Vermont has recently taken steps to combat Non-Practicing Entities (“NPEs”) at the state level. Also known as “patent trolls,” NPEs operate by acquiring ownership of existing patents and asserting these patents against alleged infringers to gain revenue in the form of either licenses or infringement damages. Vermont recently filed a lawsuit against MPHJ Technology Investments, LLC, (“MPHJ”) alleging MPHJ violated the Vermont Consumer Protection Act by sending unfair and deceptive letters to numerous small businesses and non-profit organizations in Vermont threatening patent infringement litigation unless a per employee license of between $900-$1200 was obtained, depending on the letter.

In the complaint, Vermont alleges MPHJ’s letters accused the recipient business of infringing at least one of its patents, which are directed at using a scanner to send electronic copies of a scanned document through email. As alleged by Vermont, these letters required a recipient to fill out a questionnaire and provide extensive proof of non-infringement if the recipient believed it was not infringing MPHJ’s patents. Recipients of the letter that did not respond were then allegedly sent one or two letters additional letters, this time from a law firm threatening imminent litigation if the recipient did not obtain a license within two weeks. On the contrary, Vermont alleges that MPHJ has never filed a lawsuit against an accused infringer and did not have local counsel required to do so. Essentially, Vermont alleges that MPHJ’s communications contain various deceptive statements designed to lead small businesses to believe that they are infringing a patent and that expensive patent litigation is imminent in order to secure licenses without MPHJ conducting any investigation into the accused infringement.

Vermont’s attempt to regulate conduct of NPEs related to patent law is limited by federal patent law. Any conflict between the application of Vermont’s laws and federal patent law is preempted. Federal patent law bars liability for a patent holder communicating its rights to an alleged infringer because “[p]atents would be of little value if infringers of them could not be notified of the consequences of infringement or proceeded against in the courts.” Mikohn Gaming Corp. v. Acres Gaming, Inc., 165 F.3d 891, 897 (Fed. Cir. 1998). State laws creating liability “based on enforcing a patent in the marketplace, are preempted by federal patent laws, unless the claimant can show that the patent holder acted in bad faith in the publication or enforcement of its patent.” 800 Adept, Inc. v. Murex Sec., Ltd., 539 F.3d 1354, 1369 (Fed. Cir. 2008). Vermont’s state law claims allege bad faith as to some aspects of the content of MPHJ’s letters. However, bad faith of an assertion of infringement is considered with respect to the strength of the potential infringement claim underlying the assertion, as bad faith requires that “infringement allegations must be such that no reasonable litigant could reasonably expect success on the merits.” Dominant Semiconductors Sdn. Bhd. v. OSRAM GmbH, 524 F.3d 1254, 1260 (Fed. Cir. 2008). Assuming MPHJ had a reasonable claim that its targets were infringing one of its patents, the communication of patent infringement itself would not be in bad faith. However, it remains to be seen whether regulation of deceptive communications that reasonably assert patent infringement would be preempted. In other words, does the fact that the letter is directed to asserting a reasonable patent infringement claim immunize a patent holder from all other unfair or deceptive aspects of the communication?

Soon after Vermont’s Attorney General brought action against MPHJ, Vermont’s Governor signed the Bad Faith Assertions of Patent Infringement. Act. H. 299, to be codified at 9 V.S.A. §§ 4195-99. The Act establishes an open-ended subjective test to determine bad faith assertion, including eight factors tending to demonstrate bad faith and six factors indicating absence of bad faith. In addition to providing liability for a plaintiff’s damages and possibly reasonable costs and attorney’s fees, a defendant found liable under the Act may be subject to punitive damages of the greater of $50,000 or three times the total damages, costs, and attorney’s fees.

Vermont’s lawsuit and Bad Faith Assertions of Patent Infringement law appear to be carefully crafted to avoid preemption and attempts to address tangential issues created by some instances of NPE patent infringement assertion within the purview of state unfair trade practices and consumer protection laws. As such, Vermont’s regulations on their own likely will not make a substantial impact on the greater problem that NPEs present to the patent system. Vermont’s efforts to regulate assertions of patent infringement address instances where the actions of an NPE are particularly egregious and deceptive. However, Vermont’s regulations do not appear to limit the vast majority of NPEs, which are usually more than willing to go to court to enforce their patents against accused infringers.

As Vermont takes action at the state level, the President also joined the growing effort to address the various issues presented by NPEs. On June 4, 2013, President Obama issued a proposal including five executive actions and seven legislative recommendations “designed to protect innovators from frivolous litigation and ensure the highest-quality patents in our system.” Two of these executive actions in particular would also address aspects of MPHJ’s actions in Vermont: the first would direct the PTO to begin rulemaking to require patent owners to regularly update patent ownership information specifically designating the “ultimate parent entity” in control of the patent, and the second would direct the PTO to publish plain-English education and outreach materials for end-users accused of patent infringement. In addition, the President recommends Congress permit greater discretion in awarding fees to prevailing parties, and provide greater protection of “off-the-shelf” users accused of infringement.

While it remains to be seen whether state-level efforts might have a significant impact on the way NPEs operate, these efforts to address abuses of the patent system demonstrate the continued rise in the public’s awareness of the need for a solution. Any solution would most likely require action by Congress, and with the introduction of five proposals that include a variety of solutions, changes may be on the horizon. It is unclear if any of the bills addressing NPE abuse of the patent system is likely to be passed, but increased public awareness and pressure from the states to address the problem may move Congress to act. In the meantime, it will be worthwhile to keep an eye on the effect of these creative state-level and executive efforts to curb patent abuse.