Federal and State Governments Position Patent Trolls in their Crosshairs

by Cadwalader, Wickersham & Taft LLP

I.  Introduction

The number of patents filed in recent years has increased with the proliferation of complex products containing thousands of components. So too has the incidence of lawsuits or threats of suit. Many of these actions have been brought by entities that do not make any products and whose only corporate function is buying portfolios of third party patents and asserting them against companies that are using the patented technology. Such entities are variously referred to as non-practicing entities ("NPEs") or "patent trolls."1 This article provides an update on the latest actions taken at the State and Federal level against NPEs who abuse the U.S. patent system.

Patent trolls accounted for 62% of the roughly 4,700 patent lawsuits filed in 2012, up from 29% two years earlier.2 Part of the increase may be attributed to the America Invents Act, passed March 2011, which prohibits naming multiple unrelated defendants in a single suit.3 NPEs had commonly used this tactic - filing a single lawsuit and naming many disparate defendants connected by nothing other than the allegation that they infringe the NPE's asserted patent. Now NPEs must file separate actions against each potential infringer. This increase in volume of lawsuits has consequently triggered a sharp increase in legal fees: according to a study conducted by researchers at Boston University, $29 billion in legal fees have been spent on suits initiated by NPEs in 2011.4 Although the policy behind U.S. patent law is to spur innovation, NPEs act to frustrate the patent system by asserting patents of questionable validity against companies with the exclusive intent of gaining cash benefit. These are not competitors in a technology field protecting their hard-earned technology advances, i.e., utilizing their patent to lawfully exclude others who copy their claimed inventions. Thus, NPEs have been increasingly viewed as an innovation killer by State and Federal legislative agencies, the Federal Trade Commission, and the President.

II.  Vermont's House Bill 299 targets "bad faith assertion" of patent infringement

The State of Vermont has taken an aggressive stance against NPEs. On May 22, 2013, the state of Vermont signed into law (to take effect on July 1, 2013) House Bill 299, which creates a right to sue a patent owner for making a "bad faith assertion" of patent infringement. The statutory text of the law explains that Vermont does "not wish to interfere with the good faith enforcement of patents or good faith patent litigation," but states that "[a]busive patent litigation, and especially the assertion of bad faith infringement claims, can harm Vermont companies."5 The law states that "[t]hrough this narrowly focused act, the General Assembly seeks to facilitate the efficient and prompt resolution of patent infringement claims, protect Vermont businesses from abusive and bad faith assertions of patent infringement, and build Vermont's economy, while at the same time respecting federal law and being careful to not interfere with legitimate patent enforcement actions."6

The statutory text of the law sets forth the following factors for determining whether an assertion of patent infringement is in bad faith: (1) Comprehensiveness of demand letter (whether it contains the patent number(s), names and addresses of the patent owners/assignees, factual allegations of infringing products, technology, or services); (2) Whether demander is timely (within "reasonable period of time") in responding to requests from target entity for more detailed information regarding demand letter; (3) Whether demander conducted infringement analysis against specific claims of the patent; (4) Whether the demand letter requires a payment of a license fee or response "within an unreasonably short period of time"; (5) Whether the "person offers to license the patent for an amount that is not based on a reasonable estimate of the value of the license"; (6) Whether "[t]he claim or assertion of patent infringement is meritless, and the person knew, or should have known, that the claim or assertion is meritless"; (7) Whether "[t]he claim or assertion of patent infringement is deceptive"; and (8) "Whether a person or its subsidiaries or affiliates have previously filed or threatened to file one or more lawsuits based on the same or similar claim of patent infringement."7

The law allows the Attorney General to bring an action against bad faith demanders, and allows for the following remedies: (1) equitable relief; (2) damages; (3) costs and fees (including reasonable attorney's fees); and (4) exemplary damages of $50,000 or three times the total of damages, costs, and fees, whichever is greater.8 The law also allows the accused party - upon a showing that there is a "reasonable likelihood that a person has made a bad faith assertion of patent infringement" - to require that the NPE post a bond in "an amount equal to a good faith estimate of the target's costs to litigate the claim and amounts reasonably likely to be recovered," not to exceed $250,000.9

The Vermont statute is vulnerable to a federal preemption challenge because federal courts have exclusive jurisdiction over patent disputes.10 However, Vermont's law is drafted to target only "bad faith assertions" of patent infringement, not the issue of patent infringement itself. This is significant as a patent-related claim need not necessarily be one of the claims in a lawsuit brought under the law.11 The question that remains is how "bad faith assertions" of patent infringement will be determined without some form of patent infringement analysis (which is a question for federal court).

