to these troublesome patent 

enforcement tactics. In the past two years, legislatures in eighteen states have adopted 

statutes outlawing false or bad faith assertions of patent infringement, and nearly a 

dozen additional states are currently considering similar legislation. 6 The most popular 

model for state legislation is a statute first adopted in Vermont, which, in May 2013 

5 See In re Innovatio IP Ventures, LLC Patent Litig., 921 F. Supp. 2d 903, 907 (N.D. Ill. 2013). 

6 For a regularly updated list of state legislative actions, see Patent Progress's Guide to State Patent 

Legislation, PATENT PROGRESS, http://www. patentprogress.org/pa tent -progresss-gu ide-state-patentlegislation (last visited Feb. 22, 2015), archived at http://perrna.cc/4VXD-DF6E. 

6 
40 


became the first state to adopt legislation specifically regulating patent enforcement.' 

Since then, thirteen other states have adopted statutes modeled after Vermont's, with 

some minor variations. 8 And the Council of State Governments included the Vermont 

statute in its most recent volume of suggested state legislation.9 

The core provision of the Vermont statute states, simply: "A person shall not 

make a bad faith assertion of patent infringement." 10 The statute then lists several 

factors that courts "may consider ... as evidence that a person has made a bad faith 

assertion of patent infringement," including: 

The demand letter does not contain: the patent number, the name 

and address of the patent holder, or "factual allegations concerning 

the specific areas in which the target's products, services, and 

technology infringe the patent." 

The demand letter lacks the information noted above, the target 

requests the information, and the patent holder fails to provide the 

information "within a reasonable amount of time." 

The patent holder has previously filed or threatened to file lawsuits 

and those threats lacked the information noted above or were found 

by a court to be meritless. 

• Prior to sending the demand letter, the patent holder did not conduct 

an analysis comparing the claims of the patent to the target's 

7 Interestingly, the United Kingdom has recognized a civil claim for persons targeted with 

groundless threats of suit for patent infringement since 1883. For a discussion of this so-called "threats 

action," see U.K. LAW COMM'N, PATENTS, TRADE MARK AND DESIGN RIGHTS: GROUNDLESS THREATS (Apr. 

2014). 

8 The states that have followed Vermont's model include Alabama, Georgia, Idaho, Louisiana, 

Maine, Maryland, Missouri, New Hampshire, North Carolina, Oregon, South Dakota, Utah, and Virginia. 

9 See Suggested State Legislation, COUNCIL OF STATE GOVERNMENTS, http://www.csg.org/ 

programs/policyprograms/SSL.aspx (last visited Feb. 22, 2015), archived at http://perma.cc/3U5Y -P876. 

10 VT. STAT. ANN., tit. 9, § 4197(a). 

7 
41 


products, services, or technology, "or such an analysis was done but 

does not identify specific areas in which the products, services, and 

technology are covered by the claims in the patent." 

• The demand letter demands payment of a license or a response 

"within an unreasonably short period of time." 

• The patent holder "offers to license the patent for an amount that is 

not based on a reasonable estimate of the value of the license." 

• "The claim or assertion of patent infringement is meritless, and the 

person knew, or should have known, that the claim or assertion is 

meritless." 

• "The claim or assertion of patent infringement is deceptive." JI 

In addition to the Vermont model, two other types of state patent-demand-letter 

statutes exist. First, Wisconsin has adopted a statute that outlines in detail the 

information that a demand letter must include, such as the name of the patent owner, 

an identification of each patent claim being asserted, an identification of the allegedly 

infringing product or service, and "[f]actual allegations and an analysis setting forth in 

detail" the patent holder's theory of infringement. 12 The Wisconsin statute can be 

violated in two ways: First, if the letter lacks any of the required information, the target 

may notify the sender that the letter is incomplete. If the sender does not provide the 

missing information within thirty days, the sender violates the statute." Second, a 

11 /d.§ 4197(b). The statute also lists several factors suggesting that an infringement assertion was 

not made in bad faith, many of which are simply the opposite of the factors listed in the text. See id. 

§ 4197(c). 

12 WIS. STAT.§ 100.197(2)(a). 

Bfd. § 100.197(2)(c). 

8 
42 


demand letter violates the Wisconsin statute if it "contain[s] false, misleading, or 

deceptive information."" 

A third and final model of state legislation has been adopted in Illinois, 

Oklahoma, and Tennessee. Rather than prohibiting false or bad faith assertions of 

patent infringement, these statutes outline specific acts or omissions that violate the 

statute, such as "falsely stat[ing] that litigation has been filed" against the recipient, 

seeking compensation for infringement of a patent that has been held invalid or has 

expired, or failing to include "factual allegations concerning the specific areas in which 

the [recipient's] products ... infringe[] the patent." 15 The statutes also make clear that it 

is not unlawful to notify others of or to seek compensation for patent infringement, so 

long as the patent owner "is not acting in bad faith." 16 

All of the state statutes provide for enforcement by state officials, such as the 

state attorney general. And most of the statutes create a private right of action for the 

targets of unlawful infringement assertions. The remedies available in those private 

suits include equitable relief, compensatory damages, treble damages, and attorneys' 

fees. 

In addition to these new state statutes, attorneys general in several states have 

begun to use their powers under consumer protection and deceptive trade practices 

"Id. § 100.197(2)(b). 

15 E.g., OKLA. STAT. tit. 23, § 112(A). 

"E.g., id. § 112(B). 

9 
43 


laws to fight bottom-feeder trolls. Vermont's attorney general, for instance, sued MPHJ 

in May 2013, alleging that MPHJ's demand letters violated Vermont's general consumer 

protection statute. 17 (TI1e suit was filed two weeks before Vermont's demand letter 

statute took effect.) Around the same time, the attorney general of Nebraska began an 

investigation into whether a law firm representing MPHJ and Activision TV, another 

NPE, had violated Nebraska's consumer protection and deceptive trade practices 

statutes. 18 And the attorneys general of New York and Minnesota have negotiated 

agreements with MPHJ to curb its enforcement activity. 19 

III. Constitutional Limits on State Governments and the Federal Government 

These new state statutes and state law enforcement actions challenge the 

conventional wisdom that patent law is the domain of the federal government alone. 

Indeed, the website of the U.S. Patent and Trademark Office now counsels persons who 

receive demand letters that are "deceptive, predatory, or in bad faith," to, among other 

things, "fil[e] a complaint with your state attorney general's office." 20 Doctrines of 

17 See Consumer Protection Complaint at 1-8, Vermont v. MPHJ Tech. Investments, LLC, No. 282-

5-13wncv (Vt. Super. Ct. May 8, 2013), available at http://www.atg.state.vt.us/assets/files/ 

Vermont%20v%20MPHJ%20Technologies%20Complaint.pdf, archived at http://perma.cc/93X8-G6NS. 

18 See Letter from Jon Bruning, Attorney Gen. of Neb., toM. Brett Johnson, Partner, Farney 

Daniels LLP (July 18, 2013), available at http://ipwatchdogs.com/cases/NE-cease-desist.pdf, archived at 

http:/ /perma.cc/FQ9Y-WSGV. 

19 See Investigation by Eric T. Schneiderman, Att'y Gen. of the State of New York, of MPH) Tech. 

Investments, LLC, Assurance No. 14-015, at 12-19 (Jan. 13, 2014); Julie Samuels, Minnesota: Patent Trolls 

are Not Welcome Here (Aug. 21, 2013), ELEC. FRONTIER FOUND., https://www.eff.org/deeplinks/2013/08/ 

minnesota-patent-trolls-are-not-welcome-here, archived at http://perma.cc/D2P7-4VGD. 

"'I Got a Letter . .. , US. PATENT & TRADEMARK OFF., http://www.uspto.gov/patents/litigation/ 

!_got_a_letter.jsp (last visited Feb. 22, 2015), archived at http://perma.cc/Y3RL-S3D3. 

10 
44 


federal constitutional law developed by the Federal Circuit, however, may invalidate 

the new state statutes and limit the enforcement authority of state officials. Moreoverand most importantly for the purpose of this hearing-those same doctrines may also 

limit the legislative power of Congress and the enforcement authority of the federal 

government. 

A. Judicially Created Immunity for Patent Holders 

For decades, persons accused of patent infringement have tried to assert civil 

claims against overzealous patent holders. Those claims are sometimes grounded in 

state law (for example, claims for unfair competition or for tortious interference with 

business relations) and other times grounded in federal law (for example, claims for 

unfair competition under the Lanham Act or for violations of the civil RICO statute). 

The Federal Circuit, however, has held that patent holders are mostly immune from 

civil liability for their enforcement behavior. According to the Federal Circuit, to strip a 

patent holder of this immunity, the plaintiff must prove not only the elements of its 

state or federal claim, it must also prove, by clear and convincing evidence, (1) that the 

patent holder's infringement allegations were "objectively baseless," meaning that no 

reasonable litigant could have expected to succeed, and (2) that the patent holder made 

its infringement allegations with knowledge of their inaccuracy or with reckless 

disregard for their accuracy. 21 

21 Globetrotter Software, Inc. v. Elan Computer Grp., Inc., 362 F.3d 1367, 1377 (Fed. Cir. 2004). 

11 
45 


Although no court has yet applied this standard to the new state statutes, it 

seems to ensure that most tactics employed by bottom-feeder trolls will remain legal. 

To begin with, the rule requires a plaintiff to show that the patent holder's infringement 

allegations were objectively baseless. 22 Accordingly, false statements about matters 

peripheral to the infringement claims, such as misrepresentations about how many 

other persons have purchased licenses to the patents, will not strip a patent holder of 

immunity."' 

Moreover, it is very difficult to prove that infringement allegations were 

objectively baseless. The issue of infringement often turns on the judge's interpretation 

of the patent's claims. Those decisions are notoriously unpredictable, 24 making it hard 

to say that any given infringement allegation was so unlikely to succeed that it was 

objectively baseless. Also, an accused infringer who seeks to show that a patent is 

invalid must prove invalidity by clear and convincing evidence.25 Thus, even if a patent 

probably does not satisfy validity requirements such as novelty and nonobviousness, 

this high burden of proof could still give the patent holder a reasonable hope of success. 

22 See id. ("A plaintiff claiming that a patent holder has engaged in wrongful conduct by asserting 

claims of patent infringement must establish that the claims of infringement were objectively baseless." 

(emphasis added)). 

23 See, e.g., In re Innovatio IP Ventures, LLC Patent Litig., 921 F. Supp. 2d 903, 922 (N.D. Ill. 2013) 

(dismissing claims challenging patent enforcement conduct where the alleged false statements "[were] all 

peripheral to the question of infringement"); Activision TV, Inc. v. Bruning, No. 8:13-CV-215, slip op. at 

13 (D. Neb. Sept. 2, 2014) (applying Federal Circuit law, noting that "the crucial issues to establish 

objective[] baselessness involve validity and infringement"). 

24 See Dan L. Burk & Mark A. Lemley, Fence Posts or Sign Posts? Rethinking Patent Claim 

Construction, 157 U. PA. L. REV. 1743, 1744-46 (2009). 

25 See Microsoft Corp. v. i4i Ltd. P'ship, 131 S. Ct. 2238, 2242 (2011). 

12 
46 


That is sufficient under Federal Circuit law to immunize the patent holder from 

liability. In my research, l have conducted an extensive survey of Federal Circuit cases 

applying this immunity rule, and I have found that it is extremely rare for a plaintiff to 

prevail on a claim challenging patent enforcement conduct. 26 

Most disturbingly, two federal district courts have relied on the Federal Circuit's 

immunity doctrine to shelter Innovatio and MPHJ. After Innovatio began its 

enforcement campaign against users of wireless Internet routers, the manufacturers of 

the routers (Cisco, Motorola, and Netgear) sued Innovatio, asserting a claim under the 

federal RICO statute and several claims under California state law.27 The complaint 

alleged that Innovatio had made numerous false statements in its letters, including 

statements that it had "successfully licensed thousands of business locations under 

the ... patents" and that "the validity of many claims of the ... patents ha[d] been 

confirmed by both the Federal Circuit and the United States Patent Office, via both 

judicial and re-examination proceedings." 28 On Innovatio's motion to dismiss, the court 

26 By my count, since 2004, the Federal Circuit has barred the plaintiffs claim in all but one case 

raising an immunity issue. See Matthews lnt'l Corp. v. Biosafe Eng'g, LLC, 695 F.3d 1322,1332 (Fed. Cir. 

2012); Contech Stormwater Solutions, Inc. v. Baysaver Techs., Inc., 310 F. App'x 404, 409 (Fed. Cir. 2009); 

800 Adept, Inc. v. Murex Sec., Ltd., 539 F.3d 1354, 1372 (Fed. Cir. 2008); Judkins v. HT Window Fashion 

Corp., 529 F.3d 1334, 1339 (Fed. Cir. 2008); Dominant Semiconductors Sdn. Bhd. v. OSRAM GmbH, 524 

F.3d 1254, 1264 (Fed. Cir. 2008); GP Indus., Inc. v. Eran Indus., Inc., 500 F.3d 1369, 1375-76 (Fed. Cir. 2007); 

Serio-US Indus., Inc. v. Plastic Recovery Techs. Corp., 459 F.3d 1311, 1321 (Fed. Cir. 2006). But see 

Breckenridge Pharm., Inc. v. Metabolite Labs., Inc., 444 F.3d 1356, 1369 (Fed. Cir. 2006) (reversing 

summary judgment, holding that "the question of whether [the patent holder's] statements ... were 

'objectively baseless' is genuinely disputed"). 

27 In novalia, 921 F. Supp. 2d at 906. 

"I d. at 920-21. 

13 
47 


accepted the plaintiffs' allegations as true but still dismissed the complaint.29 Although 

the plaintiffs alleged that Innovatio had lied in its demand letters, the court reasoned 

that Innovatio was immune from civil liability because the plaintiffs did not plead that 

Innovatio's infringement claims were objectively baseless/0 as the Federal Circuit 

requires. 

Likewise, a federal district court in Nebraska enjoined that state's attorney 

general from pursuing a state-law case against MPHJ because the attorney general did 

not allege that MPHJ's theories of validity and infringement were objectively baseless. 31 

The attorney general argued that MPHJ had made "false and misleading 

representations" in its demand letters, such as statements that many businesses had 

already purchased a license and that it intended to file suit against recipients who did 

not purchase a license.32 But the court held that to strip MPHJ of immunity, the 

attorney general had to show that MPHJ' s theories of validity and infringement were 

objectively baseless, which the attorney general had not done.33 

29 Id. at 922. 

30 I d. at 921. 

"See Activision TV, Inc. v. Bruning, No. 8:13-CV-215, slip op. at 13-14 (D. Neb. Sept. 2, 2014). 

"See id. at 13. 

33 Id. at 11, 13-14. 

14 
48 


In short, it is not hyperbole to say that, under the Federal Circuit's immunity 

doctrine, patent holders have a "legal right to lie" in their demand letters.34 It is these 

(legally protected) lies that are motivating increased interest by state governments in 

regulating patent enforcement. 

B. Limits on the Power of the Federal Government? 

Courts and commentators sometimes call the immunity enjoyed by patent 

holders a matter of "preemption" because it is most frequently invoked when an 

alleged infringer relies on state law to challenge a patent holder's behavior in enforcing 

a federal patent.35 The term "preemption" suggests that the source of the immunity 

doctrine is the Constitution's Supremacy Clause, which limits the power of state 

governments, not the federal government. In more recent cases, however, the Federal 

Circuit has made clear that its immunity doctrine stems not from the Supremacy Clause 

alone, but from the First Amendment,36 which does limit the power of the federal 

government. As a consequence, the immunity doctrine seems to apply equally to state 

governments and the federal government, and patent holders may be able to claim 

34 Steven Seidenberg, Infringe Benefits: Patent Trolls Getting First Amendment Protection, A.B.A.)., 

May 2014, http://www.abajournal.com/magazine/article/patent_trolls_are_getting_first_amendment_ 

protection_for_demand_letters, archived at http://perma.cc/LQ82-JSVS. 

35 See, e.g., Hunter Douglas, Inc. v. Harmonic Design, Inc., 153 F.3d 1318, 1338 (Fed. Cir. 1998); 

David Lee Johnson, Note, Facing Down the Trolls: States Stumble on the Bridge to Patent-Assertion Regulation, 

71 WASH. & LEE L. REV. 2023,2027 (2014). 

36 Globetrotter Software, Inc. v. Elan Computer Grp., Inc., 362 F.3d 1367, 1377 (Fed. Cir. 2004) 

("Our decision to permit state-law tort liability for only objectively baseless allegations of infringement 

rests on both federal preemption and the First Amendment."). 

15 
49 


immunity from federal initiatives to fight patent trolls, too-including any legislation 

this Committee might consider adopting. 

IV. An Argument Against Broad Immunity 

It is not, however, a foregone conclusion that patent holders will be able to claim 

broad immunity from government efforts to regulate unfair or deceptive demand 

letters. To the extent that challenges to patent enforcement conduct proceed in state 

court, such as the Vermont attorney general's suit against MPHJ, those courts could 

develop a different, narrower immunity rule than the Federal Circuit has developed, for 

state courts are not bound to follow Federal Circuit law. Indeed, there is a strong 

argument based on law, policy, and historical practice that the Federal Circuit has erred 

in granting patent holders such broad immunity for their enforcement conduct. 

To begin with, the Federal Circuit has arguably misconstrued the relevant law. 

The Federal Circuit has derived its immunity test from the requirements imposed by 

the Supreme Court on plaintiffs who seek to inflict antitrust liability on defendants 

based on those defendants' pursuit of litigation.37 This doctrine, often called the NoerrPennington doctrine (or Noerr doctrine, for short),38 sterns from the Supreme Court's 

interpretation of the federal antitrust statute, the Sherman Act, in the light of the First 

Amendment's Petition Clause, which protects "the right of the people ... to petition the 

"[d. at 1375. 

