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Statement on Senate Judiciary Committee Hearing on PATENT Act

This morning, the Senate Judiciary Committee is holding a Hearing entitled “S.1137, ‘the PATENT ACT’ – finding effective solutions to address abusive patent practices.” Below is an excerpt from testimony given by Diane Lettelleir, Senior Managing Counsel – Litigation, of J.C. Penney Corporation, Inc. J.C. Penney is a member of the United for Patent Reform Coalition:

“The retail industry represents a large contribution to the national economy. There are currently just under 3.8 million retail establishments supporting 42 million jobs that contribute $2.6 trillion annually to U.S. gross domestic product. The vast majority of the retail industry is made up of franchises and small businesses. In fact 98.6% of all retail businesses employ fewer than 50 people.[1] Abusive patentees continue to negatively impact JCPenney and other Main Street businesses. Each year, we collectively spend millions of dollars and thousands of hours of employee time fighting abusive patent litigation.”

“Many smaller retailers who lack the resources to fight patent litigation have no option but to pay the demanded settlements because they do not have the expertise or money to fight in court. This money could have been used to expand their business, hire new workers or invest in new technology. And, unfortunately, the problem continues to grow. While abusive patentees initially targeted the high-tech industry, they have expanded their focus to include Main Street businesses.”

“In 2012, for the first time, non-practicing entities (“NPE”) reportedly sued more Main Street companies than tech companies.[2] The motivation for the shift in abusive patentees targeting strategy is easy to understand. Main Street businesses that only “use” technology are easy prey because they often lack the legal resources and technical expertise to fight complex patent infringement claims. Abusive patentees take advantage of these weaknesses and strategically offer settlements at a level set below the cost of litigation. The settlements offered are not based on the value of the claimed invention in the asserted patent or the merits of the asserted claims. Faced with this calculus and having little or no understanding of the merits of the claims, many Main Street businesses are forced to pay.”

“JCPenney’s experience is similar to other retailers and provides a framework for understanding why this legislation is so important to Main Street businesses. JCPenney has been a defendant in 30 NPE lawsuits in the last six years and has had as many as a dozen active cases at any one time. In addition, JCPenney has and continues to receive threatening demand letters. None of these NPE lawsuits or demand letters relates to the items we sell; every claim relates to the technology we use to operate either the brick and mortar business or the ecommerce business. NPEs frequently seek tens of millions of dollars in damages in these cases.”

“In parallel to the direct cost of defending patent infringement allegations, the steady stream of frivolous assertions has disrupted JCPenney’s adoption of innovation from small inventors and small technology companies. This dynamic has caused a shift in how JCPenney and many other Main Street businesses approach the adoption of new technology. JCPenney has a storied history as a driver and an early adopter of new technology. In the past, JCPenney provided many opportunities for small companies to pilot new technology in a limited manner. If the technology proved successful a small company had the potential to have that technology implemented more broadly. This was a win for JCPenney, our customers and for small technology companies providing new technology.”

“Unfortunately, the cost to defend or settle abusive patent lawsuits has forced JCPenney to shy away from adopting technology offered by small inventors and small technology companies. JCPenney’s shift away from start-ups and small technology companies has not been driven by concerns that the new technology actually infringed any patent. In most cases, the start-ups or small technology companies themselves own patents covering aspects of the technology they offered to JCPenney. JCPenney’s shift away from start-ups and small technology companies is driven by the risk and expense of abusive patent litigation.”

“I can confidently speak not only for JCPenney but also for similarly situated Main Street businesses when I say that Congress must step in to curb the abuse. This targeted legislation will address the existing asymmetries, and strengthen and restore a balance that has been missing for years in abusive patent litigation. While I believe all the provisions are important to curb these abusive suits I will focus in particular on three areas: demand letters, heightened pleading and customer stay.”

[1] NRF, The Economic Impact of the U.S. Retail Industry, https://nrf.com/resources/retail-library/the-economic-impact-of-the-us-retail-industry. [2] Chien, Colleen V., Patent Trolls by the Numbers (March 13, 2013). Santa Clara Univ. Legal Studies Research Paper No. 08-13. Available at SSRN: http://ssrn.com/abstract=2233041.

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