Subcommittee Reviews Impact of Patent Assertion Entities on Innovation and the Economy

November 14, 2013

WASHINGTON, DC – The Subcommittee on Oversight and Investigations, chaired by Rep. Tim Murphy (R-PA), today held a hearing on “The Impact of Patent Assertion Entities (PAEs) on Innovation and the Economy.” The subcommittee is investigating recent trends in patent assertion practices to gain a better understanding of their impact on businesses, both large and small, and on fostering an innovative marketplace. Members today examined the practices and transparency of demand letters and other pre-litigation behaviors.

“A strong and fair patent system is essential to an innovative marketplace. Inventors and companies should be encouraged to research and develop ideas, technologies, and products and be rewarded for their risk and investment,” said Murphy. “This is about gathering facts about the nature and scope of this problem. Our purpose in holding this hearing is to learn more about a number of questionable practices that have recently proliferated and the significant direct and indirect costs they have imposed on businesses, large and small.”

“Protecting patents and inventions is important. Bringing a lawsuit to protect a patent, to protect an invention, is warranted in many cases. Those types of cases — where a valid patent is being asserted and protected — seem to be a very different thing from the recent rash of demand letters that are vague, do not contain simple information about the patent at issue or the alleged infringement, and contain threats to sue unless a company pays up,” added full committee Chairman Fred Upton (R-MI). “As job creation and innovation are threatened, we want to figure out today what separates legitimate patent disputes from the types of demand letters and actions that seem to be brought simply to exact a settlement payment.”

Witnesses explained that PAEs often seek out companies that are less likely to be able to fight a lengthy and costly legal battle, and will instead settle. Additionally, witnesses described the deceptive patent demand practices often used by PAEs. Robin Feldman, Director of the Institute for Innovation Law at the University of California Hastings College of the Law, explained that these efforts are often “shrouded in nondisclosure agreements and hidden behind layers of shell companies.” Feldman also referred to a White House report released this summer that she said showed “90 percent of this activity never proceeds to the courthouse.”

“The impact of these patent demands against companies large and small is troubling. A recent study of mine showed that one in three startup companies has faced patent demands and that most of these demands are coming from assertion entities. Other scholars have estimated that very little of the vast amount of money changing hands ever gets back to the inventors who filed the patents. It does not take fancy economics to know that time spent analyzing patent demands is time away from innovating, and money spent on patent demands is money not spent on jobs,” said Feldman.

Lee Cheng, Senior Vice President of Corporate Development at Newegg.com, similarly explained the cost of patent trolls and their impact on the American economy. “Patent trolling is unfortunately a growing and uniquely American problem that was estimated to have cost the American economy over $80B in 2011 in legal fees, settlements, lost productivity and stifled entrepreneurism, due to loopholes in the patent laws. The cost is likely substantially more today,” said Cheng. “Patent trolls take advantage of substantive and procedural deficiencies in law to extract a tax on all of society. Everyone pays the toll of the troll, even when they are not directly paying.”

Murphy concluded, “As always, we will follow the facts so that our oversight can inform any solutions that may be proposed to address the underlying problems relating to abusive demand letters and related practices. Today is a first step in that process.”

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