When Senator Patrick Leahy (D-Vt.) announced on May 21 that he was pulling patent reform off the agenda of the Senate Judiciary Committee, commentators were quick to pass judgment: "Patent reform is dead." These reform efforts were meant to address the growing concern over patent assertion entities (PAEs) or non-practicing entities (NPEs), better known by the more pejorative nickname, "patent trolls." However, some hope remains for the ongoing legislative effort to solve PAE litigation issues. Patent reform may have been tabled in the Senate Judiciary Committee, but two patent reform bills are still alive in Congress. Both bills aim to prevent abusive practices by targeting illegitimate patent demand letters.
Background to Demand Letter Reform Legislation
PAEs acquire patents, but do not actually use them in any
products or services. Instead, they pursue potential patent
infringers and demand licensing fees by sending patent demand
letters. These demand letters tend to contain vague or misleading
language, but threaten recipients with costly infringement
litigation if the licenses are not paid. PAEs often send out demand
letters by the thousands, without making a genuine inquiry into the
merits for each targeted individual.
Much of the public attention surrounding PAEs stems from
high-profile litigation against well-known Silicon Valley
corporations. In March, a Texas jury ordered Google to pay $85 million to
SimpleAir, a PAE, for infringing network messaging and data
transmission patents. SimpleAir had also filed suit against other
tech companies like Apple, Microsoft, Motorola, and Samsung.
At the same time, these abusive tactics are especially effective
against small companies and individuals. Lacking the immediate
legal resources to evaluate the validity of the infringement
claims, smaller entities are forced to pay the licensing fees in
order to avoid an even more expensive lawsuit.
Recently Halted Patent Reform Bills in the Senate
Although reports on the demise of patent reform may have been
exaggerated, it is fair to note that similar legislative efforts
have fallen short in the recent past. On December 5, 2013, the
House passed the Innovation Act (H.R. 3309), a comprehensive bill intended to
combat abusive behavior by PAEs. Among other things, the bill would
have raised the standards for pleading patent infringement, and
imposed disclosure requirements regarding the identification of the
patent claims asserted, the accused methods or acts, and the party
alleging infringement. Additionally, the bill included discovery
cost-shifting and fee-shifting provisions.
The Patent Transparency and Improvements Act (S. 1720) was introduced on November 11, 2013,
and proceeded through the Senate almost contemporaneously, albeit
at a slower pace. The Senate bill lacked the provisions regarding
the heightened pleading requirement, cost-shifting, and
fee-shifting, and was generally considered to be a stripped-down
version of the Innovation Act. However, there were other bills in
the Senate to cover those provisions in the event of S. 1720's
passage.
The key differences between the bills proved fatal, as attempts to
reconcile the variance between them failed. Although the bills were
meant to protect against NPE abuse, some allege they carried an
unintended potential to harm legitimate infringement enforcement,
particularly by individual inventors and universities. The bills
would have applied to all infringement enforcement, and thus came
under criticism for their perceived over-breadth. Markup sessions
to bridge the gap between the two bills were postponed five times,
eventually ending when the Judiciary Committee removed patent
reform from the agenda altogether. With the imminent return of
members of Congress to their states and districts to concentrate on
reelection, action on this legislation is considered unlikely.
Draft Legislation to Address Demand Letter Abuse
In contrast to the reform proposed by the Innovation Act and the Patent Transparency and Improvements Act, the draft bills currently circulating through Congress are tailored to combat one specific facet of PAE abuse – patent demand letters. In the Senate, Senator Claire McCaskill (D-Mo.) introduced the Transparency in Assertion of Patents Act (S. 2049). Because this bill is in the Senate Commerce Committee, Congress may examine it separately from its recently shelved counterparts in the Judiciary Committee. The main provision empowers the Federal Trade Commission to promulgate rules requiring demand letters to contain certain minimal disclosures. These include, among other things:
- a detailed description of each patent and each claim that is allegedly infringed;
- a detailed description of the product or service that allegedly infringes each claim;
- contact information and the identity of the person with the right to enforce the patent; and
- current instances of reexamination or post-grant review of each patent, including any determination of the invalidity of the patent or its claims.
A violation of the proposed Act would also constitute an unfair
or deceptive act or practice under the Federal Trade Commission
Act, allowing state attorneys general to enforce the terms of the
Act under the parens patriae doctrine. Damages would be
calculated by multiplying the number of separate violations by an
amount no greater than $16,000. The proposed bill was referred to
the Committee on Commerce, Science, and Transportation on February
26, 2014 but has not yet been acted upon, likely out of
deference to the Senate Judiciary Committee's halted discussions.
Meanwhile in the House, Representative Lee Terry (R-Neb.) has
introduced draft legislation to enhance federal and state
enforcement of fraudulent patent demand letters. This proposed bill
contains detailed disclosure requirements for demand letters, to
provide greater transparency for recipients. It would also define
bad-faith sending of a demand letter, marking it as an unfair or
deceptive act or practice under the FTC Act. Representative
Terry's bill would empower the FTC to regulate demand letters
and to seek civil penalties for a violation. While the legislation
would preempt state laws regarding patent demand letters (currently
active in nine states), it would still allow state attorneys
general to enforce the terms of the bill under the parens
patriae doctrine.
The draft bill was reviewed by the House Subcommittee on
Commerce, Manufacturing, and Trade at a May 22 hearing. The
Subcommittee heard from a panel of government and private sector
witnesses who provided suggestions on how to improve the draft,
while identifying the areas of disagreement. There was some concern
that the disclosure requirement might be considered "compelled
speech," thus creating First Amendment issues. Some witnesses
criticized the bill's wording on the specific types of
activities that would allow the FTC to bring actions against PEAs
and the class of protected recipients. The concern was that if a
so-called patent troll activity was not explicitly listed, or if
the demand letter recipient did not fall under the list of
protected recipients, then there could be no relief. This
inevitably raised the counter-argument that broadening the bill
would harm legitimate patent enforcement activity and damage
innovation.
Representative Terry indicated to reporters after the hearing that
he hoped to resolve these issues and formally introduce an improved bill by the end of June. For the bill
to pass this year, markup would likely need to occur before the
August recess. Although comprehensive patent reform has suffered
its share of setbacks in Congress, important work continues on the
subject of PAE demand letters.
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