Patent reform has been an increasingly popular topic of discussion and public interest in the past few years, largely fueled by assertions from non-practicing entities. Despite the increased interest, federal patent reform legislation has failed to materialize. The Innovation Act was the closest recent federal patent reform legislation has come to becoming law, passing the House in December 2013, only to stall in the Senate.1 In response to the federal government’s failure to pass legislation, many states have forayed into patent reform, passing laws to curb abusive patent assertions. Although largely untested, these state laws may serve an expanding role in patent disputes.
State Patent Reform Legislation
On May 22, 2013, Vermont governor Peter Shumlin signed into law legislation aimed at slowing bad faith patent assertions.2 Citing the high expenses associated with patent litigation, the statute is intended to help Vermont “businesses avoid these costs by encouraging the most efficient resolution of patent infringement claims.”3 The law prohibits a “bad faith assertion of patent infringement,” listing several factors a court may consider in determining whether a patent infringement assertion was made in bad faith.4 Factors in support of an assertion being in bad faith include, for example, vague demand letters lacking information, failure to conduct a pre-suit investigation, failure to provide requested details in a reasonable time, deceptive practices, or any other factor the court finds relevant.5
The Vermont statute permits a party aggrieved by a violation of the statute and the state attorney general to bring a cause of action in Vermont Superior Court.6 Upon a determination by the court that there is a “reasonable likelihood that a person has made a bad faith assertion of patent infringement,” the patent owner must post a bond of up to $250,000.7 A prevailing party is entitled to equitable relief, damages, costs and fees, and exemplary damages.8
As many as seventeen other states have passed similar patent reform legislation. Still other states have used existing state consumer protection and deceptive trade practice laws to tackle abusive patent assertion techniques. For example, state attorneys general in Nebraska9, Minnesota10, and New York11 have conducted investigations under these statutes into allegedly bad faith assertions of patent infringement.
Limits on State Patent Reform Efforts
State patent laws and enforcement efforts are limited by preemption and personal jurisdiction. Under the doctrine of preemption, state laws must yield to federal patent law,12 and any state law imposing liability for good faith patent assertions is preempted by federal patent laws.13 However, states may regulate “bad faith” patent assertions to the extent such assertions are objectively baseless.14 Although many of the new state laws are narrowly tailored to “bad faith” assertions,15 the validity of the laws is likely turn on how they are applied by the courts.
State patent reform laws may also be hindered by the jurisdictional limits of the courts. Some states, like Virginia, have included a jurisdictional provision within the patent reform statute that maintains “[a]ny person outside the Commonwealth asserting patent infringement to a target shall be deemed to be transacting business within the Commonwealth.”16 It remains unclear if such jurisdictional provisions comport with “traditional notions of fair play and substantial justice,” as required by the Supreme Court’s personal jurisdiction precedent.17
Strategy Considerations Going Forward
Parties faced with a patent licensing demand letter or a complaint alleging patent infringement should explore whether state law remedies are available. Potential state law liability may provide leverage to encourage an early settlement. Exemplary damages and/or the upfront expenses associated with posting a bond may be particularly useful against non-practicing entities who otherwise have little risk in asserting patent infringement claims. For example, Sumitomo Electric Lightwave Corp., a North Carolina company, filed a counterclaim under the North Carolina abusive patent assertion statute when sued for patent infringement in the Delaware district court, ultimately settling the case within months without having to pay the patentee.18 State law claims may also be leveraged to obtain additional details from the patentee regarding the asserted claims of the patent and accused products or services in order to assess the strength of the patent infringement allegations and prepare a defense, even before a complaint is filed.
Patent owners seeking to enforce their patent rights should review state laws to avoid liability under one or more of the new state patent reform laws. Failing to include sufficient details in a licensing
State patent reform efforts have resulted in a number state laws and investigations directed at bad faith patent assertions. The contours and boundaries of state patent reform efforts are likely to change as the new laws are applied and tested in future patent disputes. Until comprehensive federal patent reform legislation is passed, state laws may play an expanding role in patent disputes. Thus, parties asserting patent rights and parties defending against patent assertions both stand to gain from becoming more familiar with the new state patent reform laws.