Senate Legislation Update -- The Commerce Committee Gets in the Act

\ Washington - Capitol #2Last Thursday, Sen. McCaskill, along with Sen. Rockefeller, introduced the "Transparency in Assertion of Patents Act" (S. 2049).  Of course, several other bills are currently pending in the Senate that have been introduced by such politicians as Sen. Leahy (S. 1720), Sen. Hatch (S. 1612), Sen. Cornyn (S. 1013), and Sen. Schumer (S. 866).  What sets the current bill apart is that it was referred to the Committee of Commerce, Science, and Transportation instead of the Judiciary committee.  This may be due, in part, to the fact that the McCaskill bill is directed exclusively to abusive demand letters, with enforcement provisions directed to the Federal Trade Commission ("FTC").  However, the Leahy bill also contains a demand-letter provision, and also provides the FTC with enforcement power.  It will therefore be interesting to monitor this newly introduced bill to see how it will be reconciled, if at all, with the other pending Senate bills.  The McCaskill bill was scheduled for mark-up today, March 5, 2014, but that was postponed, likely until next week.

Of course, the difficulty with any bill aimed at the sending of demand letters is that the First Amendment rights of patent holders need to be taken into account.  Congress cannot simply make the practice of sending such letters, without more, a judicial cause of action.  More importantly, the sending of such demand letters is an essential part of our patent system, allowing patent holders to put alleged infringers on notice and, ideally, facilitating licensing activity between the parties.  Care must be taken, therefore, to ensure that legitimate, non-abusive demand letters are not negatively impacted by any legislation.

On the other hand, curbing abusive demand letters is one of the only new legislative proposals that would impact pre-litigation activity.  Such controls are essential, the anti-troll activists advocate, because many so-called "trolls" never end up in a courtroom.  Instead, the argument goes, their main objective is to "shake-down" as many companies and individuals as possible, obtaining quick settlements because accused infringers are motivated to avoid costly litigation.  If true, then some legislation impacting demand letters should be necessary if the "patent troll" problem is truly going to be addressed.

The Innovation Act, passed by the House last December, struck an appropriate balance.  It was first made clear that the "Sense of Congress" was that the sending of purposely evasive demand letters was an abuse of the patent system.  Importantly, the redress was narrowly tailored to the perceived problem.  If a patent holder is found to have omitted certain essential facts from a demand letter, including the asserted patent and accused instrumentality, that same party could not rely on the demand letter as evidence in a willful infringement charge.  In other words, if the letter does not put the accused infringer on notice, it cannot be relied upon to establish that they had actual knowledge of the patent or that they might be infringing the patent.

The Patent Transparency and Improvements Act (S. 1720), introduced by Sen. Leahy et al., takes a different tack, providing that "[i]t shall be an unfair or deceptive act or practice within the meaning of section 5(a)(1) of the Federal Trade Commission Act (15 U.S.C. 45(a)(1))" to engage in the abusive dissemination of demand letters.  Specifically, it will be considered abusive if the patent holder (1) falsely threatens administrative or judicial relief, (2) the assertions lack a reasonable basis in fact or law, or (3) the content is likely to materially mislead a reasonable recipient.  However, just what constitutes a threat remains unclear.  It appears that Sen. Leahy had identified a particular "troll-like" behavior that he wanted to curb, but his proposed solution could end up impacting the legitimate assertion of patent rights.

Sen. McCaskill's bill is very similar to the provision in S. 1720.  First, the bill would require the FTC to "promulgate rules to prohibit unfair or deceptive acts and practices" in the abusive sending of demand letters.  The actions that would constitute unfair or deceptive assertion are the same as in the Leahy bill.  However, the McCaskill bill outlines just what information a demand letter should contain: (1) each patent and asserted claim; (2) a detailed description of the accused instrumentality; (3) a detailed description of the alleged activity; (4) notice that the recipient has the right to have the manufacturer defend against the alleged infringement; (5) information about any party with a direct financial interest related to the assertion of the patent; (6) any licensing commitments; (7) any methodology used to calculate compensation; (8) any activity of the patent at the Patent Office or in court; and (9) anything else the FTC deems necessary.  McCaskill's bill, much like the Leahy bill, would provide enforcement power to the FTC.  However, her bill goes beyond the Leahy equivalent in providing for enforcement power by the states' attorneys general on behalf of their residents, should it be determined that the citizens of that state are falling victim to such abusive activity.  The bill would provide for a civil penalty not to exceed $16,000 (adjusted for inflation) per violation of this rule.  The FTC would be able to intervene, and a state could not bring such an action if the FTC has already instituted a civil action.  The acknowledgement of the state attorneys general by the McCaskill bill is interesting, especially in view of their recent activity in states such as Vermont and Nebraska.

We will continue to monitor the situation in the Senate.  Sen. Leahy recently reported that he would like to schedule the mark-up for next month, but it will likely not occur until May.  It will be interesting to see how these two bills are rectified, or to see to what extent the two committees cooperate on passage of demand letter reform.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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