The Vermont House and Senate have approved a first-in-the-nation bill that provides a legal tool for Vermont companies who face extortionate claims of patent infringement from “patent trolls.”  In brief, the legislation gives Vermont companies the ability to bring a lawsuit against patent owners who – acting in bad faith — threaten to sue, or who actually sue, a Vermont company.   Gov.  Peter Shumlin signed the bill into law on May 22.  The anti-patent trolling bill, as passed by the Vermont House and Senate, has the designation H.299.

The legislation was spearheaded by Vermont Rep. Paul Ralston, D-Middlebury, and Vermont Chamber of Commerce President Betsy Bishop in response to concerns raised by an informal coalition of Vermont companies.  These companies, many of whom are my firm’s clients,  have been threatened and injured by extortionate claims of patent infringement asserted by patent trolls.  They have experienced anxiety, frustration and a deep sense of powerlessness after receiving a demand letter from a patent troll.  My colleague Eric Poehlmann and I were instrumental in developing the legal approach that is codified in the new legislation, and I testified three times before House and Senate committees that crafted the legislation.  For the first time, Vermont companies now have a tool to help level the playing field against patent trolls.

The new law allows Vermont companies to seek recovery of their legal fees, damages and other remedies if they can show that the patent troll acted in bad faith.  Whether a company asserting a claim of patent infringement is a “patent troll” or is making a legitimate effort to enforce a patent is notoriously difficult to determine.  Only “bad faith” assertions of patent infringement violate the new Vermont legislation.  The legislation requires a court to apply a multi-factor test to decide whether the patent infringement claim was made in “bad faith.”

The factors the court may look at as an indicator of bad faith include the following:

• If the demand letter sent by the alleged patent troll does not include specific allegations of how the Vermont company’s technology infringes particular claims in the patent;
• If the demand letter sent by the alleged patent troll demands that the Vermont company pay a license fee within an unreasonably short period of time;
• If the demand letter sent by the alleged patent troll is deceptive;
• If the alleged patent troll knew or should have known that the claim of patent infringement is meritless.

By contrast, several factors tend to show that the claim of patent infringement is legitimate, and therefore would not constitute a violation of the Vermont legislation:

• If the alleged patent troll has made a good faith effort to establish whether the target of the claim has infringed the patent and has made an effort to negotiate an appropriate remedy;
• If the alleged patent troll is the inventor or a university;
• If the alleged patent troll has successfully enforced the patent against another company.

In addition to the right given to Vermont companies to sue the alleged patent troll, the legislation enables the Vermont Attorney General to bring a suit against an alleged patent troll.

The legislation is highly innovative, but does not undermine the rights of patent holders to threaten and bring legitimate claims of patent infringement.  The new law asks the court to make a determination of “bad faith” based on a range of factors.  The structure of the Vermont bill is similar to federal legislation aimed at cybersquatters, enacted in the federal Anti-Cybersquatting Consumer Protection Act. The Vermont legislation is also derived from a series of federal patent decisions that recognize that a defendant in a patent infringement lawsuit can assert a counterclaim under state law if the plaintiff (the patent owner) asserts a patent infringement claim in bad faith.

Accordingly, while we expect that a patent troll sued under the Vermont law may well try to defend by counter-claiming that the Vermont legislation is pre-empted by federal patent law, we believe that a proper claim of bad faith under this legislation will survive a pre-emption challenge.

The Vermont solution is certainly not the end of the effort to curb extortionate patent claims.  A complete solution can only be achieved through changes in federal patent law. Indeed, several proposals for changing federal patent law are under consideration.  In the meantime, this Vermont law will provide a valuable tool for Vermont companies confronted with an extortionate patent claim.

I look forward to our readers’ comments and questions about this legislation.