by: Robert Wagner, intellectual property attorney at Picadio Sneath Miller & Norton, P.C. (Robert Wagner on G+)
In the continuing quest to limit or prevent patent “trolls” from filing frivolous lawsuits against alleged infringers, state legislatures are jumping into the mix and proposing state laws to discourage or prohibit this kind of conduct. Pennsylvania is among the latest to join this bandwagon. PA Senate Bill No. 1222, introduced on February 4, 2014 is an effort to limit and discourage frivolous patent infringement lawsuits. However, given the scope of the bill, and the potential conflicts with federal law, there are serious questions as to both the wisdom of the approach it takes and whether this bill will ever become law.
The Language of the Bill
Bill No. 1222 purports to prohibit bad faith assertions of patent infringement. (Section 3(a)). It allows a target of a demand letter, someone threatened with patent infringement, or a defendant in a patent infringement lawsuit to bring an action in state court (the court of common pleas) for bad faith. (Section 5(b)). If the court determines that there is a reasonable likelihood that the patentee has threatened or is litigating a patent infringement claim in bad faith, the court can require the patentee to post a bond to cover the target’s legal costs and damages, but not to exceed $250,000. (Section 4). In addition, among the possible remedies are equitable relief, damages, costs and fees, and exemplary damages of $50,000 or three times the total damages, costs, and fees, whichever is greater. (Section 5(b)).
Under the bill, the following factors may be considered as evidence that a patentee is bringing a bad faith claim of patent infringement (Section 3(b)):
- When a demand letter fails to contain the patent number, the identity of the patent owner, or factual allegations of why the target infringes.
- When the patentee conducted adequate due diligence before sending the demand letter.
- When the patentee refuses to provide certain information to the target when requested to do so.
- When the demand letter demands a response or payment within an unreasonably short period of time.
- When the license demand is not reasonably related to what the license should be worth.
- When the patentee knew the claim was meritless or deceptive.
- When the patentee previously filed or threatened similar actions that were meritless or failed to disclose the kinds of information identified above.
In contrast, the following factors may be considered as evidence that the patentee is not bringing a bad faith claim of patent infringement (Section 3(c)):
- When a demand letter includes the patent number, the identity of the patent owner, and factual allegations of why the target infringes, or the patentee provides this information on request.
- When the patentee engages in a good faith effort to establish infringement and negotiate an appropriate remedy.
- When the patentee has made a substantial investment in using the patent or selling products that use the patent.
- When the patentee is the inventor, joint inventor, original assignee, or an institution of higher education (or its tech transfer office).
- When the patentee has demonstrated successfully enforced the patent in litigation or has in good faith previously tried to enforce the patent.
Thoughts About the Merit of This Bill
Determinations of whether a patent infringement claim has been brought in good or bad faith will necessarily require a significant analysis of the underlying merits of the claim, including claim construction and the intricacies of infringement and invalidity issues. State courts have never had to deal with these issues before because federal courts have exclusive jurisdiction under 28 U.S.C. § 1338(a) to hear all patent cases. Thus, this bill would place state courts in uncharted and complex waters that they have never had to deal with.
In addition, this bill purports to extend not just to demand letters sent by patentees, but also filed patent infringement lawsuits (which must be in federal court). It is unclear how state courts are to be addressing issues being litigated in federal court and what power a state court has to interfere with those parallel proceedings. One would think that a federal court that is handling the lawsuit is in a far better position to assess the good or bad faith of a patentee’s claims.
While it is a laudable goal to create disincentives to filing frivolous lawsuits, this bill seems particularly ill suited to this goal. We will be following this bill as it progresses, and will report on its progress.
The ultimate obstacle for alleged infringers is Zenith v. Exzec, which involved a substantive and a procedural component. Substantively, Zenith held that the scope of infringers’ rights for state and federal antitrust causes of action ultimately turns on patentees’ rights under their patent, and one stick in this “bundle of rights” is the affirmative right to notify others of their patent rights, i.e. send demand letters. In other words, all other laws, both state (no surprise there) and federal yield to accommodate the patentee’s rights. Procedurally, Zenith was significant in that it gave the court adjudicating the patent issue jurisdiction over the state law claim. The court would not merely construe the other causes of laws, but also adjudicate them, too. Thus, staying out of district court (or, on appeal, the Federal circuit), is a hard battle for alleged infringers.
The good news is that Zenith found that liability under state and federal antitrust law would lie when (1) the patent was invalid, unenforceable, or not covering the infringer’s activities and (2) the patentee had knowledge of (1). So, some cases following Zenith have found the patentee liable under state and federal trade law, though these are rare. (See the Dole Pineapple cases.)
What could be interesting for infringers, and I believe this is an untested question, is that what to do when a troll’s patent is found invalid? Since liability could lie, I wonder if demand letters asserting a patent that has been found invalid through prior adjudication would be enough to survive the pleadings stage. The infringer would need some evidence of the patentee’s knowledge of invalidity to survive summary judgment. (Additionally, they’d need a factual basis for whatever other causes of action they’re alleging.) But the question of whether this would suffice for the pleadings stage, and whether this could put drive patent trolls back on their heels, is an interesting one.