©2015. Published in Landslide, Vol. 7, No. 3, January/February 2015, 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.
In recent issues of Landslide®, Hayden Gregory has nicely recounted recent efforts at the federal level—Congress, the Federal Trade Commission, and the courts—to curb “patent troll” abuses.1 The federal legal landscape—and corresponding environment as it relates to troll activity—is changing rapidly.2
Defining a “patent troll” can, of course, be controversial. A patent conveys a right to exclude, not a duty to practice.3 Universities and small inventors, among others, sometimes obtain patents that they themselves do not commercialize. And it is oversimplistic to label as a “troll” any patent enforcer that purchased the patent in order to enforce it. Patent rights are commercial assets, which the purchaser presumably gave value to acquire. As a general proposition, we do not want to chill trade in patent rights any more than we want to chill trade in any other legitimate commercial asset.
At the other end of the spectrum, take a patent enforcer that acquired the patent from someone else and hasn’t commercialized it, but is using the patent to extract licensing fees from targets who may—but may not—be infringing, with said licensing fees set just low enough to make paying a superior option for the target than incurring the cost of defense, or even the cost of investigation.4 Many would say this enforcer is a troll. Of course, if the target actually infringes, it is difficult to cast many aspersions on the vindicated owner of a federal property right.
Federal solutions having proved elusive, state attorneys general increasingly have taken the anti-troll fight upon themselves—with mixed results.5 At least arguably, this phenomenon reflects an efficient pooling of anti-troll resources—the public treasury—akin to the pooling that individual targets sometimes have attempted to establish themselves, through defense cooperation groups among companies targeted by particular trolls, on particular patents, or in particular industries. Experience suggests that “consumer protection” efforts by state attorneys general can have great effect as parallel or cooperative efforts gain momentum with the involvement of more and more states: compare such actions in the arenas of Medicare reimbursement and big tobacco.
But state-level efforts confront immediate legal obstacles. Patent rights are created and governed by federal law.6 Principles of federal statutory preemption,7 as well as constitutional free speech and petition rights,8 can be problematic.
Thus, as Hayden notes, states have sued trolls under state consumer protection statutes, as well as under statutes directed specifically to “bad faith demand letters.” The basic premise is that, generally speaking, there is no constitutional right to deceptive commercial speech.9 Yet settlement demands by patent trolls at least arguably contain falsehoods—such as that litigation will ensue if the target does not comply, or that many or most other targets have complied, with the troll’s demand for payment.10
Apart from the fine legal details, the mere fact that state attorneys general have identified this as an issue worth tackling is, itself, newsworthy. We sat down with one of the leaders of these efforts, Vermont Attorney General Bill Sorrell, to obtain his perspective. Attorney General Sorrell is well known for having sued MPHJ Technology Investments on behalf of the State of Vermont in Vermont state court in May 2013, alleging violation of the Vermont Consumer Protection Act. MPHJ removed the case to federal court, the federal district court remanded the case, and on August 14, 2014, the Federal Circuit held that it lacked federal jurisdiction over the remand order.11
The patent troll problem is a problem throughout the United States, but you have been a pioneer in dealing with it. Why was your office the first to file suit?
Yes, but the credit goes to a number of Vermont companies, some of them very well known, who got together in the spring of 2012 and talked internally about problems they were having with patent trolls. These companies reached out to me and to Vermont’s secretary of commerce and asked if we would meet with them. We did. The companies described the problems they were having, and asked whether we in Vermont could do something to make Vermont a “troll hostile” environment.
We thought about it. We considered that patents are creatures of federal statute, and that there could be preemption issues. The companies had hired a law firm, and we agreed to interact with the firm to consider the matter further.
Then, in the fall of that year, we received complaints about one patent troll, MPHJ, in particular. Our earlier discussions put this troll’s activities in context, and led us to respond as we did to the allegations that MPHJ had communicated with something like 75 nonprofits and small businesses in our state.
So you already were communicating with the business community about patent trolls several months before MPHJ became a focus?
Yes, that’s absolutely correct.
Things are tough all over. There are severe resource constraints on law enforcement agencies all across the country. What made you decide that this issue was worth spending your time and resources on, as compared to other matters such as financial crimes, drug trafficking, and the other things that might occupy a state’s lead law enforcement officer?
