[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]
ASSESSING THE EFFECTIVENESS OF THE TRANSITIONAL PROGRAM FOR COVERED
BUSINESS METHOD PATENTS
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
COURTS, INTELLECTUAL PROPERTY,
AND THE INTERNET
OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTEENTH CONGRESS
SECOND SESSION
__________
MARCH 20, 2018
__________
Serial No. 115-54
__________
Printed for the use of the Committee on the Judiciary
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Available via the World Wide Web: http://judiciary.house.gov
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COMMITTEE ON THE JUDICIARY
BOB GOODLATTE, Virginia, Chairman
F. JAMES SENSENBRENNER, Jr., JERROLD NADLER, New York
Wisconsin ZOE LOFGREN, California
LAMAR SMITH, Texas SHEILA JACKSON LEE, Texas
STEVE CHABOT, Ohio STEVE COHEN, Tennessee
DARRELL E. ISSA, California HENRY C. ``HANK'' JOHNSON, Jr.,
STEVE KING, Iowa Georgia
LOUIE GOHMERT, Texas THEODORE E. DEUTCH, Florida
JIM JORDAN, Ohio LUIS V. GUTIERREZ, Illinois
TED POE, Texas KAREN BASS, California
TOM MARINO, Pennsylvania CEDRIC L. RICHMOND, Louisiana
TREY GOWDY, South Carolina HAKEEM S. JEFFRIES, New York
RAUL LABRADOR, Idaho DAVID CICILLINE, Rhode Island
BLAKE FARENTHOLD, Texas ERIC SWALWELL, California
DOUG COLLINS, Georgia TED LIEU, California
RON DeSANTIS, Florida JAMIE RASKIN, Maryland
KEN BUCK, Colorado PRAMILA JAYAPAL, Washington
JOHN RATCLIFFE, Texas BRAD SCHNEIDER, Illinois
MARTHA ROBY, Alabama VALDEZ VENITA ``VAL'' DEMINGS,
MATT GAETZ, Florida Florida
MIKE JOHNSON, Louisiana
ANDY BIGGS, Arizona
JOHN RUTHERFORD, Florida
KAREN HANDEL, Georgia
Shelley Husband, Chief of Staff and General Counsel
Perry Apelbaum, Minority Staff Director and Chief Counsel
------
Subcommittee on Courts, Intellectual Property, and the Internet
DARRELL E. ISSA, California, Chairman
DOUG COLLINS, Georgia, Vice-Chairman
LAMAR SMITH, Texas HENRY C. ``HANK'' JOHNSON, Jr.,
STEVE CHABOT, Ohio Georgia
JIM JORDAN, Ohio THEODORE E. DEUTCH, Florida
TED POE, Texas KAREN BASS, California
TOM MARINO, Pennsylvania CEDRIC L. RICHMOND, Louisiana
TREY GOWDY, South Carolina HAKEEM S. JEFFRIES, New York
RAUL LABRADOR, Idaho ERIC SWALWELL, California
BLAKE FARENTHOLD, Texas TED LIEU, California
RON DeSANTIS, Florida BRAD SCHNEIDER, Illinois
MATT GAETZ, Florida ZOE LOFGREN, California
ANDY BIGGS, Arizona STEVE COHEN, Tennessee
DAVID CICILLINE, Rhode Island
PRAMILA JAYAPAL, Washington
C O N T E N T S
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MARCH 20, 2018
OPENING STATEMENTS
Page
The Honorable Bob Goodlatte, Virginia, Chairman, Committee on the
Judiciary...................................................... 4
The Honorable Darrell Issa, California, Chairman, Subcommittee on
Courts, Intellectual Property, and the Internet, Committee on
the Judiciary.................................................. 1
The Honorable Jerrold Nadler, New York, Ranking Member, Committee
on the Judiciary............................................... 4
The Honorable Henry C. ``Hank'' Johnson Jr., Georgia, Ranking
Member, Subcommittee Courts, Intellectual Property, and the
Internet, Committee on the Judiciary........................... 2
WITNESSES
John Neumann, Director, Natural Resources and Environment, U.S.
Government Accountability Office
Oral Statement............................................... 6
David Hale, Chief Privacy Officer and Deputy General Counsel, TD
Ameritrade
Oral Statement............................................... 7
Aaron Cooper, Vice President, Global Policy, BSA, the Software
Alliance
Oral Statement............................................... 9
ASSESSING THE EFFECTIVENESS OF THE TRANSITIONAL PROGRAM FOR COVERED
BUSINESS METHOD PATENTS
----------
TUESDAY, MARCH 20, 2018
House of Representatives
Subcommittee on Courts, Intellectual Property, and the Internet
Committee on the Judiciary
Washington, DC.
The Subcommittee met, pursuant to call, at 2:00 p.m., in
Room 2141, Rayburn House Office Building, Hon. Darrell Issa
[chairman of the subcommittee] presiding.
Present: Representatives Issa, Goodlatte, Collins, Smith,
Chabot, Jordan, Marino, DeSantis, Biggs, Johnson of Georgia,
Nadler, Bass, Lieu, Schneider, and Jayapal.
Staff Present: John Lee, Counsel; Carlee Tousman, Clerk;
and Jason Everett, Minority Counsel.
Mr. Issa. Good afternoon, thank you for your patience in
the delay; the Committee will now come to order. The
Subcommittee on Courts, Intellectual Property, and the Internet
will come to order. Without objection, the chair is authorized
to declare a recess of the Subcommittee at any time, which will
not be necessary because we will get this done before the next
vote.
We would like to welcome today all of our guests for this
important hearing, Assessing the Effectiveness of the
Transitional Program for Covered Business Method Patents. Now,
I will recognize myself for a short opening statement.
Low quality patents are bad for the economy, and the
Covered Business Methods Patent, or CBMs, are in fact the
result directly of the transition from a series of patents that
got out that the court today clearly has said the PTO should
not grant.
