House Hearing, 113TH Congress - Patent Reform Implementation and New Challenges For Small Businesses
House Hearing, 113TH Congress - Patent Reform Implementation and New Challenges For Small Businesses
House Hearing, 113TH Congress - Patent Reform Implementation and New Challenges For Small Businesses
HEARING
BEFORE THE
HEARING HELD
MAY 15, 2013
81197
2013
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(II)
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CONTENTS
OPENING STATEMENTS
Page
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10
WITNESSES
Dennis D. Crouch, Associate Professor of Law, University of Missouri Law
School, Columbia, MO ..........................................................................................
Jeff Grainger, Managing Partner, The Foundry, LLC, Menlo Park, CA, testifying on behalf of the Medical Device Manufacturers Association ..................
John R. Thomas, Professor of Law, Georgetown University, Washington, DC ..
Mark Grady, Founder and President, INdigital Telecom, Fort Wayne, IN ........
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4
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8
APPENDIX
Prepared Statements:
Dennis D. Crouch, Associate Professor of Law, University of Missour
Law School, Columbia, MO ..........................................................................
Jeff Grainger, Managing Partner, The Foundry, LLC, Menlo Park, CA,
testifying on behalf of the Medical Device Manufacturers Association ....
John R. Thomas, Professor of Law, Georgetown University, Washington,
DC ..................................................................................................................
Mark Grady, Founder and President, INdigital Telecom, Fort Wayne,
IN ...................................................................................................................
Questions for the Record:
Questions and Responses Submitted for the Record by Rep. Bentivolio
to Mr. Grainger .............................................................................................
Questions and Responses Submitted for the Record by Rep. Bentivolio
to Mr. Thomas ...............................................................................................
Questions and Responses Submitted for the Record by Rep. Bentivolio
to Mr. Crouch ................................................................................................
Additional Material for the Record:
National Retail Federation - NRF ...................................................................
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62
(III)
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HOUSE OF REPRESENTATIVES,
COMMITTEE ON SMALL BUSINESS,
Washington, DC.
The Committee met, pursuant to call, at 1:05 p.m., in Room
2360, Rayburn House Office Building, Hon. Sam Graves [Chairman
of the Committee] presiding.
Present: Representatives Graves, Luetkemeyer, Mulvaney,
Hanna, Schweikert, Bentivolio, Rice, Velazquez, Chu, and Schneider.
Chairman GRAVES. Good afternoon. We will go ahead and call
the hearing to order. The Ranking Member is going to be a little
bit late but she said for us to go ahead and get started so we didnt
delay you all. But I want to thank all of our witnesses for taking
time away from their jobs and making the trip to Washington.
Some of you have come a long way, and we obviously look forward
to your testimony.
Since the founding of this great Nation, intellectual property
rights have been protected as a way to inspire innovation and perpetuate economic growth. Our Founding Fathers enumerated this
within our Constitution. And last Congress, we passed the America
Invents Act, which represents the most significant reform to the
American patent system in over 50 years.
The AIA included historic changes such as moving to a first-tofile system, as well as revisions in patent fees and a post-grant review process. These reforms help strengthen our patent system to
ensure that the United States remains the world leader in innovation.
In the patent arena, small firms play a critical role in developing
innovation, producing 16 more patents per employee than big businesses do. Obtaining a patent is equally critical for small businesses in their ability to attract startup capital and grow their
businesses. According to the United States Patent and Trademark
Office, it takes more than 31 months to process a patent application. The AIA was passed to help reduce this backlog while also improving the overall quality and strength of the patent system. For
small firms, this is vitally important and it helps expedite the development of businesses and, in turn, aids in creating new jobs.
However, as expected with major policy initiatives, there will be
challenges and some obstacles. As Chairman, I have frequently
heard from inventors and small businesses about the changes to
the patent system and opportunities to address the new challenges.
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Despite the substantial progress made under the AIA, many
firms have expressed concerns about patent assertion entities,
PAEs, or patent trolls, as they are often called. Patent trolls attempt to bring frivolous patent claims against all types of businesses, which hinder innovation and economic growth. Recent studies found that the direct cost of these litigation cases was approximately $29 billion in 2011, with 55 percent of those costs attributed
to firms with less than $10 million in revenue. For small businesses, the costs of litigation are particularly harmful, and it turns
their limited monetary resources away from building that next
great product or service, whatever that may be.
While it is important that those with valid infringement claims
protect their intellectual property, one must carefully examine if
merely receiving a demand letter will cause a small company to
shut its doors rather than challenged the validity of the claim to
ensure its merits.
With that, again, I appreciate all of you being here, and we will
start right out with our first witness. Our first witness is going to
be Dennis Crouch.
Mr. Crouch is an Associate Professor at the University of Missouri School of Law, where he specializes in patent law. In addition
to his work educating new legal minds, Mr. Crouch also authors
Patently-O, which Business Week called the most widely read patent blog. As a leading expert in the patent community, we appreciate you being here today, and we look forward to hearing your
testimony.
STATEMENTS OF DENNIS D. CROUCH, ASSOCIATE PROFESSOR
OF LAW, UNIVERSITY OF MISSOURI SCHOOL OF LAW; JEFF
GRAINGER, MANAGING PARTNER, THE FOUNDRY, LLC, TESTIFYING ON BEHALF OF THE MEDICAL DEVICE MANUFACTURERS ASSOCIATION; JOHN R. THOMAS, PROFESSOR OF
LAW, GEORGETOWN UNIVERSITY; AND MARK GRADY,
FOUNDER AND PRESIDENT, INDIGITAL
STATEMENT OF DENNIS D. CROUCH
Mr. CROUCH. Thank you, Mr. Chairman, for having me, ranking
member, Members of Congress. Usually we think of patents as a
form of intellectual property that is a form of property rights. But
small businesses often see the patent system more as a set of regulations. And in fact, really, these days it might be called a morass
of regulations. That is, regulations in terms of obtaining patent
protection, enforcing those patents, a morass of difficulty in terms
of figuring out how to make a product without infringing patents,
and as the chairman mentioned, the difficulty in terms of litigating
and challenging patents and fending off litigation from patent
trolls.
Now, regulations require expertise, they require contacts, they
require money. And all of those are elements that are in short supply among small businesses. And so it is no surprise that small
businesses are complaining about the patent system. Now in my
view, the greatest problem and the keys to any kind of solution,
whether it be legislative, through the courts, or through the Patent
Office, is in thinking about how to reduce this regulatory burden.
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And in particular, I think the greatest problem and the best way
to address this is by thinking about clarity and transparency in the
patent system.
We have a problem with the patent system today in that
innovators, patent attorneys, and patent applicants have a strong
incentive to hide the ball when they are filing for patent protection.
That is, in essence, to disguise or not fully disclose or point out the
particular innovation that they are trying to protect and draft patent claims that are intended to delineate the scope of their property rights, but in fact, do so in a way that is ambiguous that leads
to some confusion down the line.
And so my proposal and my idea for the best way to address the
patent system is to figure out ways and focus especially at the Patent Office on clarity in patent rights, clarity in the scope of rights,
clarity in defining who owns patent rights, and clarity in defining
exactly what innovation has been developed. With that clarity, I
certainly believe we can move toward a system where strong patent
rights will be available, it will be easier to determine bad patents,
invalid patents, and invalidate those. And although no with one enjoys paying licensing fees, it is a much more straightforward path
when you understand the scope of a patent and it is easy to tell
that your particular project does, in fact, infringe that patent.
Now I want to change gears just one minute and think about, in
particular, small businesses. Now in preparation for this Committee hearing, I did some amount of research in terms of patenting amongst small business entities and I found one interesting,
although perhaps not entirely surprising, finding that the percentage of patents being obtained by small businesses in this country
has dropped significantly over the past 15 years or so from about
30 percent; that is, 30 percent of issued patents in 2000 were
issued to companies or individuals designated as small entities.
Today, that number is down to about 20 percent. So it dropped
from 30 percent to 20 percent.
Now in fact, in looking at these numbers more particularly, I
found that the decrease was not actually a decrease in the number
of patents being filed by small entities, but just that large entities
greatly increased their filings. And so, in a sense, it is not like they
are falling behind by staying steady.
My view, although I did not develop particular data on this, my
hunch is that this decrease in patenting is more a result of the regulatory burden, the difficulty of obtaining and enforcing patent
rights, than it is on any lack of innovation among small companies.
And I am sure we will get more testimony on that front.
Now there are two particular points of data that also come out
from this that have to do, in a sense, with American ingenuity. One
is that the vast majority of small entity filers in the United States
are United States-based small companies, whereas the majority of
large entities that are filing for patent protection in the U.S. are
actually foreign entities. And what that means is that any focus,
any help that is given to small entities has a particular effect that
is primarily addressed toward U.S. companies.
Although my students would understand I could go on for a long
time, but I will stop here and look for any questions as we move
on.
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Chairman GRAVES. Thank you, Mr. Crouch.
Our next witness is Jeff Grainger. Mr. Grainger is the managing
partner for The Foundry, which is a medical device incubator located in Menlo Park, California. In this capacity, Mr. Grainger
helps transition numerous innovative ideas into successful medical
device startups. In addition, Mr. Grainger is a patent attorney and
inventor, holding over 30 patents himself. He is testifying on behalf
of the Medical Device Manufacturing Association. I thank you for
coming all the way from California.
STATEMENT OF JEFF GRAINGER
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of intellectual property law. He has served as a visiting scholar at
the Congressional Research Service for the past decade and was
named the inaugural Thomas Alvin Edison Visiting Scholar at the
U.S. Patent and Trademark Office in 2011. He formally served as
a visiting fellow at the Max Planck Institute for Foreign and Comparative Patent, Copyright, and Unfair Competition Law in Munich, Germany, and is a research scholar at the Institute of Intellectual Property in Tokyo, Japan.
Welcome.
