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December 23, 2013 Articles

Vermont Enacts Legislation Against Patent Trolls

The first-of-its-kind bill gives companies the legal ability to fight back against patent owners acting in bad faith.

By Walter E. Judge Jr. and Eric A. Poehlmann

On May 22, 2013, Governor Peter Shumlin signed into law Vermont's first-in-the-nation (and so far sole) anti-patent troll law. The Vermont legislature approved a bill that provides legal redress for Vermont companies that face extortionate claims of patent infringement from individuals or entities known as "patent trolls." In brief, the legislation gives Vermont companies the legal ability to fight back against patent owners who—acting in bad faith—threaten to sue, or actually sue, a Vermont company.

The fundamental purpose behind the U.S. patent system has been subverted in recent years by the activities of so-called patent trolls. Upon acquiring a patent (regardless of how enforceable the patent actually is), a patent troll seeks out businesses that unwittingly rely on technology or processes arguably covered by the patent in order to extract licensing fees from those businesses. The licensing fees demanded by the troll are often exorbitant, especially when compared with the value of the technology or processes allegedly covered by the patent. On the other hand, the fees are less than the cost of defending an infringement lawsuit; therefore, the target company might make the decision to pay the demanded fees. Some commentators have called the patent troll's business model nothing short of legalized extortion.

Although elimination of patent trolling will ultimately require decisive federal action, the State of Vermont has recently enacted legislation meant to give the victims of patent trolls a way to stand up to their tormentors. The new law arose out of research and a proposal that Peter Kunin and Eric Poehlmann of Downs Rachlin Martin PLLC made to a consortium of business leaders in Vermont who had personally felt the impacts of patent trolls. Ultimately, Vermont's General Assembly adopted the proposal and passed the bill now known as 9 V.S.A. §§ 4195–4199 (effective July 1, 2013) (Bad Faith Assertions of Patent Infringement).

The impetus for this statute originates in Vermont's vision of its future economy. The state strives to provide an environment that nurtures small and medium-sized Internet technology and other knowledge-based businesses. The state understands that patents are necessary to protect inventions and to encourage innovation, but the state also recognizes that certain persons or entities have burdened companies and hindered economic growth through bad-faith assertions of patent infringement. Patent trolls neither create nor manufacture anything with their patents, thereby contributing nothing to the economy with them. Rather, they purchase one or more patents with the goal of forcing licensing fees from alleged infringers within a short period of time. Patent trolls do so through letters asserting patent-infringement claims, which often fail to specify how the alleged infringer is infringing on the patent. Because patent litigation is costly and time-consuming, companies accused of patent infringement by such patent trolls often acquiesce, agreeing to pay a demanded licensing fee because the cost of the license is less than the cost of defending the infringement claim. This practice has had the effect of burdening companies with unnecessary costs and depriving them of anticipated revenue. The new law provides companies, which previously might have acquiesced to the troll's demands due to a lack of resources to fight the claim, the opportunity to fight back through the threat of collecting damages and fees from the troll. Downs Rachlin Martin attorneys Peter Kunin and Eric Poehlmann drafted and promoted the legislation. See Press Release, Vermont Chamber of Commerce, Vermont's Governor Shumlin Signs Nation's First Patent Protection Law Against Bad Faith Claims (May 22, 2013).

The purpose of the statute is to facilitate the efficient and prompt resolution of patent-infringement claims, protect Vermont businesses from abusive and bad-faith assertions of patent infringement, and build Vermont's economy. The law allows Vermont companies to recover treble damages and their legal fees if they show that the patent troll acted in bad faith. At the same time, the statute aims to avoid conflict with existing federal patent law and interference with legitimate patent-enforcement actions. The Statement of Purpose section of the statute makes it clear that it in no way is meant to interfere with the legitimate enforcement of patents, whether through patent litigation or otherwise. The key element is "bad faith": If the patent holder is found to have acted in bad faith, federal preemption does not bar the alleged infringer's claim under the Vermont statute against the patent holder.

One reason that patent trolls acting in bad faith are willing and able to engage in their practice of "legalized extortion" is that, in the past, they have had very little to fear from the legal system. Trolls typically create a shell company (usually a limited liability company (LLC) or some similar entity) whose only asset is the patent it seeks to enforce. If a target company refuses to give in to the demand for a license fee and the troll brings an infringement suit, it knows that it has almost nothing to lose in litigation. Even in the event that the troll loses its infringement suit and is found liable for the target's attorney fees and other damages, the LLC has no financial assets to actually pay the damages.

Vermont's statute seeks to end that. In particular, section 4198 of the new law gives the court the power to require an entity asserting patent infringement to post a sizeable prosecution bond (up to $250,000) in the event the court determines that the entity's actions are taken in bad faith. Although even $250,000 may not cover an eventual award of attorney fees or damages should the target be successful in litigation, the fact that a patent troll would have to put up $250,000 at the start of the litigation creates a powerful disincentive for a troll to pursue a patent-infringement claim that it knows to be frivolous.