In this transition, it is essential to find an effective
and affordable way to overturn bad patents. However, this is,
as my introduction said, a program intended to be transitional.
We are here today to consider legislation that could
revise, extend, or do nothing to this important piece of
legislation, which I believe all of our witnesses will agree.
And if we had Apple here, one of the major opposers of it
originally, they would agree has done a lot of good to get rid
of bad patents.
In the past, patent trolls have abused weak or bad business
methods patents for years. They were so broad and vague as to
allow you to sue anyone anywhere on almost anything. Retail
stores, hotels, and even public transit systems have been sued
by nonpracticing entities with low quality patents alleging
covered basic business practices.
And, of course, any time there is a new industry or a new
patent, the record is not sufficient for the patent office to
actually find the prior art. Only through expensive litigation
can the prior art be found.
This system has--the CBMs--for a number of years done a
good job of lowering that cost. Today, among others, we will
introduce our representatives from the GAO, who have completed
an exhaustive study of the program, and the report has just
been released.
This, therefore, is a good time to contrast their report,
their independent nonbias, nonpartisan, not perfect always, but
every attempt to do a good job. And over a long period of time
against others who think the bellwether of CBMs may, in fact,
be different.
It is now my great pleasure to recognize the Ranking Member
of the Subcommittee for his opening statements, the gentleman
from Georgia, Mr. Johnson.
Mr. Johnson of Georgia. Thank you, Mr. Chairman. Today, Mr.
Chairman, we will examine the recent report issued by the
Government of Accountability Office, the GAO, which examined
the Transitional Program for Covered Business Method patents,
or the CBM Program.
In July 2014, the Judiciary Committee requested a report
from the GAO to study the CBM Program. The GAO has completed
their report. And the purpose of this hearing today is to
examine the findings of that report and assess the state of the
CBM Program. This hearing will give us an opportunity to
examine the extent to which the CBM Program has been used to
challenge patents, and to examine how the United States Patent
and Trademark Office, the USPTO, has engaged with stakeholders
to improve proceedings for the program.
I am interested to hear from the witnesses as to whether
the CBM Program should be extended, and/or whether there are
any modifications or improvements needed for the CBM Program.
The Transitional Program for Covered Business Method Patents
was created in 2011 when Congress passed the Leahy-Smith
America Invents Act; the AIA.
As the GAO report notes, a Covered Business Method Patent
is a patent that claims a method or corresponding apparatus for
performing data processing, or other operations used in the
practice, administration, or management of a financial product
or service.
The CBM Program was a temporary proceeding that can be used
to challenge a patent at any point in the life of the patent.
The program was designed to address the problem of low quality
business method patents. These patents were often used by
patent asserting entities with the threat of infringement
lawsuits to get settlements and to pressure targets to pay for
licenses. The CBM Program sunsets in 2020.
The GAO report found several things. First, it found that
the USPTO has issued an increasing number of business method
patents in the last 20 years. And it also found that from
September 2012 to September 2017, petitioners filed 524 Covered
Business Method petitions challenging the validity of 359
patents.
Although the rate of CBM filings has fluctuated, the use of
the program has declined since 2015. The report also notes that
there has been a decline in CBM petitions. According to the GAO
report, there are many different reasons that stakeholders
argue that there has been a decline in CBM petitions.
I would like to hear from the witnesses about whether
petitioners have successfully targeted the lowest quality
business method patents. I would also like the witnesses to
discuss whether patent owners may be waiting until the CBM
Program sunsets to assert their patents. The GAO report found
that the stakeholders generally agreed that the CBM Program has
reduced patent litigation involving business method patents.
The report also notes that owners of business method
patents have adjusted their litigation strategy due to the CBM
Program, focusing on higher quality patents that are more
likely to withstand CBM review. The GAO has found that more
documentation for policies and procedures is needed, although
the PTAB has multiple policies and procedures in place to
ensure consistency in AIA reviewed decisions.
One of the key issues that will be discussed today is
whether the CBM Program should be extended. Supporters of the
CBM Program say that it should extend beyond the current sunset
date of 2020.
They argue that there is a strong need for the program to
still exist, and note that fewer than 400 business method
patents have ever been subject to a CBM petition. In their
view, many low quality patents still exist, and there is a need
for the program to remain in place. They also argue that the
USPTO continues to have difficulty examining poor quality
business method patents.
On the other hand, we will hear today from a witness who is
opposed to the CBM Program being extended. There are several
arguments for why this program should be able to sunset.
Opponents of extending the sunset argue that CBMs harm
innovation and weaken the value of software patents. They also
argue that the CBM Program is susceptible to abuse by alleged
infringers who unfairly use them to delay infringement
litigation.
One of the key arguments that we will hear today by the
opponents of extending CBM is that 2020 is a good time for CBM
to end. This argument is supported by those who believe that
the worst quality business method patents that were issued have
been cleared away. They also dispute the view that many poor
quality patents remain.
While the purpose of this hearing is to examine the
findings of the GAO report, there appear to be many good
arguments by those who want the CBM Program extended and by
those who want the CBM Program to sunset. I look forward to
hearing from the witnesses. And I thank the chairman for
holding this hearing. And I yield back the balance of my time.
Mr. Issa. I thank the Ranking Member. We now go to the
Chairman of the full Committee, the gentleman from Virginia,
Mr. Goodlatte, for his opening statement.
Chairman Goodlatte. Thank you, Mr. Chairman. A strong and
healthy patent system is important to the economy, and to
American technological leadership. A strong patent system
requires high-quality patents that are clear, precise, and
claim actual innovations. Congress passed the America Invents
Act in 2011 because the health of our patent system was in
jeopardy.
The system was clogged with numerous low quality patents
that had slipped past the Patent and Trademark Office. These
patents were vague, overly broad, and often claimed to cover
things that had been well-known and widely used for many years.
