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Joint | May 21, 2014 | Chamber | Appropriations commerce meeting

Full MP3 Audio File

Good morning, everyone. Welcome to the House Commerce Committee meeting. If members would suspend conversations and take their seats, we will get started. I would like to recognize our Sergeant-at-Arms today. We have Bob Rossi, Doug Harris, Young Bay, Warren Hopkins, David Collins and Patrick Mason. Thank you for helping us out today. We also have four pages with us today. Pages, when I announce your name, if you will wave to the crowd so they can see you. Matthew Anthony from Wake County, sponsored by Representative Malone; Richard Baker from Pender County, sponsored by Representative Millis; Hannah Bowen from Cleveland County, sponsored by Representative Tim Moore; and Rodney Strickland from Cumberland County, sponsored by Representative Glazier. We also have members of the committee staff which will be available for the members to ask questions. We have Jennifer Munt, Greg Roney, Dan Edefa, and we have my Clerks here are Regina Irwin, we have Cameron ??, the intern serving in my legislative office, and we also have Lisa Kennedy to help as well, so thank you for helping us today. We’re going to start off with SB 294. Jennifer has to go to another committee and we’re glad that she’s spending some time with us today to lend us her expertise on this issue, and I will recognize Representative Conrad to help present SB 294 on behalf of Senator Parman. Representative Conrad, you’re recognized. [SPEAKER CHANGES] Thank you, Mister Chairman. This Bill passed the Senate during the long session very easily. I believe there was only one negative vote. Our current Post-Construction Storm Water Statutes address traditional storm water projects where you can manipulate the water runoff to one or two areas of the property, such as in a storm water retention pond when you have a large, impervious surface, and of course the properties are contiguous so it’s easy to comply with the statutes. The paragraph which you see added on line 31 of the Bill addresses linear projects, which would be roads, or particularly in this instance greenways, which are built in a more confined area like a right-of-way or an easement, where either it is impossible to comply with the current statutes or either it’s cost-prohibitive to comply because of the restricted area, and also you’ve got hills and valleys, and when you build greenways in roads. What this would do would be to allow municipalities which are allowed to issue post-construction storm water permits, or private developers who would then be turning over the completed project to either the municipality or the state, to access the North Carolina Department of Transportation Best Management Practices, their toolbox. Now when this was passing through the state Senate, the NCDOT was updating that toolbox. I’m not sure that it’s completed, but it would be the current Best Management Practices. There was a fiscal note done. There is no fiscal impact to the state or the DOTs, as they are not the ones issuing these storm water permits, and they did have a note on there that municipalities would see cost savings if they are allowed more latitude in implementing strategies for storm water design. This latitude in choosing the storm water design is similar to the DOT’s current practices. I think this Bill falls in line with many of the measures that we’ve taken over the last year with regulatory reform, where we want to have a little more flexibility, a little more common sense, and hopefully save the tax payers money. If you do have any real technical questions on storm water control, I do have an expert here. Mister Chairman, Keith Huff from Winston-Salem, and also a Representative from a municipality, Winston-Salem, who is allowed to issue these storm water permits, Angela Carmen is the head attorney from Winston-Salem. So if you have any questions for them as well, but certainly hope you will pass this out of Committee. [SPEAKER CHANGES] Thank you, Representative Conrad. Further discussion, further debate on SB 294? Representative Robert Brawley. [SPEAKER CHANGES] You’re headed for a motion for ?? report? [SPEAKER CHANGES] Yes Sir. [SPEAKER CHANGES] I move that we give SB 294 a favorable report. [SPEAKER CHANGES] Representative Brawley moves SB 294 be given a favorable report. All those in favor, say “Aye”. [SPEAKER CHANGES] Aye. [SPEAKER CHANGES] All those opposed, say “No”. Ayes have it. Thank you Representative Conrad. I will now let Representative Moffett take over because I’m going to present the next bill.

