From the Hill

Combatting So-Called Patent Trolls: Demand Letters Demand Attention

Hayden W. Gregory

©2014. Published in Landslide, Vol. 6, No. 5, May/June 2014, by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association or the copyright holder.

The 113th Congress is well past its mid-point, and as it moves toward the home stretch, the number one intellectual property related issue remains, as it has been from the beginning, abusive patent enforcement practices by so-called patent trolls or patent assertion entities (PAEs). These same issues are also receiving significant attention in the other two branches of government.

In late February, the White House convened a meeting of stakeholders concerning issues involved in the legislation. In June 2013, the White House had announced a number of executive actions and legislative proposals aimed at abusive PAE enforcement tactics, and in December, the Administration had given its blessing to the House bill, H.R. 3309, on the eve of its passage by the House. The February White House meeting was billed as an occasion to announce the Administration’s plans for future action to combat abusive PAE activity, but the meeting served more as a pep rally for support of proposals in the June 2013 package than for unveiling of anything new. This included announcement of the launching of a USPTO website to provide assistance to “patent troll victims” who have received demand letters and the issuance of proposed new rules requiring identification of the ownership of patents. Both of these initiatives were included in the original June 2013 White House package.

Potential is also being seen for the U.S. Supreme Court to contribute to the resolution of some of the problems concerning PAE enforcement practices. Several of the PAE-related legislative proposals call for mandatory or presumptive award of attorney fees to a prevailing party in a patent infringement suit. These proposed changes are inspired by concerns that decisions of the Federal Circuit have made it virtually impossible for a prevailing defendant in a patent infringement case to receive such an award, despite authorization in existing law.

On February 26, the Supreme Court heard oral arguments in two cases that relate to fee-shifting in patent cases, Octane Fitness v. Icon Health and Fitness and Highmark v. Allcare Health Management System. Octane Fitness addresses the standard to be applied in determining if a prevailing party should be awarded attorney fees under section 285 of title 35 of the United States Code, which authorizes such an award in “exceptional cases.” In Highmark, the issue is the standard of appellate review of district court decisions applying section 285. The decisions of the Court in these two cases could affect the outcome of legislative proposals for more radical changes such as mandatory fee-shifting in all patent cases. If so, it would not be first time that a judicial decision provided a workable response to a politically difficult question of intellectual property law reform for which Congress was seeking but not finding a legislative response. Court decisions on issues such as injunctions, damages, and venue helped clear the route to enactment in the Leahy-Smith America Invents Act of difficult patent law reform issues that for years had blocked legislative reform. The Court’s decisions in Octane Fitness and Highmark could also provide remedial action regarding another major abuse associated with PAEs: the sending of hundreds or even thousands of identical letters alleging infringement by retailers or end users of commercial products, and offering settlement for a price well below the cost of a successful defense in an infringement suit.

Since “loser pays” fee-shifting is ordered only when litigation has occurred, the issue is not yet directly in play at the demand letter stage. Nonetheless, bad faith demand letters are very much linked to decisions regarding remedial fee-shifting, in both a legislative and a judicial forum. This linkage was visibly displayed in the oral argument in Octane Fitness, where Justice Breyer envisioned conduct of a PAE that might justifiably call for a fee-shifting order:

We don’t want to go to court and cost you $2 million. Please sent us a check for a thousand, we’ll license it for you. They do that to 40,000 people, and when someone challenges it and goes to court, it costs them about 2 million because [of] every discovery in sight. Okay? You see where I’m going?

In fact, bad faith demand letters are increasingly on the minds—and the agendas—of stakeholders and decision makers involved in the search for effective measures to combat abusive PAE enforcement tactics. Demand letters such as that described by Justice Breyer have long served as the emblematic poster child of the anti-PAE movement, but only recently have these practices been targeted in specific legislative proposals. There were no such provisions in H.R. 3309 as introduced, and only one substantive amendment relating to demand letters was adopted in markup in the Judiciary Committee. That amendment would provide that for a demand letter to satisfy the requirement of pre-suit notification of infringement as a predicate to a claim for willful infringement, it must identify with particularity the patent infringed, the infringing product, and how the product infringes. Other non-substantive amendments adopted in the House called for a study and report on bad faith demand letters and expressed a sense of Congress that sending bad faith demand letters is an abuse of the patent system and against public policy.

In December 2012 the Federal Trade Commission and the Department of Justice held a joint workshop looking into PAE activities. In October 2013 the FTC sharpened its focus on PAEs by initiating a compulsory process calling for the submission of information on patent acquisition and enforcement activities of PAEs and their competitors, including detailed information regarding the use of demand letters and other instruments demanding compensation or other enforcement measures.

The potential for demand letter enforcement activity by the FTC received a major boost with the introduction on November 18, 2013 of S. 1720 by Senate Judiciary Committee Chairman Patrick Leahy. Section 5 of that bill would identify bad faith demand letters alleging patent infringement as an unfair or deceptive act or practice under the FTC act, and provide for FTC enforcement activity against offenders.