Such patents harm innovation by blocking off broad areas of
endeavor, and not giving inventors enough room to innovate.
Further, bad actors discovered they could use these bad
patents to hold businesses hostage. Vague patents could be
reinterpreted and repurposed to broadly cover products and
processes used or sold by many companies. Litigating in court
to invalidate even a bad patent could cost millions of dollars
and take years.
The consequences of losing often meant the company's
existence could be threatened. Small businesses without the
resources or expertise to defend themselves from bad patents
were particularly at risk. For such businesses, a lawsuit was
not even necessary. The mere threat of a lawsuit was often
enough to extort a settlement from them.
For many patent trolls, their weapon of choice was a
business method patent. Ill-advised court decisions in the
late-1990s and 2000s opened the floodgates to overly broad
business method patents, in particular those relating to the
use of financial services. These patents posed unique
challenges to the U.S. Patent System, so the America Invents
Act included a specialized procedure to address them, the
Covered Business Method Program.
Many stakeholders, including the financial industry and the
software industry, worked with Congress as we formulated the
program. In 2014, 2 years after CBM patent reviews began, I
requested the Government Accountability Office to study the CBM
Program so that the committee's oversight could be informed by
its unbiased research.
With the sunset date of the program approaching, the GAO's
report is timely because the committee is faced with a decision
of whether to renew the program. With over 500 cases and over
300 patents having gone through the CBM Program, we now have
enough information to assess how effective the program has
been, and whether it is accomplishing the goals Congress had in
mind for the program.
This information will be important as we examine if the
program is still needed. I thank Chairman Issa for overseeing
this hearing. And I thank the witnesses for their
participation. I look forward to exploring these important
issues.
Mr. Issa. I thank the gentleman. It is now my pleasure to
introduce the Ranking Member of the full Committee, my former
partner on the Committee, the gentleman from New York, Mr.
Nadler.
Mr. Nadler. Thank you, Mr. Chairman. Mr. Chairman, the
United States leads the world in innovation because our strong
patent system helps translate creativity into economic growth
by enabling creators to protect and to exploit their
inventions. But maintaining a strong patent system also
requires that only truly novel and useful inventions receive
this protection.
Over the last two decades, business method patents have
posed a unique challenge to this vibrant patent system for a
variety of reasons, including the difficulty in identifying
prior art where business methods are concerned; the lack of
clear guidelines for what was eligible to be patented; and then
overburdened Patent and Trademark office. The significant
number of poor quality business method patents began flooding
the system starting in the late 1990s when the courts first
ruled that business methods could be patented.
Many of these business method patents were over broad or
unclear, and they became prime targets for so-called patent
trolls. With these low quality patents in hand, the patent
trolls could extort financial settlements from defendants who
might reasonably conclude that it made financial sense to
settle even a bogus claim rather than to engage in costly
litigation.
Although later court decisions and new Patent Office
procedures limited the impact of future business method patents
would have on the patent system, these improvements could not
address the existing patents that were still wreaking havoc,
particularly within the financial services sector. It was
against this backdrop that Congress created the transitional
program for Covered Business Method patents as part of the 2011
America Invents Act, which ushered in a host of reforms to
strengthen the patent system and to promote innovation.
At the time that the CBM Program was created, proponents
argued that the financial services sector was being especially
harmed by low-quality business method patents, and that the
other post grant review procedures established by the AIA were
insufficient to address this category of patents. Therefore, a
special temporary program expiring in 2020 was created
specifically to weed out those financial services-related
patents that in hindsight should never have been granted in the
first place.
By most accounts, the CBM Program has successfully carried
out its mandate of offering a cheaper and more efficient
process than district court litigation to challenge this subset
of business method patents, and to filter out the poor quality
patents. This success has spurred some proponents to advocate
for a long-term, or even a permanent, extension of the CBM
Program. Some have even argued that CBM should be expanded to
include other types of patents.
Opponents of extending the program point out that the
number of CBM challenges has declined significantly in recent
years. And they argue that this is evidence that most of the
weak patents have now been eliminated from the system. They
also note the value of uniformity within the patent system,
which can be upset by carve outs for certain industries and
specific types of patents.
While I have supported the limited extension of the CBM
Program in the past to ensure that the program can fully
complete its job, I am skeptical of any effort to expand it
beyond its limited scope, which has significantly lengthened
the life of the program. The CBM Program was enacted in part on
the premise that it would be temporary. And I have not seen
evidence to date that a dramatic expansion is warranted.
The GAO has written a thorough and detailed report
evaluating the CBM Program. And I appreciate the opportunity to
hear from Mr. Neumann today about his findings, and to hear the
perspectives of our two stakeholder witnesses as well. I thank
the chairman for holding this important hearing. And I yield
back the balance of my time.
Mr. Issa. I thank the gentleman. All Members will have 5
days in which to put their opening statements and extraneous
material into the record, without objection.
Today, we welcome our distinguished panel of witnesses. If
you would all, pursuant to the Committee's rules, rise to take
the oath. Please raise your right hand. Do you swear or affirm
that the testimony you are about to give will be the truth, the
whole truth, and nothing but the truth? Thank you very much.
Please be seated. Let the record reflect that all members
answered in the affirmative.
Today, our witnesses include Mr. John Neumann, Director of
Natural Resources and Environment, U.S. Government
Accountability Office, and a key proponent of the report that
just came out; Mr. David Hale, Chief Privacy Officer and Deputy
General Counsel, TD America; and Mr. Aaron Cooper, Vice
President of Global Policy at BSA, the Business Software
Alliance.
Pursuant to the rules, each of you will have 5 minutes for
your opening statements. You are all experienced. Green means
keep going, yellow means you should have probably stopped, and
red means that I am going to find the gavel. So with that, Mr.
Neumann, please begin.
