States Take on Bad-Faith Patent Assertion

Authored by Jason E. Stach and C. Brandon Rash

Federal law is the primary source of authority most intellectual-property attorneys face, but state law can provide powerful remedies to complement federal law. In the patent arena, state lawmakers have become concerned about what they perceive as abusive practices by patent assertion entities that send out hundreds or thousands of demand letters alleging patent infringement and threatening a lawsuit unless paid. Some entities send the letters to individual mom-and-pop customers who use a product or service. To counter these tactics, which some believe indicate bad faith on the part of the patentee, in 2013 Vermont enacted the first state law that prohibits bad-faith patent assertion.¹ Several states have since passed similar bills, including Alabama, Georgia, Idaho, Louisiana, Maine, Maryland, Oklahoma, Oregon, South Dakota, Tennessee, Utah, Vermont, Virginia, and Wisconsin. At least a dozen other states are considering similar bills. Understanding these new laws is important both for patent owners who send demand letters and those who receive them.

Vermont's Law

Under the Vermont law, "[a] person shall not make a bad faith assertion of patent infringement."² The law allows the Attorney General of Vermont, a target of conduct involving assertions of patent infringement, or a person aggrieved by a violation of the law to bring an action in Superior Court.³ A "target" is defined broadly as a Vermont person "who has received a demand letter or against whom an assertion of patent infringement has been made," "who has been threatened with litigation or against whom a lawsuit has been filed alleging patent infringement," or "whose customers have received a demand letter asserting that the person's product, service, or technology has infringed a patent."⁴

If the target prevails in proving bad-faith assertion, the court may award equitable relief, damages, costs and attorney fees, and exemplary damages in an amount equal to $50,000 or three times the total damages, costs, and fees, whichever is greater.⁵ If the target establishes a reasonable likelihood of bad-faith assertion, the court may require the asserter to post a bond in an amount equal to a good-faith estimate of the target's cost to litigate and any money reasonably likely to be recovered, up to a total of $250,000.⁶

Although the court may consider any factor it finds relevant,⁷ the Vermont law provides eight exemplary factors the court may consider as evidence that a person has asserted a patent in bad faith:⁸

1. The demand letter does not contain: (a) the patent number; (b) the name and address of the patent owner or assignee, if any; and (c) factual allegations concerning the specific areas in which the target's products or services infringe the patent or are covered by the patent claims.
2. Before sending the demand letter, the person fails to conduct an analysis comparing the patent claims to the target's products or services, or such an analysis was done but does not identify specific areas in which the products or services are covered by the patent claims.
3. The demand letter lacks the information described in subdivision (1) above, the target requests this information, and the person fails to provide the information within a reasonable time.
4. The demand letter demands payment of a license fee or response within an unreasonably short period of time.
5. 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. The claim or assertion of patent infringement is meritless, which the person knew or should have known.
7. The claim or assertion of patent infringement is deceptive.
8. The person or its affiliates have previously filed or threatened to file one or more lawsuits based on the same or similar claim of patent infringement and: (a) those threats or lawsuits lacked the information described in subdivision (1) above; or (b) the person attempted to enforce the claim of patent infringement in litigation and a court found the claim to be meritless.

The Vermont law also specifies six factors the court may consider as evidence that a person has not asserted a patent in bad faith, in addition to any other factor the court finds relevant:⁹

1. The demand letter contains the information described in subdivision (1) above.
2. The demand letter lacks the information described in subdivision (1) above, but the person provides the information within a reasonable time of any request.
3. The person engages in a good faith effort to establish that the target has infringed the patent and to negotiate an appropriate remedy.
4. The person makes a substantial investment in the use of the patent or in the production of a product or item covered by the patent.
5. The person is: (a) the inventor or joint inventor of the patent, or the original assignee; or (b) an institution of higher education or a technology transfer organization affiliated with such an institution.
6. The person has: (a) demonstrated good faith business practices in previous efforts to enforce the patent or a substantially similar patent; or (b) successfully enforced the patent or a substantially similar patent through litigation.

The Vermont law's factors suggest that the law targets patent assertion entities that purchase patents solely for the purpose of licensing, as the law indicates that being an inventor, original assignee, institution of higher education, or person investing in the use of the patent is evidence that the assertion is not in bad faith. Although a demand letter should not require payment or a response within an unreasonably short period of time, the Vermont law allows a sender to remedy a deficient demand letter with a prompt follow-up to a target's request for additional information. The law also emphasizes past failure or success in enforcing the patents or "substantially similar" patents in litigation as bearing on the issue of bad faith.

Other States' Laws

The provisions in bills passed by other states are similar to the Vermont provisions, but some deviate in substantial ways. For example, Virginia and others offer no private cause of action, allowing only the Attorney General to bring an action. A group of states including Idaho specifies a separate statute of limitations precluding a private action more than three years after the cause of action arises. Several states also exempt assertions of patent infringement under the Hatch-Waxman Act.¹⁰ What works in one state will not always work in another.

Practical Tips

Senders and receivers of demand letters should keep in mind the factors demonstrating good faith and bad faith. For those sending demand letters, to ensure compliance with the state laws, one should at a minimum provide patent numbers, names and addresses of patent owners, factual allegations of infringement, and a reasonable amount of time to respond. If demand letters contain this information, however, they may create declaratory judgment jurisdiction for recipients to file suit against the sender. Some senders will find this undesirable, so they should work with counsel to balance the need to avoid liability under state law while avoiding creating declaratory judgment jurisdiction. It may not always be possible to achieve both ends, and an unintended consequence of these new state laws may be for a patentee to file suit before negotiating with a defendant.

Targets of demand letters should notify the sender of any defects, such as omitting information the laws identify as indicating good faith. If the sender provides the requested information, the target can decide whether to negotiate or initiate a case on the merits, such as by seeking to invalidate the patent in court or at the Patent Office. If the sender refuses to provide the requested information despite specific requests for it, the target could argue that the refusal further demonstrates bad faith under the catch-all categories found in most states' laws. Targets also may band together to collectively fight the patentee. Doing so may highlight the expansive nature of the sender's allegations, which may further support a claim of bad faith. Because some states allow companies whose customers have received a demand letter to bring an action, manufacturers and retailers should be aware of these laws as a way to protect their customers against bad-faith patent assertion.

It remains to be seen whether these new laws will curtail abusive patent assertions. What is certain is that the new laws provide traps for unwary senders and tools for their targets, so patent litigators must be more cognizant of state laws than perhaps ever before.

Endnotes

¹ 9 V.S.A. §§ 4195-4199.

² 9 V.S.A. § 4197.

³ 9 V.S.A. § 4199(a)-(b).

⁴ 9 V.S.A. § 4196(2).

⁵ 9 V.S.A. § 4199(b).

⁶ 9 V.S.A. § 4198.

⁷ 9 V.S.A. § 4197(b)(9).

⁸ 9 V.S.A. §§ 4197(b)(1)-(8).

⁹ 9 V.S.A. §§ 4197(c)(1)-(6).

¹⁰ 35 U.S.C. § 271(e)(2).

Reprinted with permission from the IP Litigator, published by Aspen Law and Business. This article is for informational purposes, is not intended to constitute legal advice, and may be considered advertising under applicable state laws. This article is only the opinion of the authors and is not attributable to Finnegan, Henderson, Farabow, Garrett & Dunner, LLP, or the firm's clients.