Federal Anti-Patent Troll Legislation Would Ensure Consistency Among the States, But Are We Throwing the Baby Out With the Bathwater?

January 2016

As a patent attorney in Billings, Montana, I have represented hundreds of patent owners and about a dozen clients that have received cease and desist letters (or "invitations to license") from patent trolls. The clients that have received letters from patent trolls include banks and credit unions, engineering and construction firms, insurance companies and software providers. I believe I even received such a letter at some point because I have a printer/scanner in my office. The inventors and patent holders that we represent include farmers, ranchers, hunters, fishermen, oilfield workers, software engineers, and owners of small businesses ranging from baby products to pyrotechnics. By far, the clients in the latter category—that is, those who seek to protect their inventions via patents—outnumber those in the former category.

As of the writing of this article, more than half the states in the country have passed legislation designed to address the problem of patent trolls. (As I explained in an earlier article, we need to be mindful of how we define "patent trolls," but I will not re-address that issue here.) This legislation is not consistent among the states, but most of these statutes aim to prohibit "bad faith assertions of patent infringement" and provide factors for courts to consider in assessing whether a patent infringement claim has been asserted in bad faith.

Rule 11 of the Federal Rules of Civil Procedure has long governed the conduct of attorneys and their clients in ensuring that they have both a legal and a factual basis for asserting any litigated claim. The problem with attempting to define what constitutes "bad faith" assertion of a claim is that this determination will necessarily be somewhat subjective (despite the offering up of purportedly objective factors to consider), and it will always benefit from the clarity of hindsight. The issue of bad faith assertion of claims has historically been dealt with by courts under the protections afforded by the Federal Rules of Civil Procedure, including, but not limited to, motions to dismiss, motion to transfer, dispositive motions, discovery motions, and sanctions. Apparently these tools are deemed insufficient to deal with the problem of patent trolls.

A patent holder is a plaintiff like any other plaintiff. In some egregious cases, patent owners have sued hundreds of defendants in a single action, demanded outrageous settlements, and refused to engage in substantive discussions about the merits of a claim. Having begun my legal career litigating environmental, securities, insurance coverage, and later product liability cases, I can tell you that patent litigation is not the only type of litigation that suffers from these kinds of abuses. I believe, however, that it was the relatively recent practice of sending pre-litigation letters to multitudes of companies accusing them of patent infringement and demanding immediate settlement payments to avoid the threat of suit that has attracted the attention of the state and federal legislatures. These letters would often intentionally obfuscate (or misrepresent) the identity of the real party in interest and neglect to include any substantive analysis whatsoever of the infringement claims.

The Innovation Act, introduced in the U.S. House of Representative in February of 2015 but not yet enacted, is Congress' attempt to address the perceived problem of patent trolls. The proposed legislation imposes on plaintiffs (that is, the party asserting infringement) greater pleading requirements; this same heightened standard does not apply to the party (usually the defendant) asserting patent invalidity. It also makes the award of fees and expenses to the prevailing party mandatory (as opposed to discretionary, which is what it is under the current law). The bill would allow the prevailing party to bring an "interested party" into the litigation if the party against whom fees are awarded does not have the financial wherewithal to pay such fees and if it can be shown that the non-prevailing party (i.e., the plaintiff) has "no substantial interest in the [case] other than asserting [a] patent claim in litigation." The latter provision is intended to prevent the subterfuge associated with the formation of multiple entities solely for the purpose of sending out threat-of-suit letters. The legislation also includes a separate section entitled "Transparency of Patent Ownership," which requires the plaintiff to provide certain information pertaining to the assignment and licensing of the patent(s) at issue.

A thorough analysis of the proposed federal legislation is beyond the scope of this article, but several other sections are worthy of note. First, the bill would stay discovery of facts pertaining to patent infringement if the defendant files a motion to dismiss or transfer the case. Second, the bill would allow claims against customers to be stayed if the manufacturer or supplier of the accused product or service has also been named as a defendant and the customer agrees to be bound by certain issues determined in the course of the litigation, for example, claim construction and patent validity.

Third, the bill would substantially restrict those states in which a patent holder could sue an accused infringer. Rather than being able to sue in any state in which the infringer is doing business, which has been the standard for all cases brought in federal court for as long as I have been practicing, the plaintiff in a patent infringement case would only be able to sue in a state in which the infringer is located (i.e., has a physical facility) or where the infringement occurred; the only exception is that a plaintiff could also sue in a state in which it had engaged in research and development activities relating to the patent-in-suit. (The latter provision is likely intended to protect universities and similar research institutions.) What is left out of this equation, however, is the individual Montana inventor or small business that would like to enforce a patent. There are no special venue provisions for these clients.

Finally, with respect to demand letters, the legislation provides that the patent holder may not rely on pre-suit notification in establishing willful infringement unless the demand letter identifies with particularity the asserted patent, the accused product or process, the parent entity of the claimant, and the substantive basis for the infringement assertion.

I appreciate the motivation behind the state and federal anti-patent troll legislation, and enacting federal legislation would, at a minimum, ensure consistency among the states; however, I do not believe that all aspects of the federal legislation will benefit Montana inventors. In my view, the venue provisions are overly restrictive and will substantively increase the costs to Montana inventors of enforcing their patents. The discovery provisions may also be unnecessarily restrictive in that they may prevent the patent holder from obtaining early discovery with regard to the infringement itself. The heightened pleading requirements will increase the costs associated with filing suit and will undoubtedly lead to the automatic filing of motions to dismiss on the grounds that the pleading was insufficient. The mandatory award of fees to the prevailing party significantly raises the stakes for patent holders seeking to enforce their rights. On the other hand, the customer suit exception, the provisions relating to demand letters and willful infringement, and the provisions relating to the identification of the real party in interest are unobjectionable.

In short, as with any legislation, I think we need to be careful not to throw the baby out with the bathwater. My constituency is the individual Montana inventor and small Montana business with a patent portfolio. Although transparency in this context is good, throwing up barriers to suit hurts not only the so-called patent troll but also the legitimate patent holder faced with an infringement situation.


Amicable photo of Toni

Antoinette M. Tease, P.L.L.C.