38 The doctrine's name stems from the cases in which the Supreme Court first developed it. See E. 

R.R. Presidents Conf. v. Noerr Motor Freight, Inc., 365 U.S. 127 (1961); United Mine Workers of Am. v. 

Pennington, 381 U.S. 657 (1965). 

16 
50 


government for a redress of grievances."39 But the Federal Circuit's reliance on Noerr's 

view of the Petition Clause is a mistake: Letters sent from one private party to another, 

such as letters threatening patent infringement litigation, are simply not "petition[s]" to 

"the government" within the meaning of the First Amendment. 

By looking to history, the Federal Circuit could better strike a balance between 

protecting patent holders from liability when they make legitimate allegations of 

infringement and punishing patent holders when they employ unfair or deceptive 

tactics. At the time the Federal Circuit was created in 1982, the lower federal courts 

had-for nearly a century-been addressing the precise question of when a patent 

holder may be held liable for its enforcement conduct. Those courts enjoined patent 

holders from making infringement assertions in bad faith-exactly the behavior that 

many of the new state statutes condemn. 40 But the Federal Circuit has largely ignored 

that long line of decisions, instead demanding that anyone challenging patent 

enforcement conduct prove that the infringement allegations were objectively baseless. 

Historically, the courts treated bad faith as a flexible standard with both 

subjective and objective components." Under this equity-based immunity standard-as 

opposed to the rigid "objective baselessness" test mandated by the Federal Circuit-the 

"U.S. Const. amend. I. 

40 See, e.g., Emack v. Kane, 34 Fed. 46, 50-51 (C.C.N.D. Ill. 1888). 

41 See MarkS. Bicks, Threatening to Sue for Patent Infringement: Unfair Competition and Antitrust 

Consequences, 59 J. PAT. OFF. Soc'y 302, 303-04 (1977) ("The good faith involved refers to a state of mind 

and, in this context, means that the speaker sincerely and reasonably believes in the truth of his 

statements."). 

17 
51 


government could impose reasonable restrictions on patent enforcement, enjoining 

enforcement campaigns where, for instance, the patent holder threatened a large 

number of accused infringers42 or failed to follow its threats with actuallawsuits. 43 At 

the same time, cases in which courts enjoined enforcement conduct under the 

traditional standard were usually egregious and often involved claims that were 

objectively weak on the merits. 44 Accordingly, a good faith immunity standard-as 

opposed to the Federal Circuit's "objective baselessness" rule-would protect patent 

holders' ability to provide legitimate notice of their patent rights while offering the 

government some leeway to punish deceptive behavior. 

V. What Can Congress Do? 

If, as the Federal Circuit claims, broad immunity for patent holders is mandated 

by the First Amendment, it might appear as if there is little Congress can do to regulate 

demand letters. However, I believe Congress can still play an important role in this 

area. To begin with, this hearing can serve the important function of bringing a 

problematic line of cases to the attention of both the Federal Circuit and the Supreme 

Court. This Committee's discussion could encourage the Federal Circuit to reconsider 

its case law. 

42 E.g., lnt'l Indus. & Devs.,lnc. v. Farbach Chern. Co., 241 F.2d 246,247-48 (6th Cir. 1957). 

43 E.g., Adriance, Platt & Co. v. Nat'! Harrow Co. 121 F. 827, 829-30 (2d Cir. 1903). 

"E.g., Emack, 34 Fed. at 49. 

18 
52 


Such a response to the work of a congressional committee would not be 

unprecedented. Several scholars (including myself) have observed that the Federal 

Circuit keeps close watch when Congress considers amending patent law and have 

found numerous examples of the court revising its case law to align with proposed 

legislation.45 For instance, in the mid-to-late 2000s, Congress considered several bills to 

restrict plaintiffs' choice of venue in patent cases. While those bills were pending, the 

Federal Circuit-for the first time ever-ordered a district court to transfer a patent case 

to a more convenient venue. 46 After that initial decision, the Federal Circuit issued 

several more opinions ordering transfer.47 To date, the core venue statute remains 

unchanged. 48 

Likewise, during roughly the same time period, Congress was considering 

proposals to limit damages in patent cases. While those proposals were pending, the 

Federal Circuit issued several decisions increasing its scrutiny of damages awards. For 

instance, the court conducted a close review of the facts supporting a jury's royalty 

calculation, overturning a nearly $358 million award against Microsoft as unsupported 

45 See Paul R. Gugliuzza, The Federal Circuit as a Federal Court, 54 WM. & MARY. L. REV. 1791. 1827-

28 (2013); see also Jonas Anderson, Congress as a Catalyst of Patent Reform at the Federal Circuit, 63 AM. U. L. 

REV. 961, 966-69 (2014). 

46 See In re TS Tech USA Corp .• 551 F.3d 1315,1321-22 (Fed. Cir. 2008); see also 28 U.S. C.§ 1404(a) 

("For the convenience of parties and witnesses, in the interest of justice, a district court may transfer any 

civil action to any other district or division where it might have been brought .... "). 

47 See generally Paul R. Gugliuzza, The New Federal Circuit Mandamus, 45 IND. L. REV. 343, 346 

(2012). 

48 See 28 U.S. C.§ 1400(b). 

19 
53 


by the evidence.49 The court also rejected the much-maligned "25 percent rule of 

thumb" as a starting point for the hypothetical negotiation used to calculate a 

reasonable royalty. 50 Thus, the fact that the Committee is holding this hearing and 

considering legislation to regulate patent demand letters could spur the Federal Circuit 

to reconsider its immunity doctrine. 

In addition, this hearing draws attention to the important efforts of state 

governments to combat abusive patent enforcement. The proliferation of state statutes 

and state law enforcement activities raises the question of whether, going forward, this 

problem is best solved through state-federal cooperation or whether patent law should 

remain the federal government's exclusive domain. 

Congress could, if it so chooses, expressly preempt state law in this area 

pursuant to the Supremacy Clause. A single, federal statute governing patent 

enforcement has some obvious benefits: It would provide a uniform legal standard to 

govern all patent enforcement efforts undertaken anywhere in the country. A uniform 

legal standard should, in theory, allow patent holders to better predict whether their 

actions are lawful or not. 

But the benefits of legal uniformity should not be overstated. Several scholars 

(myself included) have recently questioned whether uniformity is a sufficiently 

important policy goal in the patent system that it should outweigh the benefits of 

49 Lucent Techs., Inc. v. Gateway, Inc., 580 F.3d 1301, 1324-36 (Fed. Cir. 2009). 

50 Uniloc USA, Inc. v. Microsoft Corp., 632 F.3d 1292, 1315 (Fed. Cir. 2011). 

20 
54 


interjurisdictional dialogue and experimentation. 51 It is likely no coincidence that, since 

states began adopting anti-troll statutes, the frequency of mass enforcement campaigns 

seems to be decreasing. State-by-state regulation in this area may have significant 

deterrence value: Rather than defending against, say, one investigation brought by the 

Federal Trade Commission, a patent holder might be forced to defend against multiple 

lawsuits in multiple states, brought by both private plaintiffs and state attorneys 

general. 

State law enforcement agencies also provide substantial enforcement resources. 

The ability of dozens of states' attorneys general offices, joining together, to monitor 

and punish deceptive patent enforcement behavior likely dwarfs what the federal 

government could do. And state governments are more accessible than the federal 

government to those most likely to be targeted by bottom-feeder trolls: small 

businesses, nonprofits, and local governments. Vermont's pathmarking statute, for 

instance, was the product of a grassroots effort: businesses and non-profits in the state 

that had received demand letters from trolls approached their state legislators and 

attorney general and, together, they drafted Vermont's statute. 

An approach to regulating demand letters that emphasizes the respective 

strengths of state governments and the federal government would be optimal. One 

51 See Paul R. Gugliuzza, Patent Law Federalism, 2014 WIS. L. REV. 11, 48-51; Craig Allen Nard & 

John F. Duffy, Rethinking Patent Law's Uniformity Principle, 101 Nw. U. L. REV. 1619, 1623 (2007); Lisa 

Larrimore Ouellette, Patent Experimentalism, 101 VA. L. REV. (forthcoming 2015) (manuscript at 7-13), 

available at http://ssrn.com/abstract~2294774. 

21 
55 


important strength of federal regulation, which has not been widely discussed, is that it 

could provide certainty about which courts can hear cases involving unfair or deceptive 

patent demand letters. The federal district courts have exclusive subject-matter 

jurisdiction over cases "arising under" patent law, 52 meaning that state courts cannot 

hear those cases. But difficult questions occur when a plaintiff asserts a state-law claim 

that implicates federal patent law, such as the Vermont attorney general's consumer 

protection lawsuit against MPHJ. MPHJ was able to delay that suit for nearly a year by 

arguing that the state had improperly filed the case in state court. 53 If Congress were to 

enact a federal statute governing patent demand letters, cases involving claims under 

that statute would be-without question-subject to the federal courts' exclusive 

subject-matter jurisdiction. 

A federal statute governing patent demand letters could also reduce uncertainty 

on matters of personal jurisdiction. The courts of a particular state may exercise 

jurisdiction over a defendant only if the defendant has "certain minimum contacts" 

with that state "such that the maintenance of the suit does not offend traditional notions 

of fair play and substantial justice." 54 Typically, the personal jurisdiction of a federal 

court is the same as the jurisdiction of the courts of the state in which the federal court 

52 28 U.S. C.§ 1338(a). 

53 A federal district court ultimately rejected MPHJ's jurisdictional argument and sent the case 

back to state court. See Vermont v. MPHJ Tech. Investments, LLC, No. 2:13-CV-170, 2014 WL 1494009, at 

*1 (D. Vt. Apr. 15, 2014). 

54 Int'l Shoe Co. v. Washington, 326 U.S. 310, 316 (1945). 

22 
56 


sits. 5

5 And the Federal Circuit has held that a patent holder who merely sends ceaseand-desist letters into a state does not create the required minimum contacts with that 

state.56 This rule enables litigants such as MPHJ to argue that the act of sending 

demand letters into Vermont is not sufficient to allow a court sitting in Vermont-state 

or federal- to exercise jurisdiction over it.5' Under MPHJ' s reading of the Federal 

Circuit's case law, which is not unreasonable, any litigant who wishes to challenge its 

demand letter practices must travel to MPHJ' s home state of Texas. Congress, however, 

has the power to authorize the federal courts to exercise personal jurisdiction on a 

nationwide basis. 58 Thus, a federal statute on unfair or deceptive patent demand letters 

could ensure that a patent holder who blankets the country with letters could be sued in 

any federal district court in the United States. 

Assuming Congress chooses to adopt a federal statute regulating demand letters, 

what conduct, exactly, should it outlaw? Setting aside for the moment the 

constitutional constraints discussed above, 59 the concept of "bad faith" should, in my 

view, be at the core of the statute. As discussed, a long line of pre-Federal Circuit case 

law provides substantial guidance to courts in making bad faith determinations. 

55 See FED. R. C!V. P. 4(k)(l )(A). 

56 See, e.g., Red Wing Shoe Co. v. Hockerson-Halberstadt, Inc., 148 F.3d 1355, 1361 (Fed. Cir. 1998); 

see also Megan M. La Belle, Patent Litigation, Personal Jurisdiction, and the Public Good, 18 CEO. MASON L 

REV. 43, 47-48 (2010) (critiquing this line of cases). 

57 See Defendant MPH) Tech. Investments, LLC's Motion to Dismiss at 6-13, Vermont v. MPH) 

Tech. Investments, LLC, No. 2:13-CV-170 (D. Vt. filed Sept. 17, 2013). 

58 See FED. R. C!v. l'. 4(k)(1 )(C). 

ss See supra Part lll. 

23 
57 


Because of that already-existing case law, I would argue that there is no need for the 

statute to define bad faith in great detail. A long list of statutory factors, or a 

complicated statutory definition, would obscure the basic, equitable purpose of the bad 

faith inquiry.60 

Conclusion 

Thank you again for inviting me to testify. In my statement, I have sought to 

highlight that patent holders might currently enjoy an unduly broad immunity from 

civil liability for their enforcement conduct. Although this immunity could limit the 

power of Congress to take action against those who abuse the patent system, I hope this 

hearing will encourage further discussion, both in Congress and in the courts, about the 

proper scope of protection for patent holders and about whether the states or the 

federal government are best situated to solve this important problem. I would be 

pleased to answer any questions the Committee might have for me. 

60 See RICHARD A. POSNER, REFLECTIONS ON JUDGING 86-87 (2013) (critiquing multifactor legal tests 

because they obscure the core purpose of the relevant law). 

24 
58 

Mr. BURGESS. Gentleman yields back. The Chair thanks the gentleman for his testimony. 

Ms. Ranieri, you are recognized for 5 minutes for the purposes 

of an opening statement. 

STATEMENT OF VERA RANIERI 

Ms. RANIERI. Mr. Chairman, Ranking Member Schakowsky, and 

Members of the subcommittee, thank you for the opportunity to be 

here today. 

For those of you who aren’t familiar with my organization, the 

Electronic Frontier Foundation, or EFF, we are a nonprofit organization dedicated to protecting consumer interests, innovation and 

free expression in the digital world. As part of that work, we regularly advocate for reform of the patent system in courts, Congress, 

and at the Patent and Trademark Office. EFF is greatly encouraged by Congress’ interest in the important issue of deceptive and 

abuse patent rule demand letters, and its impact on consumers and 

small businesses. 

EFF is one of the few nonprofit legal services organizations that 

small businesses and innovators can turn to in order to get help 

when faced with a patent troll demand letter. Unfortunately, we 

cannot help everyone, and more importantly, because of a lack of 

meaningful, manageable legal options, we are too often unable to 

help push back against those who use deceptive patent demand letters in order to extract money from their victims. 

The problem of abusive patent rule demand letters is a result of 

a perfect storm of circumstances. Patent owners sending these letters use vague and overbroad patents that likely never should have 

issued, in order to confuse and obfuscate. Patent owners rely on the 

eye-popping cost of litigation in order to intimidate, and patent 

owners take advantage of their victims’ relative lack of experience 

with technology and the legal system to ensure improper claims of 

infringement go unchallenged. For example, in 2011, a company 

known as Eclipse IP sent demand letters to various retailers alleging infringement of patents on tracking packages through the use 

of UPS tracking. Eclipse demanded licenses in the hundreds of 

thousands of dollars. Seeing their customers being targeted, UPS 

filed a declaratory judgment of non-infringement and invalidity, 

but before the court could address whether Eclipse’s claims of infringement had merit, Eclipse filed what is known as a covenant 

not to sue. In doing so, Eclipse ensured that its patent rights would 

not actually be litigated, that is, they did everything in their power 

to stop the court from deciding the merits of its claims. Eclipse apparently merely wanted to extract settlements from its victims, despite assertions in its demand letter that it would engage in litigation if its licensing demands were not met. Since 2011, Eclipse has 

sued over 100 companies and presumably sent letters to countless 

others. 

Letters and actions like Eclipse’s are all too common. Other letters employ tactics such as not mentioning licenses that likely exhaust patent rights, or use complex and vague nonsense terms 

from the patent in order to make infringement claims that would 

never have been apparent to someone reading the patent. Dealing 

with even the most frivolous of letters takes time and money away 

59 

from what small businesses should be doing, which is growing their 

business and creating jobs. 

I could tell many more stories, but most demand letters never 

see the light of day. Recipients of letters from patent trolls are 

often afraid of speaking out, and no wonder, by speaking out, they 

worry they would become an even bigger target and subject to even 

larger demands they cannot afford. Patent trolls use this fact to 

hide their practices from scrutiny and from lawmakers and the 

public. 

Deceptive and unfair patent troll demand letters must be addressed, but it is important to address them in a way that makes 

sense. Specifically, Congress should not limit the ability of State attorneys general to protect their citizens, whether that be through 

State laws addressing abusive demand letters, or through their 

own little FTC acts. State AGs are often the closest to the problem, 

and in the best position to address deceptive practices targeted at 

their citizens. Second, Congress should allow for flexibility in the 

law. Overly rigid rules regarding what constitutes bad faith will 

allow patent trolls to comply with the letter of the law but not the 

spirit. As a lawyer, I can assure you that we are enterprising people. If there is a loophole to be found, we will find it. Flexibility 

is key to ensuring patent trolls don’t find new ways to deceive their 

targets. 

Finally, in order to protect technology end users such as retailers 

and tracking—such as retailers implementing tracking technology, 

or the coffee shop offering Wi-Fi, Congress should mandate disclosure requirements. Through these disclosure requirements, Congress can better understand the scope of the problem, and agencies 

such as the PTO, the FTC, and nonprofit organizations such as 

EFF, can better target those practices and those patents that are 

being abused. 

Addressing the deceptive patent troll demand letter problem is 

an important piece of broader patent reform. In tandem with other 

measures, we can limit the ability of patent holders to use patents 

that never should have been issued, to extort undeserved money 

from those who just want to pursue their livelihoods. 

Thank you, and I look forward to your questions. 

[The prepared statement of Ms. Ranieri follows:] 

60 


ElECTRONIC FRONTIER FOUNDATION 

Committee on Energy & Commerce 

Subcommittee on Commerce, Manufacturing, and Trade 

U.S. House of Representatives 

Hearing 

"Update: Patent Demand Letter Practices and Solutions" 

Testimony of Vera Ranieri 

Staff Attorney 

Electronic Frontier Foundation 

February 26, 2015 
61 


• ELECTRONIC FRONTIER FOUNDATION 

SUMMARY OF TESTIMONY 

Patent troll demand letters continue to frustrate and intimidate small businesses 

and innovators. Through the use of vague statements and legalese, and by exploiting 

asymmetries in information and resources, patent trolls sending unfair and deceptive 

letters have been able to receive undeserved "licenses" from their victims with relative 

impunity. 

All of this often happens in the shadows. Recipients of letters from patent trolls 

are often afraid of speaking out, believing that may make them a bigger target. Patent 

trolls use this fact to hide their practices from scrutiny by lawmakers and the public. 