We initially were approached by the kind of businesses we want to have and grow in Vermont—many in high tech, which offer well-paying jobs to well-educated work forces in a nonpolluting environment. When we can do something that assists those kinds of businesses, we are going to try to do that.
But there were also the nonprofits, and MPHJ’s targeting of them, that motivated us. There was one nonprofit that provided daily living skills training to developmentally disabled Vermonters—a small operation that was totally dependent on state and federal grants. This organization was targeted by MPHJ and the law firm, Farney Daniels, which appears joined at the hip to MPHJ.
We very much enjoy standing up for the little guy who is being victimized.
And the more we investigated MPHJ, the more it appeared that, at least in Vermont, its modus operandi is to pick on small nonprofits and small businesses that are unlikely to have legal counsel on staff. And even if they do have legal counsel, they have poor choices: spend a huge amount of money for legal representation to fight; ignore it and hope it goes away; or just pay the licensing fees. David versus Goliath. Those are the kinds of cases where, if we think we’ve got the facts and law on our side, we love to wade in and help David.
Some would view your approach as using state resources to combat a federal problem. Some might see an analogy in other federal issues that have prompted states to act, such as in the immigration arena. Was any of your thinking inspired by those other kinds of state actions?
You know the famous line about the states as laboratories of democracy. The beauty of our federal system is that states are able to move ahead of the federal government, other states might follow along, and ultimately maybe the federal government will follow along. Vermont has not been afraid to plow new ground. Vermont was the first state after the 13 original colonies. Vermont was the first state to grant the right to vote without regard to property ownership. Vermont was the first state to ban slavery in its constitution. Coming forward to the present day, Vermont just passed a law making it the first to require labeling of foods containing genetically modified organisms. Consequently, and unsurprisingly, we have found ourselves in federal court defending that statute. So we take advantage of our constitutional rights, and do not simply rely on the federal government to do everything for us.
Can you put the Supreme Court’s recent decisions in Octane Fitness and Highmark into the broader context of your fight against patent trolls?
These decisions were a positive development. Whether hindsight will prove them to have been a giant step or just a step in the right direction, time will tell. But certainly, it was very difficult to get attorneys’ fees before these decisions. We think they will have some impact reducing some of the frivolous patent assertion litigation by trolls.
But the cases that result in litigation are just the tip of the iceberg. It has been estimated that only 1 or 2 percent of patent assertion cases end up in litigation. So focusing on whether attorneys’ fees should be awarded to a prevailing party does not offer much help to many troll victims. Take MPHJ. One of its demand letters said that the recipient would be sued in two weeks if the recipient did not pay up. But MPHJ did not sue. In fact, my impression is that MPHJ has actually sued only a very small fraction—tenths of a percentile—of the thousands of targets it has threatened.
Did any Vermonters voice any concern that either your office’s enforcement efforts, or Vermont’s new statute addressing bad faith demand letters,12 might chill the appropriate exercise of patent rights?
No, we have not received complaints from within Vermont. One of Vermont’s very largest private sector employers is IBM. I think it is fair to say that it would have been uphill sledding to pass the statute had IBM been opposed.
Neither I nor any other state attorney general is trying to get in the middle of a good faith fight between an entity asserting patent infringement and an alleged infringer. If it is a good faith fight, we don’t want to get in the middle of that. And so the Vermont statute is carefully limited to bad faith assertions of patent infringement, with various criteria bearing upon whether the assertion of patent infringement is made in good faith or bad faith. So I do not think Middlebury College, the University of Vermont, IBM, et cetera, are really concerned about Vermont’s statute or our enforcement efforts, because they are not going to be asserting patent infringement in bad faith.
We live in a country that rather prides itself on free speech and the right of petition. Proving someone has committed a wrong by speaking, let alone petitioning the court, generally has been challenging.