STATEMENT OF JOHN R. THOMAS
Mr. THOMAS. Thank you, Mr. Chairman and distinguished members of the Committee. It is great to have the opportunity today to
testify before you about patent reform implementation and new
challenges for small businesses.
First, I want to thank the Committee and give my congratulations to the Committee for enacting the AIA. I think it has been
a very positive step forward for the patent system. I am grateful.
When I teach, I no longer have to say here is what the rest of the
world does with respect to best patent practices and here is what
we do in the United States, on the other hand. So those days are
gone. And I think the Committee did a wonderful job of protecting
the interest of small businesses by maintaining the small business
discount, the small entity discount at the PTO, and introducing a
micro entity discount that is even steeper for the aid of small businesses.
For example, the fee to file a patent application for a micro entity
is only $70. So this committee has represented small firms very
well.
Consideration of patent reform implementation in large measure
involves a consideration of what is going on at the USPTO. And as
someone who has been critical of the agency at times in the past,
I do want to report a very highly favorable impression about what
the agency has done. I think they have met the deadlines, they
have implemented the law in a timely and transparent manner,
and they deserve a lot of congratulations for doing that.
I further observe that the agency has reduced its first office action pendency to 18.7 months and has cut its inventory of filed but
unexamined applications to under 600,000 cases, which, again, are
pretty impressive accomplishments given its implementation of the
AIA as well. The USPTO also has a large number of programs to
help small businesses. There is an Office of Innovation and Developmentit is right as you go in the agency in the Madison Buildingthat helps small businesses. There is an Ombudsman, an Inventors Assistance Center. And the agency is very active in the
conferences to help independent inventors.
Obviously, a lot of these programs are in jeopardy, or at least
being scaled back, because of sequestration. And I would like to associate myself with the comments of Mr. Grainger about the importance of the agency getting the funding and how important that
was in the enactment of the AIA. Obviously, the Office of Management and Budget has reportedly reasoned that the fees that the
USPTO collects are, in fact, subject to sequestration, which for
many of us was a surprising ruling. We will see what impact that
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Chairman GRAVES. Thank you, Mr. Thomas.
Our next witness is Mark Grady. Mr. Grady is founder and president of INdigital Telecom in Fort Wayne, Indiana. INdigital was
formed in 1995 and was selected by the Indiana Wireless 911 Advisory Board to build an innovative, new e-911 network to bolster
public safety. As a patent holder himself, Mr. Grady understands
the benefits and challenges still existing for small, innovative companies under the new patent system.
Welcome, Mr. Grady, and thanks for coming in.
STATEMENT OF MARK GRADY
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AIA clearly takes the right of patent away from the inventor to instead upon the first person to file, even when it can be determined
that or she is not the first inventor, could you do it, and if so, how?
Mr. THOMAS. I think the current system is highly defensible, sir,
the reason being it is the first inventor to file. So it is someone who
has invented the technology herself and has submitted an application. Even prior to the AIA, if I invented and kept something as
a trade secret for years, and Professor Crouch then filed, I would
not get the patent and Professor Crouch would. So in fact, the patent law has long been the case in the United States that the patent
proprietor is not necessarily the first inventor in the manner that
you seek. The bottom line is it has to be the inventor herself and
someone who has not derived it from another who seeks the patent.
Thus, I believe that the first-to-file system comports with our Constitution.
Mr. BENTIVOLIO. Right. But you cant just change the meaning
of the word inventor in the Constitution 224 years later. The
Constitution doesnt even use the word patent. Clause 8 specifically says Congresss job is to protect the discoveries of inventors.
You cant just say an inventor now means he or she who files. In
Kendall v. Windsor (1859), the Supreme Court held that only
writings and discoveries of authors and inventors may be protected.
You can think this over and respond on the record. My time is
short and I would like to talk about solutions.
Mr. THOMAS. Well, again, it seems to me that you have to be the
first to file, but you actually have to be an inventor. So if I steal
the invention from Professor Crouch and file, I am not an inventor
and I wont get the patent. So I will stick to my guns on that one.
Thank you.
Mr. BENTIVOLIO. I yield back my time. Thank you very much.
Chairman GRAVES. Ms. Velazquez.
Ms. VELA ZQUEZ. Thank you, Mr. Chairman. Let me take this opportunity to thank all the witnesses for being here. I am sorry I
got here late. I was in another meeting.
I would like to address my first question to both Mr. Crouch and
Mr. Thomas.
This week, the Supreme Court ruled for Monsanto in a landmark
case regarding its patent of a genetically modified soybean seed. It
found that self-replicating products can be expansively protected
from patent infringement. I would like for you to comment on the
impact of this ruling.
Mr. CROUCH. I will start. When I think about Monsantos patents
on their Roundup-Ready genetically modified seeds, the kind of future impact for that technology in particular is most interesting,
not because of the Supreme Court decision, but because over the
next couple of years, and now I think less than 2 years, the patents
covering those innovations will all expire. And what that means is
that anyone then who would like to can genetically modify whatever plant they want to by adding those genes into those seeds.
And so while Monsanto has really had that technology locked
down for the past 20 years and not allowed kind of Roundup Ready
tomatoes, Roundup Ready whatever crop you want, that is now potentially going to change, and that is going to have a dramatic
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Ms. CHU. Mr. Grady and also others on the panel, I would like
to ask this question about patent trolls targeting end users. In a
Judiciary Committee hearing recently, I was outraged to hear that
Sysco reported that 13,000 of its customers got demands from patent trolls. And these were customers that simply were using routers. They were the end users of these routers.
I wonder if you have experience with end users getting these
types of baseless patent infringement cases and what your customer base has received, have any of them resorted to paying settlement fees to avoid litigations, and is there something that Congress should do to protect consumers from patent trolls that go
after end users such as your clients?
Mr. GRADY. I will respond to that, too. We use a good bit of Sysco
equipment in our business, and yes, our end user customers have
received demand letters, both for Sysco equipment and for other
digital subscriber line or DSL equipment. Most businesses, I think,
that are served by small, independent telephone companies were
targeted by that. And a lot of those end users got demand letters
as well. Frequently, they refer them to us. We referred them to the
vendor that we purchased them from, and tried to dispute the
claim informally as much as we could. But it has been an ongoing
problem.
Ms. CHU. And do you know if anybody has paid these fees?
Mr. GRADY. Not to the best of my knowledge. I was involved in
a matter in 2002 prior to AIA where a small business was hit with
a shopping cart violation proceeding, and we successfully defended
would against that.
Ms. CHU. Anybody else on the panel?
Then, Mr. Thomas, you acknowledge that the U.S. Patent Office
is considering small businesses in a more improved way through
the America Invents Act. And I successfully amended the bill to
create a pro bono program designed to help financially
undersourced independent inventors and small businesses. Are you
familiar with the pro bono program and how it helps small businesses? If so, do you think there are improvements that can be
made to not only sustain the program but make it more successful?
Mr. THOMAS. I am familiar with the program. I believe it is very
beneficial. It is my understanding it is up and running in several
regions of the country. The USPTO has augmented that with a 1
800 help line that is staffed by retired senior examiners. They come
on in and help people who are having trouble getting their applications through. They have inventors conferences all over the country
that people are attending. So I think the pro bono program, it is
just starting, so I think it is early days before we can assess it
fully. Again, with sequestration, it means these programs are going
to be scaled back.
Ms. CHU. Okay. Thank you. I yield back.
Chairman GRAVES. Mr. Hanna.
Mr. HANNA. Thank you, Chairman.
This is for anybody, but maybe Mr. Grainger. Patent trolling. I
guess the overlying assumption is it is a bad thing. But there have
been estimates that less than 8 percent of the total number of
cases brought would actually survive in court. Can you talk about
what that means? It seems like profiteering, pirating, yet people
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still opt to pay fees to settle it. So the whole thing is kind of this
mix-match of leverage, disproportionate and unfair. Can you just
talk about that, if you think I am at all right in that?
Mr. GRAINGER. I would say at the outset that patent assertion
entities, or trolls, have not been a big issue in the medical device
industry. However, reportedly, some of the biggest trolls out there,
some of these organizations that collect intellectual property, are
amassing war chests of medical device-related, health care-related
patents. So we may see this in the future.
My view is that needs to be addressed on two fronts: One would
be just the Patent Office doing a better job so that overly broad
patents are not issued in the first place. And maybe there needs
to be some sort of systemic reexamination of patents in certain art
spaces, particularly in the computer software space. But in addition, what really makes the whole troll industry thrive is that everybody settles. And if you can get at that problem
Mr. HANNA. It works in the legal profession.
Mr. GRAINGER. Maybe there could be a pool created for companies to collaborate in defense of these claims, and also maybe an
insurance scheme has been proposed to fund defending rather than
just settling. If you
Mr. HANNA. What you are saying is it is unbalanced and there
is no one on your side if you were that victim?
Mr. GRAINGER. Right.
Mr. HANNA. Mr. Thomas.
Mr. THOMAS. I tend to agree with your assessment, and I am impressed the Committee is aware of this issue at this level of detail.
I think there was an effort in the AIA to deal with trolling, in
terms of having rigorous post-grant reviews at the agency that
would get suspect patents before them.
Obviously, the price of the proceedings is high. Also, it is a public
goods problem. Many are accused of infringement; who is actually
going to lead the charge to invalidate the patent. Why should I do
the effort if I can get Professor Crouch to do it. That also tends to
be an issue. Again, I think quality patent grant and an effective
and efficient revocation proceeding at the agency may be the way
to go.
Mr. HANNA. Is there a good side to it? Why would you pursue a
patent to basically take it if you didnt have an opportunity to do
something more with it? I know that may be beside the point.
Mr. THOMAS. There are many different flavors of patent trolls,
which makes it difficult to elucidate this problem. Some are startup
companies, some are universities, some are companies that are
marketing other products but not that particular product. So we
have a lot of different kinds of patent assertion entities, or nonpracticing entities to deal with. The good side can be sure, it is a
small company that wants to market its product, just hasnt done
it yet. But short of sorting out behaviors that we like and those
that we dont, I think
Mr. HANNA. Is it possible that if you lose a lawsuit, you should
pay more than the cost? That there should be some compulsory
damages associated with it?