In addition to the bond requirement, the statute incorporates the remedial provisions of Vermont's Consumer Protection Act. Consistent with the act, a target that brings a successful action under the statute may obtain damages, attorney fees, and punitive damages. It is intended that the availability of this relief will further discourage trolls from activity in Vermont.

Determining Bad- or Good-Faith Assertions of Patent Infringement
The statute prohibits a person or entity from making a bad-faith assertion of patent infringement. It lists factors that a court may consider to determine whether a person or entity made an assertion of patent infringement in bad or good faith.

Bad-faith factors. The statute provides a list of factors that a court may consider as evidence of bad faith:

1. The demand letter does not include the patent number, the names and addresses of the patent owners or assignees (if there are any), and the specific way in which the alleged infringer's technology infringes on the patent;

2. The failure of the person or entity asserting patent infringement to research and identify the specific areas in which the products, services, and technology are covered by the claims in the patent;

3. The failure of the person or entity to provide information requested by the alleged infringer within a reasonable period of time;

4. The demand letter seeks payment for a licensing fee or a response within an unreasonably short period of time;

5. The amount demanded for the license 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 or entity making such a claim or assertion knew that it was meritless;

7. The claim or assertion is deceptive;

8. The person or entity (or their subsidiaries or their affiliates) have previously filed or threatened to file one or more lawsuits based on the same or similar claim of patent infringement, and either those threats or lawsuits lacked the information provided under factor (1) or a court previously found the claim meritless; and/or

9. Any other factor that the court may deem relevant.

Good-faith factors. The statute also provides a list of factors that a court may consider as evidence that the person or entity has made a good-faith assertion of patent infringement:

1. The demand letter contains the patent number, the names and addresses of the patent owners or assignees (if there are any), and the specific way in which the alleged infringer's technology infringes on the patent;

2. The person or entity asserting patent infringement provides information requested by the alleged infringer within a reasonable period of time;

3. The person or entity makes a good-faith effort to establish patent infringement and to negotiate an appropriate remedy;

4. The person or entity 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 or entity is the inventor, joint inventor, or original assignee of the patent, or the person or entity is an institution of higher education or a technology transfer organization owned by an institution of higher education;

6. The person or entity has demonstrated good-faith business practices in previous efforts to enforce the same or similar patent, or the person or entity has successfully enforced the same or similar patent through litigation; and/or

7. Any other factor that the court finds relevant.

Other Issues

Bond. If the alleged infringer, by motion, is able to establish a reasonable likelihood that a person or entity has made a bad-faith assertion of patent infringement, then the person or entity is required to post bond in an amount equal to a good-faith estimate of the alleged infringer's costs to litigate the claim and the amounts reasonably likely to be recovered. The court will draw from this amount to award the alleged infringer if the alleged infringer prevails in the litigation. However, the bond cannot exceed $250,000. The court may also waive the bond requirement if the court finds that the person or entity has assets equal to the amount of the proposed bond or if other good cause is shown.

Enforcement and remedies. In addition to the private right given to Vermont companies to sue the alleged patent troll, the legislation enables the Vermont Attorney General to bring a suit against the troll. The Attorney General also has the authority to make rules, conduct civil investigations, bring civil actions, and enter into assurances of discontinuances as provided under Vermont's Consumer Protection Act. See Vt. Stat. Ann. tit. 9 §§ 2451–2481w. Further, in an action brought by the Attorney General to enforce the provisions of this statute, the court may award or impose any relief provided under the Consumer Protection Act.

The legislation is highly innovative, but it does not undermine the rights of patent holders to threaten and bring legitimate claims of patent infringement. The new law asks the court to make a determination of "bad faith" based on a range of factors. The structure of the Vermont bill is similar to federal legislation aimed at cybersquatters, enacted in the federal Anti-Cybersquatting Consumer Protection Act. The legislation is also derived from a series of federal court decisions that recognize that a defendant in a patent-infringement lawsuit can assert a counterclaim under state law if the plaintiff (the patent owner) asserts a patent-infringement claim in bad faith.

The Vermont solution is certainly not the end of the effort to curb extortionate patent claims. A complete solution can only be achieved through changes in federal patent law. Indeed, several proposals for changing federal patent law are under consideration. In the meantime, this Vermont law will provide a valuable tool for Vermont companies confronted with an extortionate patent claim and can serve as a model for legislation by other states.

Keywords: litigation, intellectual property, Vermont, patent troll, bad-faith assertion, legislation

Walter E. Judge Jr. and Eric A. Poehlmann – December 23, 2013

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