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Today, before the United States Senate Consumer Protection Subcommittee, Cisco SVP and General Counsel Mark Chandler had the opportunity to talk about a new and troubling kind of scam dressed up with language such “patent infringement” and “innovation.” As he shared with the Subcommittee, the perpetrators of this scam are sending out thousands of threat letters to small businesses and consumers, and file lawsuits in the hope of a big payday, not based on the merits of the case, but on the fears of victims who just want to make a problem go away.

These victims — mom and pop stores, hospitals, pharmacies, car dealers, — aren’t manufacturers of products, they’re simply users, like you and me.

Chandler’s full testimony can be read on the U.S. Senate Commerce Committee website here.

His oral testimony as offered to the committee is in full below:

Madam Chairman, Ranking Member Heller, members of the Subcommittee,

My name’s Mark Chandler, and I’m Senior Vice President and General Counsel of Cisco.

Today I will describe our experience with a new kind of scam based on a formula that’s as old as the hills, but dressed up with the language of “patent infringement” and “innovation”.

The perpetrators send out thousands of threat letters to small businesses and consumers, and file lawsuits in the hope of a big payday, not based on the merits of the case, but on the fears of victims who just want to make a problem go away.

These victims — mom and pop stores, hospitals, pharmacies, car dealers, — aren’t manufacturers of products, they’re simply users, like you and me.

I’m involved as General Counsel of Cisco because I want to defend my customers. But we need your help in bringing a little sunshine to this dark corner of the patent system.

Cisco was founded 30-years ago to build equipment so that disparate computer systems could communicate with each other.   Today we’re the worlds’ largest manufacturer of devices that makes up the backbone of the internet, and we also build Wi-Fi, telephone and video systems.

We employ 36,000 people in the US and indirectly provide jobs for hundreds of thousands more.   Our products are used directly or indirectly by billions of people around the globe, and are in tens of millions of American homes and businesses.

We hold over 10,000 individual US patents, and we appreciate that your colleagues on the Judiciary Committee are tackling issues related to the patent system.

But their efforts to make the litigation process more fair won’t affect what I’m describing today.

Let me tell you a story that unfortunately is not unique, as has been well documented by others on this panel, including EFF, which has collected many examples:

Our story begins when a lawyer named Noel Whitley bought patents related to Wi-Fi from a great American chip company, Broadcom, and created a entity that he cynically named “Innovatio.”

Broadcom, for its part, didn’t want the patents anymore since their intrinsic value was coming to an end – they were near expiration, had been broadly cross licensed to other chip companies, and were subject to binding contracts requiring licensing on fair terms.  But Whitley was not deterred.

Whitley and his lawyers, at the Niro firm in Chicago, which specializes in this game, sent 14,000 threat letters to small businesses, cafes, bakeries, inns and hotels, a children’s health clinic — basically anyone that might use Wi-Fi in their place of business.

Did he tell them what specific products might infringe? Nope. Instead, his lawyers just wrote:

“I represent an individual who has suffered injuries as a result of your company’s business,” and claiming that the Innovatio portfolio covers all Wi-Fi usage.

Did his lawyers disclose that a huge proportion of Wi-Fi devices were already licensed and no more could legally be collected? No.

Instead they told them thousands of companies had already paid Innovatio, and referred to almost a billion dollars in royalties, without letting on that they were talking almost exclusively about Broadcom cross licenses that had little or nothing to do with these particular patents.

Did they tell them the patents related to industry standards and had to be licensed on fair terms? No.

Instead they told them, and again I quote, “We wish to license your company at a very affordable rate—far less than the cost of patent litigation. I can quote you a rate of less than $3000 per location” – this for patents that a court determined were worth pennies per chip.

And did they tell them that the manufacturers like Cisco, were eager to defend them? No.

Instead they wrote that the equipment manufacturers  “have not stepped in to defend any of their users. This means we can still sue your client and they cannot expect equipment manufacturers to aid in their defense.”

Finally, for those who had the temerity to resist, they enumerated thousands of pages of documents to be reviewed by counsel, meaning a mountain of legal fees.

Sadly, this is not an isolated incident, as Attorney General Bruning can tell you, and as I’ve described in my written statement, but a dangerous trend.

Let me close by suggesting four simple steps that would make it much harder to carry out these schemes:

First, require anyone sending more than 10 patent demand letters to someone who is NOT a manufacturer or reseller of the accused product to file the letters in an on-line registry at the FTC.

Second, require them to include a list of model numbers which are believed to infringe, the fact that the manufacturers may be required to defend, and contact information for the manufacturers.

Third, require any such letter to include the names of the real entities or individuals which own the patents.

And fourth, require the letters to include a list of all previous licenses and whether the patents are subject to the special licensing rules that apply to standards.

We aren’t asking you to change substantive patent law.  But these simple steps will provide a basic level of transparency to protect innocent end users.

The paycheck I get every other week says “Cisco” on it, but every cent comes from my customers.  That’s why I’m passionate about making sure they don’t get ripped off by charlatans dressed up as innovators when they trust us to supply them with products.

And, Madame Chairman, if the predators are forced to come to me once they ‘ve disclosed what they’re after, I can guarantee they will get a fair fight.

Thank you.

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