The Electronic Frontier Foundation is encouraged by Congress' efforts to address 

this problem through legislation targeting the deceptive and unfair business practices of 

patent trolls who send these letters. We hope that in enacting any legislation, Congress 

gives tools to all those who can stop deceptive business practices, and leaves flexibility in 

the law to ensure new tactics can be addressed as they arise. We also urge Congress to 

view efforts to curb unfair patent troll demand letters as an essential part of, but not a 

substitute for, broader reform that targets the true source of patent trolls' power. 

The Electronic Frontier Foundation also encourages Congress to enact disclosure 

requirements that would allow lawmakers, and the public more generally, the ability to 

better understand how demand letters negatively impact our innovation economy. 
62 


ELECTRONIC FRONTIER FOUNDATION 

Full Testimony of Vera Ranieri 

Electronic Frontier Foundation 

Before the House Energy & Commerce Committee Subcommittee on Commerce, 

Manufacturing, and Trade 

February 26, 2015 

Chairman Burgess, Ranking Member Schakowsky, and members of the 

subcommittee, thank you for holding this hearing and inviting me to testify today about 

deceptive practices by Patent Assertion Entities ("PAEs"). We are greatly encouraged by 

your interest in this important issue and its impact on consumers and small businesses. 

I am a Staff Attorney at the Electronic Frontier Foundation, a non-profit civil 

liberties organization that has worked for almost 25 years to protect consumer interests, 

innovation, and free expression in the digital world. Founded in 1990, EFF represents 

more than 25,000 active members. Many of those members are small businesses, 

innovators, and tinkerers who often find themselves facing unfair patent litigation or 

demands. Through litigation, the legislative process, and administrative advocacy, EFF 

seeks to represent those members' interests and promote a patent system that facilitates, 

rather than impedes, what the Constitution defines as "the Progress of Science and useful 

Arts." 

Defining the Patent Troll Demand Letter Problem 

For more than a decade, a crucial part of EFF's work has been addressing the 

rising problem of PAEs, sometimes also known as non-practicing entities (NPEs) or, 

colloquially as patent trolls or patent bullies. These entities usually neither make nor sell 

anything but litigation and paperwork. Rather than relying on patents to protect their 

ability to bring new products to market, they acquire and use patents solely to sue, or 

threaten to sue, unsuspecting businesses. As Judge Posner of the Seventh Circuit Court of 

2 
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• ELECTRONIC FRONTIER FOUNDATION 

Appeals explained, patent trolls "are companies that acquire patents not to protect their 

market for a product they want to produce-patent trolls are not producers-but to lay 

traps for producers, for a patentee can sue for infringement even if it doesn't make the 

product that it holds a patent on."1 

One tactic is to use the threat of patent litigation to extort settlements in the form 

ofletters demanding "licensing deals." These "licensing deals," however, are not the kind 

of responsible technology transfer that benefits consumers. Rather, they are intended to 

extract rents from legitimate businesses who have no idea, until they get a demand letter, 

that they might be infringing any patent and, very often, little ability to investigate the 

claim and fight back where appropriate. 

EFF previously testified on the problem of patent troll demand letters in 2013. 

Unfortunately, little has changed for small businesses and innovators since then. 

A. Patent Troll Demand Letters Are Used To Threaten and Intimidate 

Consumers and Small Businesses 

Patent trolls continue to cause enormous harm to innovators and consumers, not 

to mention job creators. Companies that actually create products, services, and jobs find 

themselves under siege by trolls wielding vague and overbroad patents to launch or 

threaten expensive litigation. Addressing this conduct, and finding solutions to curb 

further abuse, is a priority for this Congress, as it should be. The harm to consumers, 

1 Richard A. Posner, Why There Are Too Many Patents in America, The Atlantic 

(July 12, 20 12), http://www .theatlantic.com/business/archive/20 12/07 /why-there-are-toomany-patents-in-america/259725/. 

3 
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18 ELECTRONIC FRONTIER FOUNDATION 

however, does not only arise out of actual lawsuits; an often-invisible part of the problem 

comes from dangerous and irresponsible demand letter campaigns. 

Specifically, patent trolls often send letters with vague and threatening language 

to small businesses and innovators knowing that it is likely the recipients have little, if 

any, experience with patent law or the judicial system more generally. These demand 

letters often lack basic detail of what the recipient does to allegedly infringe the patent at 

issue, if the specific patent is mentioned at all. Where the letters do mention the patents, 

they often list patent numbers without detailing which parts of the patent-which 

typically comprises many pages of dense technical content and legalese-are relevant. 

The recipient of the letter, often an entrepreneur focused on building her business, likely 

has few connections that would be able to help them understand the legitimacy of the 

claim. Where the companies do have legal counsel, those lawyers may not be patent 

specialists. Indeed, the demand letters often tell small businesses that they must speak to 

a more specialized lawyer, one who may charge significant amounts of money just to 

evaluate the claims .. 

Some of the language used by patent trolls to intimidate the targets of their letters 

includes: 

• "As background, our firm practices nationally and specializes solely in 

patent litigation and licensing"2 

• "We believe you will find that Landmark's patent teaches technologies 

which are contributing significantly to [redacted] bottom line[.]"3 

Letter from Activision TV, Inc., (Mar. 1, 2013), available at https:// 

trollingeffects.org/demand/activision-tv-inc-20 13-03-01. 

4 
65 


Itt ELECTRONIC FRONTIER FOUNDATION 

• "As your organization almost certainly uses in its day-to-day operations 

[the patented technology], you should enter into a license agreement with 

us at this time. If you believe you are in the unusual position of not have a 

system [that practices the patented technology], please contact us so we 

may discuss means for confirming that. ... The materials we likely would 

require could include copies of the user manuals for your office 

copying/scanning equipment, along with the IP addresses and 2012 daily 

activity logs for each of them, as well as the registry of each of the email 

servers and file servers used in your company."4 

• "As you may know, a United States patent grants its owner the right to 

exclude others from using products that fall within the scope of the 

claimed invention and collect damages not less than a reasonable 

royalty."5 

Those familiar with patent law--or even the legal system more generally-might 

recognize many of these statements as bluster. To those unfamiliar with the system, 

however, the threats are confusing, opaque, and esoteric. 

This is intentional. Patent trolls exploit asymmetry of information. As an example, 

letters often include a "deadline" to respond by, leaving implicit the "or else." 6 The 

recipient has no legal obligation to reply, but she might not know that. In fact, the senders 

often include "draft complaints" and other enclosures in an attempt to threaten real 

3 Letter from Landmark Technology, LLC, (July 23, 2013), available at https:// 

trollingeffects.org/ demand/landmark -technology-llc-20 13-07-23. 

4 Letter from HarNol, LLC/MPHJ Technologies, (Jan. 17, 2013), available at 

https://trollingeffects.org/demand/harnol-llc-2013-0 1-17. 

5 Letter from Treehouse Avatar Technologies, (July 30, 2013), available at 

https:/ /tro llingeffects.org/demand/treehouse-avatar-technologies-inc-20 13-07-30. 

6 See, e.g., Letter from Lodsys, (July 15, 2011) ("We are interested in reaching a 

negotiated non-litigation licensing arrangement with you for all of your uses of the 

Lodsys Patents under your brand name and would like to discuss this matter with you 

within 21 days of your receipt of this letter"), available at https://trollingeffects. org/ 

demand/lodsys-llc-20 11-07-15. 

5 
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ELECTRONIC FRONTIER FOUNDATION 

litigation in order to make the claim even more immediate, threatening, and intimidating, 

even though the patent holders may have no intention of actually bringing a suit in court. 

And this is no surprise, as the letters' targets are often individuals and small companies 

whose entire annual revenue would not cover the cost of a lawyer's time to obtain the 

information necessary to respond to the letter. 

If the target does consult a lawyer, moreover, she will quickly learn something 

else: the tremendous costs of patent litigation are, put simply, more than most people 

could ever afford. If taken to verdict, defending a lawsuit can easily cost several million 

dollars.7 Even if the case is dismissed early, legal costs will often run into the six and 

seven figures. 8 It is no wonder many customers and small businesses feel compelled to 

pay the troll. 

Even though a demand letter is not a legal complaint, and even if it makes 

specious claims, the serious costs it can impose have been well-documented. As one 

study found: 

Patent demands can be costly to resolve, and particularly so for small 

companies. The overwhelming majority of companies said that resolving 

the demand required founder time (73%) and distracted from the core 

7 See American Intellectual Property Law Association, Report of the Economic 

Survey (2013) (reporting median litigation costs for lawsuits brought by NPEs to be 

between $600,000 and $4 million, depending on the amount in controversy); see also Jim 

Kerstetter, How Much is That Patent Lmvsuit Going to Cost You?, CNET, (Apr. 2, 2012), 

http:// news. cnet. com/830 1-32973 _ 3-57409792- 296/how-much- is-that- patent-lawsuitgoing-to-cost-you. 

8 !d.; see also Colleen V. Chien & Edward Reines, Why Technology Customers 

are Being Sued En Masse for Patent Infringement & What Can Be Done, Santa Clara 

Univ. Sch. of Law Working Paper No. 20-13, at 3 (Aug. 2013) ("Chien & Reines"), 

available at http://papers.ssrn.com/so13/papers.cfm?abstract_id=2318666. 

6 
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• ELECTRONIC FRONTIER FOUNDATION 

business (89%); most experienced a financial impact as well (63%). 

However, responses and the costs of these responses ran the gamut; for 

example, 22% of those surveyed said they "did nothing" to resolve the 

demand.9 

The serious problem of patent troll demand letters is part of a larger trend: an 

explosion of patent troll litigation. The number of patent suits filed by PAEs has 

increased, on average, by 22% per year since 2004. 10 Indeed, there were more cases filed 

by PAEs in one month in January 2015 than in the entire year of2004. 11 Since 2002, 

litigation at the hands of patent trolls has grown from just five percent of total patent 

litigation to a majority of all patent cases. 12 Moreover, patent trolls are targeting smaller 

companies, such as startups, that lack the resources to defend against patent suits and thus 

have no choice but to pay extortionate settlement demands. 13 The burden of patent troll 

litigation falls particularly hard on small companies. Professor Colleen Chien recently 

9 Colleen V. Chien, Startups and Patent Trolls, 17 Stan. Tech. L. Rev. 461, 472 

(2014) ("Chien 2014"). 

10 See Litigations Over Time, PATENT FREEDOM, https://www.patentfreedom.com/ 

about-npes/litigations/ (last visited Feb. 23, 20 15). 

11 Compare id (showing 235 cases filed by PAEs in 2004) with UNIFIED 

PATENTS, January 2015 Patent Dispute Report, http://unifiedpatents.com/january-2015-

patent-dispute-report/ (last visited Feb. 23, 20 15) (showing 250 cases filed by PAEs in 

January 2015 alone). 

12 James Bessen, Jennifer Ford and Michael Meurer. The Private and Social Costs 

of Patent Trolls, Boston Univ. School of Law, Law and E~onomics Research Paper No. 

11-45 ("Bessen 2011 ") at 7, available at http:// papers. ssrn. com/ sol3/ papers. cfm? 

abstract_id=1930272; Colleen V. Chien, Patent Assertion Entities, Presentation to the 

December I 0, 2012 DOJ/FTC Hearing on PAEs, ("Chien Slides"), at slides 23-24, 

available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2187314. 

13 Chien 2014 at 464-65. 

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found that at least 55 percent of unique defendants in patent troll suits have revenues 

under $10 million per year. 14 

Of particular note, the patent troll problem is quite often a software patent 

problem. Software patents are an attractive tool for patent trolls because they are 

notoriously difficult to understand and interpret, which means that unscrupulous patent 

owners can claim that their patent covers a wide range of technology. 15 It is no 

coincidence that more than 65 percent of troll suits involve software-related claims. 16 

And those same "fuzzy boundaries" provide allow patent holders to send menacing 

demand letters to a broader range of unsuspecting targets. 

The harms caused by patent troll demand letters are not abstract. They affect real 

people everyday. In one case, lnnovatio IP Ventures, sent over 13,000 letters to small 

businesses such as cafes and hotels demanding payment for providing Wi-Fi. 17 In a 

campaign EFF believes was fundamentally unethical and deceptive, Innovatio targeted 

users of millions of devices that were already protected by patent licenscs. 18 Another troll 

called MPHJ sent over 16,000 letters to small businesses demanding payment for using 

14 !d. at 461. 

15 In other words, "software patents have 'fuzzy boundaries': they have 

unpredictable claim interpretation and unclear scope ... and the huge number of software 

patents granted makes thorough search to clear rights infeasible, especially when the 

patent applicants hide claims for many years by filing continuations. This gives rise to 

many situations where technology firms inadvertently infringe." Bessen 2011 at 24. 

16 See Brian J. Love, An Empirical Study of Patent Litigation Timing: Could a 

Patent Term Reduction Decimate Trolls Without Harming Innovators? 161 U. Penn. L. 

Rev. 1309, 1344 (2013). 

17 Chien & Reines at 19-20. 

18 /d.atl9. 

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basic "scan to email" technology. 19 To hide who was really behind this campaign, MPHJ 

set up a dizzying array of shell companies. 

MPHJ presents an important case study of the difficulty presented by the patent 

troll demand letter problem. After MPHJ's activities came to light, several manufacturers 

of the accused products challenged MPHJ's patents at the Patent Office in inter partes 

review proceedings?0 Those proceedings led to the invalidation of most of the claims in 

the challenged patents. 21 Furthermore, MPHJ recently settled with the FTC after the FTC 

investigated MPHJ's demand letter writing campaign.22 Despite MPHJ being hobbled, it 

has asked a court to allow it to continue to send demand letters.23 

Most troubling, the letters MPHJ wants to send continue the practice of exploiting 

asymmetry of information. In particular, although they admit that they do not have 

information that the recipient is infringing (nor could they, given the limited scope of the 

sole remaining claim it asserts), they ask the recipient "whether [it] would be willing to 

19 See Susan Decker, Notorious 'Patent Troll' MPHJ will East Tactics: FTC, 

BLOOMBERG BUSINESS (Nov. 6, 2014), http://www.bloomberg.com/news/articles/2014-

11-06/notorious-patent-troll-mphj-will-ease-tactics-ftc. 

20 See, e.g., Ricoh Americas Corp. et al. v. MPHJ Tech. Invs., LLC, IPR2013-

00302 (filed May 23, 2013); Hewlett-Packard, Co. v. MPHJ Tech. Invs., LLC, IPR2013-

00309 (filed May 24, 2013). 

21 !d. 

22 See In re MPHJ Tech. Jnvs., LLC et al., FTC File No. 142 3003, Agreement 

Containing Consent Order, available at http://www.ftc.gov/system/files/documents/cases/ 

141106mphjagree.pdf. 

23 See MPHJ Tech. Jnvs., LLC v. Sorrell, Case No. 2:14-cv-00191-wks, First Am. 

Compl. and Assoc. Exhs., ECF No. 18 (D. Vt. filed Dec. 29, 2014). 

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provide us with information sufficient to confirm whether [the] company is making use 

of the invention(.)"24 

As with letters that demand a response date, this sort of language relies on the 

relative lack of sophistication regarding the legal system to imply recipients have a duty 

to MPHJ that does not exist. Recipients who lack legal counsel may feel they are required 

to provide information to MPHJ and, as a result, will waste time and resources assisting 

MPHJ with its fishing expedition. 

B. The Difficulty In Information Sharing Exacerbates the Problem 

Massive P AE demand-letter campaigns like these lead to additional problems 

surrounding the sharing of and reporting on information. Because the demands by 

definition exist pre-complaint, they usually create no public record. And once a license or 

settlement is signed, it most likely will include a non-disclosure provision leaving the 

recipient unable to share its experience. This causes two problems: asymmetry of 

information and underreporting. 

The asymmetry of information problem is simple: the PAE knows all about its 

claims and options, while the recipient knows very little. Without simple facts about the 

alleged threat it faces, such as who is really behind the demand and whether the PAE's 

history makes it likely to further pursue its threats, a demand recipient is unable to assess 

its risk. It is left with a set of undesirable choices: to hire a lawyer, to pay the P AE to go 

away, or to do nothing and simply hope the PAE disappears. In most instances, the PAE 

24 ld. at ECF No. 18-13. 

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risk was not one that the recipient bargained for when it bought the product at issue or 

started its business, yet it finds itself with no choice but to face it. 

For example, just a few weeks ago EFF heard from a small four-person business 

that had received a demand letter. The letter threatened a lawsuit and demanded a 

settlement payment that was more than the salary of many people in this country. 

Although the letter was lengthy and included copious amounts of legal and technical 

jargon, one key fact was conspicuously absent: the accused product was almost surely 

licensed as a result of an infringement lawsuit the troll had previously brought against the 

supplier of the accused product. The patent owner surely knew this, yet sent the letter 

anyway, likely hoping the recipient would never find out. 

Fortunately, with our pro bono assistance, this small business was able to respond 

appropriately. But a small non-profit like EFF cannot help everyone, and not everyone 

will know to reach out. Had we not been contacted, it is unclear what would have 

happened. Most likely, the small business would be forced to settle and pay the troll to go 

away, never knowing that the troll had likely already been paid and was asserting 

frivolous claims. 

The second problem is underreporting. Because the vast majority of the deals 

entered into between PAEs and their targets are not public, the exact scope and contours 

ofPAE activity is difficult for policymakers and others to properly understand. 

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To combat these concerns, in 2013 EFF, along with a broad coalition, launched 

Trolling Effects, a database to collect demand letters. 25 The site allows demand letter 

recipients to post the documents online, find letters received by others, and research who 

is really behind the threats. The site also features comprehensive guides to the patent and 

additional relevant information. Finally-and most importantly-all ofthe information is 

freely available, not only to those who receive PAE demands, but to academics, policy 

makers, and the general public. 

