State and Federal Attempts to Combat Bad Faith Assertion of Patents

IP Reports

The Constitution provides for the patent system to “promote the progress of science and useful arts.”¹ In recent years, concerns have been raised about “patent trolls,” even drawing the attention of Congress and the White House. There are various definitions of a “patent troll,” but a common element among the definitions is “an entity that does not itself practice a patent but instead asserts the patent against entities that are actually engaged in a business of providing products or services.”² Often these entities are solely engaged in the business of monetizing patents through licensing and litigation. While preventing abusive litigation tactics may be a needed reform, there is no simple solution to the “troll” problem, nor are these the only entities who engage in abusive litigation tactics. The focus has landed on “patent trolls,” also called non-practicing entities (NPE) or patent assertion entities (PAE), because the companies often assert acquired patents and do not actually practice the patented technology, and thus are not encouraging innovation. Nothing in the Patent Act requires a patent owner to practice the patent. In fact, research entities such as universities are also commonly NPEs, and allowing them to monetize their patents encourages beneficial research and academic study. This raises the dilemma of how to stop abusive litigation tactics by “patent trolls” without harming innovation.

The complexity of this problem and difficulty in finding a workable solution is illustrated by the various reforms implemented at a state level and stalled attempts at reform on a federal level. States have attempted to combat the patent troll problem through criminalizing or outlawing typical “troll” tactics as violations of state consumer protection laws.³ Proposed federal laws have focused on measures aimed at the conduct of the litigation itself.⁴ Recent changes to the Federal Rules of Civil Procedure may negate the need for such proposed federal laws by heightening pleading standards. Even without these proposed reforms, Courts have tools to prevent abusive litigation tactics by sanctioning attorneys for bringing frivolous suits⁵ and have been given broader discretion under Octane Fitness⁶ to award attorney’s fees to prevailing parties in “exceptional cases.”⁷

State Law Patent Reforms

Twenty-seven (27) states have passed laws to attempt to combat the negative impacts of patent trolls, starting with Vermont in 2013.⁸ These laws typically set out multiple factors defining what constitutes a bad faith assertion or a good faith assertion. These state laws outlawing false or bad faith patent infringement assertions are justified on grounds of consumer protection.⁹ The state laws and proposed bills also contain a range of remedies for a violation of the provisions, including posting bond and exemplary damages.

Turning to the factors defining what constitutes a bad faith assertion of patent infringement, the Vermont law lists factors that a court may consider as evidence that an entity has made a bad faith assertion of patent infringement.¹⁰ These factors include: the demand letter does not contain the patent number, name and address of the patent owner(s) or assignee(s), or factual allegations concerning the specific areas in which the target’s products, services, and technology infringe; failing to conduct an analysis comparing the patent claims to the target’s products, services, and technology before sending the demand letter; the demand letter demands payment of a license fee or response within an unreasonably short period of time; and the claim or assertion of patent infringement is deceptive.¹¹ Laws passed or proposed in other states contain similar lists of factors.¹²

State laws and proposed bills also commonly contain a list of factors that evidence a party has not made a bad faith assertion of patent infringement. For example, the court may consider whether the entity makes 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 entity is an institution of higher education or a technology transfer organization owned or affiliated with an institution of higher education; and the entity engages in a good faith effort to establish that the target has infringed the patent and to negotiate an appropriate remedy.¹³ In addition, the court may consider as evidence that an entity has not made a bad faith assertion of patent infringement that the entity 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.¹⁴ These good faith factors may prevent NPEs who are contributing to innovation, like universities, from being encompassed by the broad scope of these state laws.

These state patent reform laws also provide for a variety of remedies. For example, violation of any provision of the Nebraska Patent Abuse Prevention Act constitutes a deceptive trade practice.¹⁵ Also under the Nebraska law, any entity who sends, transmits, or otherwise conveys demand letters to 25 or more targets in any 365 day period must notify the Attorney General.¹⁶ Under the Vermont law, a court may require a bond in an amount equal to a good faith estimate of the target’s costs to litigate the claim.¹⁷ To date, allegations of direct violations of these state laws have been rare,¹⁸ but the state patent reform laws do provide a broad range of remedies and factors, which could make them an important component of a defense to an assertion of patent infringement.