STATEMENTS OF JOHN NEUMANN, DIRECTOR, NATURAL RESOURCES AND
ENVIRONMENT, U.S. GOVERNMENT ACCOUNTABILITY OFFICE; DAVID HALE,
CHIEF PRIVACY OFFICER AND DEPUTY GENERAL COUNSEL, TD
AMERITRADE; AND AARON COOPER, VICE PRESIDENT, GLOBAL POLICY,
BSA, THE SOFTWARE ALLIANCE
STATEMENT OF JOHN NEUMANN
Mr. Neumann. Chairman Issa, Ranking Member Johnson,
Chairman Goodlatte, and Ranking Member Nadler, and members of
the subcommittee thank you for the opportunity to be here today
to discuss our recent report on the Covered Business Method
Patent Review Program.
As you know, this program was created to provide a less
costly and a more efficient alternative to challenge a business
method patent's validity at the Patent and Trademark Office
rather than having to go through the Federal Courts. This
program was established in September 2012, and is slated to
sunset in September 2020.
My statement today summarizes the findings from our recent
report on this program, which examined three areas: first, the
extent to which the Covered Business Method Program has been
used to challenge patents. Secondly, the extent to which the
Patent and Trademark Office ensures timeliness of trial
decisions, reviews decisions for consistency, and engages with
stakeholders to improve proceedings for the program. And
lastly, stakeholder reviews on the effects of the Covered
Business Method Program and whether it should be extended past
its 2020 sunset date.
First, in our review of the extent to which the Covered
Business Method Program has been used, our analysis of the data
show that since it began in 2012 through September 2017, 524
petitions have been filed with the Patent Trial and Appeal
Board to challenge the validity of 359 patents. This has
resulted in decisions that invalidated about one-third of these
patents.
While the petitions filed has fluctuated over the last 5
years, they generally have declined from an overall average of
nine petitions per month to about five per month in the most
recent year 2017. Secondly, we found that the Patent Trial and
Appeal Board has completed all of its proceedings within
statutorily directed timeframes of up to 18 months for the
entire process. We also found that the appeal board has several
review processes in place to ensure the consistency of its
decisions.
But it did not have documented procedures to conduct such
reviews. So, based on that we recommended that the Patent
Office develop guidance for its appeal board judges to ensure
consistency of the decision review process. The Patent Office
agreed and has begun to take steps to implement our
recommendation.
In addition, we found that the Patent Office takes steps to
engage with stakeholders through a variety of means to get
feedback. And has made several changes to its policies and
procedures to address stakeholder concerns on various aspects
of its trial proceedings.
Lastly, we met with a range of stakeholder groups. Those
with direct knowledge and experience with the Covered Business
Method Program to obtain their views on the effects of the
program, and whether it should be extended past its scheduled
2020 sunset date.
Stakeholders generally agreed that the program has had its
intended effect of reducing litigation involving business
method patents. Stakeholders also describe some additional
effects of the program, including a deterrent effect on patent
holders asserting lower quality patents that may be vulnerable
to challenges under the program.
According to stakeholders, the Covered Business Method
Program has also had a positive effect on patent quality, as
applicants are more aware of what steps to take during the
patent application process to ensure that a patent will survive
a postgrant challenge. Although there are very many differing
views on the need to continue the program beyond 2020,
stakeholders, for the most part, said there is value in
maintaining aspects of the program, or the program in its
current form. There were also some opposing views to that as
well. And I will be happy to discuss that in further detail.
This concludes my prepared statement. I would be happy to
respond to any questions you may have.
Mr. Issa. Thank you. Mr. Hale.
STATEMENT OF DAVID HALE
Mr. Hale. Chairman Issa, Vice Chairman Collins, Ranking
Member Johnson, and members of the committee, thank you for
holding this hearing, and for the invitation to testify on this
important topic. I will focus today on the success of the CBM
Review Program, and the clear need to make the program
permanent.
Due to the necessity of interoperability in the financial
services platforms, if a nonpracticing entity, or NPE, asserts
a low quality business method patent against one financial
institution, it is likely it will assert it against everyone
operating in that same space. Given the high and asymmetric
cost of patent litigation, companies are heavily incentivized
to settle and license rather than litigate, regardless of the
merits of the patent in question.
The CBM Program was a landmark effort by Congress to create
a relatively cheap alternative to civil litigation for
challenging low-quality patents, and to reduce the burden on
the courts of dealing with the backwash of invalid business
method patents. And it has worked. CBM is a narrowly tailored,
carefully constructed program that preserves incentives for
innovation while providing an efficient, cost-effective
alternative to litigation for the review of questionable
business method patents. It has operated precisely as Congress
intended.
I can personally attest to this since the implementation of
the CBM process, TD Ameritrade has actively used it to combat
several of the low-quality patents brought against it. The CBM
Program has played a critical role in mitigating the harmful
effects that the assertion of low-quality business method
patents has on innovation.
This is true not only for established financial
institutions such as TD Ameritrade, but for fintech start-ups,
small businesses, and local banks. Through July 2017, 358
patents asserted in 1,662 patent infringement lawsuits were the
subject of CBM review. On average, each CBM review impacts
almost 18 defendants compared to barely seven per IPR. The CBM
review has had a significant ripple effect in terms of
collateral beneficiaries to the program.
This ripple effect extends far beyond the number of patents
asserted or suits filed. Perhaps the most important evidence of
CBM's effectiveness is the decline in the number of CBM
challenges brought at the PTAB. This decline is a sign that
many of the low-quality patents are just not being asserted by
NPEs, because an efficient effective review of the validity of
those patents is now available.
But we should not confuse temporary deterrents with the
elimination of the underlying threat. There are more than
85,000 business method patents issued with thousands more added
each year. And while the PTO has made progress, quality
business method patents continues to be a problem, which is why
the CBM Program should be made permanent. The threat of these
patents does not disappear in 2020. Even patents that expire
between now and then have the ability to be asserted
postexpiration, as patent law allows a look back of up to 6
years.
