States Move to Do-It-Yourself Patent Reform
With patent reform stalled in the U.S. Congress, 27 states—including nine this year—have passed laws to stem the rise of infringement claims of questionable merit. Many of the laws had bipartisan support, and most set standards for courts to follow in determining whether patent holders are acting in good faith when they demand licensing fees from a business or launch litigation against it.
The laws also make it easier for a state’s attorney general to pursue actions against knowingly false claims made by so-called patent trolls, which buy the rights to dormant patents and use them for litigation rather than producing any product or service.
This development may come as a surprise—since federal law governs patents, and infringement claims must be filed in federal courts. However, the new state laws can give a local business the ability to countersue in state court if it believes it’s been the subject of a knowingly false or exaggerated patent-infringement claim.
One common dilemma in patent litigation is that plaintiffs with dubious claims may demand licensing fees from a business, hoping that firms will pay up rather than get embroiled in a costly legal dispute. One celebrated example was Gooseberry Natural Resources, a firm that claimed that it had invented the common process of delivering press releases electronically “over a network such as the Internet.” It began suing news websites for patent infringement in 2010, including MSN and Yahoo.
After several businesses settled out of court, the news aggregator Fark.com decided to fight Gooseberry’s demands. It won—but Drew Curtis, the site’s founder, noted that “too much money was wasted on this . . . too many hours away from running Fark.”
In December 2013 the House of Representatives passed the Innovation Act, which would make it easier for a defendant to win legal fees from a patent troll after defeating it in court. A Senate version of the bill was spiked by then-Senate Majority Leader Harry Reid. House Judiciary Committee Chairman Bob Goodlatte (R., Va.) has reintroduced the legislation, and a Senate version is likely soon. But the bill faces major opposition including from universities, which fear that loser-pays might make it riskier to sue for patent infringement.
States have stepped into the vacuum. One strategy has been to invoke consumer-protection laws to target what’s known as “bad faith assertions,” that is, claims for payment that patent holders make based on a selective presentation of the facts.
To crack down on questionable demands, new state laws provide judges with guidelines to help determine whether a claim may be in bad faith, such as when a letter from a patent holder seeking licensing fees doesn’t identify the patents at issue. The new state laws also allow a company that’s the subject of a bad-faith claim to bring a civil suit against the patent holder.
North Carolina’s law, the Abusive Patent Assertions Act, empowers a judge to require a patent holder to post a $500,000 bond if the judge thinks the case may involve erroneous assertions. In a recent case, Sumitomo Electric Lightwave, based in North Carolina, was served with a patent infringement claim and countersued, arguing that the patent holder, Cirrex Systems, had not undertaken adequate research before demanding fees. Cirrex Systems then withdrew its claims, according to an account of the case by Sumitomo’s lawyers on the Law360 website. Sumitomo, they wrote, “was spared from spending a substantial amount of time and resources to litigate a case that never should have been brought.”
Vermont Attorney General William Sorrell used the state’s consumer protection law to file suit in 2013 against one of the nation’s largest patent trolls, MPHJ Technology Investments LLC. The suit claimed that letters the company sent to Vermont firms demanding licensing fees for email scanning technology contained misleading claims. MPHJ tried to get the case moved to federal court, arguing that Vermont doesn’t have jurisdiction over patent claims, but a federal court twice ruled against it. The case is back in state court, where it awaits trial. MPHJ has also sued Vermont in federal court attempting to overturn the state’s anti-trolling law, the nation’s first.
Minnesota Attorney General Lori Swanson also invoked the state’s consumer-protection laws to sue MPHJ. According to a settlement announced in August 2013, MPHJ agreed to cease “patent trolling” in Minnesota and must first notify state officials within 60 days of launching infringement cases against state companies. MPHJ also agreed to provide any licensing or infringement letters it intends to send to state companies to the attorney general’s office for review.
Advocates hope the new laws deter the most questionable claims. Last year the number of new patent lawsuits nationwide declined for the first time since 2009. But annual filings were still dramatically higher than a decade ago. One reason: States like California and Massachusetts, where many technology firms that are the targets of patent trolls are located, have yet to pass reforms.
Congress may still enact legislation which, given its broad powers over patents, provides significant reforms, including limiting the amount of time for pretrial discovery, during which a defendant’s legal bills can soar. But absent sweeping federal legislation, the states have made a good start in restoring a sense of fairness and proportion to patent litigation.
This piece originally appeared at The Wall Street Journal
This piece originally appeared in The Wall Street Journal