Mr. THOMAS. Absent an antitrust violation or sham litigation, we
dont currently have such a system. That seems to me to be fairly
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Draconian, but I have to think about it. I have never heard that
proposal before.
Mr. HANNA. Thank you. I yield back.
Chairman GRAVES. Mr. Rice.
Mr. RICE. Thank you, members of the panel, for being here and
testifying today. I have learned a lot about patent law. Generally,
what I am hearing from you, I think, is that you like the effects
of the AIA. That you think it is a good law and generally a move
forward, is that correct? What would you do, outside of this trolling
issue and potential for loser pay and these other types of things
you are talking about, what would you suggest to make this law
better?
Mr. THOMAS. One area that was subject of very significant discussion during the debate that led to the enactment of the AIA was
damages reform. And ultimately, it did not make it into AIA. That
remains a point of significant concern, especially for manufacturers
of products of many components. So the notion is, I have got my
iPhone sitting here, I turn it off, and one statistic suggests that one
patent out of six relates to a smart phone. There are over 200,000
patents that cover this phone. So how do courts assess damages
when you infringe just one patent on functionality in the phone?
So manufacturers of electronic products, the hard tech companies,
are seeking clarification of damages, particularly when, again, the
patent just covers a small part of the product. This is called apportionment. Patent lawyers calling that apportioning damages. Apportion means something different, I think, to you, but to patent
lawyers that is what apportionment is. Many people think it is unclear. On the other hand, we have medical device manufacturers
and pharma companies who are concerned that are by watering
down patent damages, you ultimately devalue the entire system.
Mr. RICE. Is there anybody else on the panel who has any ideas
about trying to make this AIA any better? Are there fixes we can
do?
I am real concerned about American competitiveness and jobs. Is
there anything we can do to shore it up, make it better, and make
us more competitive in the world?
Mr. CROUCH. I will step in here. On the damage reform point, I
think one reason why it didnt get put into the AIA was because
that traditionally really has been a common law question for the
courts to decide. And in the lead-up to that AIA, the Court of Appeals for the Federal circuit, kind of feeling the wind of Congress,
made several important decisions that have really clarified that
law in a lot of important ways.
Although I believe that the AIA is a good law and an important
change in terms of clarifying the law, I dont think it really addressed the greatest problems in our patent system. Patent applications filed today will be under this first-to-file system. But if someone picks it upeven a patent attorney, even one of our Court of
Appeals for the Federal circuit judgesand reads that patent, likely they wont able to tell you what the invention really is. We have
a problem in our system where folks are filing patent applications
that just arent clear what invention are they trying to claim here,
what have they really come up with? And so it turns out that it
is currently within the power of our Patent Office to address that
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at the same time the actual fees have gone up, and so folks are
so, folks are paying more and more often paying that.
Now, the changeI would estimate the change in why that is
happening is generally because of this recognition of patents sets
a strong form of intellectual property right; whereas, 20 years ago,
most companies did not think about patents on a CEO level and
now they are, small and large companies.
Mr. SCHWEIKERT. So, and we are not going to have time because
I was heading towards this whole discussion of patents almost become commoditized out there as, you know, you can borrow on
them, trade them, you know, and how you turn them into cash
flow. But Mr. Chairman, thank you. Yield back.
Chairman GRAVES. Mr. Bentivolio, do you have another one?
Mr. BENTIVOLIO. Thank you, Mr. Chairman.
Just want to follow up on Mr. Thomas. Just so I understand this
correctly. If person A, for instance, has evidence they invented a
product in January and they file in June, and person B, for instance, in another State, in another garage, invents something in
March and files it in April and they happen to be the same invention, who gets the patent?
Mr. THOMAS. As someone who has just been busy writing final
exams, this is in a good spirit for me.
Mr. BENTIVOLIO. You are a student, so I thinkright.
Mr. THOMAS. Under the AIA, the new law, Inventor B gets the
patent because he is the first to file.
Mr. BENTIVOLIO. Okay. So, the original inventor who actually invented the product or whatever, in January, even though because
you know, maybe because of money or they wanted to perfect their
patent or improve upon it, filed later, the actual inventor doesnt
get the patent, correct?
Mr. THOMAS. Having been deposed many times, so I have to disagree with the question to some degree, it depends on what you
mean by first inventor. Under your hypothetical, B has self-invented the technology and then
Mr. BENTIVOLIO. Mr. Thomas, I am just going by the Constitution. That is all I am doing. I am using the Constitution as my
guide. I am not a patent attorney. I am an inventor, okay. So, January I invent, or you invent or Fred invents something andbut
hebecause of money or time and circumstance, he cant get to the
Patent Office. Maybe he is a better inventor than he is in calling
patent attorneys and he files after somebody else. He loses.
Mr. THOMAS. That is correct. And let me also point out that prior
to the AIA, under your hypothetical, if can change the facts of it,
if inventor A had invented first but then sold the product more
than a year before he soldhe filed.
Mr. BENTIVOLIO. I understand.
Mr. THOMAS. He would be divested of the patent.
Mr. BENTIVOLIO. I understand.
Mr. THOMAS. So even under the predecessor regimein other
words, that has been the Patent Act of 1952, which governed prior
to the AIA under your reasoning, it would also be unconstitutional,
because I think it is unlikely that the entire history of the U.S. patent system has beenhas not comported with the Constitution. I
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will have to come to a different conclusion than you about its constitutionality.
Mr. BENTIVOLIO. Well, I am just going by the definition on the
OED, what an inventor is, and it is the authority for definition of
words, and in 1789, what the word inventor meant.
Mr. THOMAS. One way to discern the meaning of legal documents
is to look at the dictionary. Another is to consider intellectual property policy. If we had patent terms that run 20 years from the date
of filing, we want to get the patent in, filed, and as long as it is
the person himself is an original inventor under the AIA, that person can obtain the patent. I think that is a salutary policy goal for
this country.
Mr. BENTIVOLIO. Thank you. I yield back.
Chairman GRAVES. With that, I want to thank all of you for participating today. Your testimony, obviously, underscores the importance of maintaining a strong patent system, one which allows entrepreneurs to thrive by commercializing innovative products and
services. We will continue to monitor the implementation of the
AIA and its impact on small firms as well as continuing to examine
some ways to strengthen the patent system and mitigate the effects
of patent controls on small businesses.
So with that, I would ask unanimous consent, that Members
have 5 legislative days to submit statements in support of materials for the record, and without objection, that is so ordered, and
with that, the hearing is adjourned, and we appreciate you being
here.
[Whereupon, at 2:15 p.m., the Committee was adjourned.]
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APPENDIX
Crouch - Patents and Small Business
Dennis Crouch'
On the Topic of
III.
Associate Professor of Law, University of Missouri School of Law; J.D., University of Chicago School of
Law; B.s.E., Princeton University (Department of Mechanical and Aerospace Engineering and
Engineering Management Systems).
My academic research interests focus on patent law, intellectual property law and internet law. In
addition to traditional academic publications, I am the founder of the Patently-O Patent Law Blog that
has a daily circulation of over 30,000 and is regularly read by most US patent law practitioners. Prior to
joining the University of Missouri faculty, I was a visiting professor at Boston University School of Law
and worked as a patent attorney at a major intellectual property law firm in Chicago where I
represented inventors pursuing patent protection as well as clients litigating claims of patent
infringement. Prior to entering law school, I served as a United States Peace Corps Volunteer in rural
Ghana, West Africa; worked as a manufacturing engineer in upstate New York; and conducted research
on microgravity combustion with NASA.
I am not a registered lobbyist, I do not represent any clients, and I do not own stock in any particular
company with a vested interest in patent rights (beyond broad-based mutual funds).
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23
Crouch - Patents and Small Business
I.
Introduction:
The US Patent System is not so different from other areas of business regulation.
Entrenched market leaders have a competitive advantage in a costly and complex
regulatory world where legal nuances and personal connections make a major
difference in the flow of regulatory approval and enforcement. In this arena of repeat
players, small businesses are at a comparative disadvantage. Some have called for
elimination of the patent system as a whole as the only clear mechanism for allowing
l
competition without undue regulation. However, a more reasoned and Constitutionally
appropriate approach looks for ways to simplify the patent system so that the process of
obtaining and enforcing patent rights is more straightforward and transparent. At the
same time, reforms are needed to make it easier to identify and eliminate bad patents.
Patents offer a particularly attractive policy tool because the regulatory structure is
entirely funded by user-fees. This is in stark contrast to other government incentive
mechanisms such as direct grants or tax loopholes. The societal cost of the patent
system comes from the higher prices of patented goods and from the potential chilling
of competitor innovation. The policy challenge then is in finding the sweet spot where
patent rights are strong enough to incentivize but not so strong as to cause major
market harm. Drafters of the Constitution made this balance by suggesting "exclusive
rights" for inventors but only for "limited times.,,2 Today we continue to search for the
right levels of rights and limits.
Small businesses are on several sides of the patent debate. Innovative companies
obtain patents to protect their market space and to drive royalty revenues. However,
those same companies face threats from the tens of thousands of other US patent
holders who are protecting their own positions.
II.
The baseline of a competitive marketplace is free and open competition. Patent rights
serve as a limited exception to that baseline in order to provide additional incentives for
invention and commercialization of those innovations. The exclusive rights offered by
patent protection provide a powerful foothold for small businesses who, though
innovative, may not-yet be able to fully realize the market potential of their product or
service. Patents also have the potential of serving as a commodity of exchange for small
See, Michele Boldrin and David K. Levine, The Case Against Patents (2012) at
http://research .stlou isfed.org/wp/2012/2012 -035. pdf.
