One common complaint from businesses is that they receive large numbers of frivolous “cease and desist” letters from patent trolls that require significant human and financial resources to investigate. Notwithstanding recent U.S. Supreme Court jurisprudence, which makes it easier to recover attorneys’ fees in connection with frivolous patent infringement claims, the onslaught of such letters continues. Although several proposals have been made in Congress aimed at curbing bad faith patent assertion letters, none have become law and none appear to be on their way to becoming law any time soon. Faced with this seemingly unrelenting problem, business interests have successfully moved state legislatures across the country to enact laws that deal with bad faith patent assertion letters.

This article explores the basic features of state laws regulating bad faith patent assertion letters, and identifies thorny issues that may impact the ability of such legislation to achieve its intended objective.

Congress Creates a Void That States Are Eager to Fill

The Leahy-Smith America Invents Act (AIA) addressed some important aspects of the patent troll problem directly by including a joinder provision that limits the ability of plaintiffs to file a single lawsuit against multiple defendants, and adding post-grant and inter partes review provisions.¹ Notably, however, the AIA did not contain any provisions related to “bad faith” patent demand letters.

Beginning in 2013, state bad faith assertion (BFA) legislation took center stage across the country. Each of the states that has adopted BFA legislation has done so on a consolidated timeframe, and some language in many of the enacted laws is identical.² In total, 42 states have introduced BFA legislation and, out of those, 27 have passed some version of it, beginning with Vermont in May 2013.³ Thus, in two and a half years, more than half of the country has adopted laws to curb what has become a nuisance, with broad legislative support of state governments and state attorneys general.

What Does BFA Legislation Seek to Accomplish and How?

At the very heart of most versions of the BFA legislation are provisions to make a “person” liable for the “bad faith assertion of patent infringement,” and to empower state attorneys general to pursue civil remedies, in addition to creating a private right of action. “Person” is not well defined, so arguably the “people” who might be implicated in a state action could extend beyond the patent owner or assignee, and might include patent counsel.

The Vermont statute was used as a model by 18 states, including Alabama, Colorado, Florida⁴, Georgia, Idaho, Indiana, Louisiana, Maine, Maryland, Missouri, New Hampshire, North Carolina, North Dakota, Oregon, South Dakota, Utah, Virginia, and Washington.⁵ Under the Vermont model, the factors a court can use to make a finding that a patent assertion was made in “bad faith” include⁶:

1. Prior to sending a patent demand letter (widely defined to include written and electronic communications), the person fails to conduct an analysis comparing the claims to the infringing product or service, or such analysis was done but does not identify the specific areas in which the allegedly infringing products or services are covered by the patent.
2. The demand letter fails to provide the following basic patent information: the patent number; the name and address of the patent owners or assignees; and factual allegations concerning the specific areas in which the infringer’s products or services infringe the patent.
3. Despite requests by the letter’s recipient, the letter’s sender fails to provide the basic patent information “within a reasonable period of time.”
4. The letter demands payment of a license fee or a response to the letter within an “unreasonably short period of time.”
5. The person offers to license the patent for an “amount that is not based on a reasonable estimate of the value of the license.”
6. The claim or assertion of patent infringement is “meritless,” and the person knew or should have known that it is meritless.
7. The claim or assertion of patent infringement is “deceptive.”
8. The person, or its subsidiaries or affiliates, previously filed or threatened to file one or more other lawsuits based on the same or similar claims, and those lawsuits or threats also lacked the basic patent information, or a court found that the claim was meritless.
9. Any other factor the court deems relevant.

The Vermont model permits the court to use the following factors weighing against a finding of “bad faith” patent assertion⁷:

1. The demand letter contains the basic patent information.
2. The person fails to provide the basic patent information in the letter, but provides it at the request of the infringer “within a reasonable period of time.”
3. The person “engages in a good faith effort to establish that the target has infringed the patent and to negotiate an appropriate remedy.”
4. The person “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.”
5. The person is the inventor or original assignee of the original inventor, or is an institution of higher education or a technology transfer organization owned or affiliated therewith.
6. The person has previously demonstrated good faith business practices in efforts to enforce the patent or a substantially similar patent, or previously successfully enforced the patent or a substantially similar patent through litigation.
7. Any other factor the court deems relevant.

