Controlling the Trolls: Federal, State, and Private Actions to Curb Patent Troll Activities (Part 1)

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Beware: Patent Trolls are on the loose.

In an ideal world, patents provide an avenue for individuals and businesses to earn a reasonable rate of return on their ingenuity and diligence.  Unfortunately, the patent system has flaws that have been exploited by some for financial gain unrelated to their own efforts.  These entities, referred to as Non-Practicing Entities, Patent Assertion Entities, Patent Privateers, or, more commonly, patent trolls, have engendered tremendous animosity through their use of extortionist tactics to extract licensing fees from businesses.

For the uninitiated, patent trolls purchase patents, apply for and obtain patents, or enter into agreements to enforce the rights of patent owners, and then use these patents to extract license fees by threatening other businesses with a lawsuit.  Typically, the license fees are in an amount that makes defending a patent infringement claim, even on a very questionable patent, a poor business decision due to the cost of litigation.

The federal government, the judiciary, private industry, and, more recently, state governments, are all involved in trying to curb patent troll activity.  The challenge is curtailing the vexatious practice employed by patent trolls without affecting proper licensing and patent enforcement practices of businesses, individual inventors, and universities.  Over the next several posts, I’m going to summarize recent efforts to address patent troll activity, discuss the pros and cons, and theorize as to what additional steps could be taken.

Since regulating patents and patent law is the primary domain of the federal government, it is fitting to start there:

Federal Activity

  • Immunization of Purchasers of Commodities
    • During a hearing of the House Subcommittee on Courts, Intellectual Property and the Internet, Congressman Blake Farenthold (R-TX), indicated that federal legislation could be proposed to immunize end users of certain types of products from patent litigation.  For example, if a business buys a device, such as a computer, scanner, etc., and is using it in its intended way, this business could not be sued for patent infringement – although the manufacturer could be.
      • Pros
        • Limits a patent troll’s ability to go after “small fish” that are less likely to fight a claim of infringement.
        • Allows businesses to worry less about the potential infringement liability associated with their purchases
      • Cons
        • It will be difficult to determine which products are “commodities” and thus fall under the exemption
        • Methods or processes (i.e., most software patents) are not commodities
        • Limits the ability of parties to negotiate on indemnification for patent infringement, which may increase costs of products as manufacturers take on increased potential liabilities
        • Manufacturers may claim that their products are not “commodities” in order to avoid liability
  • SHIELD Act
    • The Act implements a new “loser pays” rule, requiring certain patent-owning parties to pay the legal costs of the other party if a court finds no infringement or that the patent is invalid.
    • The Act also requires a bond from the patent owner.
      • Pros
        • The “loser pays” rule may limit the pool of entities a patent troll is willing to attack.
        • Bond requirement will limit suits brought by trolls because few have the collateral that will likely be required in order to secure the bond.
      • Cons
        • The Act will offer no real protection to smaller businesses because they are less likely to have the means to litigate in the first place.
        • A patentee doesn’t have to bring suit, and patent trolls often avoid it – thus, an entity under attack from a patent troll may have to bring a declaratory judgment action.
        • If a business is not the “original assignee” of a patent (or falls under another exemption), the business would be subject to the Act if it asserted the patent against another entity – this could diminish the value of patents as saleable assets.
        • In order to recover legal fees as required by the Act, the defendant has to win in some respect, but statistically there is not much difference between the success of suits launched by patent trolls and those initiated by others.
    • Other questions are found here.
  • Patent Quality Improvement Act
    • This Act, proposed by Sen. Chuck Schumer (D-NY), proposes a process by which all patent cases will be vetted by the USPTO prior to being allowed to go forward.
      • Pros
        • May limit which patents a patent troll is willing to assert and against whom – if the patent has questionable validity, the patent troll may be more likely to only go after smaller entities to avoid the possibility of litigation.
        • May be an inexpensive way to avoid using one of the current post-issuance review processes available at the USPTO while getting a similar result.
        • If the USPTO’s “broadest reasonable construction” for patent claims is used, this could invalidate more patents than other interpretations.
      • Cons
        • As with the Shield Act, this bill won’t apply unless a lawsuit is filed; it may be necessary to file a declaratory judgment action in order to get USPTO review.
        • As reported on CNET, “‘The problem with a system like this is that, in all likelihood, most patents reviewed will survive and actually become more formidable as a result,’ says Brian J. Love, an assistant professor at the Santa Clara University School of Law.  ‘When patents do survive additional scrutiny, their owners then have a strong rhetorical argument: this patent is so strong it survived PTO scrutiny not once, but twice…thus, under the guise of eliminating bad patents, we often end up making them more troublesome.’”
        • The USPTO can only determine issues of validity of the patent, not issues of infringement.  Thus, a lawsuit by a troll may still proceed even if it is facially illegitimate so long as the patent is valid

In sum, while the federal government is engaged with this issue, it appears that the current legislation under consideration will not do much to assist small- to medium-sized businesses from the ire of patent trolls.  However, as I shall explain later, these changes, if coupled with others, may form a more comprehensive scheme to assist all businesses.