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24
Crouch - Patents and Small Business
businesses who focus on developing new technology rather than new products as well
as a signal of innovative activity for potential investors.
Substantive Examination: All US patents pass through a substantive examination
process. To be patentable, an invention must be a non-obvious advance over what was
3
known in the prior art. The recently effective First-to-File system provides a strong
incentive for applicants to quickly file for patent protection in order to avoid losing
4
rights. However, a patent applicant has no enforceable patent rights until a patent
issues. Even then, federal patent lawsuits have become incredibly expensive. Pushing
this expense is the institutional mindset that every patent is susceptible to challenge.
Backlog and Delay: On average, it takes more than three years for a patent application
to pass through the USPTO system. s The bulk of that delay is due to a large backlog of
patent applications pending review at the U5PTO. Chart 1 shows the size of this backlog
going back twenty years. Although the U5PTO is focused on addressing that backlog,
the hole remains large. One immediate solution offered by the USPTO is prioritized
examination. For a payment of $4,000 (or $2,000 for a Small Entity), a patent applicant
can move to the prioritized application queue and largely bypass the backlog queue.
3S U.S.c. 103.
leahy-Smith America Invents Act of 2011, fully effective March 16, 2013. Although the prior system
was a first-to-invent system, it also provided substantial incentive to quickly file for patent protection.
S Dennis
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25
Crouch - Patents and Small Business
1,000,000
800,000
600,000
400,000
200,000
o
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
US law provides that inventors are the initial owners of patent rights. Most often, rights
are quickly transferred to the inventor's company as required by the relevant
employment or partnership agreement. In general, patents are fully transferrable and
can be bought, sold, divided and licensed. For the most part, the law of patents does
not shift according to the patent owner's identity. However, the law does provide for
50% reduction of most patent fees for patent applicants with "Small Entity" status. 6
"Micro Entity" applicants now receive a 75% reduction in fees. However, few innovative
small businesses will qualify for Micro Entity status because of the low income
7
requirements. The greatest cost for Small Business patent applicants is in patent
attorney fees and the conventional wisdom is that a quality patent attorney is an
extremely important element for ensuring successful patenting.
6
37 C.F.R. 1.27.
7 Oddly, the law provides that patent applications coming from US Universities will qualify for Micro
Entity status.
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4.
26
Crouch - Patents and Small Business
1990
1995
2000
2005
2010
2015
In order to get a more full scope of coverage I combined two sources of data for this chart, (1) USPTO
annual reports from 2011 and 2012 (Table 11) and (2) an analysis of maintenance fee payments.
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5.
27
Crouch - Patents and Small Business
i
j
1---------.
200,000
150,000 -I-
............. ..
_-_
...__._._..._.._....._... _.._-_.._.....
100,000
_.........._----.._---_. __._.. -
-.......--.---~.--..-.-..
_-_..........._..- ..- ..
...._....
-~------.----.----
.... ....
50,000
0+
1990
1995
2005
2000
2010
2015
Growth and Maturation of Small Entities: A patent issued to a Small Entity has an
estimated 10-20% chance of shifting to being held by in large-entity status. That change
may occur through organic growth of the owner; through acquisition by a larger entity;
or by licensing the patent right, for instance. Moving forward, these shifting patents
may serve as a useful source of information on growth and maturation of small business
enterprises.
Foreign Influence on the US Patent Regime: Through a number of reciprocal
international agreements, beginning with the Paris Convention, the US has promised
citizens of other countries access to the US patent system. Under these agreements, an
innovative foreign company seeking exclusive rights in the US market could obtain US
patent protection and enforce those rights in US courts against US competitors. Despite
the offer of rights, the bulk of US patent filers have always been for US originated
inventions. This practical statistic meant that US patent reform primarily impacted US
companies and US inventors. Over the past six years, this statistic changed, and for the
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6.
28
Crouch - Patents and Small Business
first time in history, the majority of US patents have been issued on foreign-originated
inventions. (Chart 4).
This decline in US-centric dominance of the US patent system could serve as a sign that
US innovation needs additional encouragement. In addition, however, the decline may
signal a need to change our outlook on the role of patent rights in US policy. Certainly,
the offer of patent rights encourages innovation and disclosure of new inventions.
However, this incentive is felt around the world - encouraging companies in Australia or
Germany to innovate in order to capture an exclusive slice of the US market. 9
Of note, while foreign small businesses still qualify for the benefits of Small Entity
Status, small foreign corporations are much less likely to file for US patent protection
than their larger counterparts. The result is that a focus on improving conditions for
small entity patentees continues to primarily benefit US entities.
..
80%'"
:
I
...
- ..- ... ~
70%i--~-+.... I
-....... -......- ..
.......
"1""'---"-'
50%
I,
t-~--+--
40%
"~."-'
~...
..
... ........-
60%
......-.-.-... ~ ...-~.~.~-
..-.-~.-~ ~--~.--
r---
30%
~-
20%
t .
10%
0%
+I ...~
1965
'T-'
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
9 See Commonwealth Sci. & Indus. Research Organisation v. Buffalo Tech., 542 F.3d 1363 (Fed. Cir. 2008)
(Australian government entity suing on its US software related patent in the Eastern District ofTexas).
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7.
29
Crouch - Patents and Small Business
III.
Over the past ten years we have seen a rise in the activity of patent licensing companies
- often termed patent trolls. Many of these licensing entities are the byproduct of
inventive ideas that originally failed in the marketplace but whose patents remain.
Other patent licensing companies have formed around the model of buying-up
hundreds or thousands of patents and then seeking to license the accumulated
portfolio. These processes have been fueled by a growing influx of investment funds
that pay for both acquisition and enforcement through the use of contingency fee
litigators. In these situations, there is a strong incentive to make the patents work to
generate revenue because neither the investors nor the litigators typically get paid
unless the patents are licensed or enforced by a court. Over the past few years, the
majority of new patent infringement lawsuits have been filed by patent licensing
companies seeking profits rather than competitor versus competitor lawsuits.
For small businesses, the major benefit of this change is a revitalized marketplace for
patents. In this new regime, an innovative company can turn its innovations into a
royalty stream even without delivering an actual product to consumers. Unfortunately,
the market for patents is not standardized and small businesses suffer from a
tremendous information asymmetry. Again, transparency and accountability are
mechanisms to smooth these transactions. The USPTO can facilitate this process by
ensuring that the real party in interest of a patent is publicly disclosed and by improving
patent clarity in a way that makes it easier to be certain as to the scope of a party's
patent rights.
Although the potential bankroll of large companies make them more often the subject
of patent litigation, small businesses also face the threat. And, thousands of small and
mid-sized companies are sued for patent infringement each year -- both by competitors
and by patent licensing companies. Today, many cases settle in an unsatisfying way
with the accused infringer paying a settlement fee simply in order to avoid the high cost
of fully defending the lawsuit. One solution here again is clarity and transparency.
Although no one enjoys paying royalties, the situation is more palatable when the scope
of the patent and the value of the innovation are clear. Unfortunately, few patents
today call-out the actual inventive concept or clearly delineate the scope of what is and
what is not covered by the patent right. It is within the USPTO's power to address these
concerns directly as part of the examination process. The hope here is that patents with
well-defined scope will also help develop the market for patents and patent licensing in
a way that leads to market transactions without the need for wasteful litigation.
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30
Crouch - Patents and Small Business
A further element of clarity also calls for better notice regarding patents of public
concern. Large entities and entrenched players already share information. However,
some have called for a more public database of patent enforcement attempts that
would allow small business understand common risks of operation and to collaborate in
challenging patents being asserted across an industry.
Everyone recognizes that the USPTO issues a number of patents that - if challenged would likely be found invalid. However, it is expensive to challenge bad patents. As part
of the America Invents Act of 2011, Congress implemented a system of post grant and
inter partes reviews. These new post grant opinions were intended as cost-effective
mechanisms for challenging wrongly-issued patents. Unfortunately, the USPTO has set
the filing fees for these reviews at a cost that is prohibitive for small businesses and
public interest groups wanting to challenge patents. The filing fees for a post-grant
review is $30,000 and an inter partes review is $23,000 with no discount on either for
small entities. That fee structure is unusually large -- especially in cases where the
patent is clearly invalid.
One factor that makes patents so powerful is that there is no need to show copying or
even knowledge of the patent in order to prove infringement. From this frame-ofreference, patent infringement appears akin to a strict-liability-tort. In addition to the
clarity-of-rights discussed above, I would propose a focus on adding some peace-ofmind for small business owners by (1) ensuring the availability of private insurance to
guard against claims of innocent patent infringement and (2) better standardize and
publicize contractual indemnification for downstream users and retailers.
Thank you.
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TESTIMONY
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Prepared Statement of John R. Thomas
Professor of Law, Georgetown University
Before the
Committee on Small Business
United States House of Representatives
On
Patent Reform Implementation and New
Challenges for Small Businesses
May 15, 2013
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The cost of certain USPTO post-grant procedures is also a potential issue for small firms and independent inventors. The new inter
partes review proceeding costs at least $9,000, while the minimum
fee for post-grant review is $12,000. These relatively high rates are
based upon the congressional decision in the AIA to allow the
USPTO to assess fees designed to recover the aggregate estimated
costs of the proceeding to the agency. Given that the AIA requires
post-grant proceedings to be conducted by at least three administrative patent judges of the Patent Trial and Appeal Board, one
would expect the fees to be substantialand indeed I believe that
the agency faithfully complied with the statute in setting its rates.
Nonetheless the fees are very costly and may contribute to a pricing out of small entities from robust administrative challenges to
patent validity.