However, some states are scaling back legislation meant to prevent patent litigation abuses. In Florida, a revision of the Patent Troll Prevention Act (modeled after Vermont’s law) has been presented to the governor for signature.¹⁹ The revised legislation removes the provision authorizing the target of an alleged bad-faith assertion of patent infringement to seek a court order requiring the patent owner to post a bond. The revision also amends when a demand letter contains a bad faith assertion of patent infringement, such as if it asserts an objectively baseless claim due to the patent being held invalid or unenforceable pursuant to a final judgment or an administrative order. For remedies, the revision limits the amount of punitive damages and caveats that punitive damages may only be awarded if the entity asserting patent infringement has committed repeated violations.

Proposed Federal Patent Reform

Attempts at patent reform on the Federal level have taken a different approach than at the state level.²⁰ Most recently, the “Venue Equity and Non-Uniformity Elimination (VENUE) Act of 2016” was introduced in the Senate, which would restrict filing patent suits to courts where the parties are incorporated or where they have physical facilities, tied to either the development of technology-at-issue or alleged infringement.²¹ The Innovation Act passed in the House on June 9, 2015, intended to curb abusive practices in patent litigation through provisions such as heightened pleadings requirements, fee-shifting, limitations on discovery, disclosure of real party-in-interest information, and stays of customer suits.²² The PATENT Act, approved by the Senate Judiciary Committee on June 4, 2015, included heightened pleading standards, early infringement contention disclosure, limits on discovery, and fee shifting provisions.²³

But other Federal legislation looks to strengthen patent rights in view of recent reforms in the America Invents Act that are viewed by some to have excessively weakened patent rights. The STRONG Patents Act of 2015 focuses on post-grant proceedings before the Patent Trial and Appeal Board (“PTAB”).²⁴ For example, the STRONG Patents Act requires that claims challenged at the PTAB be construed under the same standard as they are in district court effectively eliminating the broadest reasonable interpretation standard. The STRONG Patents Act would also require that the PTAB allow a first amendment as a matter of right.²⁵ Other provisions of the STRONG Patents Act would give district courts discretion to award increased damages after finding willfulness or bad faith and eliminate the single entity rule for the divided infringement of process claims.²⁶ In addition, the STRONG Patents Act would preempt all state legislation relating to bad faith demand letters, giving enforcement power to the FTC.

Some of these Federal proposals appear to be rendered moot by the December 1, 2015 amendments to the Federal Rules of Civil Procedure.²⁷ These Amendments are expected to impact several aspects of civil litigation, including discovery and pleadings requirements in patent cases. Rule 84, which stated that “the forms in the Appendix suffice under these rules” was abrogated by the December amendments. Thus, the Form 18 bare-bones patent complaint is no longer sufficient and Twombly pleading requirements apply.²⁸ It is likely Federal lawmakers will wait and see how courts interpret and apply the amended Rules, the effects the amended Rules have on pleading standards, and the number of patent claims brought by trolls in 2016.

Conclusion

In 2015, the number of patent litigation cases filed in U.S. district court rose around 15% from 2014²⁹ with NPEs making up two-thirds of cases filed in 2015 (up from 61% in 2014).³⁰ But the number of patent infringement suits is expected to decline in 2016 due to the new heightened pleading standards for patent claims that took effect in December 2015. These heightened pleading standards under the amended Rules, in conjunction with existing mechanisms for sanctions and recovery of costs and fees for baseless suits, may be sufficient to combat abusive litigation, and thus, wide sweeping Federal patent reform appears unnecessary at this time. Existing state laws outlawing false or bad faith assertions of patent infringement may also discourage bad faith patent litigation. Given the range of remedies for violation, such state laws could play a role during settlement negotiations and it may be wise to determine whether a state has such a law before bringing a patent infringement suit, or after being sued, as a consideration in the overall legal strategy. The application of state laws, however, will be unpredictable in view of the broad scope of the multi-factors tests, amount of discretion given to the court and potential preemption issues. While many still call for Federal patent reform to address abusive “patent troll” litigation,³¹ it is unlikely such proposed legislation will become law in 2016.