We have been fighting with MPHJ recently over whether our action should be in state court or federal court. We fought, ultimately successfully, to get it sent back to state court, by arguing that our case is not about whether MPHJ has this or that patent, or about what that patent or those patents control. We are focused on unfair and deceptive acts and practices on the part of MPHJ that relate to or are part and parcel of its patent infringement assertions. But it’s not relevant really in our case whether MPHJ actually has the patents or what those patents cover. In fact, we worked very hard in drafting the complaint to avoid those issues, so as to avoid what we figured inevitably would be a federal preemption claim. That is what MPHJ argued. MPHJ even filed a Rule 11 motion against my assistants litigating the case, asserting that our suit is just political—which it is not. And the federal district court said in the hearing that it had seen frivolous lawsuits and this is not one of them. Then MPHJ argued to the Federal Circuit, asking it to require the district court to rule on the Rule 11 motion, that this litigation reflects bad faith on the part of my office, but we prevailed before the Federal Circuit. We then prevailed in state court with the successful defense of MPHJ’s motion to dismiss, but MPHJ has recently filed new counterclaims and removed the case again to federal court. We are fighting hard to—once again—have the case remanded back to state court, where we firmly believe it belongs. So that is an interesting strategy MPHJ is following.
How are your efforts working out? Have you perceived a diminution in either demand letters from MPHJ in particular, or patent troll activity generally in Vermont, since you initiated your enforcement campaign or since the statute was passed?
We are not aware of any MPHJ patent assertion activities in Vermont since we sent MPHJ our first civil investigative demand. We haven’t received any further complaints about MPHJ. So my belief is we’ve had an impact.
We think our efforts have led to heightened awareness of the patent trolling issue, which in turn has led to a couple of complaints to our office about other patent assertion efforts. We’re taking a look at those.
I think it’s fair to say both our statute and our litigation efforts have had an impact. The statute was the first of its kind in the country to be enacted, with 12 or more states now having followed suit with variations of their own. Generally speaking, those statutes confer upon the target a private cause of action against those responsible for bad faith assertion of patent infringement, and provide remedies such as requiring the posting of a bond, the possibility of treble damages and attorneys’ fees, and the like. I have to believe this has had an impact on alleged patent troll activities not only in Vermont but also in other states.
What now? What next?
We among the states are watching closely to see what Congress is going to do. We have a real concern about some parties’ attempts to influence Congress to either broadly preempt state action in this arena, or more narrowly, preempt state statutes that provide a private cause of action for bad faith assertions of patent infringement. Some very large and powerful companies favor the state statutes, but others favor federal preemption. Senator Leahy’s bill has been pulled from the judiciary calendar; we’re mindful of it coming back to life or another bill coming out of the House. We’re going to fight any attempts to preempt the state statutes or state enforcement actions.
1. Hayden W. Gregory, From the Hill: Combatting So-Called Patent Trolls: Demand Letters Demand Attention, Landslide, May/June 2014, at 2; Hayden W. Gregory, From the Hill: States Go After Patent Trolls—How Far Can They Go?, Landslide, July/August 2014, at 2.
2. For example, panels of the Patent Trial and Appeal Board, which conducts the inter partes reviews (IPRs) created by the America Invents Act of 2011, have been labeled as “death squads” for patents challenged under that procedure. Tony Dutra, Rader Regrets CLS Bank Impasse, Comments on Latest Patent Reform Bill, Bloomberg BNA (Oct. 29, 2013), http://www.bna.com/rader-regrets-cls-n17179879684 (quoting then Federal Circuit Chief Judge Randall Rader). See generally Joseph Casino & Michael Kasdan, Trends from 2 Years of AIA Post-Grant Proceedings, Law360 (Sept. 29, 2014), available at http://www.wiggin.com/files/29546_Trends%20From%202%20Years%20of%20AIA%20Post-Grant%20Proceedings,%20Law360,%209.29.14,%20Casino,%20Kasdan.pdf. Yet IPRs’ impact on trolls is unclear. Compare Eric W. Schweibenz et al., Automatic Stay of Litigation Pending Inter Partes Review? A Simple Proposal for Solving the Patent Troll Riddle, Landslide, Sept./Oct. 2014, at 40 (arguing IPRs “are a particularly attractive tool to use against nonpracticing entities (NPEs) or so-called patent trolls”), with Michael Gulliford, If Patent Reform Is Meant to Starve Patent Trolls, Why Is It Feeding Them Instead?, IPWatchdog (Sept. 8, 2014), http://www.ipwatchdog.com/2014/09/08/if-patent-reform-is-meant-to-starve-patent-trolls-why-is-it-feeding-them-instead/id=51067/ (arguing that susceptibility of patents to IPR forces patentees away from contingent fee representation and toward trolls). For another example, the Supreme Court in 2014 altered the standard for awarding attorneys’ fees to prevailing parties in patent infringement cases. See Octane Fitness, LLC v. ICON Health & Fitness, Inc., 134 S. Ct. 1749, 1758 (2014); Highmark Inc. v. Allcare Health Mgmt. Sys., Inc., 134 S. Ct. 1744, 1748 (2014). In so doing, the Court rejected—in the attorneys’ fees context—the Federal Circuit’s requirement that a defendant seeking attorneys’ fees based on the infringement suit’s lack of merit prove that the suit was brought in “subjective bad faith.” It is unclear how, if at all, these rulings will impact Federal Circuit preemption standards which, at least arguably, also turn on the patentee’s subjective good or bad faith in asserting infringement. See, e.g., Hunter Douglas, Inc. v. Harmonic Design, Inc., 153 F.3d 1318, 1336 (Fed. Cir. 1998).
