Congress Seeks Solution to Abusive Patent Demand Letters

A hearing last week took a look at abusive patent demand letters and explored ways to address this growing problem, which is costing small businesses and threatening innovation.

April 14, 2014

WASHINGTON – On April 8, the U.S. House of Representatives Energy and Commerce Committee’s Subcommittee on Commerce, Manufacturing, and Trade held a hearing on “Trolling for a Solution: Ending Abusive Patent Demand Letters.” The panel heard from stakeholders about abusive patent demand letters and explored ways to address this growing problem that is costing small businesses and threatening innovation.

Subcommittee Chairman Lee Terry (R-NE), Ranking Member Jan Schakowsky (D- IL) and Rep. Jerry McNerney (D-CA) stressed the importance of finding a balanced solution to address abusive patent demand letters that would not stifle legitimate patent holders’ rights.

During his opening statement, Terry stressed that not all patent assertion entities (PAEs) are patent trolls. In fact, he emphasized that PAEs play an important role for small inventors who lack resources to enforce their own patent rights and noted that Congress must “respect the arrangements” that small inventors need to enforce their patent rights. Then, he stated that the Subcommittee would be looking to distinguish between bad and legitimate assertions of patent infringement while acknowledging that patent enforcement “technique” differs by entity. He said that legislative action would not devalue intellectual property rights and stated that legislation that would only address demand letters sent to end users would not be enough. Terry also underscored how states are already addressing the patent troll problem via consumer protection statutes and that to “get this right,” stakeholder support is very important.

Schakowsky called for continued bipartisan efforts to address patent trolling and called PAEs “misleading, and at worst extortionist.” She expressed approval that the FTC is using its existing authority to examine this issue, but urged members to take action as they wait for the results of the Commission’s review.  To ensure transparency, she called for minimum demand letter content requirements although she emphasized the need for caution to ensure that legislation does not undermine the role of innovators.  Moreover, she stressed the importance of protecting universities and research institutions.

Rheo Brouillard, president and CEO of Savings Institute Bank and Trust Company, testified on behalf of American Bankers Association and explained the abusive practices of some patent assertion entities (PAEs), or “patent trolls,” and the resulting costs on small businesses who are dragged into unnecessary litigation. “At present patent trolls are able to make patent infringement claims for nothing more than the price of a postage stamp and the paper the claim is written on. These claims are often intentionally vague and based on shaky legal standing. However, when confronted with threats of expensive litigation, many banks — especially smaller banks — find that their only option is to settle, rather than paying millions to defend against extortive claims of patent infringement,” said Brouillard.

Each witness agreed that Congress should do something to address abusive patent demand letters and protect small businesses.

Mark Chandler, senior vice president and chief compliance officer at Cisco Systems Incorporated, suggested that increased transparency and accountability would help expose patent predators. "We need a little sunshine to disinfect this dark corner of the patent world — because once the practices used by these scam artists are exposed, and the harm to their victims better understood, these rip-off artists will be forced to change their ways," said Chandler.

Vermont Attorney General William Sorrell explained efforts at the state level protect businesses from patent abuses but said that action at the federal level to increase transparency in letters is also needed. “Acting on little information, and often without legal assistance because it is not affordable, small businesses pay thousands of dollars in licensing fees for standard products being used for their advertised purpose or live with the fear that they will be sued. It is imperative that these small businesses be provided with the basic level of information necessary to evaluate their options and to not be misled or treated unfairly while doing so,” said Sorrell.

Michael Dixon, president and CEO of UNeMed, the technology transfer and commercialization entity for the University of Nebraska Medical Center, urged Congress to adopt a balanced approach and warned against overcorrection that could threaten legitimate patent practices. Dixon said, “As a university with a significant patent portfolio, every day we send letters and communications to established companies in an effort to convince them to license and invest in our innovations and technologies … Overly broad federal regulation would hinder legitimate efforts to market and license inventions on their journey to the marketplace.”

Dennis Skarvan, deputy general counsel in Caterpillar’s Legal Service Division, testified on behalf of Coalition for 21st Century Patent Reform. He sounded a note of caution stressing the need to protect business-to-business communications and also expressed the need for a targeted solution, stating, “Reasonable and clear rules of the road are needed to guide normal business activities; rules that will not inadvertently deter legitimate patent communications.”

After the hearing, Terry announced that he plans to begin drafting a “prescriptive” bill on patent demand letters “within the next few weeks,” which he thinks will pass separately from the main House bill, since demand letters is a “related but stand-alone issue.”

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