Unfortunately, our experience thus far with Trolling Effects has confirmed that 

many demand recipients are reluctant to publicly share their letters. This has to do in 

large part with the public nature of the database and the fact that, even with redactions, it 

is virtually impossible to safely anonymize letter recipients. Demand recipients, both 

large and small, often chose to keep their identity hidden. 26 Larger, more established 

companies fear that making these demands public "paints a target on their back." Smaller 

companies and individuals are often even more afraid. It appears that ensuring more 

thorough transparency will require action from Congress. 

25 See TROLLINGEFFECTS, https://www.trollingeffects.org. 

26 Professor Robin Feldman came to a similar conclusion: "for a number of years, 

companies have been reluctant to speak to reporters or researchers, partly out of fear of 

retaliation by large players with large patent portfolios." Robin Feldman, Patent 

Demands & Startup Companies: The View from the Venture Capital Community (Oct. 28, 

2013), UC Hasting Research Paper No. 75 ("Feldman") at 36, available at http://papers. 

ssrn.com/ sol3/papers.cfm ?abstract_ id=23463 3 8. 

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Statutory Intervention is Necessary to Protect Consumers 

While questions of patent law usually find themselves before the Judiciary 

Committee, this Committee should consider and correct the negative impact that demand 

letter-sending practices have on consumers. Below, we set forth some potential targeted 

legislative solutions. 

A. Defining Relevant Practices that Violate Consumer Protection Statutes. 

Section 5 of the FTC Act declares unlawful "unfair methods of competition in or 

affecting commerce, and unfair or deceptive acts or practices in or affecting 

commerce."27 Abusive demand letters are both an unfair method of competition and a 

deceptive practice. A law explicitly identifying improper demand letter tactics as unfair 

methods of competition would more clearly trigger not just Section 5, but many similar 

state law provisions already on the books. 

The FTC Act was enacted to protect consumers from the type of demand-letter 

practices many PAEs have lately practiced. By statutorily defining certain of those 

practices as "unfair methods of competition" or "unfair or deceptive acts or practices," 

Congress could better ensure that existing Section 5 protections were applied to demand 

letters. For instance, the following demand-sending behaviors might be explicitly 

addressed: 

• Demands falsely threatening litigation; 28 

27 15 U.S.C.A. § 45(a)(l). 

28 See, e.g., The Federal Fair Debt Collections Practices Act, 15 U.S.C. § 1692(e), 

limiting the scope of threats that can be made in a debt collection letter. 

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• Demands sent without specifically listing the patents and claims that are 

allegedly infringed; 

• Demands sent without listing the products and services that allegedly 

infringe those patents; 

• Demands sent without any clear indication of who owns the patent at 

issue; 

• Demands sent following a failure to perform any pre-demand investigation 

into the recipient; and 

• Demands sent to businesses with the direct knowledge that those 

businesses can neither afford to take a license or defend themselves in 

federal court. 

P AEs routinely send demands that do all of these things. Recipients lack the 

information they need to assess their liability, with means they may feel they have little 

choice but to take an unearned license. Such business practices arc unfair and deceptive, 

and they should be regulated by consumer protection statutes. As the Commission itself 

has stated, it can target "[ c Jonduct that results in harm to competition, and in turn, in 

harm to consumer welfare, [which] typically does so through increased prices, reduced 

output, diminished quality, or weakened incentives to innovate."29 

29 Statement of Commissioner Joshua D. Write, Proposed Policy Statement 

Regarding Unfair Methods of Competition Under Section 5 of the Federal Trade 

Commission Act (June 19, 2013) at 7, available at http://www.ftc.gov/speeches/wrightl 

130619umcpolicystatement.pdf. 

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Defining the types of practices that P AEs like MPHJ rely on as unfair or 

deceptive allows the FTC and various states with statutes similar to Vermont's to take 

advantage of existing statutory frameworks and end the dangerous P AE demand-sending 

campaigns. Moreover, it would present no risk to companies who engage in responsible 

licensing practices and technology transfer, who could easily obtain the information 

necessary to pursue their business interests fairly. 

To be clear, the FTC has already recognized it has the power under Section 5 to 

respond to misleading and deceptive patent demand letters. 30 But making such authority 

explicit will encourage FTC investigations and enforcement, and will make explicit to 

those sending letters that they risk such action. 

It is vitally important, however, that Congress ensure that states are able to 

address behavior occurring in their states through their own patent troll demand letter 

laws or "little-FTC Acts." Specifically, Congress should not pre-empt state laws which 

may address issues those states have encountered with patent trolls. 

Relatedly, Congress should not discourage or prohibit enforcement of the FTC 

Act by state agencies. As often the primary contact for those targeted by patent trolls, 

State Attorneys General are often the most aware of improper activity occurring in their 

jurisdiction. Indeed, several State Attorneys General have been very active in attempting 

30 See, e.g., In re MPHJ Tech. Jnv., LLC eta!., Docket No. C-142 3003, FTC 

Com pl., available at http://www.ftc.gov/system/files/documents/cases/1411 06mphjcmpt. 

pdf. 

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to limit patent troll demand letters in their states. 31 These Attorneys General should be 

encouraged. Congress should not take away flexibility from State Attorneys General and 

state laws that are invaluable resources in helping ensure patent troll demand letters do 

not extract undeserved payouts from hard-working small businesses and consumers. 

Congress should also ensure that any law passed to address patent troll demand 

letters allows for flexible applicability based on changing tactics. Patent trolls will likely 

act quickly to try to find "loopholes" in any restrictions placed on their improper letter 

writing campaigns. Thus flexibility is vitally important to ensure that the FTC and State 

Attorneys General can react to changing deceptive practices. 

Importantly, any definition of "bad faith" in sending demand letters, if included, 

should be by way of examples (using "such as" language), rather than through an 

exhaustive list. It is difficult for Congress to anticipate all ways that a PAE might engage 

in deceptive conduct through a demand letter. Thus, there is a risk that an exhaustive list 

of potentially actionable conduct will exclude some kinds of harmful and deceptive 

representations or omissions.32 For these reasons, Congress should draft legislation that 

allows the FTC, State Attorneys General, and the Courts to review practices made by a 

31 See Pamela M. Prah, State AGs target patent trolls to protect business, USA 

Today, (Nov. 25, 2013), available at http://www.usatoday.com/story/news/nation/2013/ 

11/25/state-ag-patent-trolls/3696889/. 

32 To be clear, there is little or no risk that an open-ended definition will be read 

too broadly to capture legitimate, non-deceptive demand letters because such letters are 

generally given protection by the First Amendment. See, e.g., Sosa v. DIRECTV, Inc., 

437 F.3d 923 (9th Cir. 2006). Nevertheless, the First Amendment does not protect sham 

litigation, nor does it protect intentionally deceptive demand letters. See Rock River 

Commc 'ns, Inc. v. Universal Music Grp., Inc., 745 F.3d 343, 353 (9th Cir. 2014). 

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patent troll and determine whether they are abusive in light of the totality of the 

circumstances. 

Finally, it is important that any bill to address patent troll demand letters does not 

become a replacement for broader reform. Patent trolls are able to send demand letters 

because of the high costs associated with litigation and the overly broad, vague, and 

invalid patents issued by the Patent Office. Without fundamental reform to address these 

issues, PAEs will continue to exploit the system for their undeserved gains. 

B. Creating Public Registries of Relevant PAE Information 

Because a patent is a government-granted monopoly, the government may impose 

conditions on that grant. Indeed, it does that all the time by requiring that certain 

conditions be met before a patent is granted and that patent holders keep their records upto-date by, for instance, reporting on changes in ownership. Likewise, a patent holder 

should be required to provide certain information to the Patent Office when it asserts 

infringement of that patent in a letter, just as Courts report the assertion of patents in 

litigation. 

Patent owners could be required to report information such as how many demand 

letters have been sent regarding a specific patent; identification of all parties who stand to 

benefit financially from any resulting license; identification of any obligation to license 

the patents at issue on fair or reasonable terms; and how many times the holder has filed 

suit based on the patent at issue. 

There are various reasonable triggers that could require such reporting, such as a 

certain number of letters sent in a set period of time or notification to the Patent Office of 

a threshold number of letter recipients. 

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At a minimum, reporting this information to the Patent Office would make it 

public (assuming the Patent Office provided it in a publicly-accessible database, which it 

should be required to do). This information would fundamentally change the unfair 

information asymmetry facing demand recipients-armed with more facts, they will be 

better able to assess their options. 

Collecting the information might also assist the Patent Office in initiating sua 

sponte review of certain patents. If the Office has information regarding which patents 

are most often used as weapons by PAEs, it might prioritize those for such review. 

Indeed, in a world with literally millions of existing patents, it makes sense to focus 

challenges on those that pose the greatest threat to consumers. 33 It is not until those 

patents are asserted in demands that we can ascertain just which patents will cause harm. 

Requiring reporting to the Patent Office will help the Office determine which patents it 

should target for additional review. 34 (The potential for Patent Office review of existing 

patents may likewise serve as an incentive for demand-letter recipients to provide 

information as well.) 

It is not just the Patent Office that may decide to subject existing patents to 

additional review (indeed, this is a very rare practice, though there is no reason it could 

not happen more). Better public information would improve the ability of third partiesincluding public interest groups like EFF or the manufacturers of the accused products33 Dan L. Burk & Mark Lemley, Policy Levers in Patent Law, 89 Va. L. Rev. 

1575 (2003). 

34 See Chien & Reines at 6. 

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to identify patents that deserve legal challenge. EFF alone has made more than 15 thirdparty patent challenges to patents and patent applications. These challenges require 

significant resources, both financial and otherwise, and it is helpful to know which 

patents pose the greatest threat to consumers, end-users, and those who may not be in a 

position to put forth such a challenge themselves. 

In the alternative, the FTC could also house a similar registry of patent demands. 

It already does this in various other contexts, such as the Do Not Call Registry. When a 

certain threshold number of demands are sent involving a particular patent, or from a 

particular sending party, the FTC might initiate an investigation. Similar to a registry at 

the Patent Office, one at the FTC might be made up of patent holders self-reporting or 

consumers submitting information on the demands they receive. Given the FTC's 

expertise in consumer-facing issues, it would be well-equipped to house the latter type of 

registry; given the Patent Office's expertise in dealing with patent owners, it might focus 

on the former. 

Conclusion 

EFF has grave concerns about the impact that P AE activities arc having on 

consumers. Today's hearing is important particularly because PAEs conduct the vast 

majority of their business behind a veil of secrecy. Individual consumers, small start-ups, 

and ordinary Americans find themselves facing patent troll threats everyday, yet even the 

most basic information on those threats is often unattainable. Just having us here today to 

talk about this problem is a crucial step toward solving it. We encourage Congress to 

continue this important conversation and consider legislative proposals that would limit 

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the harm to consumers from PAE activity, including particularly the direct harm that 

comes from demand letters. 

20 
81 

Mr. BURGESS. Gentlelady yields back. The Chair thanks the 

gentlelady and all the witnesses for their testimony this morning. 

Very informative, very helpful. Professor, I am now reminded why 

I didn’t go to law school. But complex discussion, and certainly the 

issues you bring before us are of importance. 

Chair now moves to the questioning part of the hearing. I want 

to recognize myself 5 minutes for questions. 

Also, just an observation. When this issue came up in previous 

Congress, when Chairman Terry was in charge of the subcommittee, I think it actually to the—before the Rules Committee, 

and we had a Member who appeared before the Rules Committee 

and said he was conflicted because some days he was asserting he 

was a patent troll, other days he was not, and defending a patent. 

So it did underscore for me how there could be actually people on 

both sides of the issue. 

But let me just ask this question to start off for the entire panel. 

I would like to get everyone’s thoughts on this. And, Ms. Self, we 

will start with you and then move down the panel. How does the— 

has the concept of bad faith been applied in patent law, and how 

should it apply to the demand letter context? 

Ms. SELF. I think the concept of bad faith is critical in the patent 

demand letter context because it prevents the use of antitrust or 

Section 5 enforcement authority in a manner that would violate the 

patent owner’s constitutional rights, and as has been said, those 

rights include First Amendment rights of free speech, rights to petition, but also the right to communicate about your patent is fundamental to your ability to enforce your patent. 

If you think about how patent owners sort of alert the world to 

the fact that they have a patented invention, and this has been 

true from the first, you know, the first days of our patent system, 

you make a public disclosure of the patent application as kind of 

a quid pro quo, if you will, for the right to enforce your patent, but 

your ability to enforce your patent is dependent on communication. 

If you are stifled in your ability to communicate about your patent, 

to make good faith communications about your patent, then effectively your patent is not enforceable. 

So bad faith is really critical to delineate the kind of conduct that 

would be appropriate for FTC enforcement. And I think it is also 

important to send a signal to State enforcement authorities that legitimate patent demand correspondence should not be the subject 

of State enforcement activity or Federal enforcement activity. 

So bad faith is really the cornerstone, if you will, in our ability 

to strike that right balance between protecting the interests of recipients who may be receiving these deceptive communications, but 

also supporting the vast majority of legitimate communications 

that are really fundamental to our innovation economy. 

Mr. BURGESS. I might come back to you because you brought up 

the issue of pattern of practice, but I want to go down the panel 

for just a moment. 

Mr. Malta, the concept of bad faith? 

Mr. MALTA. Chairman Burgess, I am a Realtor and my members 

sell the American dreams. And entrepreneurs in the coalition are 

hard-working business people that are trying to provide services to 

Americans every day. 

82 

The concept of bad faith is a legal one, and that involves an attorney, and that involves time and money, and I can give you examples of what our members have gone through just on its face. 

This is not about stifling innovation, this is about stopping deceptive practices. So when I hear bad faith it means that my members 

will have to go to an attorney, seek counsel. I have many small 

business members as well as in the coalition. So that does not resolve the issue, especially for the small business people of America. 

Mr. BURGESS. And, Professor, defining bad faith? 

Mr. GUGLIUZZA. Yes, fortunately, there is a lot of judicial case 

law applying in bad faith standard. At the time the Federal circuit 

was created, which is back in 1982, the lower Federal courts for 

nearly a century had been addressing this question of when may 

a patent holder be liable for its enforcement conduct, and they had 

enjoined patent holders from making infringement allegations in 

bad faith. But the Federal circuit has largely ignored that long line 

of decisions, instead demanding that anybody who challenges patent enforcement conduct prove that the infringement allegations 

were objectively baseless. 

Historically, you know, the courts treated bad faith as sort of a 

flexible standard that had both subjective and objective components. So under the standard, courts—you would see courts enjoining or punishment enforcement campaigns, for example, where the 

patent holder threatened a large number of accused infringers, or 

threatened law suits but failed to actually ever file them. But at 

the same time, I think these cases where enforcement conduct was 

punished were usually egregious and they often involved claims 

that were objectively weak on the merits. And so I think a good 

faith standard, particularly when it is grounded in that pre-Federal 

circuit case law, would protect patent holders’ ability to provide legitimate notice of their patent rights, but also offer the Government some leeway to punish the most deceptive and problematic 

behavior. 

Mr. BURGESS. And, Ms. Ranieri, on the concept of bad faith? 

Ms. RANIERI. The Electronic Frontier Foundation, as a digital 

civil rights and civil liberties organization, is a strong believer in 

the First Amendment. At the same time, I would like to echo what 

Professor Gugliuzza, apologies, said, that I believe the Federal circuit has narrowly ruled in a way that is inconsistent with precedent and the law, and I believe its ruling about what constitutes 

bad faith is overly narrow. 

There is room within the Constitution to regulate bad faith behavior, as well as respecting First Amendment rights. I would echo 

Professor Gugliuzza’s statements that the courts are very good at 

determining what bad faith is, and I think we should leave it to 

them and also to agencies who are used to seeing bad faith behavior to figure out what exactly the contours of that is. 

Mr. BURGESS. My time has expired. I thank the panelists for 

their responses. 

Recognize Ms. Schakowsky 5 minutes for questions please. 

Ms. SCHAKOWSKY. Thank you, Mr. Chairman. 

So States have, up until now, been leaders in the effort to combat 

abusive patent trolls. Currently 18 States including mine, Illinois, 

have enacted legislation regulating patent demand letters, and 

83 

some State attorneys general have initiated legal action against 

patent trolls under their consumer protection authority. Under 

both the new patent demand letter laws and general State consumer protection laws, many State attorneys general have certain 

remedies available to them, including equitable relief, civil penalties and attorneys fee. 

The TROL Act that passed out of the subcommittee last Congress 

included a provision that would preempt the State laws that regulate patent demand letters. 

So first, Ms. Ranieri, you testified that Federal legislation, in 

fact, should not preempt State laws that address issues those 

States have encountered with patent trolls. So why is it important 

do you think that we not preempt State laws? 

Ms. RANIERI. Thank you. That is a good question. One of the 

most important reasons that this Government should not preempt 

State patent troll demand letter laws is that people who receive 

these letters often don’t know who to turn to, and the first person 

they often turn to are the State AGs and the State agencies. And 

they are often the first line of defense for people to protect themselves. The State AGs have the most experience with what their 

citizens are receiving, and they are in the best position to see new 

developments in the patent troll demand letters, and to see the 

new deceptive practices as they arise, and legislate against that 

type of activity. 

Ms. SCHAKOWSKY. So have we seen any instances where there 

has been any problem with the fact that State attorneys general 

have been exercising that authority? 

Ms. RANIERI. None that I am aware of. 

Ms. SCHAKOWSKY. OK. Professor, let us establish how your name 

is actually pronounced. Say it again. 

Mr. GUGLIUZZA. Good, because I was about to apologize to the 

committee because I feel like this issue has sort of taken over the 

entire hearing. 

Ms. SCHAKOWSKY. No, I think we should apologize. Go ahead. 

Mr. GUGLIUZZA. It is Gugliuzza. 

Ms. SCHAKOWSKY. OK, Gugliuzza. OK. 

Mr. GUGLIUZZA. Very good. 

