Vermont Enacts The Nation’s First Anti-Patent Trolling Law (Forbes Cross-Post)

By Eric Goldman

Efforts to crack down on patent trolling are escalating.  Just a couple of years ago, Congress passed a major amendment of the Patent Act (the America Invents Act) with the hope that it would curb some abusive patent assertions.   Some members of Congress aren’t satisfied with the results of that amendment, so three different bills (the SHIELD Act, the Patent Quality Improvement Act and the End Anonymous Patents Act) have been introduced that would further restrict patent trolling [note: since I initially wrote this, the number has grown to 5].  While most folks are focusing on the Congressional debates, Vermont quietly enacted a first-in-the-nation law to combat patent trolling.  It’s not clear whether Vermont has the legal authority to regulate patent activities, but even if not, its efforts foreshadow a coming legislative crackdown on patent trolls.

Vermont’s Law

Vermont’s law (H.299, to be codified at 9 V.S.A. §§ 4195-4199) is entitled “Bad Faith Assertions of Patent Infringements.”  However, it doesn’t define “bad faith patent assertion.”  Instead, it enumerates factors to help judges distinguish legitimate from illegitimate patent assertions.  Factors that suggest a bad faith patent assertion include not identifying the patent(s)-at-issue, the patent owner, and exactly how the recipient’s behavior violates the patent; demanding too quick a response or too much money; and making deceptive or meritless assertions.  Factors that suggest a legitimate patent assertion include commercializing the patented invention; being either the original inventor (i.e., not having bought the patent for assertion purposes) or an educational institution; and having successfully enforced the patent in court.

Unfortunately, I’m skeptical of this attempt to distinguish legitimate from illegitimate patent assertions.  The enumerated factors reflect some of abusive practices we currently see from patent trolls, but as trolling tactics inevitably will evolve over time, the factors progressively will become useless.  We saw a similar dynamic with the 1999 Anti-Cybersquatting Consumer Protection Act (ACPA), which targeted domain name cybersquatting as it was conducted in the 1990s.  While the law squashed those practices, domain name squatters quickly changed their practices to avoid the law, so the ACPA is largely ineffectual at curbing modern domain name cybersquatting practices.

When there’s a bad faith patent assertion, the statute provides for:

Lawsuit.  Victims of bad faith patent assertions can file a lawsuit against the patent asserter.  The judge may award equitable relief (perhaps including an injunction against the patent asserter making further patent assertions against it), actual damages plus “exemplary” damages of the greater of 3x actual damages or $50,000, and attorneys’ fees.

Attorney General Enforcement.  The statute authorizes Vermont’s attorney general to bring civil enforcement actions against bad faith patent asserters.  Interestingly, the Vermont attorney general sued an alleged patent troll under consumer protection laws.  The implications of this lawsuit are murky.  It may show that the attorney general doesn’t need the new law because it already had adequate enforcement tools; another possibility is that the new law will make it easier for the Vermont attorney general’s office to bring cases, and the office might emerge as a leading crusader against patent trolls.

Bond.  A victim of a bad faith patent assertion may require the patent asserter to post a bond of up to $250,000 in case the victim is awarded its attorneys’ fees in litigation.  The court can deny the bond if the victim doesn’t have “available assets” equal to the bond amount.

The bond provision is odd, and I don’t see its point.  In theory, having to post a bond increases the asserter’s costs and administrative hassles.  However, companies who don’t have at least $250,000 in “available assets” aren’t prime targets of patent litigation; impecunious defendants aren’t likely to want to spend even a small extra money to get the bond; and defendants rarely get their attorneys’ fees in patent cases (something the SHIELD Act would address), so payouts from bonds will be rare.

Implications

shutterstock_92417080.jpgA Move Towards “Threats Actions”?  Vermont’s law creates what is called a “threats action,” a cause of action that the recipient of a legal threat can bring against the asserter for wrongfully asserting legal rights.  Threats actions are uncommon in the United States (a rare example is 17 U.S.C. 512(f)), but they are well-known in the United Kingdom and other Commonwealth countries.