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High Hurdle for State Laws to Curtail Patent Troll Activities

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Patent TrollThe question of how to limit the activities of patent trolls (aka patent assertion entities (PAEs) or non-practicing entities (NPEs)) has been a hot topic over the past several years.  The discussion of options for addressing the issue at the federal level continue, but in the absence of an overarching federal solution, states have been looking for ways to address the problem through state law.

Here in Vermont, for example, the Legislature is considering a bill (S.7.), to amend the Vermont Consumer Fraud statute to defines the criteria used to establish “bad faith” by a patentee sending demand letters (letters indicating that infringement may be occurring) to a potential infringer (see the full text of the bill here).  The legislation is focused on curtailing certain types of demand letters and the abusive practice that many patent trolls engage in, especially with small to medium sized businesses that may not have the financial means and wherewithal to challenge bald and possibly baseless claims of patent infringement.

Of course, seeking state solutions to a problem that is inherently a federal issue is always tricky because state laws in this area may be a) preempted by the broad scope of federal patent law and b) unconstitutional based on the general rule that a person has a right to redress of grievances before the courts, which in this case, includes the right to send demand letters or other notices of possible ensuing litigation so long as those letters are not sent in “bad faith.”  State laws that intrude upon this area run the risk of being held invalid when challenged in federal court.  In terms of patent preemption, the Federal Circuit has determined that in order for any state law tort claim (e.g., tortious interference, unfair business practices, etc.) to exist against a patent asserter, the assertion of the patent upon the potentially infringing party must be “objectively baseless” – which essentially means that a reasonable person would not have believed that they would have had a chance of a positive outcome in a lawsuit.  Unfortunately, the current draft of the Vermont legislation fails to directly address this issue.

Where the current draft of the bill falters is in its omission of language that requires a court (federal or state) to first determine whether or not the patent asserter has made an objectively baseless claim of patent infringement.  The bill does include objective criteria of baselessness, such as if the patentee knows its patent is invalid (see, sections (b)(6) and (b)(7) (and possibly (b)(8)(B), but that would be a stretch in my view), which have previously supported a finding of objective baselessness.  However, the present bill would be stronger, and more closely comport with federal law, if these criteria, individually, were required findings of the court, not just potential basis for determining that the demand letter was served in bad faith.  The law should also include an additional criterion giving broader authority to the courts to account for other factual situations, such as, “other indicia of objective baselessness” or “other indicia that no reasonable person would have considered their potential case to have merit.”

If the current bill goes forward, how is this most likely to play out?  In the past, the Federal Circuit has been quick to look to the definition of “objective recklessness” for guidance in interpreting the meaning of “objective baselessness,” and this has been an increasingly high burden for parties to meet.  Thus, I could see a patent troll, who is hailed into state court, quickly filing a counter claim/suit and having the case removed to federal court, and then successfully using the Federal Circuit’s definition of objective recklessness (which also covers frivolous suits and attorney’s fees under 35 U.S.C. 285) to avoid any state law claims.  Depending on the facts, this could make the law fairly useless if Vermont state courts apply the caselaw set forth by a Vermont district court and the facts in that case are highly supportive of a finding of bad faith.

In the end, the best part of this bill may be the ability of the Attorney General’s office to go after trolls. The Attorney General’s (AG) involvement ups the ante for any patent troll, flips the balance of power in the typically patent troll situation (there by discouraging the basic strategy of most patent troll), and importantly, can serve to insulate Vermont businesses from the claims made by patent trolls because there would be no direct recourse by the patent troll on a potential infringer.  Of course the AG would still need to meet the standard of “objective baselessness” – but the deterrence factor alone may  have a valuable dampening effect on troll activity in Vermont.  It could be strengthened further if the statute required the AG’s office to investigate any complaints of bad faith patent demand letters served on Vermont businesses.

Supplementing federal law with clearly defined and narrow state legislation make sense, and focusing on expanding the remedies and claims available under the Vermont Consumer Fraud statute is a good approach. But the current legislation needs some important revisions before it can serve as an effective deterrent of bad faith patent troll claims.  I will outline some other steps that would complement this approach in future posts.

Interested in Patents? Join me at Norwich Univ. on Wed., May 1.

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