The Patent System and Patent Trolls
A patent affords its holder a limited monopoly and an attendant right to exclude others from using patented technology without a license. If a party refuses to license the patent owner’s patented technology, the patent holder may enforce his or her patent rights by filing a patent infringement suit in federal district court. The legal issues involved in patent infringement suits are complex and, to some federal district court judges, unfamiliar, rendering patent litigation a time-consuming endeavor. Accordingly, maintaining patent infringement suits can be enormously expensive.
A patent troll, also known as a nonpracticing entity (NPE), engages in rent-seeking behavior that subverts the patent system. Instead of manufacturing, selling, or innovating upon products, services, or processes covered by a patent, trolls tend to purchase patents from other companies or inventors with an eye towards immediately monetizing these patents. Trolls may go about monetizing their patents by filing a patent infringement suit in federal district court and then reaching a quick settlement with an accused infringer wary of the costs of defending against a charge of patent infringement.
Demand Letters and the State Law Causes of Action for Bad Faith Patent Assertion
In a similar vein, patent trolls may send out letters that suggest, or outright accuse, companies of patent infringement. These “demand letters” can be quite vague, providing few specifics to recipients concerning which products or services infringe the patents-at-issue and how they infringe the claims of the asserted patents. Other demand letters may contain false or deceptive representations as to the reach of the asserted claims. The intended effect of such letters is the same: With the threat of costly patent infringement litigation, the patent troll seeks to extract a license agreement with the target of a demand letter.
States, perceiving patent trolls as harming their business interests, have begun to regulate the conduct of patent trolls by creating a state law cause of action for bad faith patent assertion.1 After Vermont enacted the nation’s first such anti-patent-troll statute, several other states have followed. On May 5, 2015, the Governor of Indiana approved Indiana’s own Troll Statute, P.L. 172-2015, which became effective on July 1, 2015.
Indiana’s Troll Statute
Like many analogous troll statutes, Indiana’s statute states that a person may not assert a claim of patent infringement in bad faith and provides an nonexhaustive2 list of factors that courts may consider in determining whether a person has made an assertion of patent infringement in bad faith. This list is followed by a nonexhaustive3 list of mitigating factors that would counsel against a finding of bad faith assertion of patent infringement. Notably, this statute only concerns demand letters alleging infringement. It does not, however, contemplate notices of patents or patent applications (such as Section §154 pre-issuance notices) that do not assert or suggest patent infringement.
This client update will briefly examine both lists of factors and then observe the sorts of remedies contemplated by the statute. Indiana’s statute is one of the more permissive troll statutes. Its provisions show that it has been tailored to target the conduct of NPEs, rather than all enforcers of patent rights. In addition, the statute specifically exempts approved post-secondary educational institutions and associated technology transfer organizations and their licensees.4
Factors Demonstrating Bad Faith Assertions of Patent Infringement
The Indiana statute directs courts to consider whether a “person” (Sender) provided the following information in a demand letter:
- The patent number of the patent that the person claims is being infringed.
- The name and address of:
- a patent owner;
- if applicable, any assignee of the patent; and
- if applicable, a patent owner's or assignee's agent who is retained by the patent owner or assignee to enforce the patent.
- Factual allegations identifying specific areas in which the target's products, services, and technology infringe the patent or are covered by the claims in the patent.5
Indiana’s troll statute fails to specify what degree of detail is necessary for factual allegations to sufficiently identify which of the target’s conduct is covered by the claims of the asserted patent; however, the statute later directs courts to consider whether a sender failed to conduct analysis comparing the asserted claims to the target’s products, services, and technologies.6 This analysis must identify “specific areas in which the target’s products, services, and technology are covered by the claims in the patent.”7
Furthermore, Indiana’s troll statute allows the sender to provide this information “within a reasonable amount of time after the target requests the information.”8 Therefore, Indiana’s troll statute places the onus, to a certain extent, on the target of a demand letter to promptly request this information from the demand letter’s sender. Nevertheless, the statute specifies that “[a] person may not use the failure of a target to request any information described in subsection (a)(1) that is not contained in the demand letter as a defense[.]”
Another factor provided by this statute concerns whether the sender of a demand letter demands payment of a license fee or some other response from the target within an “unreasonably short period of time.”9 The statute declines to specify what amount of time might constitute a reasonable period of time. Courts also are directed to consider, with little statutory guidance, whether the patent holder offers a license that is “not based on a reasonable estimate of the value of the license”10 and whether the claim of patent infringement is “deceptive[.]”11
The statute provides that courts are to consider whether the sender’s subsidiaries or affiliates have previously filed suit, or threatened to do so, based on the same or a similar claim of patent infringement. Courts are only to consider such evidence in two instances, however: when the previous assertion of infringement failed to comply with the requirements of IN ST 24-11-3-2, Sec. 2 (a)(1)(A-C); or if the sender attempted to litigate his or her patent infringement claim and a court found this claim meritless.12 Importantly, the statute does not require the patent holder to identify any judicial or administrative proceedings in which the validity of the asserted patent is under challenge, as is required by some states’ troll statutes.13 Thus, the sender of a demand letter is under no obligation to disclose that their patent is subject to, for instance, an Inter Partes Review Proceeding before the Patent Trial and Appeal Board.
Factors Mitigating Against a Finding of Bad Faith Assertion of Patent Infringement
Beyond providing the information described in section 2(a)(1),14 or providing such information to the target if requested within a reasonable period of time,15 the statute directs courts to consider whether a person engages in a good faith effort to both demonstrate that the target has infringed the patent and negotiate an “appropriate” remedy.16
Importantly, the statute carves out a mitigating factor in favor of those who make a “substantial investment” in the use of, or the production or sale of, a product or item covered by the patent.17 Somewhat similar is the mitigating factor in favor of patent holders who are inventors or joint inventors of the asserted patents or original assignees who filed and were awarded the asserted patents.18 Additionally, the statute directs courts to consider whether the patent holder has either “demonstrated good faith business practices in previous efforts to enforce the patent or a substantially similar patent” or “successfully enforced the patent, or a substantially similar patent, through litigation.”19 Such factors serve to ensure that Indiana’s statute primarily curbs the rent-seeking behavior of NPEs, rather than legitimate attempts of patent holders to enforce their patent rights.
The recipient of a demand letter may offer a motion to an Indiana court arguing that there is a reasonable likelihood that a demand letter constituted a bad faith assertion of patent infringement. If an Indiana court finds in favor of the recipient of a demand letter, it must require the sender to post a bond, not to exceed $250,000, in an amount equal to a good faith estimate of the recipient’s costs to litigate the patent infringement claim.20 The court may waive this bond requirement if it finds that the sender has assets equivalent to the proposed bond or for other good cause.21 Either party may request a hearing.22
Upon prevailing, the court may award the recipient of a demand letter attorney’s fees, litigation expenses, and costs.23 Additionally, a court may award declaratory or equitable relief, the greater of actual damages or liquidated damages of $5,000 for each demand letter received, and punitive damages ($50,000 or three times the amount of actual damages, whichever is greater).24