Ms. SCHAKOWSKY. The benefit of preemption would be to provide 

a uniform legal standard. In your testimony though you raised the 

question of whether uniformity is, in fact, an important enough policy goal that it should outweigh the benefits of State laws on demand letters. I am wondering if you could expand on the benefits— 

also expand on the benefits of not preempting State laws. 

Mr. GUGLIUZZA. Sure. You know, one of the benefits, as Ms. 

Ranieri mentioned, obviously, is the enforcement capabilities of 

dozens of States attorneys general offices might bring to the table. 

The other is the accessibility of the State governments or some of 

these small organizations that might be targeted. And then third, 

you know, I think the—in terms of forming the substance of a law, 

I think, you know, what we can see from some of these States’ statutes are maybe some examples that might be informative to Congress if you were to choose to decide to legislate federally. So allowing these ideas to percolate among the State legislatures allow the 

States to try to figure out, you know, how do we draw the line from 

84 

the—between the bad actors and the patent holders who are asserting their rights legitimately. I think the State legislation can 

shed a lot of light on those questions. 

Ms. SCHAKOWSKY. Thank you. 

Ms. Ranieri, in addition to the issue of preemption, you testified 

that Congress should not prohibit or discourage enforcement of the 

FTC Act by States. Can you expand on why State enforcement in 

this instance is so critical? 

Ms. RANIERI. I think it is for the similar reasons that I just mentioned, and also that Professor Gugliuzza also mentioned. State 

AGs have resources that the FTC might not have. The FTC might 

only have the ability to go after the worst actors, but that doesn’t 

mean that there are others that are abusing the system. And State 

AGs provide a secondary line of defense in order to go after those 

who are targeting particular citizens in those States. 

Ms. SCHAKOWSKY. And last to you as well. The last Congress 

TROL Act limited the remedies available to State attorneys general 

to an injunction and compensatory damages on behalf of recipients 

who suffered actual harm. Would the limitation of remedies discourage States from enforcing patent demand legislation? 

Ms. RANIERI. It may, and I think that is a definite concern that 

this committee should have. Importantly, this sort of regulating unfair and deceptive practices is usually considered to be an equitable 

sort of action. Courts are very good at fashioning under-equitable 

remedies; the type of remedy that is appropriate given the circumstance. And it may, if absent, more punitive consequences to 

patent hold demand letters, they may just shift their activities, seeing no actual consequence to their bad activities. 

Ms. SCHAKOWSKY. Thank you. Clearly, this will be an issue that 

we will want to discuss further among our members, so I thank 

you. 

And I yield back. 

Mr. BURGESS. Chair thanks the gentlelady. The gentlelady yields 

back. 

The Chair would like to recognize the attendance of a Member 

who is not a member of the subcommittee, but Mr. Tom Massie 

from Kentucky, from the Bluegrass State, and a noted and worldfamous inventor. We welcome your presence here today. Thank 

you. 

The Chair would now recognize Mr. Mullin from Oklahoma for 

5 minutes for questions, please. 

Mr. MULLIN. Thank you, Mr. Chairman. And just so I don’t mess 

up your last name, Paul came and introduced himself to me earlier. 

He is from the great State of Oklahoma, went to Bishop Kelley in 

Tulsa, Oklahoma, and I guess your parents still live in Bixby? 

Mr. GUGLIUZZA. That is correct. 

Mr. MULLIN. And so it is always good to see a friendly face in 

town. 

My first question would be for Mr. Malta. We just heard the conversation about our attorney generals, and so I am going to kind 

of stay on that focus. My own State of Oklahoma has laws specifically against abuse of patent demand letters. I want to make sure 

that my constituents are also protected from these type of letters, 

85 

and if our committee drafts legislation prohibiting these types of 

letters, should attorney generals be able to enforce those laws? 

Mr. MALTA. Our members believe that, yes, that they should, and 

that there—that we are more concerned about the outcome as to 

the protections because our members are in all 50 States. So if you 

are arguing preemption, et cetera, that at least there be some immediate baseline standard that is created, and that if States want 

to come and they want to make laws that are even more restrictive, 

by all means, go ahead, but we want something done in the very 

near term that affects our members in all 50 States. 

Mr. MULLIN. My next question is for Ms. Self. What if Qualcomm 

was hit from a law suit, let us say, from Oklahoma’s attorney general then Vermont’s attorney general, then say Illinois’ attorney 

general, should a company be exposed to liability from every State 

enforcement agency? If not, why not? 

Ms. SELF. Thank you for that question. Sorry, thank you for that 

question. And before I respond to that specific question, let me just 

say something about the preemption issue and the way the TROL 

Act was structured last year, at least. It did permit State attorneys 

general to bring enforcement actions under the Federal framework 

that was set out in the statute, and it would have, to your question, 

allowed more than one State attorney general to bring an action, 

assuming that the Federal Trade Commission had not already 

brought an action. And we thought that that was a balanced approach to the problem. The challenge that we are seeing at the 

State level with nearly 20 laws that have passed, and another 

dozen or so that are pending, is that you are seeing a patchwork, 

if you will, of demand letter laws that all include different standards, different penalties. Some are very broad in scope. They don’t 

clearly delineate the kind of activity that would fall within the demand letter. Sixteen out of eighteen would include a private cause 

of action. And, you know, to the point that was made about enterprising lawyers, I think it is inevitable that you will see a cottage 

industry evolve around harassing inventors under these laws. So 

the preemption language of the bill is really critical to make sure 

that you have a nationwide uniform framework that provides consumers, recipients with the guidance they need to understand what 

is deceptive behavior. And again, I think the bill does a good job 

of delineating what is deceptive statements in the context of a demand letter, as well as required disclosures, but it also puts the 

millions of small inventors in this country on notice as to what is 

appropriate or inappropriate. 

And so as we think about traditional State enforcement under 

unfair trade practices laws, we have to keep in mind that these are 

communications involving patent rights. These are rights that are 

rooted in the Constitution, they are dependent on the ability of the 

patent owner to exercise their First Amendment rights. And so this 

is really a very different dynamic than the normal activities that 

State enforcement authorities focus on. 

So we think the approach of the TROL Act is really the right approach, and it protects all interests in a balanced way. 

Mr. MULLIN. Thank you. And I will try to be quick on this last 

question for Mr. Malta. The Realtors that you represent are exactly 

the type of small businesses that are near and dear to my heart. 

86 

Could you please tell us specifically the type of information that 

needs to be included in a demand letter that would allow businesses that receive them to understand what they are accused of, 

and to what extent they need to take legal action on? 

Mr. MALTA. OK, thank you. Yes, in creating greater transparency, 4 items, OK. First one, specify the relevant patent claim 

that is at issue. Very basic. Secondly, detail how a business has allegedly infringed the patent. Thirdly, include a description of the 

patent troll’s investigation of the alleged infringing activity. And 

fourth, disclose the real parties in interest to the dispute, as many 

of these letters come from attorneys and they don’t state who the 

party in interest is that is trying to enforce the claim, or enforce 

their patent. 

Mr. MULLIN. Thank you. 

I yield back. 

Mr. BURGESS. Chair thanks the gentleman. Gentleman yields 

back. 

The Chair now recognizes the gentlelady from—Ms. Clarke from 

New York for 5 minutes for questions please. 

Ms. CLARKE. I thank you, Mr. Chairman. And I would like to 

thank our witnesses for their testimony this morning. 

In addition to serving on the Energy and Commerce Committee, 

I also serve on the Small Business Committee in our House, and 

our small business community lists fear of patent litigation as one 

of the biggest issues they face. So I am pleased that we are taking 

up this issue today. 

Frequently, patent trolls target end users of patented technology, 

such as small, local businesses who have simply purchased or use 

off-the-shelf products like a wireless router or scanner. These small 

businesses often lack expertise in patent law, and have few resources. When faced with the cost of defending even perfectly reasonable behavior, they find it is cheaper just to make a payment 

to settle the case. 

Ms. Ranieri, to what extent do patent trolls target the little guy, 

small businesses, startup, and mom and pop establishments, and 

what are some examples of everyday products that patent trolls are 

now claiming infringe their intellectual property? 

Ms. RANIERI. Thank you. The extent of the problem isn’t known, 

but I can tell you as a legal services lawyer, I receive about one 

call a week. And to be clear, these are the people that have managed to find us. There are so many more people out there that don’t 

realize that they should be contacting people like—or—and organizations like EFF. So unfortunately, the full scope of the problem 

isn’t clear, but to be clear, it is a problem. 

The type of activity that we have seen is, for example, one of the 

patent trolls that we are looking at right now has accused people 

of using maps as infringing their intellectual property. This patent 

troll has gotten licenses, it appears, from litigations that they filed 

and settled, which usually, in patent litigation that means a settlement has occurred, has gotten licenses from everybody down the 

spectrum from handset carriers to the cell phone companies, to the 

makers of applications, and now they are targeting even smaller 

parties in the play—in the space. We believe that these patent 

rights have been fully exhausted, but because of the cost of litigaVerDate Mar 15 2010 10:40 Nov 10, 2016 Jkt 037690 PO 00000 Frm 00090 Fmt 6633 Sfmt 6633 F:\114THCONGRESS\114X14PATENTLETTERSOKTOPRINT\114X14PATENTLETTERSPD
87 

tion, the cost of figuring out whether those patent rights have been 

exhausted, these trolls can continue to be able to assert patent infringement with essentially impunity. 

So the problem is large, and we believe it requires action, and 

we also believe that it needs the disclosure requirements so we can 

understand the true scope of its effect on our innovation economy. 

Ms. CLARKE. Let me ask you then, what options do small businesses or startup companies currently have when they receive a 

vague threatening demand letter, and do patent holders, other 

than trolls, routinely target end users? Could there be legitimate 

reasons to send demand letters to end users? 

Ms. RANIERI. The large number of letters that we have seen targeted at end users are from patent trolls. I have yet to see letters 

that don’t come from patent trolls. They may exist, but I have not 

yet seen one. And, sorry—— 

Ms. CLARKE. What options. 

Ms. RANIERI. What options. Unfortunately, there aren’t many 

right now. The cost of litigation for a small business of under $10 

million in revenue, the cost of litigation through trial is over $1 

million. When that means that employees might have to be laid off, 

and research and development can’t happen, this is the cost to the 

patent troll—or to the alleged infringer, sorry. And unfortunately, 

as a lawyer, what ends up happening is that if someone comes to 

us, oftentimes we can only advise them to settle because it just is 

not possible, given the current available options, to actually fight 

back and show that they aren’t violating anyone’s rights. 

Ms. CLARKE. Can you take a moment and sort of speak to the 

cost of patent litigation, and the feasibility of a small business 

mounting an adequate defense? 

Ms. RANIERI. Sure. So on a whole to our economy, it is estimated 

to cost in the billions of dollars, and those are often tangible costs. 

And intangible costs are things such as time—— 

Ms. CLARKE. Um-hum. 

Ms. RANIERI [continuing]. And stress, taken away—or—and taking people away from growing their business. The options that are 

currently available to those receiving demand letters, those who 

are end users who are implementing technology made by others, if 

they have connections with the companies that make these products that are accused of infringement, sometimes they can get help 

through the companies. That—I—like in the example that I mentioned before, UPS stepped up to protect its customers, and that 

was a great thing for UPS to do. Unfortunately, for many of these 

companies, they don’t have the connections to do that. They don’t 

have the resources and the knowledge to know that that is something that they should try to do. And oftentimes, there are no other 

viable options. 

Even filing an inter partes review at the Patent Office, which we 

commend these new procedures and we encourage them, even to 

get in the door, not even lawyer fees, which, as a lawyer, and I am 

sure many of you are lawyers—— 

Ms. CLARKE. Um-hum. 

Ms. RANIERI [continuing]. We know are extremely expensive, filing an inter partes review is over $20,000. That is the salary of a 

88 

worker, that is money that could go in towards building a business. 

Many businesses just simply do not have this money. 

Ms. CLARKE. I thank you. And I yield back. Thank you, Mr. 

Chairman. 

Mr. BURGESS. The gentlelady yields back. The Chair thanks the 

gentlelady. 

The Chair recognizes the gentleman from Florida, Mr. Bilirakis, 

5 minutes for questions please. 

Mr. BILIRAKIS. Thank you, Mr. Chairman. I appreciate it so very 

much, and I thank the panel for their testimony. 

Patent demand letters reform is an important part of curbing 

abusive practices that hurt legitimate businesses, as you know. 

However, I am concerned that overly broad definitions of patent assertion entities in other provisions that have been proposed, such 

as fee shifting and joinder, will limit our Nation’s research universities, and their ability to have patented research discoveries transferred to start up receiving venture funding that can develop and 

commercialize these early discoveries. 

The University of South Florida, just outside of my district in 

Tampa, Florida, is a world leader in university-based patents, licenses and startup companies, and is a major regional economic 

hub and job creator in our area. 

Again, Ms. Ranieri and Professor Gugliuzza, excuse me if I mispronounce, what do you believe is the appropriate balance to ensure that the technology transfer process thrives, while simultaneously implementing the real reform targeted at bad actors with 

no intention to commercialize innovations? 

Mr. GUGLIUZZA. Thanks. I think a lot can be done by sort of looking at—as I was talking about the history—a long history of courts 

prohibiting bad faith assertions of patent infringement. A lot can 

be looked at by looking at some of the examples that courts have 

condemned in the past. They look extraordinarily similar to what 

we see these bottom-feeding patent trolls doing today; sending out 

massive amounts of demand letters, targeting the customers of the 

firms that actually manufacture the allegedly infringing technology, making claims that they couldn’t—making claims that they 

could not have possibly investigated the merits of. 

So, you know, I think if you look back at those types of cases, 

you actually can see there is a very clear line between, you know, 

what is really abuse—so abusive as to be considered in bad faith, 

and the efforts of, say, an operating entity or legitimate efforts by 

a company to try to license their patents or resolve a dispute before 

it goes to court. Those lines have been drawn by courts for over 100 

years, and I think they are lines the courts can continue to draw. 

Mr. BILIRAKIS. Thank you. 

Ms. RANIERI. I would agree with Professor Gugliuzza, and I understand your question to be how do we allow for legitimate letters 

and still legislate against the bad faith letters. And I think what 

is important to know is that those who are sending legitimate letters, they include the patent numbers in their letters where possible. They will include why they believe someone is infringing, and 

they will include information so as to allow the parties to really understand the scope of the claims, and why there is a claim of infringement or why the patent is not invalid. This is the activity 

89 

that patent—bad faith patent demand letters don’t include. And so 

I would agree with Professor Gugliuzza that there is a long line of 

cases that see this distinction and make the distinction, and I don’t 

think legitimate patent holders should be concerned about any legislation against bad faith letters. 

Mr. BILIRAKIS. Thank you. Anyone else on the panel like to respond to that question? OK, thank you. I will move on if that is 

OK. 

Ms. Ranieri and Professor Gugliuzza, what factors do you believe 

should be prioritized when determining standards for demanding— 

demand letters that would address the abusive patent troll practices, while still preserving the legitimate patent holder’s ability to 

negotiate license agreements with potential infringers? 

Mr. GUGLIUZZA. Just very briefly, a couple of factors that I think 

we have talked about so far. One is to the number of letters that 

have been sent out, right? If a patent holder is sending one letter 

to one specific company, well, it seems fairly likely that that letter 

is based on some sort of investigation that gives the patent holder 

a good faith belief that that recipient is infringing. When you send 

out, as MPHJ did, 16,000 letters to users of common office scanners, it is extremely unlikely that MPHJ has actually investigated 

the allegedly infringing conduct. 

So the number of the letters can be a nice source of indication 

of whether the investigation has happened, and also the specificity 

with which the letters both describe the patent claims, and also the 

allegedly infringing technology. 

Mr. BILIRAKIS. Thank you. 

Ms. RANIERI. I hesitate to give a complete list of factors, and the 

reason is this. Oftentimes what we see as—when letters are shown 

to us is that it is not one statement in isolation that is a problem, 

it is the totality of the letter that makes clear that the patent holder has not done an investigation, is trying to extract money. For 

example, references to the extreme cost of litigation, and I have 

seen letters with actual links to tables showing the recipient how 

much money they can receive. 

Litigation does cost a lot of money, that is true, but it is the fact 

that they put these statements in there, along with a—other vaguely threatening language that together be—makes us recognize a 

bad faith letter. So I hesitate to say these certain things make a 

bad faith letter, it is oftentimes when we see it all together that 

we can tell that this is not being set—sent for legitimate purposes. 

Mr. BILIRAKIS. Thank you very much. 

I yield back, Mr. Chairman. Appreciate that. 

Mr. BURGESS. Chair thanks the gentleman. Gentleman yields 

back. 

The Chair recognizes the gentleman from Massachusetts, Mr. 

Kennedy, 5 minutes for questions please. 

Mr. KENNEDY. Thank you, Mr. Chairman. I want to thank the 

witnesses for testifying today and for your attention to an important topic. 

Professor Gugliuzza, thanks for bringing the Boston weather 

with you. I wish you would have left it at home, but nevertheless, 

appreciate it. 

90 

I want to flush out a little bit of a conversation we have had in 

the—before as well. My First Amendment law, while being a lawyer, is perhaps a little shaky. So there has been, I think some testimony that has touched already on the Noerr-Pennington doctrine, 

which touches on immunity of parties who are petitioning the Government for certain types of liability. Generally speaking, it is my 

understanding that this doctrine began in an antitrust base, but it 

has been steadily expanded over the course of case law throughout 

the years. 

So, Professor, starring with you, with regard to the Noerr-Pennington doctrine, I think that there are two open areas here, right? 

One is, does it apply to patent demand letters, and does it apply 

in the consumer protection context? And I was hoping you can just 

start with those—kind of that basic framework. 