At present, there is no viable alternative to CBM,
particularly for sectors such as financial services against
which low-quality business method patents tend to be asserted
most frequently. Procedural deficiencies make the three
alternatives to CBM poor substitutes. Litigation is expensive,
uncertain, and protracted.
In some districts, obtaining a ruling and a validity of a
patent before conclusion of the discovery phase is virtually
impossible. Postgrant review does not apply to patents issued
before March 2013 and requires companies to monitor and
ultimately contest every patent that could possibly be asserted
against them.
And finally, inter partes review most closely resembles CBM
but varies in key ways that makes the current IPR process a
poor substitute. Review for patentable subject matter cannot be
challenged under an IPR. IPRs also permit fewer types of
evidence and restrict review of indefinite claims. CBMs also
include safeguards to prevent abuse. They can only be brought
in response to litigation or threat of litigation. They have a
more likely than not standard for institution. And the estoppel
provisions provide a significant detriment to bringing CBMs
inappropriately.
The GAO report speculates that abuses to the CBM processes
are possible, but notes that abuses appear to be rare. Any
process can be abused. And potential abuses identified by the
GAO pale in comparison with the historically extensive abuses
of district court procedures by holders of low quality patents.
The CBM Program has been a success. Letting the CBM Program
expire would harm innovation that keeps our industry start-ups,
small businesses, and our customers competitive in a rapidly
changing economy.
In short, as Congress continues efforts to address the
challenge of nonpracticing entities asserting low-quality
patents, CBM should remain in place for its core elements, or
its core elements should be incorporated in the IPR Program.
Thank you, again, for this opportunity. I welcome your
questions.
Mr. Issa. Thank you. Mr. Cooper.
STATEMENT OF AARON COOPER
Mr. Cooper. Thank you. And good afternoon, Chairman Issa,
Chairman Goodlatte, Ranking Member Johnson, and members of the
subcommittee. My name is Aaron Cooper. I am Vice President for
Global Policy at BSA, the software alliance. Thank you for the
opportunity to testify today.
BSA is a leading advocate for the global software industry
in the United States and around the world. A well-functioning
patent system is important to promoting innovation and,
therefore, patent policy is important to BSA and our members.
BSA members produce much of the software that power cloud
computing, block chain, artificial intelligence, and cyber
security tools.
Our member companies are among the Nation's leading
innovators and patent holders. Due to the complexity of their
products and services, they are also frequently the target of
patent infringement claims. As a result, BSA has a unique and
balanced perspective on patent policy. For instance, BSA
strongly supports efficient non-discriminatory mechanisms at
the USPTO to challenge wrongfully issued patents, such as the
Inter Partes Review Program.
BSA also supports litigation reforms to reduce frivolous
patent litigation. But in our view, programs that discriminate
based on the area of technology, such as the Transitional CBM
Program, are detrimental to the patent system in general, and
the software industry in particular.
In our view, the CBM Program should be allowed to end as
Congress intended, and as the USPTO has recommended, in 2020.
We appreciate that the GAO report makes one recommendation, and
it is not about extending the program.
As Chairman Issa and Chairman Goodlatte said, ``Patents on
true inventions provide an important incentive for research and
development.'' On the other hand, overly broad or obvious
patents chill innovation and increase prices for consumers. It
is, therefore, important that review mechanisms are in place
that cost effectively and efficiently weed out mistakes. The
2011 America Invents Act created postgrant review and inter
partes review to do just this for patents on a
nondiscriminatory basis.
By contrast, the transitional CBM Program, which the AIA
also created, applies only to technology areas within the
covered definition. The CBM Program was enacted as a
transitional program to address a discreet issue in the
financial services area. After the Federal Circuit's 1998 State
Street Opinion, the USPTO began issuing patents on methods of
doing business in the financial sector.
In 2010, the Supreme Court's Bilski decision effectively
reversed the practice, but in the intervening years many
business method patents were issued. Since a specific problem
was created during a finite period of time--between the State
Street and Bilski decisions--Congress made the program
transitional determining that the 8-year window would be
sufficient.
The GAO Report shows that Congress was correct. It includes
helpful statistics drawn from the PTO's data that shows a sharp
decline in the number of CBM challenges falling from 177 in
2014, to just 48 last year.
The USPTO has similarly recommended ``adhering to the
sunset period and discontinuing CBM proceedings on September
16, 2020.'' We at BSA agree. The CBM Program imposes unintended
costs on the software industry. While the program was not
intended to apply to core software innovations, in some
instances around cyber security and general database
architecture it has been.
A program that makes it easier to challenge patents
claiming software related inventions than others decreases the
value and respect for software-related patents. And this impact
is true regardless of the validity of the patent. It is
effectively a government program that picks technology winners
and losers. And while this program specifically impacts the
software industry, we would have the same concern with a patent
program that discriminated against manufacturing, agriculture,
or any other industry sector.
In assessing the GAO report, it is important to distinguish
between what the PTO data objectively show and statements
reflecting the views expressed by the small sample of
stakeholders GAO interviewed for the report. While there may be
stakeholders that would like the program extended or expanded,
there is far broader opposition.
In summary, BSA remains committed to maintaining tools that
deter abusive litigation, and improve patent quality. BSA
supported the Innovation Act, which was approved by this
committee in the 114th Congress. And has filed numerous Amicus
briefs supporting similar reforms in court.
In addition, we urge Congress and the USPTO to resist
efforts that would reduce the effectiveness of Inter Partes
Review as a patent quality mechanism. But Congress was right to
include an end date for the technology specific CBM Program,
and the USPTO was right to recommend adhering to it.
BSA is grateful to the committee for its commitment to
ensuring our patent system as the gold standard around the
world. Thank you, again, for the opportunity to testify. And I
look forward to answering your questions.