Patent trolling remains a significant concern for U.S. enterprises
of all sizes. In my opinion, trolling results from systematic problems within the U.S. patent system and is not amenable to a quick
fix. In the 113th Congress, two bills are directed towards patent
trolling issues. The SHIELD Act mandates an attorneys fees
award in favor of any party that prevails on either validity or noninfringement, with exceptions for initial assignees of a patent, universities, and companies that spend substantial resources on the
production or sale of the patented invention. Further, unexempted
litigants must post a bond for these fees before they could even
commence litigation. Fee shifting certainly holds the potential to
deter non-practicing entities from asserting weak patents. Yet it
might also discourage small businesses from bringing meritorious
cases in an often unpredictable litigation environment. In particular, the SHIELD Act would cause certain types of patent proprietors to pay fees if they lose infringement cases, no matter how
close the issues in the case may have been.
Another bill, the Patent Quality Improvement Act of 2013, would
make two changes to the Transitional Program for Covered Business Method Patents. First, the sunset provision associated with
that post-grant proceeding would be eliminated. Second, the postgrant proceeding would be expanded in order to cover virtually any
sort of business method patent. Augmentation of the transitional
program would potentially enlist the expertise of the USPTO to
weed out improvidently granted patents in a timely manner. Nonetheless, patents that survive a second round of review may actually
become more robust and troublesomeafter all, advocates may assert that they withstood USPTO scrutiny twice and ought to be
readily enforced by the courts.
In closing, I appreciate the invitation to provide my views to the
Committee on these and other patent reform proposals, and looks
forward to working with Members of the Committee as it continues
to consider these issues.
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INdigital Telecom Testimony of Mark Grady, Founder and President
Before the Committee on Small Business U.S. House of Representatives May 15, 2013
Before
The Committee on Small Business
U.S. House of Representatives
Hearing on
Patent Reform Implementation and New
Challenges for Small Businesses
Wednesday, May 15, 2013 - 1:00 p.m.
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such as patents, copyrights, and other intellectual property matters. Even so, we are active and directly license the IP of others,
cross-license our IP, and provide critical protected technologies to
other business partners, and our customers.
As noted before, 9-1-1 emergency services are going through a
technological evolution. As other providers in the telecom industry
realized the need to update their 9-1-1 networks, INdigital has
been successful in capturing market share with its 9-1-1 innovations. Therefore, we recognize the need, value, and importance of
a well-defined and efficient patent system to protect and monetize
those innovations. We appreciate and support Congresss efforts in
these regards. INdigital believes in and supports a robust intellectual property system that works for small business, not against it.
Having said this, please note that INdigital is not patent centric. Our patent law firm understands our business and our culture, and recognizes that our IP works in conjunction with the actual products and services we provide, not in the abstract. Our
business succeeds by understanding our customers problems, then
putting a working solution into our customers hands for refinement, not by just cranking out low quality patents whenever technically feasible. Often, our patent applications only start after the
products are deployed and proven. In short, like many small businesses, patents are a by-product of and support our innovation, not
the reason we exist.
Even so, we believe that, on balance, the new provisions of the
American Invents Act (Act or AIA) has been and will continue
to be of some benefit for INdigital. Certainly, patent fee reform is
helpful to our small business, as is the first to file and provisional patent concepts that makes the decision to file a patent
clearer and easier. Its beyond my expertise, but its my understanding that the AIA attempts to make it easier to challenge poor
quality patents. Also, I have read about special rules for challenging new business method patent applications. While these
sound sensible as ways to increase patent quality, these seem to be
too expensive for a small business like ours. Again, were not patent experts, and are only now starting to see how net patent applications will be processed and enforced under the Act. We remain
optimistic that the Act, with some refinements, will yield faster results for higher quality patents without harming small businesses.
As the public safety landscape transitions to NG9-1-1 and to a
more competitive environment, we are seeing an increased use of
patents in our industry sector. We are increasingly aware that companies are hiring armies of patent attorneys, and are buying stagnant companies solely for their patent portfolios. This brings me to
the biggest IP challenge that we and other small businesses face
todaythe inappropriate assertion of poor quality over-broad patents. This is especially troublesome for us when they apply to 91-1 public safety, an area that clearly deserves as much special protection from frivolous lawsuits as business methods.
One of our frenemies, a company that INdigital works with
often on many types of projects, has fallen behind in developing
new NG9-1-1 technology. Rather than innovate in-house, they ac-
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AIA. Unfortunately, however, for all the progress that was made,
the Act has not remedied these current IP issues as they relate to
essential 9-1-1 public safety services.
As we continue to work to develop and deploy important new lifesaving NG9-1-1 services, we are forced to divert our limited resources to plan for the business and financial impacts of unknown
patent assertion claims. This has directly affected our innovation
efforts, ability to hire new employees, and our work to help protect
our communities. From the perspective of our small business, the
AIA is incomplete until our nations 9-1-1 public safety and homeland security system is secure.
As we begin to benefit from the other aspects of the AIA, our
Company is asking this Committee to take half a step back and
help level the playing field as it relates to public safety intellectual
property disputes. Two ideas weve heard discussed in the trade
press, in our view, have particular merit and we support their introduction into law. First, the law should recognize 9-1-1 and NG91-1 for what they are; essential government services, and patent
litigation claiming 9-1-1 infringement should be managed under an
existing patent statute28 United States Code Section 1498. This
will help control the costs of the court process, yet still guarantee
a legitimate patent will be enforced and the patent holder compensated. Second, every infringement complaint should contain a
detailed explanation of the claimsomething more than just the
assertion of a hypothetical infringement we receive today. It is
unfair to burden small businesses with patent allegations no more
substantive than a TV commercial.
No doubt there are other useful concepts that can be considered.
Whatever the conclusions from this hearing, our request is that
this Committee take prompt action to discourage frivolous 9-1-1
public safety related lawsuits while protecting valid patent holders.
In conclusion, thank you for your time and the opportunity to
help you understand the IP problems faced by INdigital and other
small business entrepreneurs today. I look forward to your questions.
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Committee on Small Business
Hearing: Patent Reform Implementation and New Challenges for Small Businesses
May 15, 2013
Questions for the Record Submitted by Rep. Bentivolio
Questions for Mr. Grainger:
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The device has been approved in Europe and is in clinical trials for
approval in the U.S. Medtronic recognized the value of this technology and acquired the company for more than $800 million. See
http://www.medtronicrdn.com/intl/healthcare-professionals/
index.htm. Similar stories can be told about the devices we invented for removal of clots from cerebral blood vessels to reduce the
damage caused by stroke (Concentgric Medical, acquired by
Stryker), and for repairing diseased mitral valves using a catheter
rather than open-heart surgery (eValve, acquired by Abbott). Both
devices were pioneering advances without any comparable devices
available for treating those diseases. Currently we are working a
catheter to enable replacement of the mitral heart valve without
open heart surgery, and a device to relieve osteoarthritis of the
knee for patients not ready or not able to undergo knee replacement. While companies have been working on these problems for
years, none have succeeded in developing a successful device-based
treatment.
It is not entirely accurate to say that The Foundry creates companies based off of patents. We start by identifying major clinical
needs, then we develop the technologies needed to solve those
needs. If a technology shows the promise of working clinically, we
start a company to pursue it. We file patents on everything we invent because we know it is a requirement to obtain funding for
these companies. Often we find that others have invented technology that will complement or that is better than what we have
invented, and we will attempt to acquire rights to that technology.
In most of the companies we have created (now working on the fifteenth), the patents protecting their core technology include some
invented internally and some we have acquired from others.
3. The America Invents Act cited in its Constitutional Authority
Statement Article I, Section 8, Clause 8. Explicitly, this clause secures to authors and inventors their writings and discoveries. As
I observed, the AIA removes this security from an inventor, transferring it to a first-to-file entity who was not the first to invent. Is
that not explicitly forbidden by I:8:8? If not, please explain how the
definition of inventor is lawfully changed from one who invents
to one who files.
Answer: With the disclaimer that I am not a constitutional law
scholar, I believe Article I can be interpreted to require that a system be established that allows all inventors to obtain patent protection for their inventions. However, I do not believe it prohibits
the establishment of a system that makes sense in terms of efficiency and creation of economic value, so long as all inventors have
reasonable opportunity to participate in that system. In my view
the first inventor to file system eliminates huge waste in time and
resources spent in resolving first to invent disputes, when it was
well-established that a party who was second to file rarely won
these contests. Under the first-to-invent system, inventors who took
their time in filing a patent were hurting their own chances of obtaining enforceable patent rights, as well as creating uncertainty
and perceived risk for other parties who were more prompt in filing. Further, the new system increases the efficiency of commercializing valuable inventions by allowing inventors and funders to
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ably can be combined and together disclose all the elements of the
invention, then the invention is non-obvious and a patent should
be allowed. To ensure this is done competently on a more consistent basis, the patent office needs to hire better-qualified examiners, increase examiner training, and improve searching techniques and systems.
9. How do we return the patent office to its constitutional role
of protecting real ingenuity, by stopping the issue of frivolous patents?
Answer: See comments above regarding hiring more and betterqualified examiners, increasing examiner training, allowing examiners more time to examine patents, improving PTO computer infrastructure, and developing better searching techniques and systems.
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49
GEORGETOWN LAW
John R. Thoma.
Protess('}( of Law
1. The America Invents Act cited in its Constitutional Authority Statement Article I,
Section 8, Clause 8. Explicitly, this clause secures to authors and inventors their
writings and discoveries. As I observed, the AlA removes this security from an
inventor, transferring it to a first-to-file entity who was not the first to invent. Is
that not explicitly forbidden by 1:8:8? If not, please explain how the definition of
inventor is lawfully changed from "one who invents" to "one who fIles."
In my professional opinion, because the AlA awards patents only to individuals who actually
developed the invention themselves, rather than derived it from another, the first-inventor-to-file
principle is pennissible under the Constitution. As a textual matter, the Constitution does not
require that a patent be awarded only to the "true and first inventor," as did the English Statute of
Monopolies of 1623, 21 .lac. I, c. 3, s. l. As indicated by the wording of Question 5, reprinted
below, the tenn "inventor" is commonly used to mean a person who originated the invention
himself, rather than having learned of the matter from another individual. Further, the Supreme
Court has recently confinned that Congress enjoys broad ability to tailor the intellcctual property
laws under Article I, Section 8, Clause 8. See Golan v. Holder. 132 S. Ct. 873 (2012) (granting
copyright protection to foreign works fonnerly unprotected in the United States did not violate
Constitution); Eldred v. Ashcroft, 537 U.S. 186 (2003) (extending copyright tenn to life of the
author plus seventy years did not violate Constitution).