Mr. GUGLIUZZA. I have some comments that hopefully are sort of 

somewhat responsive to it. So the Noerr-Pennington doctrine, you 

are correct, that it was initially developed by the Supreme Court 

as an interpretation of the Sherman Act, in light of the First 

Amendment, right? So what happens in these cases was, defendants to law suits would turn around and sue the original plaintiffs 

and say, you know, you are a plaintiff, you have sued me and, you 

know, you have your—you have market power, your are a monopolist and, therefore, your law suit against me is anticompetitive and 

violates the Sherman Act. And what the court said was, well, you 

know, under the Sherman Act, litigation activity is actually not 

antitrust—illegal under the antitrust laws, the reason being twofold. One, the Sherman Act was intended to regulate business activity, not litigation activity. And two, to make unlawful the conduct of filing a law suit would potentially violate the First Amendment right to petition the Government. Right? 

The issue—the main issue that I see in applying that line of 

cases to these patent demand letters is that a patent demand letter 

between two private companies is just not a petition to the Government, it is a private communication among two private parties. So 

I think that is one main problem with extending, you know, main 

problem of constitutional law with extending First Amendment petition clause protection to these letters. 

Mr. KENNEDY. And so given that is the case though, but you are 

asking the—it is between two companies, but you are asking the 

Government to enforce a patent—a protection action, right, that 

patent—— 

Mr. GUGLIUZZA. Yes. 

Mr. KENNEDY [continuing]. In that context? 

Mr. GUGLIUZZA. But the law can, you know, there are lots of consumer protection laws that are similar, that I think were similar 

to what this committee is considering. The example that I like to 

invoke is the Fair Debt Collection Practices Act. 

Mr. KENNEDY. Um-hum. 

Mr. GUGLIUZZA. Right? When an attorney, acting as an attorney, 

sends a letter that is an act of debt collection, it may even be the 

filing of a law suit, right, those actions under the Fair Debt Collection Practices Act aren’t subject to Noerr-Pennington immunity. 

Courts have largely—have upheld the fair—the constitutionality of 

the Fair Debt Collection Practices Act. So I think, you know, a 

91 

similar statute that condemns patent enforcement activity, much 

like debt collection activity, should be on the same solid constitutional footing. 

Mr. KENNEDY. And then, Ms. Ranieri, could you just give a little 

bit—you were talking about the totality of the circumstances of the 

letters and such a moment ago, but in your review of the legal literature, do you believe that the general content of demand letters 

is protected speech? 

Ms. RANIERI. So as I mentioned, EFF is a digital civil rights and 

civil liberties organization, and the First Amendment is very important to us. At the same time, I don’t believe that the Noerr-Pennington doctrine extends as far as the Federal circuit would have 

it, and in fact, this recent Supreme Court decisions just won last 

year, the legal underpinnings of the Federal circuit’s decision applying the Noerr-Pennington doctrine to the demand letters was recently questioned in another case on a related issue, and I believe 

there is room within the First Amendment, respecting First 

Amendment rights, to allow for regulation of demand letters. 

To be clear, what we think the First Amendment does is it 

makes sure that legitimate patent holders can enforce—can send 

demand letters, but what it doesn’t protect is bad faith assertions, 

false statements, that are within the demand letter. 

Mr. KENNEDY. And you think that the—you think that case law 

or legislation can be developed that is going to be sufficiently narrowly tailored that will provide for a definition of good faith that 

the courts would uphold? 

Ms. RANIERI. I think what actually could happen is that Congress could leave open the definition of bad faith, and courts themselves will narrowly tailor it to make sure that it is consistent with 

the First Amendment. 

Mr. KENNEDY. Professor? 

Mr. GUGLIUZZA. I agree, and I think it is very possible that the 

courts, especially seeing the interest from Congress on this particular issue, would be very—would try very hard to interpret any 

legislation consistent with the First Amendment. 

Mr. KENNEDY. Thank you both. Thank you all. 

Yield back. 

Mr. BURGESS. Chair thanks the gentleman. 

Chair now recognizes the gentleman from Texas, Mr. Olson, 5 

minutes for questions please. 

Mr. OLSON. I thank the Chair. And welcome to our witnesses. 

Ms. Self, Mr. Malta, Ms. Ranieri, and certainly no disrespect, but 

can I call you Professor G? Is that OK, because—— 

Mr. GUGLIUZZA. You may. 

Mr. OLSON [continuing]. If I try pronouncing it with my thick 

Texas tongue, I am going to be exposing myself to a lawsuit for 

cruel and unusual punishment. All people here watching on TV, so 

Professor G is OK? Great. 

My first question for all the panelists, and starting off with you, 

Professor G, as you know, there are 18 States right now that have 

State laws that fight abusive patent letter demands. The lovely 

State of Texas is one of the 32 that doesn’t have those such laws, 

but they are being authored right now and this issue is on the 

table. And so they are in session for 140 days every 2 years, so it 

92 

is a brief window of time here. So put your cowboy hat on and come 

to Texas. How would you best like me to advise the people there 

what should they do, what should they not do if Texas steps out 

and does—some laws fighting abuse patent demand letters? Yes. 

Mr. GUGLIUZZA. So, you know, I think the concerns we have been 

talking about about, you know, the difficulty and sort of fragmentation of different States have different legal standards for demand 

letters is certainly a valid one, particularly for large, innovative 

firms. I think one thing that your State might consider is looking 

to the Vermont statute as an example. It has been sort of the most 

influential of the statutes. It has been adopted by 13 other States. 

It sets out very simply that it is unlawful to make a bad faith assertion of patent infringement, and it sets out some factors under 

which courts may determine whether an assertion is in bad faith 

or is not. And so I think if Texas were to do that, it would be joining a fairly large cohort of other States that have adopted similar 

legislation. 

Mr. OLSON. OK. Thank you. 

Ms. SELF. Can I—— 

Mr. OLSON. Ms. Self, can you comment? Anything you can advise 

our legislature? 

Ms. SELF. Yes, and in fact, just so you know, we have actually 

been in conversation with the State legislatures in Texas to talk 

about this very issue. 

Mr. OLSON. Expected. You guys are great. That was expected. 

Ms. SELF. Let me just say that—so we do think, again, sort of 

following the model of the TROL Act, that there is, you know, a 

version of State legislation that would appropriately balance the interests of potential recipients of these letters and the very large 

number of small patent holders that could potentially get, you 

know, unintentionally get caught up in legislation of this type. I 

think the challenge with the—with some of these State demand letter bills that we have seen, as I said previously, over breadth in 

terms of capturing activity that could just be normal commercial 

communications, and I should say that I, with all due respect, disagree with the Professor’s analysis of Noerr-Pennington. I think 

there is a lot of scholarship and case law that affirms that the First 

Amendment does extend to pre-litigation communications, particularly when you are talking about the enforcement of a property 

right. But again, the private cause of action that is included in the 

Vermont statute, and several other statutes, is really troubling. 

And so one of the pieces of advice that we have extended to folks 

in Texas is do not include a private cause of action. You are going 

to create far more problems than you can—are trying to solve by 

subjecting small inventors to harassment. And again, as with the 

structure of the TROL Act, to clearly delineate activity that is objectively deceptive; trying to enforce a patent that has expired, 

claiming you are the owner of a patent when you are not, and limiting affirmative disclosures to the kind of information that small 

inventors can reasonably disclose, because it is important to keep 

in mind that the vast majority of inventors in this country are also 

small businesses—— 

Mr. OLSON. Yes. 

93 

Ms. SELF [continuing]. And they may not have all of the information that they need to know whether, in fact, infringement is occurring, or the nature of that infringement, particularly when you are 

talking about negotiations or discussions with much larger product 

manufacturers. 

So finding a balance that protects both the interests of small patent owners as well as small business owners, small end users, I 

should say, is really—should really be the goal in any State. And 

again, just to reiterate my previous context—contents—or comments, rather, sorry, we believe that the structure of the TROL Act 

is that right balance, and again, it would permit State attorneys 

general, in Texas and other States, to enforce against deceptive activity under that framework. 

Mr. OLSON. Thank you. And, Mr. Malta, no intention to put you 

between two different people on different sides of the issue, but you 

are right there, my friend. How about your comments? What can 

I take back home? 

Mr. MALTA. Comments are, get it done. 

Mr. OLSON. Well, that is easy—— 

Mr. MALTA. And if you get it done in the State of Texas, then 

perhaps that will provide the patchwork that will force the Federal 

Government to finally step in and say we need to make sense of 

this so that people can work under a set of rules, and we can get 

back to business in some of these areas. So—— 

Mr. OLSON. OK. And, Ms. Ranieri, your comments on Texas? Get 

’er done, is that—do you echo those comments? 

Ms. RANIERI. I would agree, and I would also like to add that, 

although we are in the patent context, and Ms. Self raised the 

issue of it might be difficult for patent owners to be able to comply 

with a patchwork of laws. To be clear, States have long had different laws when it comes to consumer protection, and companies 

have had no problems with complying with all those laws. And we 

don’t think that the patent context needs to change—or—that, and 

companies still can comply with all the laws. We think if some— 

if a patent owner wants to purposefully avail himself of sending a 

letter to a State, they can comply with the laws, and look up the 

laws and make sure that their letter is appropriate. 

Mr. OLSON. I am out of time. Thank you. 

Yield back. 

Mr. BURGESS. Gentleman yields back. Chair thanks the gentleman. 

Chair recognizes the gentleman from California, Mr. Ca ́ rdenas, 

for 5 minutes for purposes of questions please. 

Mr. CA ́ RDENAS. Thank you very much, Mr. Chairman. And I appreciate this opportunity to discuss this important issue that really 

is hampering our economic ability throughout the country. One of 

the things that the United States has been recognized for, and we 

should be very proud of, is we are the innovative capital of the 

world, but when we have people who take opportunity to try to 

thwart that, that is something that, to me, strikes at the core of 

our ability to continue to be an economic driver, not only for ourselves as a country but for the world. 

Last year, I introduced a bipartisan bill to address patent troll 

abuse at the International Trade Commission. Patent trolls have 

94 

been impacting businesses in every forum, and we should do everything that we can to curb their ability to exploit businesses of every 

size, small and large. Patent trolls’ abuse of the complicated patent 

system can harm our economy, and hamper innovation by imposing 

huge litigation costs on productive companies. 

I would like to get a sense of the significance of the problem that 

we—that faces us here today. Ms. Ranieri, in your testimony, you 

quoted Seventh Circuit Judge Posner’s statement, and I am paraphrasing, patent trolls are not trying to protect the market for 

products they want to produce, but instead, lay traps for producers. 

How does patent toll activity negatively affect the economy and innovation as far as you are concerned? 

Ms. RANIERI. So let me give an example. What we see in the Bay 

Area is a lot of people who are developing new technologies, and, 

for example, apps on a smartphone. These innovators, they want 

to bring a new product to the market, they are very excited. They 

come out and they bring the—bring it to market and hopefully it 

becomes successful. What then happens is later, they will receive 

a demand letter or a filing of a litigation claiming that they infringe on patent rights. These innovators have not seen these patents before. These are not cases of copying others’ ideas, this is a 

case—these are cases of innovators who independently created 

works and brought them to market, and tried to grow their business, and once they become successful, become targets of patent 

trolls. And this is the cost to our economy. It is people who are 

independently creating, independently innovating, that then get 

targeted by those who have created nothing, and instead, wait for 

someone else to do the hard work of developing products, testing, 

marketing, things like that. And not only is the financial cost significant, the settlement demands are extreme, but also it takes 

away time and energy from actually growing the business. Instead, 

it directs it towards stress, gathering documents, and although this 

might be good for the lawyers, it is not good for the companies. 

Mr. CA ́ RDENAS. So, for example, what you just described, I would 

imagine could, in fact, wreak havoc on a small inventor, a small 

company, maybe with 5 employees, or 10 or 20 employees, that 

that particular product is the reason for their existence as a company. Could that kind of activity actually bring such a company 

like that to bankruptcy or to actually fold? And when I say fold, 

that means that that 5 or 10 or 20 employees in that scenario now 

will have to go look for work elsewhere. Do—have you ever seen 

that happen? 

Ms. RANIERI. We have. Actually, there was a case very recently. 

Someone contacted us and they were being sued by a patent troll, 

and the patent was on placing photos from sports events online, 

and allowing someone to search those sports events for their bid 

number in order to order a picture. And there is actually a patent 

on that. And it was a small, four-person business, and he was extremely scared that he was going to have to lay off employees in 

order to fight back. He chose to fight back, but in doing so, he 

spent a significant amount of resources, and eventually this patent 

was actually invalidated, but the amount of money and time and 

stress that that took was significant. 

95 

Mr. CA ́ RDENAS. Upwards of how much did he spend? I mean, was it only $5,000, $10,000, $50,000 perhaps? 

Ms. RANIERI. So I can’t—I don’t know his particular case, but 

having been in private practice, the amount—what I saw happen 

in his case, I would estimate anywhere from $200,000 to $250,000. 

Mr. CA ́ RDENAS. Exactly. That is a small business. Very few small 

businesses can part with those kinds of resources and stay in business, and that is at the core of what the problem is. The problem 

here is, in my opinion, we have individuals and law firms that are 

just preying on people without even any regard or concern for the 

cause and the consequence of what happens. And to lose in such 

a case, or what have you, it appears, in my opinion, that an organization that would bring that upon a small business would probably 

still flourish and go on, probably have many irons in the fire, such 

as the one you just described, but you have a small business, one 

after another, after another, who just disappear because of this 

practice that should not be allowed. 

Thank you very much, Mr. Chairman. I yield back. 

Mr. BURGESS. Gentleman yield back. Chair thanks the gentleman very much for his questions. 

Chair recognizes the gentleman from Illinois, Mr. Kinzinger, 5 

minutes for your questions please. 

Mr. KINZINGER. Thank you, Mr. Chairman. And again, to our 

witnesses, thank you for being here today and spending some time 

with us. 

Ms. Self, companies like Qualcomm have large patent portfolios 

because they have invested a large amount of money in new patents and the creation of new products. And presumably, many of 

Qualcomm’s patents can be similar to patents held by other companies. When Qualcomm believes a similar company with a large patent portfolio may be infringing on its patents, how does Qualcomm 

open communications with that company? 

Ms. SELF. Well, let me just say at the outset that, you know, 

Qualcomm, we are—we have been existence for 30 years. Today, we 

are a large mature company, as you said, with one of the world’s 

largest wireless communications portfolios, but we—our roots were 

as a startup, you know, seven engineers, seven academics, who had 

what they believed was a highly effective solution to what was then 

viewed as an intractable problem in wireless communications. And 

solving that problem has allowed this mobile ecosystem to grow, 

and we would not have an app development community or industry 

without the hard work that engineers at Qualcomm and other inventive companies undertook. 

So today, our—basically, our portfolio is very well known. Most— 

if you have a smart device, a 3G, 4G device, you use Qualcomm 

technology, and you—and if you are, you know, a legitimate player, 

you come to Qualcomm and seek a license, but that dynamic is entirely different for small inventors in this country. And I just wanted to take issue with the characterization of inventors as creating 

nothing, and all the hard work being done by product manufacturers. Inventors in this county are, I think responsible for the vast 

majority of economic growth and success that we have seen over 

the last 200 years, and so characterizing inventors as doing nothing simply because they don’t—— 

96 

Mr. KINZINGER. Right, I—— 

Ms. SELF [continuing]. Manufacture a product really does disservice. 

Mr. KINZINGER. I get that, and I will let you, on somebody else’s 

time, can expand on that, but my question is if you have a company with a large patent portfolio—— 

Ms. SELF. Um-hum. 

Mr. KINZINGER [continuing]. That you believe is impinging potentially on what you guys have, how do you open communications 

with that company? 

Ms. SELF. You know, you—I mean, candidly, I am not part of our 

licensing team, but I—as a lawyer, I am assuming that you send 

a letter, you pick up the phone, you send an email communication, 

you initiate a conversation about the fact that you believe that the 

other company’s products may be infringing or reading upon some 

aspect of your portfolio. So again—— 

Mr. KINZINGER. But—— 

Ms. SELF [continuing]. It is the communication. 

Mr. KINZINGER. And, Professor, I am curious as to how private 

causes of actions have worked in the States. Have they been effective? 

Mr. GUGLIUZZA. So, no. As far as I know, there actually is not 

yet—the statutes are so new, there actually has not yet been a private cause of action actually asserted under any of the statutes. 

The claims that we have seen so far challenging these mass enforcement campaigns actually come under sort of preexisting general consumer protection and deceptive trade practices laws. 

Mr. KINZINGER. OK, all right. Another—are there other theories 

rooted in tort law that would allow businesses or individuals to reclaim money that they lost to a patent troll? 

Mr. GUGLIUZZA. Absolutely. You know, for—even—so as I mentioned the example of general consumer protection deceptive trade 

practices laws, there are theories of tort law available, tortious interference with business relationships, if a patent troll is targeting 

your customers, you might be able to assert that claim. You can assert claims of unfair competition under State common law. Under 

Federal law, for example, when Innovatio sent letters to 8,000 

users of wireless internet routers, the manufacturer of those routers, Sysco, Netgear, Motorola, actually sued Innovatio under the 

Federal RICO Statute—— 

Mr. KINZINGER. OK. 

Mr. GUGLIUZZA. Racketeer—Corrupt Organization—— 

Mr. KINZINGER. And—— 

Mr. GUGLIUZZA [continuing]. Statute. Sorry. 

Mr. KINZINGER. And I have one more question for you. In your 

testimony, you mentioned Illinois and a couple of other States have 

taken a slightly different tactic on dealing with patent trolls; namely, they focus on specific acts or omissions that violate the statute, 

rather than prohibiting false or bad faith assertion. As I am sure 

you are aware, the business community in Illinois appears to be 

more comfortable with this approach. What lessons should Congress learn from this approach as we try to balance going after patent trolls with protecting legitimate communications between businesses? 