3. E.g., King Instruments Corp. v. Perego, 65 F.3d 941, 949 (Fed. Cir. 1995).
4. See, e.g., Hana Oh Chen, Combating Baseless Patent Suits: Rule 11 Sanctions with Technology-Specific Application, 54 Jurimetrics 135 n.2 (2014) (defining patent assertion entities, “[s]ometimes referred to as ‘patent trolls,’” as “entities that frequently acquire weak or poorly granted patents, and file numerous patent infringement lawsuits against companies and inventors”).
5. Compare Activision TV, Inc. v. Pinnacle Bancorp, Inc., 976 F. Supp. 2d 1157, 1169 (D. Neb. 2013) (granting patentee’s motion for preliminary injunction prohibiting the attorney general from enforcing a cease and desist letter), with Assurance of Discontinuance, State ex rel. Swanson v. MPHJ Tech. Invs., LLC, No. 62-CV-13-6080 (Minn. Dist. Ct. Aug. 20, 2013), available at http://intellectualip.files.wordpress.com/2013/09/state-of-minnesota-by-its-attorney-general-lori-swanson-v-mphj-technology-investments-llc.pdf, and Assurance of Discontinuance, In re Investigation by Eric T. Schneiderman, Attorney Gen. of the State. of N.Y., of MPHJ Tech. Invs., LLC, No. 14-015 (N.Y. Att’y Gen. Jan. 13, 2014), available at http://ag.ny.gov/pdfs/FINALAODMPHJ.pdf.
6. U.S. Const. art. I, § 8, cl. 8; 35 U.S.C. §§ 1 et seq.
7. See generally Bonito Boats, Inc. v. Thunder Craft Boats, Inc., 489 U.S. 141 (1989).
8. U.S. Const. amend. I; see also Borough of Duryea, Pa. v. Guarnieri, 131 S. Ct. 2488, 2494 (2011) (“[T]he Petition Clause protects the right of individuals to appeal to courts and other forums established by the government for resolution of legal disputes.”).
9. “Because ‘disclosure of truthful, relevant information is more likely to make a positive contribution to decisionmaking than is concealment of such information,’ only false, deceptive, or misleading commercial speech may be banned.” Ibanez v. Fla. Dep’t of Bus. & Prof’l Regulation, Bd. of Accountancy, 512 U.S. 136, 142 (1994) (citation omitted); see also Gertz v. Robert Welch, Inc., 418 U.S. 323, 339–40 (1974) (“Under the First Amendment there is no such thing as a false idea. . . . But there is no constitutional value in false statements of fact. Neither the intentional lie nor the careless error materially advances society’s interest in ‘uninhibited, robust, and wide-open’ debate on public issues.”).
10. See, e.g., Steven Seidenberg, Infringe Benefits: Patent Trolls Getting First Amendment Protection, ABA J., May 2014, at 19.
11. See Vermont v. MPHJ Tech. Invs., LLC, 763 F.3d 1350 (Fed. Cir. 2014).
12. Vt. Stat. Ann. tit. 9, § 4197.
13. Patent Transparency and Improvements Act of 2013, S. 1720, 113th Cong. (2013).