Mr. Issa. Thank you. I will now recognize myself for a
short round of questioning. And Mr. Cooper, he who is last
sometimes is first, so get that drink of water. You know you
mentioned the earlier decision in 2010, but the Alice decision
in 2014 was, to a great extent, needed because PTO did not get
it in 2009, 2010, 2011, correct?
Mr. Cooper. Well, but the patent at issue in Alice was
issued, I believe, before the Bilski decision. So, I think we
have an issue where there is a period of time where patents
were----
Mr. Issa. Right. Okay, but effectively 2014 was when the
PTO began changing its procedures. So, bad patents probably, by
today's definitions, came out in 2011, 2012, 2013, correct?
Mr. Cooper. I think it is fair to say that there were
patents that should not have been issued that come out in all
our areas frequently. And that is one of the reasons why it is
so important to have the Inter Partes Review Program and the
PGR Program as patent quality improvements.
Mr. Issa. Mr. Hale, to that point if there were bad patents
issues in 2011, 2012, 2013, 2014, and as Mr. Cooper, who would
like to see the program go away by his own statement, said,
They are still issuing bad patents, right? There are still
vague patents that come out that CBM, among those nearly 600,
include some that were issued after 2014 that were just as
vague and as a result were struck down, correct?
Mr. Hale. Certainly. The, great question, the process has
been changed over time at the Patent and Trademark Office, but
there is still the possibility of bad patents coming out.
Likewise, patents that were issued in 2010 and 2012 or, for
that matter, 2002 would still be eligible to be brought past
2020. If I were in possession of a patent that issued in 2005
and considering bringing it today: I would wait.
Mr. Issa. So, there is still 3 or 4 years of extension just
to cover patents from that period where we know that these two
decisions found that they were weak. Or patents granted based
on things that would not be granted today.
Mr. Neumann, your report obviously sees an effective tool,
but a tool that you are not supporting specifically extending,
correct?
Mr. Neumann. Right. So, we spoke to a wide range of
stakeholders, including practitioners, people who are opposed
to CBM and have done poorly under it, and those who have done
well under it, as well as legal scholars, and a range of
companies. So, we feel like we got a good cross-section of
views on it.
Mr. Issa. And so, I mean a yes, I reached the right
conclusion that you generally----
Mr. Neumann. Right, we did not come out with a position one
way or the other. But definitely the stakeholders had some
strong views about the benefits of CBM, but a lot of mixed
views on how it should be handled in the future.
Mr. Issa. Well, within your study, you were limited to CBM,
which is limited to financial-type transactions. So, you were
not able to ask the question of what if CBM was applied to
other areas where there are, if you will, Lucy Goosey patents
granted.
Mr. Neumann. Well, we did hear from stakeholders on that
point.
Mr. Issa. And what did they say?
Mr. Neumann. A range of them were suggesting that perhaps
that the CBM Program could be extended, for example, by just
removing the financial services part of that definition to
allow other types of patents related to business methods, or
expanded to other areas, or keep some aspects of CBM Program.
For example, the various forms of challenges and add that to
other proceedings like the inter partes review.
Mr. Issa. Well, and that brings up the final question for
each of you. The Inter Partes Review System is currently a
single sort of a system. You go in, you make your pleading
basically, and then you go through a process that is
dramatically cheaper, but not free, in which if both of you
have attorneys, and both of you defend your positions, you will
spend some money and some time.
The question is: is there any valid reason that as we are
looking at--and I happen to have a judge who is on loan to us
from the system working with us. Is there any reason that if we
are going to make this program go beyond 2020--I even-outed,
John, sorry--that we should not try to consolidate into as few
organizations as we can these procedures, including CBM. And I
would go to you first, Mr. Neumann.
In other words, purely an efficiency question of if we go
to, let's say, 2035 this is no longer a temporary or a
transitional program. So, standing on its own does it make
sense to have this here, yeah, the ex partes oppositions. In
other words, the noninter partes oppositions that go on, the
inter parte. And then, obviously, the other courts that we are
in. Is there any reason we should not try to at least cut one
court down if we are going to keep this for a long time?
Mr. Neumann. There was certainly support amongst many of
the stakeholders we spoke to do that.
Mr. Issa. Mr. Hale, I am going to be brief. Any reason that
we should not try to at least consider, if we are extending for
a long period of time, consolidating the bureaucracy involved
in this?
Mr. Hale. We are supportive of the idea of consolidation. I
mean, bringing over some of the key aspects of CBM into the IPR
process would be an excellent idea.
Mr. Issa. Mr. Cooper, you are the lone dissenter here
because we have a neutral, a for, and then yourself. Briefly,
if there were one thing that you could get out of a change at
time of extension, if there is one, what would that be?
In other words, you have already you would like to kill it,
put a stake in it and it go away, and thank you for having
existed. But, if you could just have one item what is the most
important item that BSA would say is there that you would like
to not see there going forward?
Mr. Cooper. Well, I think what we like about the review
processes that exist at the PTO generally is that we
experienced the problem of patent trolls. We have a need to be
able to oppose patents that should not have been issued. But
where we have concerns with the CBM Program in particular is
that it identifies a specific area of technology, in this case,
software-related.
Mr. Issa. Okay. So, I will take that, as I give this to Mr.
Johnson, that your preference would be we take out that
limitation of financial services, and simply make it in some
way equal to all types of patents.
Mr. Cooper. Well, no Mr. Chairman, because that would still
have it be discriminatory if you just took out the financial
services aspect of it. If you applied it across the board----
Mr. Issa. That is what I said.
Mr. Cooper. I am sorry. Then, yeah, applying it across the
board. Yeah.
Mr. Issa. Take out the limitation it apply to everyone. Mr.
Johnson.