The Vermont model permits the “target” (accused infringer) to move the court to issue a bond upon a finding of bad faith. If the court finds a reasonable likelihood that the “person” has made a “bad faith” patent assertion, the court must order the “person” to post bond in an amount equal to a “good faith” estimate of the infringer’s costs to litigate the claim, not exceeding $250,000, unless the court separately finds that the infringer has adequate assets to fund the litigation defense, or “for other good cause shown.”⁸ While the Patent Act does not have a per se rule that provides for punitive damages to plaintiffs in infringement actions, BFA laws do permit such an award to accused infringers, making the Vermont model very accused-infringer friendly.

There are some differences in state BFA laws, so practitioners must know the law in each state prior to engaging in presuit infringement discussions. For example, while some states permit a private cause of action against the sender of a letter covered by the law, others permit only government action. In states like Alabama, the sender of a bad faith patent assertion letter can, in extreme cases, be found guilty of a crime carrying a jail sentence.⁹ Florida’s BFA law has a special carve-out provision exempting from the statute universities and technology transfer institutions that are owned by, or affiliated with, an institution of higher education.¹⁰

This last provision (exempting Florida universities) exemplifies the hidden dangers of the BFA legislation. Although the laws are intended to attack “patent trolls,” that term is so ill-defined that innocent victims may be swept into the troll dragnet, hence the need for exceptions. In addition to the foreseen need for numerous exceptions (universities are unlikely to be the only one), the issue of fairness is also sure to rise. If a university, or other exempted entity, behaves as a troll, why should it be treated differently? Thorny questions such as these have gone unanswered in the quest for quick-fix legislation at the state level. But they are likely to threaten the viability of the laws when they are inevitably challenged.

Problems with BFA Legislation

To be clear, state-centric legislation is not a solution in search of a problem; the societal costs associated with massive and indiscriminate patent assertions by trolls are real and cannot be ignored. However, it is not clear that these laws will do anything besides prompting these same, often deep-pocketed, “patent assertion entities” (PAEs) to file lawsuits first and seek settlements second to avoid the BFA headache, while simultaneously creating a chilling effect on small businesses that have legitimate interests in seeking patent licenses through presuit demand letters. These small businesses and independent inventors, who possess and wish to enforce valid patents (and who often see them as a “great equalizer”), must now fear that such presuit litigation activity will subject them to significant financial liability in the form of a hefty bond.

Under these circumstances, independent inventors who are faced with infringement of their patents may be left with no viable recourse for fear that a state court might order a $250,000 bond simply because the inventor had not yet begun practicing the invention. This leads to the question of whether BFA laws effectively encroach on inventors’ rights by saddling settlement discussions with limitations even before they begin. Putting aside the inequities inherent in BFA legislation, they also seem to offend basic principles of federal preemption and raise issues related to First Amendment doctrines of petitioning immunity,¹¹ which call into question whether these laws, when inevitably challenged, will survive judicial scrutiny.

Constitutional Issues

Since its ratification in 1788, the “patent and copyright clause” of the U.S. Constitution paved the way for Congress, not the states, to enact patent legislation.¹² Although the Constitution explicitly states the goal of the patent system is to “promote the progress of science and useful arts,” some argue that “in reality the goal of the patent is three-fold: (1) an incentive for inventors to invent; (2) an incentive for inventors to disclose their inventions; and (3) to induce firms to invest in innovation of patentable inventions.”¹³