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I further observe that under the predecessor first-to-invent system, the first-inventor-in-fact
did not always obtain entitlement to a patent. Prior to the enactment of the America Invents Act,
50
if a first-inventor-in-fact maintained his invention as a trade secret for many years before seeking
patent protection, he may have been judged to have "abandoned, suppressed, or concealed" the
invention. In such a case a second-inventor-in-fact may have been awarded a patent on that
invention. See 35 U.S.C. 102(g). Courts reasoned that this statutory rule encouraged
individuals to disclose their inventions to the public promptly, or give way to an inventor who in
fact does so. See Del Mar Engineering Labs. v. United States, 524 F.2d 1178 (Ct. Cl. 1975). As
the first-inventor-to-file rule acts in a similar fashion to this longstanding, predecessor patent law
principle, conflict with the Constitution appears extremely unlikely. See generally John Burke,
Examining the Constitutionality of the Shift to "First Inventor to File" in the Leahy-Smith
America Invents Act. 39 JOURNAL OF LEGlSLA TlON 69 (2012-13); Robert P. Merges, Priority and
Novelty Under the AlA, 27 BERKELEY TECHNOLOGY LAW JOURNAL 1023 (2012).
2. The Supreme Court has ruled repeatedly that "inventive genius" is the standard by
whicb an invention overcomes tbe "obviousness" hurdle to patentability. Has the
USPTO ever endeavored to define standards of inventive genius, and if so, what was
the outcome?
Congress has not delegated substantive rulemaking authority to the USPTO. See Merck &
Co. v. Kessler, 80 F.3d 1543, 1549-50 (Fed. Cir 1996) ("As we have previously held, the
broadest of the PTO's rulemaking powers-35 U.S.c. 6(a)-authorizes the Commissioner to
promulgate regulations directed only to 'the conduct of proceedings in the [PTO),; it does not
grant the Commissioner the authority to issue substantive rules."). As a result, the USPTO is not
a position to define the governing standard of nonobviousness under 35 U.S.C. 103.
3. One issue today is that end-users of a device, using it for its normal intended
purpose, infringe on patents that the manufacturers of the devices do not infringe
upon. (See Ars Technica, "Meet the nice-guy lawyers who want $1,000 per worker
for using scanners," April 7 2013.) The situation is plainly absurd. Is there a
judicial remedy for the victims of the patent trolls? What legislative remedy would
you envision? More specifically, how is it that an end-user, using a device in an
advertised manner, is taken to be an "inventor" when the maker orthe device is
not?
Patent proprietors have long been allowed to commence infringement litigation against any
user of a patented invention. In the past patent owners were likely more reluctant to commence
litigation against individual users of a patented invention, as compared to the manufacturer or
other central source of supply, but this situation has apparently changed. Note that the subject of
the infringement suit is not the inventor of the patented invention, but rather an accused
infringer.
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Possible solutions for lawsuits against end users include: (I) a mandatory stay of the
proceeding until a contemporaneous suit against the manufacturer is complete; (2) the
establishment of a small claims court where such suits could be transferred; and (3) greater
private use of infringement indemnifications within the private sector.
51
4. Do you believe the lifetime of a patent, the same across all types of utility patents, is
reasonable in its duration for all types of inventions?
Commentators have for many years recognized that technologies and industries vary in ways
that are salient to the patent system. In particular, the costs and risks of conducting R&D differ
widely among industries. Some sectors are marked by stand-alone, discrete advances, while
others feature steady, cumulative innovation. Product cycles also vary markedly different sectors
of our economy. In view of these and possibly other distinctions between technologies and
markets, policymakers may not be particularly confident that a one-size-fits-all patent system
ideally encourages innovation throughout a diverse array of industries. One possible point of
adjustment is the term of the patent, which in theory could be adjusted to fit the perceived needs
of distinct industries.
Others have questioned the wisdom and practicality of line-drawing among different
industries and technologies within the patent system. Defining a specific industry or category of
technologies may prove to be a contested proposition. Even if an industry or technology remains
relatively stable, the innovation environment within it might change. The legislative effort to
enact sector-specific patent laws may provide an opportunity for politically savvy firms to exert
more lobbying and political power, at the possible expense ofless sophisticated firms. Finally,
distinct patent terms among industries or technologies may lead to strategic behavior on behalf of
patent applicants. For example, a computer program that controls a fuel injector within an
automobile could possibly be identified as either an automobile-related or a computer-related
invention.
In addition to these practical concerns, U.S. membership in the World Trade Organization
(WTO) may restrict congressional ability to tailor the patent system to account for different
industries and inventions, to the extent that compliance with WTO standards is desired. The
Agreement on Trade Related Aspects ofIntellcctual Property Rights (TRIPS Agreement) is a
WTO-administered treaty that stipulates minimum standards for many forms of intellectual
property protection. Article 27 of the TRlPS Agreement expressly provides that, with some
exceptions, "patents shall be available and patent rights enjoyable without discrimination as to
the place of invention, the field of technology and whether products are imported or locally
produced." Under the TRIPS Agreement, there is little possibility for implementing variable
patent terms for distinct technologies. In sum, a regime of uniform patent duration is a secondbest solution to detennining the scope of patent rights-but it is one that is more practicable than
its altemative. See generally Michael W. Carroll, One For All: The Problem a/Uniformity Cosl
in Intellectual Properlv Law, 55 AMERICAN UNIVERSITY LA W REVIEW 845 (2006).
5. If two companies independently invent the same thing within a reasonable period,
doesn't that suggest the invention is really neither's to exclude from the other? Does
innovation and invention mean the same thing?
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The world's patent laws assess the stale of the art as it existed prior to the tiling date of the
application to determine whether a particular invention should be patented. This question
captures the insight that review solely of the "prior art" may not he the most appropriate measure
of patentability. Rather, contemporaneous invention--even if that inventive activity occurred
52
after the filing date--may also be an important measure of whether society should award
exclusive rights to one of the inventors. For further discussion of this issue, see Mark A.
Lemley, The Myth of the Sole Inventor, 110 MICHIGAN LAW REVIEW 709 (2012).
Following the AlA, a contemporaneous inventor may be able to establish a prior commercial
user defense under 35 U.S.C. 273. If that defense is successfully invoked, the patent proprietor
would not be able to exclude the contemporaneous inventor from using the patented invention.
The patent could still be enforced against third parties, however.
Many authors use words "innovation" and "invention" synonymously. Others draw
distinctions between the terms. For example, Professor Robert Merges writes:
An invention refers to the practical implementation of the inventor's idea. This
often takes the form of a prototype or model. An invention, then, is more than a
concept (it is usually a tangible thing), but less than the fully worked out product
or process first offered for sale to customers. An innovation is the 'debugged'
and functional version of the invention: the version first offered for sale.
Robert P. Merges, Commercial Success and Patent Standards: Economic Perspectives on
Innovation, 76 CALIFORNIA LAW REVIEW 803 (1988).
6. How would you devise some staudards for the patent office to reject issuing patents
for gadgetry?
7. How do we return the patent office to its constitutional role of protecting real
ingenuity, by stopping the issue offrivolous patents?
I understand both questions to be directed to concerns over improvidently granted patents.
Congress has tasked the USPTO with routinely making the complex determination of whether a
particular invention, or its obvious variant, has been used or described anywhere in the world
prior to the date the patent application was filed. In my opinion, the best way to promote timely
and accurate patentability assessments is to increase the resources available to the agency. At a
minimum, the USPTO should be able to keep the fees it collects, rather than having that revenue
diverted to other, unrelated goverrunent functions.
The America Invents Act (AlA) allows post-grant reviews of patents that have been
granted for unpatentable ideas. It is very possible to have a situation where a
company that is being sued in federal court for patent infringement has challenged
the patentability of what they are being sued for at the USPTO. It is also possible
that a company could find a decision against it in federal court for a patent that the
USPTO later finds unpatentable. In that circumstance, it doesn't seem the company
would have much recourse if the federal court decides its case first and the company
is found to owe a significant amount. For a small business, such a process could
cripple its business. What should be done to fix this? How do we ensure that
companies who are sued for patens the USPTO finds invalid can recoup any fees
they pay as a result of federal court proceedings?
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8.
53
Following Blonder-Tongue Laboratories, Inc, v, University of Illinois Foundation, 402 U.S.
313 (1971), once a patent is held invalid it is ordinarily invalid as to all parties. More
specifically, Blonder-Tongue allowed the use of the doctrine of defensive collateral estoppcl
when the accused infringer shows (1) that a patent was found invalid in a prior case that had
proceeded through final judgment; (2) the two cases involve identical issues; and (3) that the
party against whom estoppel is applied had a full and fair opportunity to litigate. However,
Blonder-Tongue and subsequent case law do not contemplate a refund of damages award if the
patent-in-suit is declared invalid in subsequent proccedings.
Although the scenario described above is certainly possible, it does not seem to be a
particularly common one. Under the AlA, post-grant and inter partes review must be completed
within 12-18 months. Litigation, including an appeal and possible petition to the Supreme Court,
commonly take much longer to complete. This issue seems one that is best handled by
competent lawyering rather than legislative intervention.
***
Thank you again for the opportunity to participate in this hearing. I appreciate the invitation
to provide my views to the Committee on these and other patent reform proposals, and look
forward to working with Members of the Committee as it continues to consider these issues.