Members of the next bill on our agenda is the Patent Abuse Bill, otherwise known as the Patent Troll Bill. Chairman Murry, you're recognized to present the bill. [SPEAKER CHANGES] Thank you Representative Moffitt. It's a pleasure for me to introduce subject matter that I would expect not very many people to have on your radar screen but it's an exceedingly important issue for innovators in our state. This is an issue that deals with abuse of patents. There are some enterprising individuals that purchase patents that are not what we call non-practicing entities or NPEs. They purchase the patent and then they litigate that patent against individuals who have, in my opinion, deep pockets and the ability to settle out of court before it goes to full-blown litigation. [SPEAKER CHANGES] Mr. Chairman. [SPEAKER CHANGES] Chairman Murry, will you suspend? [SPEAKER CHANGES] I'm sorry but, we haven't voted to have the PCS before ??. [SPEAKER CHANGES] That is appropriate. [SPEAKER CHANGES] Thank you very much. [SPEAKER CHANGES] We have a motion to have the PCS before us. All in favor say aye. [SPEAKER CHANGES] [together] Aye. [SPEAKER CHANGES] That's actually a good transition because the proposed committed substitute the original bill as followed has criminal penalties in it and we have removed that from the PCS. So, that's an important note to make sure that you know that this is about civil litigation. It doesn't have criminal penalties. So, thank you for, thank you for discussing the appropriate bill. We have worked with several stakeholders. North Carolina Technology Association, SAS, North Carolina Bankers Association. We've worked with FARMA. This basically deals with technology issues. It doesn't deal with pharmaceuticals and so the patent issues surrounding drugs aren't addressed in this bill. We have worked with major corporations like Caterpillar. They raised some issues about this legislation and so we've worked with them and so I think we're getting-. If we're not a consensus, we're 90% there. This bill does have to go to Judiciary B as well. We'll get a thorough review I'm sure, by our good friends in the Judiciary Committee. But, the reason why it's before Congress today is because this does impact innovation in our state. SAS has litigated patent control cases and it's cost them well over $8 million in a single case. And, we do have representatives from SAS here, including the general council that can help address specific issues if you want to learn enough. I've talked with First Citizens Bank who have addressed major issues with patent trolls and so I think this is a step in the right direction. There's about 23 states that have introduced the same legislation. U.S. House of Representatives has passed legislation. Representative George Holding. Congressman Holding has worked on this bill and it's kind of stalled in the Senate and so the advocates for patent troll litigation have gone state-by-state to try to address this issue at the state level. So, it addresses basically unfair and deceptive trade practices by a non-practicing entities who execute patents against a legitimate business. So, with that, I will gladly walk through the legislation. It's relatively straightforward. Because it basically deals with bad faith action. And, that's clearly spelled out and if you have any specific questions about the legislation, I'll gladly go through it. Dan ?? been extremely helpful in helping us write this legislation with the stakeholders. And, with that I will open it up to any specific questions about the legislation. [SPEAKER CHANGES] Thank you Representative Murry. Representative Robert Brawley. [SPEAKER CHANGES] Yes, sir. Question Representative Murry. I like the concept of the bill but I thought the law currently the losing party has to pay legal fees anyway. Is that not? [SPEAKER CHANGES] We don't have a loser-pay system in North Carolina. What we do have though is for unfair and deceptive trade practices. If you are, and this broadens that to specific patent troll situations for unfair and deceptive trade practice you are liable for treble damages. Which means if you have $1 million worth of damage, $1 million worth of actual damages, because it's unfair and deceptive, we triple that to three million dollars and then you add attorney's fees to that. This expands that unfair and deceptive trade practice to specific situations where it's a patent abuse litigation so that it expands that. [SPEAKER CHANGES] Representative Torbett. [SPEAKER CHANGES] For motion Mr. Chairman. [SPEAKER CHANGES] Please hold your motion. Do we have any additional questions for Representative Murry from members of the committee? Representative Blackwell. [SPEAKER CHANGES] I have a couple of questions if I may. I'm trying to read the summary that we just got. At the end of the discussion of current law, assuming I've got the right summary, the one dated May 20. Is that the one I assume that relates to the PCS. [SPEAKER CHANGES] Yes, sir.

