Sri Sankaran, Patent Attorney, Winthrop & Weinstine

Recent developments in executive, legislative, and judicial branches present new challenges for patent trolls (or less pejoratively “non-practicing entities” or “assertion entities”).

The White House recently outlined a series of initiatives to address the impact that patent assertion entities have on the economy.  The administration cited a report from the National Economic Council and the Council of Economic Advisers, entitled Patent Assertion and U.S. Innovation.  The report states that patent assertion entities bring 62% of all infringement suits and took in $29 billion in 2011 alone. Patent assertion entities are described in the report as not playing a role in the U.S. “invention ecosystem,” and instead focus on aggressive litigation tactics such as threatening to sue thousands of companies at once without specific evidence of infringement of any of them.  The report suggests that patent assertion entities have a negative impact on innovation and economic growth that far outweighs any benefit to the assertion entities themselves.  Pointing to a study of 14 publicly traded patent assertion entities from 2001 to 2012, the report contends that during that period the assertion entities had revenues of $7.6 billion, while during the same period patent infringement lawsuits they initiated were associated with an $87.6 billion dollar decline in the share price of the defendant companies.

The Obama administration has proposed a number of legislative and executive steps to address the economic impact of this type of litigation.  The proposed steps include: laws requiring disclosure of the real party of interest behind efforts to enforcing patents; giving courts more flexibility in awarding attorney’s fees to the prevailing party; restricting infringement actions against consumers or companies that buy a product off-the-shelf and put it to its intended use; and limiting the circumstances in which the International Trade Commission can ban imports of infringing products. The White House proposals join other initiatives already percolating in Congress.

A key issue underlying any effort in this area is whether the new rules will apply just to “trolls” and, if so, exactly how a troll is defined.  Universities, for example, may own patents but not manufacture and sell patented products.  The same could be true for individual inventors.  If production of patented products is to be the benchmark, how much production is necessary to turn a “troll” into a member in good standing of the “innovation ecosystem.”  Similarly, if the International Trade Commission’s (“ITC”) exclusion remedies are to be limited, is that limitation only for “troll” cases?  What is the justification for such a limitation when a party seeking relief in the ITC must first prove, as part of its claim, that there is a domestic industry in patented products.

Apart from these federal developments, at least one state government has also weighed in.  Spurred by a desire to facilitate “the efficient and prompt resolution of patent infringement claims,” build the local economy, and attract small and medium size internet companies to the area, Vermont recently enacted a statute prohibiting bad faith assertion of patent infringement.  The statute, 9 V.S.A. §§ 4195-99, provides that violators can be sued by the state attorney general or by the targets of the bad faith assertion.  The statute provides for equitable relief, damages, costs, and attorney’s fees.  In addition, the court can award as exemplary damages, the greater of $50,000 or three times the actual damages, costs, and attorney’s fees.

The new law does not define “bad faith assertion of patent infringement,” but instead provides a non-exclusive list of factors that the court can consider in determining whether the assertion is made in bad faith.  Indicators of bad faith include: failure to disclose basic information such as the patent number or facts pertaining to the claim of infringement; demands for payment or response within an unreasonably short period of time; the failure to conduct an infringement analysis prior to making the assertion; knowingly making an assertion that is meritless; and making a claim which is deceptive.  Indicators of the absence of bad faith include: the disclosure of facts pertaining to the claim of infringement; substantial investment in the use, production, or sale of the patented products; and successful enforcement of the patent through litigation.

Because patent rights are created by the federal government, the Vermont statute raises a host of preemption issues, which will surely be litigated if the law is ever put to use.  The legislation itself notes that the state “is preempted from passing any law that conflicts with federal patent law.”  Not all assertions or uses of patents, however, are insulated from claims that they violate state law.  Improper claims that one’s own products are covered by a patent may give rise to claims of unfair competition. Unfounded claims of infringement may give rise to claims of malicious prosecution. The Vermont Attorney General recently filed an action for unfair and deceptive trade practices based on a campaign of demand letters sent to Vermont businesses.  This action was based on the pre-existing Vermont Consumer Protection Act, not the newly enacted statute.  Among the allegations in the Complaint: the demand letters stated that “many” or “most” targets took licenses when only “a tiny fraction” did so; the demand letters overstated the average license fee collected; and the senders claimed to have exclusive licenses when they did not.

The interest of state and federal authorities has focused a spotlight on the issue of patent trolls or non-practicing entities.  At the state level, it is unclear whether others will follow Vermont’s lead and whether the state law will withstand a preemption challenge.  At the federal level, where patent enforcement activity can be most readily regulated, it remains to be seen if a consensus will emerge on whether and how to do so.

What, if any, steps would you like to see Congress, the White House, or state governments take to address the enforcement actions of patent assertion entities? Where do you draw the line between “trolls” and “non-trolls” when it comes to patent enforcement?