Most patent practitioners have had to deal with a demand letter from a patentee who is stretching the scope of the patent (or have been pressured by a client to draft such a demand letter). Such letters are often based on an overly broad reading of the claims or a less than diligent review of the allegedly infringing product. In an attempt to address the overstated patent troll plague, the Utah State Legislature has passed the Distribution of Bad Faith Patent Infringement Letters Act. While well intentioned, the Act has several provisions which are overreaches of their own – some of which raise constitutional questions.
The Distribution of Bad Faith Patent Infringement Letters Act “seeks to protect Utah businesses from the use of demand letters containing abusive and bad faith assertions of patent infringement . . .” Utah Code 78B-6-1901. The Act applies to “a letter, email or other written communication directed to a target and asserting or claiming that the target has engaged in patent infringement.” Utah Code 78B-6-1902.
The first likely problem with the Act is in its definition of a “target.” Specifically, a target “means a person or entity residing in, incorporated in, or organized under the laws of this state that has received a demand letter and includes the customers, distributors, and agents of the person or entity.” Utah Code 78-6-1902 (emphasis added). Under a very broad reading, the Act would thus apply to any corporation which does business in Utah, as the corporation may be said to reside in Utah. See e.g. 28 U.S.C. 1391(c). Likewise, it would appear to apply to any company which has customers, distributors or agents in Utah.
Under a narrower reading, however, the Act applies to communications to any company which is “incorporated in” or “organized under the laws of” Utah. Thus, according to the plain language of the Act, a letter written from a company in New York to a company in Florida would be subject to the Act if the Florida company was incorporated in or organized under the laws of Utah. It seems unlikely that such an application would withstand Constitutional scrutiny – but someone will likely have to litigate the point due to poor legislative drafting. Moreover, the issue may have to be litigated in a state court which has no experience with patent law.
In addition to problems regarding what entities are subject to the Act, the Act also goes overboard on what evidences a bad faith assertion of patent infringement. Specifically, the Act allows the court to consider the omission of any of the following as evidence of “bad faith.”
(i) the patent numbers of the patent or patents being asserted;
(ii) the name and address of the current patent owner or owners and any other person or entity having the right to enforce or license the patent;
(iii) the name and address of all persons and entities holding a controlling interest in the persons and entities identified in Subsection (2)(a)(ii) of this section;
(iv) the identification of at least one claim of each asserted patent that is allegedly infringed;
(v) for each claim identified in Subsection (2)(a)(iv), a description of one or more allegedly infringing products, including the make, model number, and other specific identifying indicia of allegedly infringing products, services, or methods made, used, offered for sale, sold, imported or performed by the target, provided in sufficient detail to allow the target to assess the merits of the assertion of patent infringement; and
(vi) identification of each judicial or administrative proceeding pending as of the date of the demand letter where the validity of the asserted patent or patents is under challenge;
Utah Code 78B-6-1903.
It begs the question why a patent owner must disclose the name and address of all persons or entities holding a controlling interest in the patent owner – yet there is no requirement for the alleged infringer to disclose any information. Likewise, why is it bad faith to fail to identify each judicial or administrative proceeding pending where there is a challenge of validity? It is common when a product becomes popular for there to be numerous lawsuits all around the country, as the patentee is forced to pursue copycats selling “knock-off” products. Requiring the disclosure of every suit simply adds to the burden of the patent owner.
In addition to the listed sins of omission, the Act provides its own list of sins of commission. It is evidence of bad faith for a letter to contain any of the following:
(i) an assertion of patent infringement based on a patent or a claim of a patent that has been previously held invalid or unenforceable in a final judicial or administrative decision from which no appeal is possible;
(ii) an assertion that a complaint has been filed alleging that the target has infringed the patent when no complaint has, in fact, been filed;
(iii) an assertion of infringement based on acts occurring after the asserted patent or claim at issue has expired or been held invalid or unenforceable;
(iv) an assertion of infringement of a patent that the sponsor does not own or have the right to enforce or license; or
(v) an assertion that the amount of compensation demanded will increase if the target retains counsel to defend against the assertions in the demand letter or if the target does not pay the sponsor within a period of 60 days or less;
(vi) a false or misleading statement; or
(vii) the demand letter demands payment of a license fee or response within an unreasonably short period of time depending on the number and complexity of the claims.
Utah Code 78B-6-1903.
Some of these are fairly obvious. Prohibiting the assertion of infringement on claims which have been invalidated or expired seems reasonable. It is unclear, however, why it is “bad faith” to offer to settle at a lower amount if a resolution is obtained promptly. It is common in settlement negotiations to leave some money on the table where the defendant is willing to acknowledge infringement and pay damages quickly. This is especially true where the patent is being infringed by a number of parties.
Moreover, if a defendant hires counsel, it will almost always drive up the cost for the patent owner as counsel exchange verbose posturing regarding the merits of the infringement allegations and potential defenses. Likewise, it seems concerning to allow a state court judge to decide what is a reasonable time for response regarding patent infringement allegations where the judge is unlikely to have any experience in patent law.
Finally, the act provides for mitigating factors which the court can consider regarding whether the letter is sent in “bad faith.” This includes committing neither the sins of omission nor sins of commission, above. Furthermore, the court can consider whether: 1) the patent owner engaged in a good faith effort to establish infringement and to negotiate an appropriate remedy; 2) the patent owner has made a substantial investment in the practice of the patent; or 3) the patent owner is an inventor or the original assignee or an institution of higher education.
The irony of the Act is it divorces truly underhanded behavior from statutory bad faith standards. A party which asserts patent infringement without a reasonable basis may not be found to have acted in bad faith as long as they provided the information requested in the Act, did not insist on a prompt resolution, and were somehow related to the original inventor. In contrast, an patent owner may be found to have sent a letter in “bad faith” even if there is a clear case of wilfull infringement, simply because the demand failed to provide the address of the owner of the business and insisted on immediate resolution at a discounted amount.
While the harm caused by patent trolls who make unsupported assertions of infringement should be addressed, the Utah Distribution of Bad Faith Patent Infringement Letters Act uses a hammer to kill a flea. The further irony is that such acts actually dissuade parties from attempting to resolve the issue short of filing suit. The lesson may be to sidestep demand letters entirely. Sue Early - Sue Often.