A new Vermont state law set to go into effect on July 1, 2013, creates penalties for “bad faith assertions of patent infringement.” While this law may eventually be struck down due to preemption by federal patent law, patent owners should be aware of its provisions before engaging in enforcement activities directed to any entity that may be considered a “Vermont person” or the customer of one.

Vermont bill H. 299, which will be codified as 9 V.S.A. §§ 4195 – 4199, states that its purpose is to help the state attract small and medium-sized technology companies by protecting them against expensive patent litigation brought in “bad faith.” 9 V.S.A. § 4195. A patent owner can violate the law by simply sending a demand letter or making “an assertion or allegation of patent infringement” in bad faith, even if no lawsuit has been filed. 9 V.S.A. § 4196(2). The act identifies a lengthy list of factors for a court to consider in determining whether an infringement allegation has been made in “bad faith.” Many of those factors are based on the specific assertion of infringement being challenged, but others relate to the general business structure and practices of the patent owner.

For example, the act considers it evidence of bad faith to send an infringement demand letter that does not contain “factual allegations concerning the specific areas in which the target’s products, services, and technology infringe the patent or are covered by the claims in the patent,” or if the patentee fails to provide that information “within a reasonable period of time” after the accused infringer requests it. 9 V.S.A. § 4197(b)(1)(C) & (3). Likewise, the act considers it evidence of bad faith to demand that the accused infringer “respon[d] within an unreasonably short period of time” or to propose a license fee “that is not based on a reasonable estimate of the value of the license.” 9 V.S.A. § 4197(b)(4) & (5).

Conversely, the act considers it evidence of good faith if the patent owner “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,” if the patent owner is the inventor of the patent, or if the patent owner is an institution of higher education. 9 V.S.A. § 4197(c)(4) & (5). By carving out those classes of patent owners as inherently trustworthy, the act creates a higher burden for proving good faith by for-profit patent assertion and licensing entities.

If a court finds that these factors show “a reasonable likelihood that a person has made a bad faith assertion of patent infringement,” it can require the patent owner to post a bond of up to $250,000 to cover the accused infringer’s anticipated litigation costs. 9 V.S.A. § 4198. The act also authorizes an alleged infringer to file a lawsuit affirmatively in Vermont Superior Court seeking equitable relief, damages, costs and fees, along with exemplary damages of three times the total damage, cost and fee award. 9 V.S.A. § 4199.