One of the big unknowns surrounding BFA legislation is whether it is constitutional for the states to curtail the rights of patent owners to assert rights granted by a federal agency as authorized by the Constitution. Although state courts are considered competent to hear some cases arising under federal law,¹⁴ the Patent Act explicitly grants federal courts exclusive jurisdiction over patent cases.¹⁵ The supremacy clause of the Constitution,¹⁶ holds that if a state law is “opposed to, or inconsistent with, any constitutional power which Congress has exercised, then, so far as the incompatibility exists, the [state] grant is nugatory and void, necessarily by reason of the supremacy of the law of Congress.”¹⁷

What appears to get lost in this generation’s version of the patent troll discussion is that there is no requirement in law that a patent owner practice the patented invention in order to sue someone who does.¹⁸ Nor is there any requirement that a patent be enforced only by its original inventor. Quite to the contrary, full disclosure of the invention, something the inventor could have kept hidden from the world, fulfills the obligations of the inventor to the public and, under centuries of law, entitles the inventor, and its assignees, to a time-limited monopoly on the invention.¹⁹ Notwithstanding this, BFA laws across the country include as a factor for consideration against bad faith that the person asserting the patent practices the invention. It is foreseeable that a state court will subjectively find that where a person does not practice the patented invention (either because it is merely an assignee of the patent or because it has chosen not to), such nonpractice could be deemed as a factor “relevant to the court” in favor of a finding of bad faith. Such findings would, in essence, limit the presuit enforcement of patent rights to original inventors and/or actors that practice the invention on a commercial basis. Such a limitation has never been required by U.S. patent law and has not been authorized by Congress.

State BFA laws also question the motive of the person making the patent infringement assertion. This is an improper line of inquiry. As the Supreme Court made clear in 1902, the motives behind a patent lawsuit are not open to judicial inquiry because, “having a legal right to sue, it is immaterial whether his motives are good or bad, and [the plaintiff] is not required to give his reasons for the attempt to assert his legal rights.”²⁰ The motivation of the patent owner, however, is placed squarely into the line of inquiry by state laws that make it a factor in the determination of bad faith.

Short of a patent assertion letter sent by a person with no patent rights then in existence to assert, it is impossible to reconcile Federal Circuit precedent that the right to assert a duly granted patent is protected by the presumption that the assertion is made in good faith, with, for instance, the Florida Patent Troll Prevention Act’s prohibition against “bad faith assertion[s] of patent infringement.”²¹ In addition, federal law already has an objective and subjective notice test.²² However, BFA laws across the country give state courts an enumerated list, which includes a seemingly limitless catchall provision as its final factor, that squarely conflicts with existing federal law, by frustrating Congress’s objective of promoting “stringent requirements for patent protection.”²³

Several of the 27 states that have passed a BFA law expressly recognize federal primacy in the legislation itself, and affirm the laws seeks to avoid overstepping state authority. But stating the obvious, and claiming that a law avoids federal preemption, does not necessarily make it so. The Federal Circuit has already discussed the right of a patentee to assert its patent in the context of an actual lawsuit:

Neither the bringing of an unsuccessful suit to enforce patent rights, nor the effort to enforce a patent that falls to invalidity, subjects the suitor to antitrust liability. . . . [T]he patentee must have the right of enforcement of a duly granted patent, unencumbered by punitive consequences should the patent’s validity or infringement not survive litigation. The law recognizes a presumption that the assertion of a duly granted patent is made in good faith.²⁴

It is seemingly antithetical, or at least illogical, then for BFA laws to create punitive consequences for doing presuit what a patentee could do “unencumbered” through litigation. Further,

[g]iven that petitioning immunity protects . . . litigation, it would be absurd to hold that it does not protect those acts reasonably and normally attendant upon effective litigation. The litigator should not be protected only when he strikes without warning. If litigation is in good faith, a token of that sincerity is a warning that it will be commenced and a possible effort to compromise the dispute.²⁵

Therefore, despite language in the body of BFA laws that self-servingly claims to avoid federal preemption, these laws appear to be squarely in conflict with federal law, making them susceptible to constitutional attack.²⁶

Are BFA Laws a Good Idea?