Mr. Johnson of Georgia. Thank you. To apply the Covered
Business Method Program across the board, I guess, Mr. Neumann,
you would say that that would create cost deficiencies? It
would be cheaper for the stakeholders?
Mr. Neumann. Well, yeah. And then some of the stakeholders
also noted that the expertise of the patent judges there versus
going through the courts where the judges and juries do not
have the expertise. That was another benefit of having a
procedure that can be used as an alternative to the courts.
Mr. Johnson of Georgia. Well, now it is a fact that going
through the CBM Program does not bar one from going to court.
Mr. Neumann. That is correct. It does not.
Mr. Johnson of Georgia. So, it is an additional step that
can be costly, or that adds cost to the ultimate end which can
come about to change litigation.
Mr. Neumann. Right. Or, in many cases it resulted in
settlement or the claim being dropped, and then there was no
further litigation.
Mr. Johnson of Georgia. So, now the one-third of the cases
filed that has resulted in the patent being invalidated, are
there settlements that have taken place that are not included
within that one-third? Or, does that one-third include
settlements?
Mr. Neumann. No, that would not include settlements.
Settlements may have taken place in other cases where the
patent was not invalidated. Before it went to that point, a
settlement was made.
Mr. Johnson of Georgia. And the settlement would then
preclude litigation I would presume----
Mr. Neumann. Presumably.
Mr. Johnson of Georgia [continuing]. In most cases in
typical cases. So, what percentage of the cases were settled
along with those where the patents were invalidated? What would
be the percentage?
Mr. Neumann. I do not know that we collected that
information, because we looked at the results of the
proceedings. I can respond with a response for the record,
rather, to see if we did have that information. But that was
not included in our report, that information.
Mr. Johnson of Georgia. I think that would probably be
useful information. Mr. Cooper, you indicated that the
stakeholders that Mr. Neumann and the GAO talked to were
insufficient in terms of making the determination that there is
value in continuing the CBM Program. You take issue with that
conclusion, correct?
Mr. Cooper. I think, as you well know, in Congress as you
hear from stakeholders, as many stakeholders as possible as you
are formulating legislation, that there is an array of views on
any one issue. I think the GAO spoke to a number of parties
that had an interest in the CBM Program. But I think that if
you look broadly across the patent system, both for patent
holders and users, you would find that the vast majority oppose
having the CBM Program, and would like to see it expire.
Mr. Johnson of Georgia. So, I guess your stakeholder group
would include nonfinancial services stakeholders. And, Mr.
Neumann, I suppose yours included only financial services
stakeholders, is that correct?
Mr. Neumann. No, that is not correct. We looked at a broad
cross section of different stakeholder views, including
software companies and other practitioners who have experience
in other areas, not just financial services.
Mr. Johnson of Georgia. So, is it your opinion, Mr.
Neumann, that the CBM Program should remain and be made
permanent?
Mr. Neumann. We did not reach a conclusion on that. There
are many competing interests there and it is a decision best
left to the policymakers. What we did do is talk to a range of
stakeholders to identify what their concerns would be, either
for or against continuing the program. And many saw the value
in continuing the program, and some even suggested that there
could be changes made to further expand it. But that was not an
overwhelming viewpoint.
Mr. Johnson of Georgia. Mr. Hale, how has Ameritrade used
the CBM process to combat low-quality patents brought against
it?
Mr. Hale. Thank you for the question. We have generally
used it exactly as intended. When patents have been asserted
against us that fall into the category that it falls under the
CBM process, we have filed for petitions to initiate reviews.
And then, it turned around in the district court litigation
that initiated the issue with the patent and filed stays to
stop that litigation so that we are not duplicating efforts.
And that we are not, as intended under the CBM process, we are
not incurring additional costs for both sides. So at any given
point there is only one line of litigation, not two.
Mr. Johnson of Georgia. Thank you. I yield back.
Mr. Issa. I thank the gentleman. I believe we now go to the
vice chairman of the full committee, Mr. Collins.
Mr. Collins. Thank you, Mr. Chairman; I appreciate that.
And before I get started, there is a letter that was sent back
in 2013. But I think it reflects the position of BSA and many
others on this issue that I would like to submit for the
record.
Mr. Issa. Without objection, so ordered.
Mr. Collins. Thank you, Mr. Chairman. Again, Mr. Chairman,
thanks for holding this hearing today. And thanks for the
witnesses for being here. I think this is something that I am
eager to talk about. I think patents, and the U.S. Patent
System more broadly and to move forward to ensure that the
United States remains a beacon for innovation, and intellectual
property rights.
In talking about the Covered Business Method Transition
Program, a topic that was a source of considerable debate
before this very committee just a few years ago. Just under 3
years ago during this committee markup of the Innovation Act, I
opposed an amendment that would have extended the Covered
Business Method Transition Program.
I opposed the amendment for various reasons, but the chief
among them was that it would have extended the recently created
CBM Transition Program 5 years before it was set to expire. At
that time, we did not know what the world of patent litigation
would look like in 5 years, and we did not know much about the
program itself.
Now, we have the benefit of 3 years of information with 2
years to go before the CBM Program is set to sunset. To be
clear, I am concerned now as I was then about the potential
implications for our economy and U.S. innovation of a program
that by its nature discriminates among types of inventions.
Additionally, I remain concerned about expanding or extending a
program that was specifically implemented to address the well-
defined problem, and not intended in perpetuity.
I also want to note that the fact that the recently issued
GAO report states that the use of CBM Program has declined
since about 2015. I appreciate the input from the GAO and
relevant stakeholders about the Covered Business Method
Program. And I think that, as Congress, we have a
responsibility to review the effectiveness and efficiency and
efficacy of these programs.
I am particularly interested today in the hearing on how
CBM Program has been operating, its impact on the economy and
innovation, and arguments about whether the extension of the
Transition Program will be necessary to achieve the
Congressional intent behind its creation. Many of these issues
affecting patent litigation have also changed in the 3 years
since this committee debated the Innovation Act. And this
committee will need to consider many of those things again and
look at the issues with fresh eyes.