It says that objective baselessness is not the standard for the state court action that would be implicated or provided for in this statute in the PCS, and therefore the argument could be made that this legislation, that is the PCS, would raise a problem of federal preemption. And I’m just wondering what the thinking is on that. [SPEAKER CHANGES] Preemption, in general, patents are a federal issue. But because this legislation doesn’t deal with the veracity of the patent itself. It’s not whether the patent is a valid patent; it’s whether you have a valid claim against that patent. Federal issues center around the validity of the patent, the veracity of the patent itself. This legislation seeks to remedy a situation where you do not have a valid claim to the patent at all. And you’re still filing a claim asserting your patent rights on a basically on a situation where you don’t have a valid claim. So that’s the line of demarcation. We’re not talking about the veracity of the patent. That is a federal role. That’s why we have a federal patent office. It’s in the constitution. It’s one of the things that separate America from the rest of the world. This deals with the veracity, the ability for a claim, a claim it, to have a valid claim against a patent. This is why it falls unto the unfair and deceptive trade practices round. [SPEAKER CHANGES] Follow up if I may. Actually it’s a different question. You mentioned the example of assassin first citizens , is it the opinion that this statute had it been in place would have protected them and potentially avoided those things? Or does it not really solve their problem. Are they simply examples of abuse, but this is not really going to change that. [SPEAKER CHANGES] Mr. Chairmen, at your indulgence could I ask the general counsel from SaaS to help address that question? I’ve talked to them plenty enough on the phonel. I think they would wish this legislation to be in place. But I’ll let you answer that question directly. [SPEAKER CHANGES] Thank you ?? Murray. If you could identify yourself for the record. [SPEAKER CHANGES] I’m John Boswell. I’m Chief Legal Officer at SaaS. SaaS is a computer software company based in ??, and it has its world headquarters here in the triangle. To answer the specific question, had this legislation been in effect , it would have given us a remedy that we didn’t have otherwise. The case that Representative Murray refers to. We were sued in the eastern district of Texas. The patent was invalid. The case was dismissed on summary judgment, but by the time we could get there we had to spend over eight million dollars. We got an award of cost, which was only a few hundred thousand dollars, but the entity that sued us only had eight hundred dollars in assets. So it was a ?? victory to say the least. This bill would have allowed us to bring a claim against the people behind the actual suit. Who had previously collected eighty-five million dollars in a shakedown of other companies before they sued us. So they collected eighty-five million dollars but there was no money left in the entity that sued us. So although we got an award of cost not a reward of attorney’s fees, but at least an award of cost. We still couldn’t even collect that. So the idea behind this legislation is to level the playing field so that when these shell companies are being used to attack North Carolina businesses, it gives North Carolina businesses an opportunity to have some arrows in their own quivers. [SPEAKER CHANGES] Thank you Mr. Boswell Any questions for Mr. Boswell from members of the committee? Representative Blackwell. [SPEAKER CHANGES] Yes, one follow up. In the case of the statute that’s before us the purposed statute, is it the provision in there that I think talks about being able to go after interested parties other than the I guess the actually plantiff that you’re saying would have allowed you to go after the people with the deep pockets? [SPEAKER CHANGES] Mr. Boswell [SPEAKER CHANGES] Yes. That is the provision I am referring to. But there’s also a provision, I mean our case was an unusual case because it was so expensive. But it was one of the tactics that these none practicing entities used to try to make the litigation as expensive as possible to get you to settle. Because the real

The real value of these patents is not that the patent is going to be ultimately enforced against you, because patent trolls lose about 90 percent of the cases that actually go to judgement. The value in the patent is simply that they make it so expensive, time consuming, and distracting. We can't afford, every time we get sued, to spend eight million dollars to prove that we're right. Eventually, you give up and you just settle the cases. That's the paradigm we're trying to change in North Carolina so that patent trolls will think twice before they just start suing companies or threatening to sue companies with patents that aren't valid or probably aren't valid. That's the provision, but also the provision of requiring them to post a bond we believe will also do a lot to modify the behavior that we're seeing. It's not just SAS by the way, and it's not just large companies. We have many small companies that are suffering this same abuse. [SPEAKER CHANGES] Thank you Mr. Boswell. Representative Sane. [SPEAKER CHANGES] Thank you Mr. Jared. Representative Murray, what are other states doing to address this issue or are we at the forefront here in addressing this issue, and if that's the case, in your opinion, does this make us a better environment for this proposed law change, a better environment for companies to locate here? Is this at the forefront there as well? [SPEAKER CHANGES] That's part of it. I think we are on the forefront a little bit, and when I started working on this legislation, only Vermont and Idaho had passed the bill. Since I've started working on the legislation at least two or three other states have passed it and another 20 states have introduced it. We would be one of the first 10 states in the country to pass this legislation if we act with all deliberate speed that we generally do in a short session. I think this does protect innovators. It rewards innovation by letting innovators know that you've got protection in our courts if you decide to innovate in our state whether you're a small company or a large company. I know the companies that are here appreciate it, and I think it could be a tool that we can use from an economic development perspective to make sure innovators know that they've got a warm place to do business and receive protection in our court system as well. [SPEAKER CHANGES] Follow up representative Sane? Representative Jeeter. [SPEAKER CHANGES] Thank you Mr. Chairman. Two questions for you representative Murray, and perhaps the general counsel from SAS can answer one. First question is is this not a avenue to make it easier to pierce the corporate veil? I mean is that some degree what we're talking about here? [SPEAKER CHANGES] That is. You can pierce the corporate veil right now. For anybody that's, I'll explain that term for our friends that didn't go to law school. If you form an LLC, that protects your personal assets from litigation in general. If you co-manger your funds and you don't have really a separation between the LLC and your personal funds, then you can do litigation, pierce the corporate veil. Current law, without this bill, you can pierce the corporate veil for bad action. This just expands that in my opinion to specific situations surrounding patent abuse. You can pierce the corporate veil right now for unfairness after trade practices. This just makes it more specific to patent troll situations. [SPEAKER CHANGES] Follow up? [SPEAKER CHANGES] Yes please, Mr. Chairman. I appreciate, I just want to make that clear, Representative Murray, your answer. On page five of the bill, one of my concerns, and I agree wholeheartedly with the premise, is on line 30 on page five of the bill, "The bond could be up to $500,000." My only concern with this legislation would be that we don't get in a situation where the pendulum swings too far the other way. Was there a thought process of why 500, is that based on the other states? [SPEAKER CHANGES] Well, it's up to $500,000, and that's based on the patent. That's the sliding scale that you're talking about. If the patent isn't worth $500,000, I can't see any judge setting a bond for $500,000 for a $10,000 patent. That's the thought process, and I think it...there are patents that are worth a lot more than $500,000, and so I think that's...it's consistent with other states, and I don't think it's going to prevent litigation, prevent value, prevent litigation that's valid as well. I think it's a good start. I'd be willing to entertain negotiations on the bond. That's not the staking point of the legislation. If we need to work on the bond issue, we can do that. [SPEAKER CHANGES] Representative Starns.