97 

Mr. GUGLIUZZA. Sure. You know, certainty is important, and I 

think that sort of purveys a lot of the discussion both in terms of 

should the Federal Government regulate this or should the State 

government regulate this, and also the question of what should the 

standard we are judging this under be. And one that provides certainty is important so that, you know, legitimate assertions of infringement are not punished, but deceptive assertions that intentionally target small businesses, as these mass enforcement campaigns do, are punished. 

Mr. KINZINGER. OK. Mr. Chairman, I will yield back. Thank you. 

Mr. BURGESS. Chair thanks the gentleman. 

Chair recognizes the gentlelady from Indiana, Mrs. Brooks, 5 

minutes for your questions please. 

Mrs. BROOKS. Thank you, Mr. Chair. 

Profession Gugliuzza, I am worried about the widespread practice of sending abusive demand letters. As we have heard, it is a 

drain on employers and a drain on jobs. And apparently, according 

to a University of California Hastings College of Law study, 70 percent of venture capitalists had portfolio companies that received 

patent demand letters. It is a—it does seem suspicious to see so 

many startups hit with patent claims, and it is troubling to think, 

and as we have heard, that startups in particular may have a good 

bit of their funding and money going into fighting patent claims 

right off the bat. 

Do you have any sense, or have you seen anything that talks 

about how much money and how many jobs are being impacted in 

our economy to fight off these types of abusive demand letters? 

Mr. GUGLIUZZA. So quantifying the effect of these demand letters 

is incredibly difficult because the persons who are targeted with 

them or the persons who purchase licenses because of them, are 

not very willing to identify themselves or disclose what they have 

done. The reason being that it just makes them a target for the 

next round of demand letters. 

Mrs. BROOKS. And, Mr. Malta, do you have any sense from those 

you are representing how many job losses there have been among 

your members? 

Mr. MALTA. So the job loss is direct and indirect. Direct when a 

company is put out of business, OK, and that is more quantifiable, 

but it is also indirect. We could provide an example such as J.C. 

Penney who now has a policy of no longer employing or hiring a 

startup company, in getting them the latest technology, out of fear 

of being sued because lawyers go where the money is. And so they 

will go with the startups and then, of course, they will go for the 

deep pockets in some of the major corporations. So that is affecting 

small businesses in a great way, when they are not being hired by 

larger businesses out of fear that they will be sued by patent trolls 

in relation to their work. 

Mrs. BROOKS. Do we have any information as to how many companies have been put out of business? Has there been—and while 

I recognize that that could be difficult, Ms. Ranieri, anyone know 

if we have an estimates of how many companies have been put out 

of business, whether it is startup or larger? 

Ms. RANIERI. To be frank, it—we can’t figure that out right now. 

Patent trolls take advantage of the fact that this occurs in the 

98 

shadows, and that is why we at EFF think it is really important 

to have—to implement disclosure requirements so we can understand the true scope of the problem, and the effect that it is having 

on our economy. 

Mrs. BROOKS. Thank you. And finally, Ms. Self, certainly, I am 

concerned about protection of property rights, ensuring that 

innovators have the confidence that their patent rights are going 

to be secure, and you have made a great point in your testimony 

that IP-intensive industries account for more than 1⁄3 of U.S. GDP, 

and directly or indirectly support over 40 million jobs in this country. If we do move forward, and I appreciate your point on the 

TROL Act from last Congress, but if we approve the legislation, 

what is the most important thing, the most important thing you 

think we need to focus on to get it right in order to protect legitimate patent holders’ ability to communicate with potential infringers or licensees? 

Ms. SELF. Thank you for that question. I, you know, it hard to 

point to just one piece of this bill that is, you know, the most important factor. It—the framework of the bill, I think, the four factors that I mentioned in my oral statement, the fact that it is limited to bad faith communications, the fact that it clearly delineates 

categories of deceptive activity as well as required disclosures, but 

in a way that is balanced and respectful of the rights of patent 

owners. The preemption issue, again, I think the combination of 

preemption with the authority of State attorneys general to enforce 

the law under the Federal framework. Those components, I think, 

are really critical. And I think, again, it is that framework that 

provides the balance and, you know, not just one particular component. So I think all of those components work together to provide 

an effective solution to what we, I think, all agree is a problem, but 

without creating unintended problems for patent owners because, 

you know, the other part of this calculus, if you will, is that if you 

make it so onerous for patent owners to enforce their rights, then 

they will become the target of abuse by infringers, by opportunistic 

lawyers who use State laws to harass them. So that is another important focus to keep in mind as we try to chart forward with the 

right path. 

Mrs. BROOKS. Thank you. Thank you for the thoughtful response, 

and for all of your work and all of the input all of you are providing 

us. Thank you. 

I yield back. 

Mr. BURGESS. Gentlelady yields back. 

Chair now recognizes the gentleman from Kentucky, Mr. Guthrie, 5 minutes for questions please. 

Mr. GUTHRIE. Thank you, Mr. Chairman. Thank the panel for 

being here. 

Sorry, I was in another hearing of this same committee, in another subcommittee, so I apologize that I may ask questions and 

you all sort of repeat a little bit of what Mrs. Brooks just asked, 

but I think a lot of us here are just trying to get our heads around 

this. I think when you talk about the sports—I can—my son played 

little league, because I know there are guys in my area go online, 

you can buy pictures, and I can see where that— I mean, $250,000, 

and those stories are out there, they are real. And that is clear, we 

99 

need to stop that. Then I have my friend, Thomas Massie here, 

who represents the northern part of Kentucky, District 4, 3 or—I 

am 2, so 4 maybe, 4, in Kentucky, he was an inventor. And so 

when we hear the story like you, Ms. Ranieri, and it is like, well, 

this is simple, we need to fix this, so that is obviously—obviously 

needs to be fixed. And then you hear people say, well, if people 

have patents, if they are not using them, that is a good way—like 

the manufacturer. Well, then Thomas explains in a long dissertation at breakfast one day about how a lot of people who are legitimate patent holders, who will legitimately invent, hold these patents because they don’t have the means or the ability, they are trying to move forward. And so if you do this and this kind of—that 

kind of reaction to stop patent trolls is going to—could stop the 

small entrepreneurial inventor, and so you have unintended consequences. 

So I am—I guess what I am asking, is there any of this expert 

panel—where can we delineate between—what—you know, was the 

old Justice Potter, I know it when I see it. I can’t really describe 

it, but I know it when I see it. And how do you delineate between 

what is clearly somebody out there patent trolling, versus, you 

know, somebody like Thomas who works in his garage and comes 

up with—essentially what you did, come up with several patents 

that, you know, takes him a while to find the resources to move 

forward. And so the question is the people just out searching, and 

then you have trolling, and then you have the people who are legitimate small folks. And that is what we are trying to find with 

the balance, because we want to fix the problem, but we don’t want 

to have unintended consequences. So I will kind of open it up to 

the panel. 

Mr. MALTA. Thank you. With an issue like this, there is a starting point, and you are here at the starting point, and that is to stop 

deceptive practices. 

Mr. GUTHRIE. Um-hum. 

Mr. MALTA. And the way—and we are not stopping innovation. 

And so you are right, it is that balance, but let us stop deception. 

And that is why we are suggesting and recommending that these 

letters have basic information in it. And basically stated earlier, 

state the claim, who is the part at interest, et cetera. 

Mr. GUTHRIE. Um-hum. 

Mr. MALTA. And that would be the start to a much greater reform that will probably evolve over time, that will deal with the 

balancing that needs to be done to preserve innovation. 

Mr. GUGLIUZZA. Yes, let me—you know, the enforcement efforts 

I think this committee should focus on are particularly egregious, 

right? They, for example, are targeting large numbers of end users 

of relatively commonplace technology, right? MPHJ sends 16,000 

letters out alleging infringement of use of a common office scanner. 

Innovatio sends out 8,000 letters alleging infringement because of 

the use of common wireless internet routers. That is—so these are, 

you know, egregious, they are sending out large numbers of letters 

focusing on end users, and also the claim—the patents themselves 

are sort of—you might say they are objectively weak. So an example of this is a troll up in the Pacific Northwest called Savannah 

IP. It sent letters to home builders throughout the Pacific NorthVerDate Mar 15 2010 10:40 Nov 10, 2016 Jkt 037690 PO 00000 Frm 00103 Fmt 6633 Sfmt 6633 F:\114THCONGRESS\114X14PATENTLETTERSOKTOPRINT\114X14PATENTLETTERSPD
100 

west alleging infringement of a patent on a ‘‘moisture removal system’’ to dry lumber during construction. So if you were using a fan 

to dry your lumber during construction, you may be infringing Savannah IP’s patent. 

Mr. GUTHRIE. Well—— 

Mr. GUGLIUZZA. There were real questions about whether that 

patent is valid, and those sorts of assertions are the ones—— 

Mr. GUTHRIE. No, I agree with you 100 percent. So you walk out 

of that and you are going, boy, this is easy to get behind. Let us 

get onboard, let us move forward, I like the legislation. And then 

you a have the talk with Thomas and say, well, these are some of 

the consequences that could come from that, and you walk out 

going—I mean we are really trying to figure out exactly what the 

right thing to do is, because we all want to solve the problem. I 

think even people who you are probably hearing oppose the current 

bill will say I—I have heard Thomas say it, I recognize there is a 

problem that needs to be solved. 

Mr. GUGLIUZZA. Yes. 

Mr. GUTHRIE. And so what we are trying to figure out, where is 

that—I mean what—every situation you just described where 

somebody is patenting a fan, we all agree needs to be fixed. 

Mr. GUGLIUZZA. Yes. 

Mr. GUTHRIE. I think most all of us—— 

Mr. GUGLIUZZA. I would—— 

Mr. GUTHRIE [continuing]. Would agree. 

Mr. GUGLIUZZA. I would just encourage you to trust the courts. 

They know—they can tell the difference between the good actors 

and the bad actors. And—— 

Mr. GUTHRIE. Well, the problem is a lot of people go through 

court—the problem is the expense of going to court. 

Mr. GUGLIUZZA. Yes. 

Mr. GUTHRIE. So I mean that is what we are trying to solve. 

That is one of the problems we are trying to solve is—— 

Mr. GUGLIUZZA. Well—— 

Mr. GUTHRIE [continuing]. That people are just paying—they are 

sending out 8,000 letters, if 1,000 people paid and not go to court, 

so just using that as a solution, that is actually part of the problem 

we are trying to solve. 

Mr. GUGLIUZZA. So if you have enforcement by State attorneys 

general or the Federal Government, that can help rectify the sort 

of resource imbalance that you are talking about, I think. 

Mr. GUTHRIE. Yes, but just relying on the courts is what we are 

trying to solve, the problem, the expense of that. 

Ms. SELF. Can I—— 

Mr. GUTHRIE. I think I am out of time. So I don’t know if the 

chairman wants to—— 

Mr. BURGESS. Chair will allow both Ms. Self and Ms. Ranieri to 

respond. 

Ms. SELF. Yes. I just wanted to echo part of the comments that 

the Professor made. First of all, the bad faith requirement, I think, 

is an important, you know, dividing line between legitimate communications and communications that are appropriate for FTC enforcement authority. And again, the goal, at least from our perspective, the goal here is not to expand FTC authority, it is to clarify 

101 

it. But the pattern or practice component, I think does help, again, 

further delineate because—I have seen—we have seen at the State 

level proposals, for example, that any demand—any patent owner 

that sends 10 demand letters is, you know, automatically subject 

to enforcement. That is really not an appropriate approach. Pattern 

or practice denotes widespread communications that meet a standard of deception, and I agree that that standard will evolve through 

the courts. I think the TROL Act helps—is a starting point because 

it clearly identifies some areas where, you know, you do have clear 

objectively, you know, verifiable deception as well as some, you 

know, some minimal baseline affirmative disclosure requirements. 

But also the FTC authority has traditionally been limited to consumers, and that means small businesses, nonprofits, as well as individual recipients. I think that is another dividing line that helps 

with the problem that, I think, you have rightly laid out for us. 

If large companies are receiving demand letters, that is a very 

different dynamic than small mom and pops, and it should be 

treated differently under the law. So I think all of these various, 

what I would consider to be safeguards, if you will, that are set forward in the TROL Act, I think, help solve the problem that you 

have articulated. 

Mr. BURGESS. Ms. Ranieri? 

Ms. RANIERI. I just wanted to add that EFF is—our constituency 

are the small innovator and inventors, and unfortunately, as Mr. 

Malta said, this is a starting point, the deceptive letter practices, 

but our position is until we get better patents issuing out of the 

patent office, and until we stop the flow of patents that should 

never be issued, we cannot solve this problem. And that is why 

broader reform is needed. Once patents become more—sorry, once 

patents that issue out of the patent office can actually be looked 

at and seen as actual inventions, this will make it much easier and 

clearer to solve all of these problems. 

Mr. GUTHRIE. I think that is the argument Thomas Massie made, 

but he made it in 30 minutes, you have made it in 1, so I appreciate that very much. 

Mr. BURGESS. Gentleman’s time has expired. 

Chair would ask of the ranking member, do you have a followup question? 

Ms. SCHAKOWSKY. I do not. 

Mr. BURGESS. Ranking member has no follow-up question. 

The only thing I was going to ask in follow-up, and Professor and 

Ms. Ranieri, you all talked about flexibility, but then, Ms. Ranieri, 

you had given us an admonition earlieron’t give us loopholes or we 

will drive a truck through them. So how do we achieve that balance 

between flexibility and loopholes? 

Ms. RANIERI. That is a good question, and I think that is where 

the courts and the attorneys general, and the FTC and other agencies like the FTC come into play. They can recognize these activities. And as I mentioned, at its base, these laws are meant to target unfair and deceptive trade practices, and these are activities 

that States have a lot of competency with, in that they see them 

a lot in different industries, and they can apply the knowledge that 

they have learned in those industries to this context. 

102 

Patents are involved, yes, so that changes it slightly, but at the 

base, the types of deceptive and unfair practices often span many 

different industries. 

Mr. GUGLIUZZA. Yes, I agree. I think, you know, the—allowing 

the courts flexibility rather than sort of hamstringing them with a 

complicated statutory definition of bad faith, or a long list of factors 

of bad faith, is very important in allowing courts in a case-by-case 

basis to try to close those loopholes. 

Mr. BURGESS. Chair thanks all of our witnesses. And seeing no 

further Members wishing to ask questions, again, thank the witnesses for their participation. 

Before we conclude, I would like to include the following documents to be submitted for the record by unanimous consent: A letter on behalf of the National Association of Federal Credit Unions, 

a letter on behalf of the Direct Marketing Association, a joint letter 

on behalf of the American Bankers Association, the American Insurance Association, the Clearinghouse Payments Company, Credit 

Unions National Association, Financial Services Roundtable, Independent Community Bankers of America, National Association of 

Federal Credit Unions, and the National Association of Mutual Insurance Companies. Pursuant to committee rules, I remind members that they have 10 business days to submit additional questions for the record. I ask that witnesses submit their responses 

within 10 business days upon receipt of the questions. 

VOICE. We also have a letter from the National Retail Federation. 

Mr. BURGESS. My understanding is a late arrival, a letter from 

the National Retail Federation, which we will make part of the 

record. And—— 

Ms. SCHAKOWSKY. Without objection. 

Mr. BURGESS. Without objection, so ordered. 

[The information appears at the conclusion of the hearing.] 

Mr. BURGESS. And then without objection, the subcommittee is 

adjourned. And I thank the witnesses. 

Ms. SCHAKOWSKY. Thank you. 

[Whereupon, at 11:56 a.m., the subcommittee was adjourned.] 

[Material submitted for inclusion in the record follows:] 

103 


A 

NAFCU 

3138 1Oth Street North 

Ar!ington, VA 22201-2149 

P: 703.842.2234 

F: 703.522.0594 

chunt@nafcu.org 

Carrie R. Hunt 

Senior Vice President of Government Affairs 

and General Counsel 

National Association of Federal Credit Unions I www.nafcu.org 

February 24, 2015 

The Honorable Michael Burgess 

Chairman 

Subcommittee on Commerce, 

Manufacturing and Trade 

House Enerb'Y and Commerce Committee 

U.S. House ofRcipreSentativcs 

Washington, D.C. 20515 

The Honorable Jan Schakowsky 

Ranking Member 

Subcommittee on Commerce, 

Manufacturing and Trade 

House Energy and Commerce Committee 

U.S. House of Representatives 

Washington, D.C. 20515 

Re: Patent Demand Letter Practices and Solutions 

Dear Chairman Burgess and Ranking Member Schakowsky: 

On behalf of the National Association of Federal Credit Unions (NAFCU), the only trade association 

exclusively representing the interests of our nation's credit unions, I write today in advance of this week's 

subcommittee hearing, "Update: Patent Demand Letter Practices and Solutions." On behalf of NAFCU 

member credit unions and the IOO million credit union members across the country, we appreciate the 

subcommittee's continued attention to this matter. 

A growing number of credit unions are reporting receipt of demand letters from law firms representing patent 

assertion entities, claiming patent infringement, with the option to settle or face litigation. These deceptive 

letters are confusing and misleading as they often allege that the use of everyday technology violates the 

patent holders' rights. Further, these letters typically state vague or hypothetical theories of infringement, 

and often overstate or misinterpret the patent in question. Because the cost of litigation is often more 

expensive than paying a settlement amount, these "patent trolls" use the threat of Htigation as leverage to 

extract payment from the recipient business who settles in lieu of running the risk of a complex and lengthy 

legal battle. 

NAFCU believes a legislative solution is necessary to alter the intimidating business model used by these 

patent assertion entities and will continue to be supportive of Congressional efforts to curb these practices. 

As the subcommittee examines this issue further, we would urge you to address the demand letter issue in 

any action that you take. 