III.  Vermont files action against notorious patent troll

In any case, on May 22, 2013, Vermont attorney General William Sorrell announced that he has taken action against MPHJ Technology Investments LLC, a notorious NPE. In announcing the suit, Sorrell clarified that Vermont Bill 299 is not the direct basis for the suit against MPHJ, but rather, is based on a Vermont consumer protection statute which prohibits deceptive practices.12 However, Sorrell acknowledged the utility of the new law in the war against patent trolls, noting that Vermont Bill 299 is "another arrow in our quiver."13 The lawsuit against MPHJ was filed under seal on May 8th, but publicly announced on May 22nd once notice was served. MPHJ is accused of sending demand letters to "thousands" of businesses and nonprofit organizations, demanding up to $1,200 per employee, for infringement of its patent directed to scanning documents into e-mail (U.S. Patent No. 7,986,426). Sorrell fired a warning shot at NPEs - stating "if you're going to unfairly and illegally prey on Vermont small businesses, you're going to have a fight on your hands."14

Shortly after Sorrell's lawsuit against MPHJ was announced, Ricoh America Corporation ("Ricoh") and Xerox Corporation ("Xerox") filed an inter partes Review proceeding in the U.S. Patent and Trademark Office ("USPTO"). In its petition, Ricoh and Xerox have challenged the validity of MPHJ's patent (U.S. Patent No. 7,986,426).15 The petition, filed May 23, 2013, argues that "[a]t least a decade before the alleged effective date of the '426 patent, Xerox was already publically using the disclosed and claimed technology[.]"16 Petitioners submitted evidence in the form of prior art and the opinion of a technical expert, asserting that, in light of the overwhelming evidence of anticipation and obviousness presented, the "Board should cancel all of the patented claims."17

One day after Xerox and Ricoh's petition, Hewlett-Packard Company ("HP") filed its own inter partes Review proceeding against MPHJ, challenging the validity of another one of MPHJ's patent (U.S. Patent No. 6,771,381).18 HP asserts that its own products anticipate all of the claims of the '371 patent, noting that "[t]hroughout the 1990s, HP produced a variety of products that combined various features of scanners, copiers, printers and document management applications."19 Specifically, HP asserts that the claims of the '371 patent are either anticipated or obvious under 35 U.S.C. §§ 102 and 103 in light of HP products like the HP Scanjet 5, The Scanjet 4Si, HP LaserJet 3100, HP 9100; and HP's own Patents (U.S. Patent 6,661,291 and U.S. Patent 5,499,108).20

IV. The Federal Trade Commission initiates 6(b) investigation on NPEs

The FTC has also taken a stance against NPEs. In a June 20, 2013, letter from Senate Judiciary Chairman Patrick Leahy (D-Vt.), Leahy urged the FTC to crack down on the issue of "patent trolling."21 In his letter, Leahy states that:

[a]busive behavior by some holders of low-quality patents continues to impede innovation and harm small businesses in Vermont and across the country. We must combat the abusive behavior to preserve and advance the patent system envisioned by the founders and provided for in our Constitution.

Letter from Patrick Leahy (D-Vt.) to Edith Ramirez, Chair of FTC (June 20, 2013).

Leahy noted that licensing demands are "particularly egregious" when the demander has no intention of actually filing an infringement suit, but threatens to do so "simply [to] extract unwarranted payments."22 Leahy notes that he is working on "bipartisan legislation to combat patent trolling" and encourages the FTC to "use aggressively the consumer protection and competition laws already in place" to "bolster the American economy and ensure the patent laws are used to encourage invention, not impede innovation."23

In response, in a keynote address on June 20th, FTC Chair Edith Ramirez announced plans to undertake a 6(b) investigation, which allows the FTC to conduct wide-ranging economic studies that do not have to be justified by a specific law enforcement purpose.24 Under 6(b), the FTC has the power to issue subpoenas and to conduct in-depth industry studies and report findings to Congress and the public.25 Ramirez noted that the rise of NPEs reflects "flaws in the patent system" and recommends that the 6(b) investigation be but one piece of a broader response to such anti-competitive activities. Chair Ramirez emphasized the antitrust ramifications of the NPE business model of "privateering," especially if "the [NPE] is effectively acting as a clandestine surrogate for competitors."26 Acknowledging the general lack of information on the operations of NPEs, Ramirez stated that the patent study has the goal of providing a "full, complete picture" of NPEs and will "focus on areas where there may be competitive harm." Ramirez emphasized that the FTC is "ready to enforce its antitrust powers" and is ready to use its Section 5 powers, which are used to address "unfair and deceptive" business practices.

V. Conclusion

Regardless of whether the Vermont law gains traction on behalf of enforceability or preemption issues, the law represents the galvanization of political will against NPEs and appears to be prompting Federal agencies to act on the issue. Analysts applaud Vermont's efforts in that this is the first time a congressional body has taken serious action against patent trolls. On June 4th, President Obama issued five executive orders and seven legislative recommendations that aim to protect innovators from NPEs. These include directing the Patent and Trademark Office to give greater scrutiny to functional patent claims, and recommending that Congress expand the Covered Business Review transitional program directed to computer-related patents. On the same day, the National Economic Council and the Council of Economic Advisers released a report, titled "Patent Assertion and U.S. Innovation," describing NPEs as stifling innovation and economic growth. The FTC, which has been soliciting comments on the activity of NPEs since December 2012, is now poised to conduct an in-depth study on NPEs and the spotlight on patent law may well serve as a catalyst for several draft patent legislations currently in Congress. As Rep. Judy Chu (D-Calif.) remarked: "We can't let patent trolls hide under the bridge any longer - we must expose them of their deceptive practices."27 Only time will tell whether the initiatives of the FTC and Vermont will be successful in curbing patent trolls, but one thing is certain: federal and state governments are no longer merely watching from the sidelines but are now actively targeting the practices of NPEs.

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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