Politics is a competitive sport, and the emergence of jurisdictional struggles for control of an issue is a pretty good sign that the issue is one whose time has come. This seems to be the case with PAE demand letters. In both the House and the Senate, jurisdiction over intellectual property is assigned to the Judiciary Committee. Of course, IP is heavily involved in commerce, and as IP has grown in economic and political importance, so too has the interest of the Senate and House Commerce Committees. The Senate Commerce, Science, and Transportation Committee has recently demonstrated such an interest by staking a claim to a piece of the action against bad faith demand letters alleging patent infringement.

On February 26, Senator Claire McCaskill, a member of the Commerce Committee, introduced S. 2049, the “Transparency in Assertion of Patents Act,” a bill which, like section 5 of S. 1720, provides for FTC enforcement action against overly aggressive and underly informative demand letters. S. 2049 was co-sponsored by Commerce Committee Chairman John D. Rockefeller IV. Without following the usual practice of first scheduled a hearing to consider the bill, Chairman Rockefeller immediately scheduled a Committee vote on the bill a week later, which seems to indicate a desire for his committee to strike first in the jurisdictional skirmishes that seem likely to unfold. However, that Commerce Committee vote has been postponed twice and has not occurred as of this writing.

In addition to the very real issue of which committee should have primary authority to act on these matters, reconciliation of competing interests may be complicated by the fact that S. 2049, the bill in the Commerce Committee that does not have responsibility for patent laws, is much more intrusive into patent law than S. 1720, the bill in the Judiciary Committee, which does have jurisdiction over patent laws. Both provide for FTC enforcement action against bad faith demand letters as unfair or deceptive acts or practices under the FTC Act. However, S. 1720 describes the conduct that can trigger such action in broad advisory terms such as “falsely threaten that administrative or judicial relief will be sought” or “the communications lack a reasonable basis in fact and law,” with examples of particular conduct that might warrant scrutiny and action. By way of contrast, S. 2049 is highly detailed and specific in setting out the content that must be included in a demand letter to avoid FTC enforcement action. This includes detailed information regarding each patent and each claim alleged to be infringed, any infringing products, how each product or process is infringed, identification of any person with a right to enforce or a financial interest in the patent in question, how any compensation claimed was computed, any history of litigation or current administrative review of the patent, and notice to the recipient of the demand letter of any right that it might have to have a manufacturer brought it to defend the suit.

Bad faith demand letters alleging patent infringement and seeking compensation are also increasingly gaining the attention of state legislatures and state enforcement authorities. Since patent law is normally a matter left to federal law, such wide-spread state activity is unusual, and indicative of the notoriety and impact that these activities are having across the economy and throughout the country.

States are mobilizing against bad faith demand letters and other claims of patent infringement on at least three fronts. One is through application of pre-existing state consumer protection and unfair competition laws. In the second, more recently, state legislatures are considering and enacting state statutes on demand letters that largely track provisions in proposed federal legislation such as those in S. 1720 and S. 2049, and authorize state attorney general and private enforcement is state courts. A third approach is seen when states, acting either individually or jointly, align themselves behind congressional efforts to enact federal anti-PAE legislation, such as S. 1720 and S. 2049, that targets abusive demand letter tactics.

Of the three, only the third is without controversy. States are certainly free to lobby Congress on issues of interest to them and their citizens, as seen recently when 42 state and territorial attorneys general sent letters to the Senate urging enactment of the pending PAE legislation. Perhaps as evidence of the controversial nature of direct state action against patent trolls, the AGs’ letters not only urged enactment of the pending bills to enhance federal enforcement against PAEs, but they also urged Congress to amend its legislation to “confirm the concurrent authority of state attorneys general to bring the same types of enforcement action under state law.”

It is by no means clear that states presently have such “concurrent authority,” nor is the extent and manner in which it can be exercised when it does exist. Landmark Supreme Court decisions such as Bonito Boats v. Thundercraft Boats and Sears, Roebuck v. Stiffel hold that state laws are preempted when they extend patent protection to subject matter that is in the public domain under federal patent law, including when that state law protection is cast as a consumer protection law. However, the Supreme Court has also held that a state law protecting trade secrets is not preempted by federal patent law (Kewanee Oil Co. v. Bicron Corp), and similarly, that a California state statute prohibiting piracy of sound recordings was not preempted by federal copyright law, since the latter did not apply to sound recording fixed before February 15, 1972 and the California law applied only to recordings fixed before that date (Goldstein v. California).

The above referenced Supreme Court cases all concerned state statutes that afforded protection for intellectual property that for one reason or another was not protected under federal law. State statutes such as the one recently enacted in Vermont do not present such a binary protection/non-protection conflict, but rather seek to supplement enforcement mechanisms in federal law. These differing circumstances may call for a different analytical approach, perhaps along the line applied by the Supreme Court in its 2012 decision in Arizona v. United States, where Arizona maintained that its immigration enforcement laws were not preempted because they had the same objective and adopted the same standards as federal immigration laws. In striking down a key provision of the Arizona law, the Court held that where Congress by statute occupies an entire field, such as it has in registration of aliens in the United States, even complementary state regulation is impermissible.

State interest in enacting laws regulating bad faith demand letters concerning patent infringement is growing, and likely to continue to grow. The very preliminary discussion of these developments and of the legal authority of states to so act that begins here is likely to continue and be explored in a future issue of Landslide® magazine.

Hayden W. Gregory

Hayden W. Gregory is legislative consultant for the ABA Section of Intellectual Property Law in Washington, D.C.