I expect that, ultimately, we will be best equipped to
debate the future of the CBM Program in the context of a
broader debate on the future of our Patent System, because as
we have seen every change to our Patent System has ripple
effects that impact the future of innovation and our economy.
For all of you here, especially the GAO reporting for the
testimonies given, I am not going to go back over a lot of what
you said. I think it is very, and Mr. Hale and Mr. Cooper
especially in your positions. But I do want to say this this
committee has very broad jurisdiction in this area. This is the
next step in, I think, the broad based economy for the next 40
to 50 years.
I looked forward and I appreciate the chairman having this
hearing today. I think these reports are necessary. But I want
to make sure that as I go far as a member of this committee to
make sure that our patent, our innovation system, our creative
process continues to be the place in which people want to
invest.
They want to create, they want to put their emphasis and
time because this is where the best ideas we feel like come
from. And we do not want that transferred to other countries or
other areas simply because they have chose to do a better job
dealing with, basically what I call their creative community,
that intellectual property space.
When we understand that, and I think that gives us a good
basis to go on, I believe the GAO report reflects some things
that I thought a few years ago, and some other things that I
think we can continue to work on. I do believe as we look
forward though this is something we can look at in the picture
of a bigger contextual issue of patents. And I look forward to
having that debate as we go forward.
So I want to thank you for the report. And I thank you for
the information we have. And for Mr. Hale and Mr. Cooper,
again, we have had conversations before. I look forward to
having continued conversations as we go forward. And with that,
Mr. Chairman, and in the interest of time and a wonderful
snowstorm outside, I yield back.
Mr. Issa. The Chairman yields back. We now go to the
gentlelady from California, Ms. Bass.
Ms. Bass. Thank you very much. I know votes are going to be
called soon, so I will be quick. So just a couple of questions;
I wanted to know if----
Mr. Issa. If the gentlelady would suspend. If other members
would like to go vote and come back, we could probably not
adjourn at all because there is only one vote. So if a couple
of Members would go and then when they come back if we can that
would keep us from stopping altogether. Please continue.
Ms. Bass. Okay. So this is a question that maybe all three
of you could answer quickly. If it would make more sense to
have an independent judicial process, like the district court
litigation settle patent disputes between two parties versus
the agency that I know some people have said, you know, the
agency has its challenges. And I wanted to know how many
patents challenged at the PTAB were also challenged in district
court, and maybe you could comment on this.
Mr. Cooper. If I may, so I do not have the specific numbers
about how many are challenged in court and also at the PTO. I
think, you know, representing an association that would like to
see the CBM Program sunset, we still believe that it is
important that the PTO have a good strong system for reviewing
patents that it should not have issued in the first place. I
think that is important to be there in addition to having the
ability to challenge patents in court if you are sued for
patent infringement.
So I think having both is important. Our concern with the
CBM Program is that it is effectively the government picking
winning technologies and losing technologies, and that is
probably not the best way to go.
Ms. Bass. And what do you say to that, Mr. Hale, in terms
of picking winning technologies and losing technologies?
Mr. Hale. So I think that there are two aspects to that.
One is that, first of all, it seems to have been the sense of
Congress and we do not disagree that the financial service
industry was particularly susceptible to these types of
patents; and this type of resolution mechanism was particularly
applicable. That being said, we are not opposed to having this
type of review being available to all industries.
The second, to answer your first question you asked, which
is with the CBM process in particular, every instance of a CBM
in order to initiate a CBM you either have to have been sued or
have to have threat of suit. And I believe almost all of them
were actually initiated through lawsuits. And because of the
CBM's processes stay provision, which is a very strong stay, it
actually stops the other suit, stops the district court
litigation almost entirely, so that there is only one track
going at any given point.
Ultimately, our view is that the CBM process changes the
order of consideration, and changes in some cases the person
who is making the decision. But it does not duplicate effort
because of the stay and estoppel provisions.
Ms. Bass. Mr. Neumann.
Mr. Neumann. Yeah, I would say most of the stakeholders we
spoke to, and this is a broad cross section of folks, saw value
in having cost efficient time, more time sensitive, way to have
the Patent Office reconsider poor-quality patents.
In our past work in 2016, we found that 70 percent of
patent examiners felt they did not have enough time to do a
thorough review of a patent application, which is one of the
reasons why there are some poorly written patents out there.
And so, many of the stakeholders believe that having these
processes was very beneficial to weed out some of those poor
quality patents more efficiently, and more cost-effectively.
Ms. Bass. Thanks.
Mr. Issa. The gentlelady yields back. What we are going to
do is we are going to recess. If Mr. Collins comes back here
before I do, he will pick it right back up. And the hope is
that we will get you out of here, let's say, by 4:00. So, I am
going to run to the vote and come right back. We stand in
recess.
[Recess]
Mr. Collins [presiding]. We have asked and many other
members--due to the timing there is going to be no other
questions. I will ask this, is there any other member of the
panel, I appreciate you staying, would you like to have a
brief--anything that you would like to add for this hearing for
the record? Mr. Neumann.
Mr. Neumann. No, I do not, thank you.
Mr. Collins. Mr. Hale.
Mr. Hale. No, thank you.
Mr. Collins. Okay, Mr. Cooper.
Mr. Cooper. No, thank you for the opportunity.
Mr. Collins. You have all earned great points today. That
is a wonderful closing statement. I love it. No, this concludes
today's hearing.
Thanks for all our witnesses for attending. Without
objections, all members will have 5 legislative days to submit
additional material, written questions for the witnesses, and
additional materials for the record. With that, this hearing is
now adjourned.
[Whereupon, at 3:39 p.m., the subcommittee was adjourned.]
[all]