Assuming, arguendo, BFA laws do not offend the Constitution, these laws may do more harm than good when put in practice. At the outset, any BFA law in the books will discourage presuit settlement because a PAE will want to avoid claims of bad faith and a possible $250,000 bond. These laws will not eliminate claims of patent infringement; instead, patent assertions will begin not as presuit settlement discussions or demand letters but as federal patent infringement complaints. This, of course, will further clog court dockets and increase litigation costs, and therefore the costs of doing business, for all parties. This is likely the exact opposite of what these laws are intended to do, but it is this type of knee-jerk reaction that typically makes bad law in the first place.

Patentees will be less likely to assert valid rights outside of the courtroom and will instead choose to file a lawsuit first, under Federal Circuit immunity, and seek a license second. This works well for the well-funded “patent troll,” who has the money to burn. But what about the small-time inventor who went through the time and expense of research and development to create a new invention and obtain a valid patent? What happens when this patent owner wants to assert its intellectual property rights against an infringer in a state that has a BFA law on the books? This small-time patentee now has to decide whether it wants to risk the imposition of a $250,000 bond (or worse) if a warning letter is sent, or instead hire patent litigation counsel and spend the few hundred dollars it takes to file a federal lawsuit, so that this discussion can happen without such fears. BFA laws, in this context, appear to be a lose-lose for all involved in that they improbably appear to encourage more litigation rather than less.

A preferable solution to high-volume and indiscriminate demand letters is for Congress to pass legislation that explicitly preempts state-enacted BFA laws, and that strikes a better balance between the rights of inventors and those of businesses accused of infringement. Congress is much better equipped than state legislatures to craft such laws because it has been engaged in patent legislation for more than 200 years. Without a more balanced law, the benefits associated with innovation and patenting may be outweighed by the potential risks of asserting valid patent rights. To an independent inventor, or a small business dependent on innovation, this may lead to the inevitable conclusion that a patent is a worthless piece of paper unless it is backed by deep pockets.

Endnotes

1. Pub. L. No. 112-29, 125 Stat. 284 (2011); see Protecting American Talent and Entrepreneurship (PATENT) Act of 2015, S. 1137, 114th Cong.

2. Paul R. Gugliuzza, Patent Trolls and Preemption, 101 Va. L. Rev. 1579, 1591 n.71 (2015) (“The states that have followed Vermont’s model include Alabama, Colorado, Florida, Georgia, Idaho, Indiana, Louisiana, Maine, Maryland, Missouri, New Hampshire, North Carolina, North Dakota, Oregon, South Dakota, Utah, Virginia, and Washington.”) See Ala. Code §§ 8-12A-1 to – 7; Colo. Rev. Stat. §§ 6-12-101 to – 104; Fla. Stat. §§ 501.991–.997; Ga. Code Ann. §§ 10-1-770 to – 774; Idaho Code Ann. §§ 48-1701 to – 1708; Ind. Code §§ 24-11-1-1 to – 5-2; La. Rev. Stat. Ann. § 51:1428; Me. Rev. Stat. tit. 14, §§ 8701–8702; Md. Code Ann., Com. Law §§ 11-1601 to – 1605; Mo. Rev. Stat. §§ 416.650–.658; N.H. Rev. Stat. Ann. §§ 359-M:1 to :5; N.C. Gen. Stat. §§ 75-140 to – 145; N.D. Cent. Code §§ 51-36-01 to – 08; Or. Laws 2014 ch. 19, § 2; S.D. Codified Laws §§ 37-36-1 to – 9; Utah Code Ann. §§ 78B-6-1901 to – 1905; Va. Code Ann. §§ 59.1-215.1 to .4; Wash. Rev. Code. §§ 19.350.005–.900; see also 815 Ill. Comp. Stat. 505/2SSS; Kan. Stat. Ann. § 50-6,140; Miss. Cod. Ann. §§ 75-24-351 to – 357; Mont. Code Ann. §§ 30-13-151 to – 154; Okla. Stat. tit. 23, §§ 111–114; Tenn. Code Ann. §§ 29-10-101 to – 104; Tex. Bus. & Com. Code. Ann. §§ 17.951–.955; Vt. Stat. Ann. tit. 9, §§ 4195–4199; Wis. Stat. § 100.197.

