Vermont Takes A Leap: First State To Pass Law To Combat Patent Trolling

Patent trolls have been in the spotlight of national attention in the past year, as President Obama addressed the problem in his Fireside Hangout and a White House report attempted to quantify the impact of abusive litigation. Officially known as Patent Assertion Entities, or PAEs, these companies purchase patents and bring patent infringement claims as a business model. The Federal Trade Commission (FTC) has recently announced a proposal to obtain more data on approximately 25 PAEs in order to better understand their impact on innovation and the economy. Meanwhile, Vermont has become the first state to take matters into its own hands with a state law to combat patent trolls. While it is not clear whether Vermont has the legal authority to regulate patent activities, its innovative “threats action” approach may prove to be successful enough to be adopted more widely.

Background: National Efforts To Prevent Patent Trolling        

On September 16, 2011, President Obama signed into law the Leahy-Smith America Invents Act (AIA), a major amendment to the 1952 Patent Act that has governed patent law for nearly sixty years.  While the primary purpose of the AIA was to encourage innovation by modernizing the patent application and review process, several provisions in the Act were aimed at patent trolls. Following the AIA, additional measures to combat patent trolling have been introduced in Congress. Three of the most high profile proposals are: (1) the Saving High-tech Innovators from Egregious Legal Disputes (SHILED) Act “forces patent trolls to financial responsibility for frivolous lawsuits”; (2) the Patent Quality Improvement Act expands the AIA by allowing more businesses to be covered under the transitional program for business method patents; and (3) the End Anonymous Patent Act, which requires the owner of patents to register with the UPSTO. While these proposals are being debated in Congress, Vermont has become the first state in the nation to pass its own law to combat patent trolls.

Vermont’s Answer To Patent Trolling: Bad Faith Assertions of Patent Infringements

In May of 2013, Vermont enacted “Bad Faith Assertions of Patent Infringement” under its Consumer Protection Act (H.299, codified at 9 V.S.A. §§ 4195-4199) to combat abusive patent claims. The law is constructed around threats actions. Threats actions are claims that a recipient of legal threats can bring against an asserter for wrongfully asserting legal rights. As a result, the law allows defendants to terminate a patent infringement suit and reduce the costs of litigation. Threats actions are rare in the United States (one example is 17 U.S.C. 512(f), which addresses misrepresentation in copyright infringement), but are widely used in the United Kingdom and other Commonwealth countries. Now, one must ask — what are bad faith assertions of patent infringement? Interestingly, the law does not give a definition. Instead, it provides judges several factors that distinguish between legitimate and illegitimate patent assertions.

What is “Bad Faith Assertion of Patent Infringement”?

The statute provides that patent assertions can be considered legitimate when they provide one or more the following:

  • Evidence of commercialization of the patented invention
  • Evidence of successful enforcement of patent in court
  • A showing that the asserting party is the original inventor, an educational institution, or a technology transfer organization which is owned or affiliated with an institution of higher education
  • A good faith effort to establish the recipient has infringed, and to negotiate an appropriate remedy

Conversely, the statute provides that patent assertions can be considered illegitimate when they don’t provide one or more the following:

  • The patent number for each allegedly infringed patent
  • The patent owner’s name and address
  • Information stating in detail how the recipient’s technology, products, or services are infringing on the particular claims in the patent
  • A reasonable demand for the amount of money owed for infringement
  • A reasonable time for recipient to respond to assertions of infringement
  • Allegations which are non-deceptive and of merit

Remedies against illegitimate patent assertions

The statute allows the Vermont Attorney General or defending party against illegitimate patent assertions to bring a lawsuit against the patent asserting entity. Vermont’s Attorney General, William H. Sorrell, has already filed the first complaint under the statute, providing a first example of the “bad faith” conduct targeted by the legislation.

The Vermont Attorney General or defending party against illegitimate patent assertions may be entitled to one or more of the following: (1) an injunction against the party bringing the illegitimate patent assertion from making further claims, (2) actual damages, (3) punitive damages of the greater of three times the actual damages, and (4) $50,000 plus attorney’s fees. Furthermore, the illegitimate patent asserter may be required to post a bond of up to $250,000 to cover the victim’s attorney fees. The court may deny the bond if the patent asserter does not have enough available assets.

Federal Preemption: Will Vermont’s Carry Any Weight?

Federal law governs patent rights and federal district courts have original jurisdiction in all patent infringement claims. Therefore, Vermont’s attempts to regulate patent suits may face preemption challenges since the subject is exclusively a matter of federal law.

Because Vermont’s law is the first of its kind, no prior case law on the issue exists; however, the two Federal Circuit cases provide some insight into federal preemption of state laws relating to patents. In Zenith Electronics Corp. v. Elo Touchsystems, Inc., the Federal Circuit held that state unfair competition claims are not barred by patent or antitrust laws. In a more recent case, Globetrotter Software, Inc. v. Elan Computer Group, Inc., the court elaborated on the decision in Zenith by holding that an allegedly “bad faith” patent assertion must pass the “objective baselessness” standard to survive federal preemption of state-law counterclaims for tortious interference with prospective economic advantage and unfair competition.

The “objective baselessness” standard is borrowed from antitrust preemption doctrine, which states that a lawsuit “must be objectively baseless in the sense that no reasonable litigant could realistically expect success on the merits. If an objective litigant could conclude that the suit is reasonably calculated to elicit a favorable outcome, the suit is immunized.” However, the Federal Circuit in Globetrotter did not elaborate on the analysis of objective baselessness in the context of patent infringement, concluding that the suit was not objectively baseless because a genuine issue of material fact existed with respect to non-infringement of the patent at issue. It is thus possible that Vermont’s law could withstand preemption scrutiny if the patent claims meet the “objective baselessness” standard.

Camilla A. Hrdy, a Resident Fellow at the Yale Law School Information Society Project, argues that federal patent law does not preempt Vermont’s law because the latter does not interfere with the objectives of federal patent law; i.e. Vermont’s law does not interfere with the inventor’s choice to file for a patent in exchange for disclosing the invention. Instead, it only seeks to limit the business practice of patent trolling.

Is state-by-state patent reform desirable?

Eric Goldman, a professor at Santa Clara University School of Law, suggests that Vermont’s decision to pass its anti-trolling law was a bad move. Professor Goldman disfavors state-by-state development of intellectual property because believes that if each state developed its own intellectual property doctrine, the costs to enforce patent rights would be more expensive due to researching the laws of each state.

In opposition, Hrdy argues that states have an economic interest to protect and grow businesses within the state and attract other businesses. Furthermore, state-by-state patent reform can lead to experimentation in the legal system which could further strengthen patent reform at the federal level. In fact, Minnesota’s Attorney General was recently the first to reach an “Assurance of Discontinuation” with the same patent troll company, MPHJ Technologies, sued by Vermont. Under the agreement, MPHJ will no longer be allowed to send out “cease and desist” letters in that state under the threat of civil penalty.  Meanwhile, Nebraska’s Attorney General issued a letter to the law firm representing MPHJ warning that it may be engaging in false and deceptive conduct under the Nebraska Consumer Protection Act; the firm chose to fight the battle out in court by joining the Attorney General’s office as a defendant. In October, a federal judge ruled that the Attorney General violated the constitutional rights of the law firm’s client by demanding that it cease patent enforcement efforts in Nebraska. Nonetheless, the Attorney General pledged to continue his investigation of patent trolls in the state.

Time will tell which of the state approach proves to be the most effective, and which of the proposals currently before Congress moves forward. But if Vermont’s model is successful, we may just see a nation-wide threats action, perhaps even for all forms of intellectual property, not just patents.