Thank you. Well this is a relatively new law in America. You said Vermont had passed it and maybe a handful of other states, but has it been on the books long enough in another state to where you can determine if it’s been an effective tool in guarding against some of these lawsuits? [SPEAKER CHANGES] I think that the hope for the community that’s interested in this legislation was that Congress would act, and half of Congress has acted, and so this is better addressed, honestly, at Congress, and so we’re trying to remedy a situation by Congress’ inaction, and so it’s an interesting question. Directly, no, this law has not been enforced or been on the books, so to speak, in other states long enough to determine its effectiveness, but I can tell you the more states that pass it, there will be more of a chilling effect in this behavior, and it will stop bad action. The day that Congress had the Bill, I think it was before Committee – either before Committee or it was on the House floor in congress – it was the largest number of patent abuse cases filed in the Eastern district of Texas in the past… forever. I mean there was literally hundreds of patent cases filed the day before the vote in Congress on this legislation. I may not have the specific facts right, but this legislation will top bad behavior because when we are advancing this legislation, the bad behavior ramps up. [SPEAKER CHANGES] Any additional questions from members of the Committee? Representative Floyd? [SPEAKER CHANGES] My question is on page 5, line 34 C, and it has “30 days”. Is that normal, or…? [SPEAKER CHANGES] Yes. So if the person assess… going after the patent – if the patent troll or the plaintiff in this case fails to pay the fee, then it’s paid out of the bond, and so that’s… paying a fee in a timely manner is an important… we want to make sure that all court fees are paid in a timely manner because that’s an indication that you’re not serious about the litigation if you’re not paying your court fees, and so 30 days is a reasonable timeframe. Did you want to go shorter? [SPEAKER CHANGES] Follow-up? [SPEAKER CHANGES] Follow-up. My question is that is that normal? Is 30 or 60 days…? [SPEAKER CHANGES] My recollection on several proceedings, 30-day fee filings is pretty normal. It’s pretty normal, and I’ll defer to any other practicing litigates who would like to answer that question more directly. What do you think, Dan? Is that normal? [SPEAKER CHANGES] Mister ??. [SPEAKER CHANGES] I don’t the answer to that but I can look into it. [SPEAKER CHANGES] But that’s… follow-up. [SPEAKER CHANGES] Follow-up. [SPEAKER CHANGES] It will hold up the process, but if we could look into it… [SPEAKER CHANGES] Sure. I don’t think 30 days is out of the ordinary, but 30, 60, 90, those are all normal dates within the litigation scope, but at the end of the day, we want to make sure that if you’re serious about this litigation, you need to be paying your court fees in a timely manner, and that’s the purpose of this section. [SPEAKER CHANGES] Mister ??, if you could get us that answer and circulate it with the Committee. Any additional questions from members of the Committee? Committee will suspend for a moment. Representative Torbett, you’re recognized for your motion. [SPEAKER CHANGES] Thank you, Mister Chairman. I would move for a favorable report to the PCS of HB 10-32, unfavorable to the original. [SPEAKER CHANGES] We have a motion before us, favorable report for the proposed Committee substitute for HB 10-32, unfavorable to the original, with a referral to Judiciary B. All in favor, say “Aye”. [SPEAKER CHANGES] Aye. [SPEAKER CHANGES] All opposed? Motion is adopted. Any additional comments or questions from members of the Committee? No additional comments before us, we stand adjourned.