A bill introduced last July in Michigan referred to as the “Bad-Faith Patent Infringement Claims Act,” House Bill No. 5701. The bill is intended “to prohibit the bad-faith assertion of patent infringements” and to protect small and medium size companies and nonprofit organizations that may succumb to meritless demands and enter into licensing agreements simply because they do not have the funds to engage in a costly and complex patent infringement action.

The bill recognizes that “[p]atents are essential to encouraging innovation, especially in information technology and knowledge-based fields,” that “[t]he protections afforded by the federal patent system create an incentive to invest in research and innovation, which spurs economic growth,” that “[p]atent holders have every right to enforce their patents when they are infringed,” and finally, that “patent enforcement litigation is necessary to protect intellectual property.”

The bill, however, balances these interests against the State’s “striv[e] to build an entrepreneurial and knowledge-based economy,” in relation to which, “[a]ttracting and nurturing small- and medium-sized knowledge-based companies is an important part of th[e] effort and will be beneficial to this state’s future.” The bill also recognizes that patent litigation “can be technical, complex, and expensive,” costing “hundreds of thousands of dollars or more” which can be “a significant burden on small- and medium-sized companies.” According to the bill, “[a]busive patent litigation, and especially the assertion of bad-faith infringement claims, can harm companies in this state.” Small or medium size businesses, or a non-profit, that receive a letter asserting an infringement claim faces the “threat of expensive and protracted litigation and may feel that it has no choice but to settle and to pay a licensing fee, even if the claim is meritless” simply because they lack the resources to investigate and litigate such claims.

Recognizing that it cannot pass any law that conflicts with Federal patent law, but wishing to help small- and medium-sized businesses avoid patent litigation costs “by encouraging the most efficient resolution of patent infringement claims without conflicting with federal law,” the bill “seeks to facilitate the efficient and prompt resolution of patent infringement claims, protect businesses in this state from abusive and bad-faith assertions of patent infringement, and build this state’s economy, while at the same time respecting federal law and being careful not to interfere with legitimate patent enforcement actions.” To combat bad-faith patent infringement claims, the bill provides that a person, defined as “an individual, partnership, corporation, association, governmental agency, or other legal entity” “shall not make a bad-faith assertion of patent infringement.”

The “Bad Faith Inquiry”

Factors a court can consider under the bill in determining bad faith include:

 

  • That the demand letter did not include: the patent number, the name and address of the patent owner or owners and assignee or assignees, if any, and “factual allegations concerning the specific areas in which the target’s products, services, and technology infringed the patent or were covered by the claims in the patent” and/or that such information was not provided within a reasonable time when requested by the target;
  • The person “failed to conduct an analysis comparing the claims in the patent to the target’s products, services, and technology” prior to sending a demand letter;
  • The demand letter “demanded payment of a license fee or response within an unreasonably short period of time”;
  • “The person offered to license the patent for an amount that was not based on a reasonable estimate of the value of the license”;
  • “The claim or assertion of patent infringement was meritless, and the person knew, or should have known, that the claim or assertion was meritless”;
  • “The claim or assertion of patent infringement was deceptive”; and
  • The personal history of threatening or filing lawsuits “based on the same or similar claim of patent infringement” that lacked the necessary information set forth in the bill or that a court found to be meritless.

Conversely, factors weighing against a finding of bad-faith include:
 

  • That the demand letter contained all of the required information or that the information was provided within a reasonable time of request by the target;
  • “The person engaged in a good-faith effort to establish that the target infringed the patent and to negotiate an appropriate remedy”;
  • “The person made a substantial investment in the use of the patent or in the production or sale of a product or item covered by the patent”;
  • The person making the claim is an inventor or joint inventor of the patent or an original assignee, or [a]n institution of higher education or a technology transfer organization owned or affiliated with an institution of higher education”; and
  • The person making the claim has “[d]emonstrated good-faith business practices in previous efforts to enforce the patent, or a substantially similar patent” or [s]uccessfully enforced the patent, or a substantially similar patent, through litigation.”

The Target’s Remedies
 

If the court determines on a motion by a target that there is a “reasonable likelihood that a person has made a bad-faith assertion of patent infringement,” the court “shall require the person to post a bond in an amount equal to a good-faith estimate of the target’s costs to litigate the claim,” not to exceed $250,000. Although the bond requirement can be waived upon a showing that the person has “assets equal to the amount of the proposed bond or for other good cause shown.”

In addition to authorizing the attorney general to make rules, conduct civil investigations, and bring civil actions, the bill provides for a private cause of action in the circuit court by a target, in which the court may award any of the following remedies:

  • Equitable relief;
  • Damages;
  • Costs and fees, including reasonable attorney fees;
  • Exemplary damages in an amount equal to $50,000 or 3 times the total of actual damages, costs, and fees, whichever is greater.

A copy of House Bill No. 5701 can be found here.

A Level Playing Field?

Although intended to level the playing field and provide small and medium size companies and nonprofits a mechanism by which to fight patent infringement claims asserted in bad faith, I question whether the bill, if enacted, will really have such an impact. If small and medium size companies and nonprofits are without sufficient resources to fight a bad faith infringement claim, will they have the resources, or desire even, to engage in a separate action under the bill to fight such claims? Moreover, the bad faith inquiry appears to be very fact intensive, likely making it ill-suited for early resolution by means of a motion for summary determination, which may mean that by bringing an action under the bill, the target is simply determination, which may mean that by bringing an action under the bill, the target is simply signing up for another long, complex battle. If successful, the target may be awarded costs and fees, including reasonable attorney fees, but of course, that award would not come until after a trial on the merits. The target would still be required to front the costs and attorney fees, or find another way to fund the action. And what exactly is meant by “costs and fees, including reasonable attorney fees?” Does this include costs and fees incurred in relation to the underlying bad faith infringement action, or would those be considered “damages” under the Act?

These are just a few questions that the bill raises in my mind. As other jurisdictions propose and enact similar statutes, it will be interesting to see how similar the bills are to Michigan’s bill and how any actions filed under similar statutes play out.