In the US, most litigation reform efforts target lawsuits that have been already filed.  Threats actions push litigation reform earlier into the litigation process, before the parties have reached the courthouse.  This has at least two advantages.

First, the litigation process is like a pyramid, with a large base of legal disputes, a smaller middle of disputes where a lawsuit is filed, and a tiny apex of lawsuits that reach a final judgment on the merits.  Litigation reform post-lawsuit-filing affects only a small percentage of the overall disputes, while pre-filing litigation reform targets the pyramid base, i.e., the vast majority of disputes that never produce formal litigation.

Second, letters asserting rights have significant implications for both individual letter recipients and society at large, even if those letters don’t actually lead to lawsuits.  The letters, by design, get many recipients to change their behavior.  In some cases, recipients are so intimidated by the legal threats that they will immediately surrender.  In other cases, the recipients know the assertions are bogus, but they aren’t willing to spend the time and money to prove that in court.  A generic run-of-the-mill lawsuit, even if unmeritorious on its face, requires a defendant to spend thousands of dollars and many hours of time to dismiss (and that’s not counting the stress and aggravation). A patent lawsuit is even more pernicious; quick wins are rarely possible, and vigorous patent defenses can require millions of dollars.

Given these implications, it makes sense to regulate the pre-litigation assertion of patent rights.  A threats action, like Vermont’s, allows a letter recipient to go on the offensive, not just remain in limbo waiting to see if the asserter ever pursues its threats.  Furthermore, the risks that a patent asserter will find itself subject to a lawsuit and potential damages just for sending an assertion will encourage patent asserters to do their homework before firing off letters.  This should mean fewer assertion letters are sent, and the ones sent should be more meritorious.  This is one of the main reasons I’ve long supported a threats action both for trademark claims.

Federal Law Preemption?  While I think Vermont’s approach is promising, I don’t think state-level regulation is the right solution to patent trolling.  First, due to federal preemption doctrines, states cannot enact their own patent laws, and that preemption principle may apply to this law.  As just one example, federal courts have exclusive jurisdiction to determine patent validity and infringement, but Vermont courts effectively would have to make these determinations to decide if a patent assertion was in bad faith.

Second, even if the law isn’t preempted by federal patent law, I don’t favor state-by-state development of intellectual property doctrines for numerous reasons: it would be troublesome if states adopt inconsistent or different legal standards for threats actions; it becomes exponentially more expensive for IP owners to enforce their rights when they have to research and comply with multitudinous state laws; and business activities routinely cross state borders (especially with respect to the Internet), making it hard to determine which state’s laws apply.  I would enthusiastically favor a nation-wide threats action–and I’d favor it for all of the intellectual properties, not just patents.  However, if the choice is between no threats action at all versus state-level threats actions, I might favor the former to avoid the inevitable problems that accompany state-by-state regulation.

[UPDATE: At Patently-O, Camilla Hrdy explains why she disagrees with my discussion about state regulation of IP.]

Patents Have an Image Problem.  Patents used to be viewed favorably as an essential tool to spur innovation, but increasingly, patents are now viewed as anti-innovation killers of start-up companies and jobs.  As the statute says:

Not only do bad faith patent infringement claims impose a significant burden on individual Vermont businesses, they also undermine Vermont’s efforts to attract and nurture small and medium sized IT and other knowledge based companies. Funds used to avoid the threat of bad faith litigation are no longer available to invest, produce new products, expand, or hire new workers, thereby harming Vermont’s economy.

There is growing consensus that patent law is miscalibrated.  It’s great to see increasing efforts to strike a balance that results in the socially optimal level of innovative activity.  The Vermont law is just an early step in a lengthy regulatory arc to restore this balance.

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You might be interested in my related blog posts on software patents:

The Problems With Software Patents

Two Challenges to Fixing Software Patents

How to Fix Software Patents

[Photo Credit: Group of pirates trying to push a young man over a plank // ShutterStock]

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