3. See Patent Progress’s Guide to State Patent Litigation, Pat. Progress, http://www.patentprogress.org/patent-progress-​legislation-guides/patent-progresss-guide-state-patent-legislation/ (last updated Feb. 24, 2016).

4. On March 24, 2016 the relevant Florida statute was significantly revised to, among other things: (i) define a bad faith letter as one falsely asserting that suit has been filed, is objectively baseless or is materially misleading; (ii) eliminating bond requirements for patent owners; and (iii) limiting punitive damages to repeat violators of the statute.

5. See supra note 2.

6. Vt. Stat. Ann. tit. 9, § 4197(b).

7. Id. § 4197(c).

8. Id. § 4198.

9. Ala. Code § 8-12A-5.

10. Fla. Stat. §§ 501.991–.997.

11. United Mine Workers v. Pennington, 381 U.S. 676 (1965); E. R.R. Presidents Conference v. Noerr Motor Freight, 365 U.S. 127 (1961).

12. U.S. Const. art. I, § 8, cl. 8.

13. Elizabeth D. Ferrill, Patent Investment Trusts: Let’s Build a PIT to Catch the Patent Trolls, 6 N.C. J.L. & Tech. 367, 370 (2005); see Rebecca S. Eisenberg, Patents and the Progress of Science: Exclusive Rights and Experimental Use, 56 U. Chi. L. Rev. 1017, 1024, 1028, 1036 (1989).

14. See, e.g., Claflin v. Houseman, 93 U.S. 130, 136–37 (1876).

15. 28 U.S.C. § 1338(a) (“The district courts shall have original jurisdiction of any civil action arising under any Act of Congress relating to patents . . . . No State court shall have jurisdiction over any claim for relief arising under any Act of Congress relating to patents[.]”).

16. U.S. Const. art. VI, § 1, cl. 2.

17. Gibbons v. Ogden, 22 U.S. 1, 30 (1824).

18. See Cont’l Paper Bag Co. v. E. Paper Bag Co., 210 U.S. 405, 424 (1908).

19. Id.

20. Connolly v. Union Sewer Pipe Co., 184 U.S. 540, 546 (1902) (“The exercise of the legal right cannot be affected by the motive which controls it.” (quoting Kiff v. Youmans, 86 N.Y. 324, 329 (1881)).

21. Compare C.R. Bard, Inc. v. M3 Sys., Inc., 157 F.3d 1340, 1369 (Fed. Cir. 1998), with Fla. Stat. § 501.993.

22. Dominant Semiconductors Sdn. Bhd. v. OSRAM GmbH, 524 F.3d 1254, 1260 (Fed. Cir. 2008) (holding that a showing of bad faith as required for liability in notification of an alleged patent infringement “includes separate objective and subjective components”).

23. Ultra-Precision Mfg., Ltd. v. Ford Motor Co., 411 F.3d 1369, 1378 (Fed. Cir. 2005) (holding that a state cause of action that frustrates Congress’s objective of promoting “stringent requirements for patent protection” is preempted).

24. C.R. Bard, 157 F.3d at 1369 (citations omitted); cf. Concrete Unlimited Inc. v. Cementcraft, Inc., 776 F.2d 1537, 1539 (Fed. Cir. 1985) (finding no liability for unfair competition based on suit to enforce an invalid patent).

25. Coastal States Mktg., Inc. v. Hunt, 694 F.2d 1358, 1367 (5th Cir. 1983).

26. Cipollone v. Liggett Grp., Inc., 505 U.S. 504, 516 (1992) (holding that “it has been settled that state law that conflicts with federal law is ‘without effect’”).