Thank you for holding this important hearing. If my staff or I can be of assistance to you, or if you have any 

questions regarding the impact of patent trolls on credit unions, please feel free to contact myself, or 

NAFCU's Director of Legislative Affairs, Jillian Pevo, at 703-842-2836. 

cc: Members of the Energy and Commerce Subcommittee on Commerce, Manufacturing, and Trade 

NAFCU I Your Direct Connection to Education, Advocacy & Advancement 
104 


February 25, 2015 

The Honorable Michael C. Burgess 

Chairman, Subcommittee on Commerce, 

Manufacturing and Trade 

U.S. House of Representatives 

2336 Rayburn House Office Building 

Washington, DC 20515 

The Honorable Jan Schakowsky 

Ranking Member, Subcommittee on 

Commerce, Manufacturing and Trade 

U.S. House of Representatives 

2367 Rayburn House Office Building 

Washington, DC 20515 

Statement for the Record for the Energy and Commerce Subcommittee hearing entitled 

"Update: Patent Demand Letter Practices and Solutions" 

Dear Chairman Burgess and Ranking Member Schakowsky: 

On behalf of the thousands of financial institutions of all sizes and charters represented by the 

undersigned trade associations, we are writing to commend you for your leadership in holding a 

hearing entitled, "Update: Patent Demand Letter Practices and Solutions." We respectfully 

request that this letter be included as part of the record for the hearing. 

We fully support your goal of developing legislation to tackle the scourge of bad faith patent 

demand letters. Financial institutions of every size have been targeted by Patent Assertion 

Entities (PAEs), often referred to as patent trolls, who in most cases assert patents of dubious 

quality through vaguely worded demand letters or intentionally vague complaints. Indeed, patent 

trolls' recent focus on credit unions, community banks and other financial institutions threatens 

to pose additional, unwarranted costs on lenders and the communities they serve. In our 

industry alone, there are hundreds of examples of a patent troll attempting to sell a product- the 

patent license- to a bank or credit union using tactics resembling fraud or extortion. 

Although legislation has not yet been introduced, we strongly believe any legislative solution 

should include provisions clarifying the Federal Trade Commission's (FTC) authority to fight 

against deceptive practices, while not affecting legitimate patent holders' rights to send demand 

letters or otherwise assert their patent rights. FTC and state Attorneys General enforcement 

would help alter the fraudulent business model of trolls by removing some of their financial 

incentive to send intentionally vague demand letters in the hope of quick settlements. Although 

outside the scope of your Committee'sjurisdiction, we believe it would also make sense for 

patent troll legislation to provide that if a demand letter does not contain specific information 

about the patent, the alleged infringement and who is asserting the patent, any civil action that is 

later brought by the troll would be dismissed. Compromise language developed by Senators 

Cornyn and Schumer in the Senate Judiciary Committee in 2014 provides a good model. Indeed, 

such a provision would complement this Committee's work because it would help provide the 

FTC the evidence of unfair and deceptive behavior it needs to bring enforcement actions against 

the worst actors. 

1 
105 


Added transparency would also help businesses make sense of a demand letter upon receipt so 

they are better equipped to evaluate the claim. We also urge the Committee to limit the number 

of exceptions provided to patent trolls, such as through affirmative defenses to fraudulent 

behavior. In addition, we note that states have proven to be effective laboratories for developing 

and furthering robust policy relating to patent trolls. While most states could see a reduction in 

unsubstantiated bad faith demand letters if this legislation were to be enacted, the bill should also 

allow states that have proactively enacted laws to discourage bad faith demand letters to continue 

to enforce them. If state law is preempted, it is imperative that strong and enforceable 

national standards for demand letter transparency be put in place. 

We look forward to continuing to work with the Committee and stakeholders to craft a bipartisan 

solution that directly addresses the growing abuse of our patent system and these specious claims 

that are having a negative impact on our industry, our customers, and the American economy. 

To that end, the following is a more detailed summary of the financial services recommendations 

for comprehensive legislation dealing with the patent troll problem. 

Patent Troll Legislation- Principles Advocated by the Financial Services Industry 

The financial services industry, like many other sectors ofthe economy, has faced deceptive 

demand letters and frivolous litigation from patent trolls asserting low-quality patents. 

We have serious concerns about the current patent litigation environment as well as the quality 

of patents granted by the Patent and Trademark Office (PTO). In addition, patent trolls continue 

to assert low-quality patents through vaguely- worded demand letters with the full knowledge 

that their targets, our members, are more likely to pay unnecessary licensing agreements than 

engage in lengthy, costly litigation. The deadweight cost of compliance with demand letters and 

the threat oflitigation are ultimately born by our customers. 

To that end, the financial services industry has coalesced around a set of key principles needed to 

address this critical issue. These principles fall into three distinct yet interrelated baskets that, if 

enacted, would improve the patent system, promote innovation and discourage the assertion of 

low-quality patents as a legitimate business model. 

I) Efficiency of the Litigation Process: improvements need to be made to make the cost and 

burdens of patent litigation equitable and more efficient. 

2) Enhanced Transparency: abuse of the patent system through the use of vaguely-worded 

demand letters must be ended by requiring such letters to provide more details about the 

patent and who claims to assert it. 

2 
106 


3) Patent quality: improvements are needed in the post-grant review of patents such as 

making the Covered Business Method (CBM) permanent and more useable for smaller 

entities. 

Collectively, these principles will go a long way in protecting the tlnancial services sector and 

the millions of customers our members interact with on a daily basis from the harm wrought by 

patent trolls. As the issue of patent reform unfolds in the 114'h Congress, we look forward to 

working with you to advance these core principles. 

The following summarizes a set of principles that the financial services sector is advocating for 

inclusion in any patent reform legislation during the 114'h Congress: 

LITIGATION EFFICIENCY 

:» Contribution Doctrine: Patent trolls target financial services companies as end-users of a 

product or service, leaving our members vulnerable and liable for products and services 

outside of their control. Adding a right of contribution to the patent law would enable a 

more equitable distribution of liability between end users and vendors. Under common 

law and certain federal statutes, there is right of contribution (e.g., a tortfeasor, or 

defendant, has a right to seek contribution from other joint tortfeasors where one 

tortfeasor has paid more than its fair share of damages to the plaintiff). In the patent 

context, a right of contribution could arise where a patent troll sues the end user of a 

system, not the upstream supplier of components of the system. Unfortunately, no right 

of contribution exists under the patent law and state law claims for contribution are 

preempted. 

:» End-User Protections: End users should be protected from patent troll lawsuits based on 

infringements by manufacturers and producers. Trolls should be required to sue the party 

that is actually responsible for infringement, and end users should be protected by having 

their cases consistently stayed when the manufacturer is best positioned to fight the 

patent troll. Definitions should ensure that the stay adequately shields business from all 

corners of "Main Street" America, including financial services. 

:» Limitation to Core Discovery Documents: Each party is to pay for the discovery it 

requests beyond "core" documents. Any discovery requested beyond the "core" 

documents is at the expense of the party requesting such discovery. 

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ENHANCED TRANSPARENCY 

~ Demand Letter Reform: Vaguely-worded demand letters have been used by patent trolls 

to entice licensing agreements and the payment of royalties even though the facts around 

infringement may not be compelling. Demand letters should contain greater specificity. 

This enhanced transparency will help curb abusive lawsuits. Further, demand letters 

should be filed with regulators and recorded in a public, searchable database. In addition, 

a demand letter should be sufficient to enable a covered business method review, and 

State laws that have been enacted to curb abusive demand letters by patent trolls should 

be viewed as a complement to any federal protections, and not be preempted. 

~ Enhanced Pleading Standards: Complaints for patent infringement should specifically 

identifY the accused product, the asserted claims and factual basis for infringement. 

~ Close Marking Loophole: Under current law, a company practicing a patent can only 

collect past damages if it marks it products, meaning it labels the product as a patented 

product. Conversely, a patent troll is entitled to past damages because they have nothing 

to mark. It is unfair that an entity that does not practice a patent is entitled to more 

damages than a company that actually employs people and contributes to the economy by 

selling products and services. To fix this loophole and put operating companies and 

patent trolls on a level playing field, a plaintiff should only be able to collect damages 

from the date it provided notice of infringement. Marking a product should be 

considered adequate notice of infringement. 

~ Recordation of Patent Sales: Establish public record of patent sales, analogous to the sale 

of real estate. Each sales record should include: (I) Real Parties in Interest- clear 

identification of purchaser, parent companies of purchaser, as well as identification of 

companies and individuals that retain a financial interest in the patents; and (2) Purchase 

Price. P-patent brokers should have licensing and other oversight requirements to ensure 

that the market is a level playing field and brokers have the requisite expertise and adhere 

to ethical business practices. As part of the sales process, an objective, third-party 

valuation should be required. In addition, there should be a transaction fee to cover the 

costs associated with licensing brokers and maintaining public sales records. 

PATENT QUALITY 

~ Permanent Covered Business Method program and Improvements to other Post-Grant 

programs: Post-grant review should be available to all practitioners including those who 

do not generally possess prior art in the form of patents and printed publications. 

Congress validated this assertion in the American Invents Act when they created the 

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CBM program. Unfortunately, without intervening action, the CBM program will expire 

in 2020 once again leaving certain industries exposed to low quality business method 

patents. The CBM program should be made permanent as it has proven to be a 

successful low-cost alternative to litigation of covered business method patents. 

However, additional modifications should be made to inter partes review to ensure that it 

can be accessed by all practitioners using the very best prior art available. Safeguards 

should ensure that post-grant proceedings cannot be used to harass patent holders and not 

so restrictive as to protect low-quality patents from review. 

)> Language to make CBM Program permanent should include the ability for the PTO to 

waive or reduce the fee for small entities. 

)> Lift the prior art bar for inter partes and remove the estoppel bar. 

Sincerely, 

American Bankers Association 

American Insurance Association 

The Clearing House Payments Co., L.L.C. 

Credit Union National Association 

Financial Services Roundtable 

Independent Community Bankers of America 

National Association of Federal Credit Unions 

National Association of Mutual Insurance Companies 

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R ''NATIONAL 

RETAIL 

FEDERATION' 

Statement of the 

National Retail Federation 

National Council of Chain Restaurants 

and 

Shop.org 

submitted to the 

U.S. House of Representatives 

Committee on Energy and Commerce 

Subcommittee on Commerce, Manufacturing and Trade 

for its hearing on 

"Update: Patent Demand Letter Practices and Solutions" 

held on 

February 26, 2015 

David French 

Senior Vice President, 

Government Relations 

On behalf of: 

National Retail Federation 

1101 New York Avenue, N.W., Suite 1200 

Washington, D.C. 20004 

(202) 783-7971 

www.nrf.com 
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Chairman Burgess, Ranking Member Schakowsky and members of the House Energy 

and Commerce Subcommittee on Commerce, Manufacturing and Trade, on behalf of the 

National Retail Federation (NRF) and its communities the National Council of Chain Restaurants 

and Shop.org, I appreciate the opportunity to submit this written statement to the Committee in 

connection with its hearing entitled "Update: Patent Demand Letter Practices and Solutions" held 

on February 26, 2015. 

NRF is the world's largest retail trade association, representing discount and department 

stores, home goods and specialty stores, Main Street merchants, grocers, wholesalers, chain 

restaurants and Internet retailers from the United States and more than 45 countries. Retail is the 

nation's largest private sector employer, supporting one in four U.S. jobs- 42 million working 

Americans. Contributing $2.6 trillion to annual GDP, retail is a daily barometer for the nation's 

economy. Retailers create opportunities for life-long careers, strengthen communities, and play a 

critical role in driving innovation. 

Retailers are Significantly Impacted bv Patent Troll Demand Letters 

Members of the National Retail Federation appreciate the attention the Committee is 

paying to the issue of false and deceptive demand letters and their harmful effect on 

competitiveness and innovation. Many retailers are using capital resources to settle with or fight 

patent trolls' infringement claims that they would otherwise use to invest in their businesses, 

engage in their communities, and create jobs. 

Retail, at its core, is a highly competitive industry, and many retailers are using 

innovative technology creatively to expand and grow their businesses. Patent trolls, who are not 

investing in technological innovation, providing jobs or giving back to their communities, 

employ tactics that cut at the heart of this growth and ingenuity. 

In recent years, hundreds of retailers have contacted NRF about this issue because they 

have been, or are currently, the target of patent trolls' abusive behavior. The threat typically 

comes from firms whose business model is buying obscure patents that are about to expire and 

then either licensing the patents to retailers through the threat of litigation or filing lawsuits in an 

effort to force a settlement. Often retailers will choose to pay the licensing fee because patent 

litigation is prohibitively expensive. 

Patent trolls sued more non-tech Main Street companies than tech companies in 2012. 1 

Regretfully there is no concrete data on demand letters because, unlike lawsuits, they are not 

officially filed. Patent trolls employ a strategy that focuses on businesses such as retailers and 

restaurants because businesses that "use" technology, but don't manufacture it, are more 

numerous. One manufacturer or vendor may supply a product or service to thousands of retail 

end-users. Thus, there are many more entities from which to demand a royalty. End-user 

retailers are also easy prey because they lack the legal resources and in-house expertise to fight 

complex patent infringement claims. Compared to high tech companies, retailers typically 

operate on thin profit margins. Patent trolls, knowing that retailers lack technical expertise, retail 

1 Colleen Chien, "Patent Trolls by the Numbers," Patently-0, March 14,2013. 

http://www.patcntlyo.com/patent/2013/03/chien-patent-trolls.html 

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stores operate on thin margins, and patent litigation is exorbitantly expensive, will often price a 

settlement demand (which may still be in the millions) below the cost of litigating, effectively 

blackmailing a retailer into settlement. This is an abuse of the system. 

Patent trolls assert infringement claims often by sending reams of vague, misleading, or 

deceptive letters to businesses. The trolls demand that those businesses immediately purchase 

expensive licenses of uncertain value or face the threat of protracted and costly patent litigation. 

These claims are often based on broad concepts and general business methods (such as operating 

a retail business "online"), covering the use of technology in all areas of e-commerce and mobile 

retailing, in addition to specific software innovations. This approach is especially damaging to 

retailers, who rely on new technology to better serve their customers. 

Trolls' claims not only affect e-commerce and mobile retailing but also the operations of 

traditional "brick and mortar" retail stores. Some examples of the latter are claims that purport 

to cover the printing of receipts at cash registers, the sale of gift cards, and the connection of any 

device (such as a computer or printer) to an Ethernet network. Recently, patent trolls have sent 

demand letters to dozens of retailers and other Main Street businesses on technology directed to 

arrival and status messaging systems and methods for transportation, transportation logistics, 

cargo shipment, package delivery, package tracking and related industries. This is a primary 

function of a retail business dealing with supply chain logistics. 

These cases rarely go to trial because the patent troll has no intention of ever taking the 

retailer or Main Street business to court. They know that their damages claims are so exorbitant, 

and the prospect of relief through litigation so time-consuming, that retailers will make a sound 

business decision and settle, rather than litigate. It has been reported that trolls lose 92 percent of 

cases that proceed to merits judgments; but, as noted, it is infrequent that a defendant has the 

fortitude to litigate2 Smaller retailers, in particular, may find themselves ill-equipped legally or 

financially to defend themselves from abusive claims, and dealing with these claims certainly 

inhibits their ability to innovate and grow. 

The exorbitant costs associated with seeing a court case through to final adjudication are 

startling for retailers, especially small businesses. We have heard from our members that they 

spend as much as one million dollars or more annually on patent troll-related expenses and 

settlement agreements. These expenditures and the employee hours diverted to fighting patent 

trolls are precious capital resources that retailers would rather reinvest in their businesses. It is 

important to note, however, that many retailers do not have these types of resources to redirect to 

fight patent trolls. Therefore, those retailers often will settle the claim when they receive their 

first demand letter to make the problem go away. 

NRF Support for Patent Legislation 

NRF is engaged in discussions with Members of the Committee and Congress to address 

patent trolls' tactics, including vague and deceptive demand letters and the abusive litigation 

practices patent trolls utilize. 

2 John R. Allison, Mark A. Lemley, and Joshua Walker, Patent Quality and Se!tlement Among Repeat 

Patent Litigants, 99 GEO. L..J. 677,694 (2011). 

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Demand letters and new cases pile up while the court cases proceed. Retailers need 

certainty and clarity that only multi-pronged legislation, targeted at the asymmetry in the system 

that patent trolls exploit, will provide. Legislation. which shonld reqnire that patent trolls include 

correct information and communicate fairly, should give Main Street businesses that certainty 

and clarity by making patent trolls explain their claims, protect innocent customers, make patent 

litigation more efficient, stop discovery abuses. make abusive trolls pay and allow for less 

expensive alternatives to litigation. 

Conclusion 

By papering Main Street businesses, including retailers, with broad and vague demand 

letters and filing an endless series of lawsuits against retail end-users alleging the same patent 

infringement claims alleged against manufacturers and service providers of a particular device or 

technology, patent trolls are able to cast a very wide net that hauls in a lucrative catch. They 

have proven that many of the companies they target will settle given the extraordinarily high 

demands they make and the costs those companies know it will take to fight even the most 

frivolous of alleged claims. 

Addressing this abusive and growing patent litigation problem with common sense 

reform will help release retailers from the controlling grip on their industry that patent trolls 

currently enjoy. Because the retail industry contributes $2.6 trillion to our nation's annual GDP, 

removing or even loosening this grip on retailers will allow innovation and growth to flourish, 

and undoubtedly benefit the overall U.S. economy. 

Multi-faceted patent litigation reform, which includes requiring transparency and fairness 

in demand letters, is about stopping the lucrative business model used by patent trolls of 

asserting meritless patents and getting shakedown settlements. Only Congress can pass reform 

needed to put them out of business for good. 

We appreciate your leadership and the Subcommittee's work on strengthening 

enforcement and dramatically reducing the number of bad faith demand letters that our 

businesses receive. With the possible exception of the patent-holding community, few 

businesses have either the expertise or the wherewithal to take multiple, million dollar patent 

claims to court. Trolls target Main Street businesses for just this reason, and thus are able to 

extract exorbitant settlements from each. NRF looks forward to working with you to address this 

growing and costly problem. 

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