Sincerely yours,
~ "~t4~-
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J6hn R. Thomas
Professor of Law
54
Committee on Small Business
United States House of Representatives
Prepared Responses to Questions for the Records
from Representative Bentivolio
Dennis Crouch *
On the Topic of
Patent Reform Implementation and New Challenges for
Small Businesses
February 4, 2014
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Bentivolio Question: 1. You recommend ensuring the availability of private insurance to guard against claims of innocent patent infringement. Does that really solve the problem, or would it
simply transfer the risk to the insurer and average out the costs
across the market?
Crouch Response: The US legal and business environment creates many major risks for small and medium sized businesses. Although rare, these risks are often outsized and too large to be selfinsured against. A strong US insurance market helps to mitigate
these risks so that those business operators can go about their
business with the assurance that they are protected against these
rare-but-major potential liabilities.
Patent infringement litigation is an area where entrenched leaders hold competitive advantages because of the costs and complexity of the system. In this arena of repeat players, small businesses are at a comparative disadvantage and an insurance market
for unintentional patent infringement would help level this playing
field. Because of their broader industry knowledge, Insurance providers may be especially good at identifying and eliminating bogus
claims for relief (as they do in other areas of liability insurance).
At the same time, an insurance market for unintentional patent infringement would not eliminate or detract from a patentees ability
to enforce its valid patent rights.
Bentivolio Question: 2. You recommend better standardization
and publicizing contractual indemnification for downstream users
and retailers. Can you please explain how what sounds like a biggovernment solution solves a fundamental issue of frivolous lawsuits threats and/or frivolous patents creating real threats?
Crouch Response: A US patent provides its holder with the exclusive right to make, use, sell, import, and export the covered invention. That right extends to stopping an end-user from unlicensed use of the invention so long as the patent right has not been
exhausted. As part of a business-to-business transaction, large
business typically negotiate the contractual indemnification associated with potential patent infringement of the product being sold,
such as when a computer manufacturer purchases elements from
microchip manufacturers. Except for their core business products,
small businesses are much more likely to purchase goods and services from a retail outlet just like an ordinary consumer and without
negotiating over these particular terms. This leaves small businesses at potential risk.
The Uniform Commercial Code (UCC) that has been enacted in
every state creates the background rules for business transactions.
The Code was largely designed as a way to define clear understandable baseline rules in order to facilitate transactions. Those
baseline rules of understanding can ordinarily be contractedaround, but offer clear, standardized, and well understood default
rules. That same process can be done with patent infringement indemnification so that all parties understand their relative risks
and obligations early in the process.
My suggestion does not arrive on a blank slate. Rather, U.C.C.
2312 already includes an implied warranty of non-infringement.
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However, there are a number of important uncertainties associated
with what that warranty and those uncertainties have been compounded by two recent Supreme Court cases.1 See, Bowman v.
Monsanto Co., 133 S.Ct. 1761 (2013) (holding farmer liable for patent infringement for replanting seeds purchased on the commodity
market) and Quanta Computer, Inc. v. LG Electronics, Inc., 553
U.S. 617 (2008) (interpreting the scope of the patent exhaustion
doctrine).
Setting of these default rules for market transactions is a core
a critical role of Government as the ultimate arbiter of contract and
property disputes.
Bentivolio Question: 3. The America Invents Act cited in its
Constitutional Authority Statement Article I, Section 8, Clause 8.
Explicitly, this clause secures to authors and inventors their
writings and discoveries. As I observed, the AIA removes this security from an inventor, transferring it to a first-to-file entity who was
not the first to invent. Is that not explicitly forbidden by 1:8:8? If
not, please explain how the definition of inventor is lawfully
changed from one who invents to one who files.
Crouch Response: The US Constitution does not authorize the
grant of patents to non-inventors. Thus, a patent regime would
overreach its authority by granting patent rights to a non-inventor
(other than a non-inventor who possesses a legal interest in the
patent right based upon a chain-of-title from the inventor).
The question then is whether the AIA provides the USPTO with
authority to grant patents to non-inventors. The answer to this
question largely depends upon the meaning of the constitutional
term inventor.
Three possible definitions include:
1. An inventor is the first to conceive of an invention.
2. An inventor is the first one to conceive of an invention and
reduce that invention to practice (either actually or constructively by filing a patent application) without abandoning, suppressing, or concealing the invention.
3. An inventor is someone who conceives of an invention and
reduces that invention to practice (either actually or constructively by filing a patent application).
Although the first definition offers simplicity in statement and
strong moral appeal, it has never been the rule. Rather, for more
than a hundred and fifty years, the US patent system has regularly
granted patent rights to someone who was the second-to-conceive
of an invention because the first-to-conceive failed to properly pursue his or her rights, either by failing to diligently pursue reduction-to-practice or else in unduly abandoning, suppressing, or concealing the invention. In those cases, the first-conceivers activities
were essentially ignored and the next-best inventor was granted
the patent. The second definition above highlights the traditional
1 Uncertain issues include, for instance, when is infringement of a process patent indemnified;
is the merchant who induces infringement required to indemnify; and does the indemnification
pass-through to any subsequent purchasers?
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57
nuance associated with being an inventor under the pre-AIA firstto-invent rules. As youll note, the definition has allowed for many
second-conceivers to get a patent so long as the first-to-conceive
failed to properly and fully protect her rights.
The third definition appears to roughly fit to the working definition of invention under the first-to-file rules of the AIA. The definition of inventorship is no longer tied to being the first-one to conceive or reduce the invention to practice. Rather, anyone who completes those steps qualifies as an inventor. Under the first-to-file
rules then, the one inventor who receives a patent will be determined by speed at filing a patent application. I should note there,
that my use of the term conceive implies that the invention was
not fully derived from elsewhere, but instead was created and realized in the mind of the inventor.
For proponents of the AIA, this third definition is merely a mild
modification of the definition already used in the first-to-invent regime. The first inventor is still given first potential rights, but only
if she is able to quickly file a patent application before someone
else independently invents and files their own application. There is
no precedent that I know of that rejects this definition as defying
the Constitutional requirement.
The one potentially major caveat is the potential that the AIA
could be interpreted to grant patent rights to individuals who do
not fit any definition of the world inventor. In particular, the statutory change removed the explicit requirement that the patentee be
the inventor. That change was designed to make it easier for corporate patent owners to file applications on behalf of potentially
non-cooperative employee inventors, but could have dire Constitutional implications. The USPTO has recognized this potential problem and has provided its interpretation that inventorship is still a
requirement of patentability required by the statute. The USPTO
points to the introductory patent provision: 35 U.S.C. 101 that indicates a patent is to be granted to an individual who invents or
discovers any new and useful process, machine, manufacture, or
composition of matter.
Bentivolio Question: 4. The Supreme Court has ruled repeatedly that inventive genius is the standard by which an invention
overcomes the obviousness hurdle to patentability. Has the
USPTO ever endeavored to define standards of inventive genius,
and if so, what was the outcome?
Crouch Response: The test for patentability is not inventive
genius but rather whether the invention would have been obvious
to a skilled artisan.
A patentable invention must be novel and must also take a substantial step beyond what was done in the prior art. In US law, we
use the term nonobviousness as the key term for defining this
substantial step. In a 1941 decision, the US Supreme Court did
write that a patentable invention must reveal the flash of creative
genius, not merely the skill of the calling. Cuno Engineering v.
Automatic Devices., 314 U.S. 84 (1941). However, that decision was
rejected by Congress in the 1952 Patent Act that established the
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58
modern test of obviousness and rejected the flash-of-genius requirement. Today, the statute reads as follows:
A patent for a claimed invention may not be obtained ... if
the differences between the claimed invention and the prior art
are such that the claimed invention as a whole would have
been obvious before the effective filing date of the claimed invention to a person having ordinary skill in the art to which
the claimed invention pertains.
Patentability shall not be negated by the manner in which
the invention was made.
35 U.S.C. 103.
Although section 103 was amended slightly in the AIA, those
amendments have been seen as technical and not substantively altering the test of obviousness. Thus, the leading cases on obviousness continue to be KSR Intl Co. v. Teleflex, Inc., 550 U.S. 398
(2007) and Graham v. John Deere Co., 383 U.S. 1 (1966). These two
cases (along with the statutory language) largely define the process
of determining obviousness that has been implemented by the
USPTO and that is used by courts.
If it so chose, Congress could further raise the standard of patentability to only allow patents for ideas of exhibiting inventive
genius. However, such a change would represent a major disruptive shift in patent law and would likely violate many of the international agreements that the US has pushed through over the past
several decades.
Bentivolio Question: 5. One issue today is that end-users of a
device, using it for its normal intended purpose, infringe on patents
that the manufacturers of the devices do not infringe upon. (See Ars
Technica, Meet the nice-guy lawyers who want $1,000 per worker
for using scanners, April 7 2013.) The situation is plainly absurd.
Is there a judicial remedy for the victims of the patent trolls? What
legislative remedy would you envision? More specifically, how is it
that an end-user, using a device in an advertised manner, is taken
to be an inventor when the maker of the device is not?
Crouch Response: First, only an very small number of individuals have been sued for patent infringement over the past 100
years apart from wealthy corporate owners sued under a corporate
veil piercing theory. However, an increasing number of patent holders are considering end-user campaigns against relatively small
companies who are merely using off-the-shelf technology in a manner that it was intended by the manufacturer. Compounding this
issue, a number of these patents (including the ones mentioned in
the Ars Technica article) are of questionable validity.
If we focus here on the hardship caused to small and medium
sized businesses, I should first note that the two solutions noted
above (insurance and standardized indemnification) could go a long
way toward protecting these interests.
I also would support an expanded fair-use doctrine of patent infringement that would permit small-scale and non-commercial use
of anothers patented invention without fear of being charged as an
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60
seventeen years. Thus, valuable inventions are those that will see
market value during that seventeen year period beginning three
years from the patent application date. New patents are thus something corporations consider as part of their five and ten year strategic plans rather than offering profits for the immediate year. In
my view, that delayed value is useful because it rewards longer
term planning and strategy that, in turn, hopefully leads to increased stability and more lasting economic security.
Bentivolio Question: 7. If two companies independently invent
the same thing within a reasonable period, doesnt that suggest the
invention is really neithers to exclude from the other? Does innovation and invention mean the same thing?
Crouch Response: Yes, I agree that near-simultaneous invention is one indication that an invention was obvious. However, such
an occurrence is not conclusive proof because innovation races
occur regularly where multiple companies (or countries) are each
racing to be the first to reach the same hard target.
Invention and innovation are related but not the same. I use invention as a term of art in patent law and innovation more loosely
as an advance that may or may not be patentable.
Bentivolio Question: 8. How would you devise some standards
for the patent office to reject issuing patents for gadgetry?
Crouch Response: The three primary standards for issuing patents on gadgetry are (1) that the invention represents a substantial
advance in technology (nonobviousness); (2) that the invention is
fully described in the patent application so that others can read
and understand the invention (enablement); and (3) that the patent
claims are written in a way that informs the public of the patents
scope (definite claims). These standards are all in place and the
USPTO has policies in place so that these standards are considered
by the patent examiner for each and every patent prior to issuance.
I have studied the patenting process extensively and have found
that the USPTO initially rejects the vast majority of patent applications (80% +) based upon one of these three standards. Following
that initial rejection, most patent applicants are able to amend
their patent to better fit within the statutory guidelines. Some applicants are successful in this argument, but more than 100,000
patent applications are abandoned each year based upon their failure (in the eyes of the USPTO) to meet the requisite standards.
Bentivolio ?Question: 9. How do we return the patent office to
its constitutional role of protecting real ingenuity, by stopping the
issue of frivolous patents?
Crouch Response: To be clear, the USPTO makes many mistakes and issues thousands of patents each year that do not meet
the appropriate standards discussed above. The agency needs to do
a better job. Although there are some litigation abuses in the system, I continue to see the greatest problems with the patent system
as derived from poorly issued patents. In truth, the Patent Office
has struggled with this issue for its entire historyever since
Thomas Jefferson took on the role as the original patent examiner.
We should not expect to find a single all-powerful solution that
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,.~~
and
Shop.org
submitted to the
United States House of Representatives
Committee on Small Business
David French
Senior Vice President.
Government Relations
On behalf of:
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Chairman Graves, Ranking Member Velazquez and members of
the House Small Business Committee, on behalf of the National
Retail Federation (NRF) and its division Shop.org, I appreciate the
opportunity to submit this written statement to the Committee in
connection with its hearing entitled Patent Reform Implementation and New Challenges for Small Businesses held on May 15,
2013.
As the worlds largest retail trade association and the voice of retail worldwide, NRF represents retailers of all types and sizes, including chain restaurants and industry partners, from the United
States and more than 45 countries abroad. Retailers operate more
than 3.6 million U.S. establishments that support one in four U.S.
jobs42 million working Americans. Founded in 1996, Shop.orgs
600 members include the 10 largest outline retailers in the U.S.
and more than 60 percent of the Internet Retailer Top 100 E-Retailers. Contributing $2.5 trillion to annual GDP, retail is a daily barometer for the nations economy. Retailers create opportunities for
life-long careers, strengthen communities at home and abroad, and
play a leading role in driving innovation. Learn more at
www.nrf.com.
Comments
Members of the National Retail Federation appreciate the attention the Committee is paying to the issue of patent reform and the
changing landscape of patent law and its effect on small businesses.
In recent years, over 200 retailers, including independent retailers and small businesses, have contacted NRF about patent trolls
demands and litigation because they have been, or are currently,
the target of patent trolls abusive practices. The threat typically
comes from firms whose business model is buying obscure patents
which 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.
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, including jobs, innovation and refurbishment of their stores. 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 engaging in communities, employ tactics that cut at the heart of this
growth and ingenuity.
Patent trolls sued more non-tech companies than tech companies
in 2012.1 Patent trolls employ a strategy that focuses on end-users
such as retailers because end-users 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
1 Colleen Chien, Patent Trolls by the Numbers, Patently-O, March 14, 2013. http://
www.patentlyo.com/patent/2013/03/chien-patent-trolls.html
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demand a royalty. The 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 stores
operate on thin margins, and patent litigation is exorbitantly expensive, will often price a settlement demand (which may reach as
high as millions of dollars) below the cost of litigating, effectively
blackmailing a retailer into settlement. This is an abuse of the system.
Patent trolls assert infringement claims covering the use of technology in all areas of e-commerce and mobile retailing because in
addition to targeting specific software innovation, their claims are
based on broad concepts and a general way of doing something.
This approach is especially damaging to retailers, who are embracing new technology and groundbreaking innovation to better serve
their customers.
For example, MacroSolve, Inc. has filed numerous suits related
to violating U.S. Patent No. 7,822,816, which is a method patent
covering the process that many businesses have used to develop
their mobile apps. It has sued technology companies, service providers and end-users, including retailers. Over half of the defendants have settled, but the settlement details have not been publicly
released. MacroSolve claims their patent covers thousands of apps
as well as those yet to be developed.2 This is of great concern to
the retail community, which increasingly relies on mobile apps as
part of their omnichannel presence in the marketplace.
Trolls claims not only affect e-commerce applications but also affect 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 product such as a computer or printer to an
Ethernet network.
These cases rarely go to trial because the damages claims are so
exorbitant, and the prospect of relief through litigation so time-consuming, that retailers make a business decision to settle, rather
than litigate. It has been reported that trolls lose 92 percent of
cases that do go to trial, but, as noted, it is infrequent that a defendant has the fortitude and resources to litigate. Small businesses in the retail sector may find themselves particularly illequipped legally or financially to defend themselves from abusive
claims, and dealing with these claims certainly inhibits their ability to innovate and grow.
The excessive 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 some spend as
much as one million dollars or more annually on patent troll-related litigation and other expenses. For smaller-sized retailers,
these costs could put them out of business, and at the very least
2 Robert Evatt, MacroSolve adds Wal-mart to list of patent lawsuits, Tulsa World, February
8,
2012.
http://www.tulsaworld.com/site/
printerfriendlystory.aspx?articleid=2012020852E1Jsasat255194&PrintComments=1
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these expenditures and the employee hours diverted to fighting
patent trolls are precious capital resources that they would rather
reinvest in their businesses.
The recent case of Soverain v. Newegg demonstrates that many
costly steps involved in litigating a patent case and the enormous
economic impact that just one patent troll can wreak on an industry. Beginning in 2004 and continuing up through 2012, Soverain
has filed numerous suits against dozens of retailers alleging that
the basic check-out technology used by nearly all websites infringe
its patents 3. One large retailer is reported to have settled the first
suit for $40 million because of the fear of jury verdicts in that era
in the Eastern District of Texas. Numerous other settlement
amounts are unreported, but in a subsequent suit, an Eastern District of Texas jury awarded damages of almost $18 million against
two other national brands.
In 2007 Soverain sued Newegg, which decided to fight back. The
case went to trail three years later in April of 2010 and resulted
in a judgment of $2.5 million against Newegg. But Newegg decided
to appeal to the Federal Circuit, and on January 14, 2013, more
than five years after the suit against it was first instituted, it obtained a judgment in its favor, reversing the lower court judgment
and declaring the patents invalid due to obviousness. Although
Newegg has won, it took more than five years and millions of dollars in attorneys and legal fees. And the saga is not over yet because Soverain still has pending before the Federal Circuit a petition for re-hearing of the case en banc by the full court, as opposed
to the panel of three judges that rendered the most recent decision.
The Newegg case is just one example of the broad infringement
claims trolls are asserting against retailers. There are over one million software patents in the United States. Many software patents
contain broad concepts dealing with Internet functionality and
have extraordinarily vague claims.
NRF is engaged in discussions with Members of Congress to address the abusive litigation practices patent trolls utilize. Retailers
support the Saving High Tech Inventors from Egregious Legal Disputes (SHIELD) Act. By requiring the patent troll to pay the defendants attorneys fees and costs, the SHIELD Act would help
deter frivolous litigation.
The America Invents Act (AIA), which the President signed into
law in September 20122, established a Patent and Trademark Reserve Fund. The United States Patent and Trademark Office
(USPTO) is required to deposit all patent and trademark fees collected in excess of the annual appropriation amount into the fund.
The provision also provides for authorization to spend all fees deposited in this fund in the USPTOs annual appropriations. The
AIA also establishes a provision requiring patent fees to be used
3 Joe Mullin, How Newegg Crushed the Shopping Cart Patent Troll and Saved Online Retail ArtsTechnica.com, January 27, 2013, http://arstechnica.com/tech-policy/2013/01/hownewegg-crushed-the-shopping-cart-patent-and-saved-online-retail/
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only for patent operations, including a share of administrative expenses.4
Senator Schumer recently introduced the Patent Quality Improvement Act of 2013, which also aims to produce better quality
business method patents. Retailers feel his is an important step,
and coupled with further litigation reform will be helpful in alleviating this extraordinary problem.
Retailers are also considering a legislative proposal which would
limit the scope of discovery requests in patent litigation to core
documents to help drive down the excessive costs associated with
patent trolls current model of abusive and endless discovery requests. These abusive discovery requests are another expensive tactic used by trolls to drive up the costs of litigation in order to compel retailers into early settlements.
While these proposals are laudable, retailers are ultimately seeking a solution that provides immunity from patent trolls altogether.
As we stated earlier, patent trolls target retailers and other endusers because they are numerous and are easy prey. But as endusers of the technology being disputed broadly and vaguely, they
should not be the principal targets of these far-reaching lawsuits.
Conclusion
By papering 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 will help release retailers from the controlling grip on their industry that patent trolls currently enjoy.
Because the retail industry contributes $2.5 trillion to our nations
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.
NRF thanks the Committee for their examination of the impact
of patent reform and is happy to work with Members of the Committee to find effective solutions against patent trolls egregious behavior.
4 USPTO.gov
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