Rule Of Law: How States Are Taking The Lead In The Fight Against Patent Trolls

Jessica Medeiros-Garrison President, Rule of Law Defense Fund
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In fairytale mythology a troll is an ugly, mean, little creature with supernatural powers. Think of the stories from childhood like Three Billy Goats Gruff.  If you are a Millennial you may associate the word with internet trolls, also typically unpleasant people. But perhaps the most dangerous form of a troll are the very real ones that have a dramatic effect on our economy and innovation – the patent trolls.

A patent troll, also known as patent assertion entity, is essentially a company or person that buys a patent without any intention to develop or market a product and then sues or threatens to sue another company claiming that one of its products violates that purchased patent. These entities typically do not create anything and have no original connection to the original patent.

The U.S. patent system has been inundated with litigation and threats initiated by patent trolls over the past 10-plus years. A Boston University Law School study estimates that firms, as defendants, accrued $29 billion of direct costs in 2011 arising from patent troll incidents. These costs rise to about $80 billion when factoring in the losses to stock market reaction in conjunction with estimated litigation costs. However, no matter which estimate you use, this abuse is bad for business and bad for the American consumer.

Federal law preempts many theoretically feasible state-based responses to patent troll activity. State-based fixes for the improper use of patents are subject to “conflict preemption.” In other words, state law is only preempted to the extent that it actually conflicts with federal law or where it gets in the way of the executions of the objectives of the law, so that it is not entirely precluded by federal law. For example, state law is not preempted by federal patent law for the misuse of bad faith litigation, which means there are legal steps that states can take to deter patent trolls from chasing businesses in their respective states and being a menace to the customers.

With federal legislation in limbo, Attorneys General are using their states’ consumer protection laws to fight abusive practices by these trolls. Attorney General Jon Bruning of Nebraska is a leading voice on this topic and has not been shy about going after these people. “‘Patent trolls’ make egregious threats with little or no valid legal purpose to gain fast money,” said Bruning. “It is a top priority of our office to protect Nebraska consumers and businesses from this sort of baseless harassment.”

Last year, Bruning offered testimony before the U.S. Senate Subcommittee on Consumer Protection, Product Safety, and Insurance during a hearing titled, “Demand Letters and Consumer Protection: Examining Deceptive Practices by Patent Assertion Entities.” Bruning testified, “The time is ripe for federal and state authorities to work in concert to address this issue and stem the tide of patent trolling nationwide, while protecting the ability of legitimate patent holders to enforce their rights.” He also called on Congress to utilize its subpoena power to bring the investigation of some of the worst known patent trolls to the national level.

Furthermore, earlier this year, an overwhelming bipartisan majority of attorneys general sent a letter to U.S. Senate leaders expressing their support for patent reform legislation. The attorneys general summed up the risk surrounding these bad actors in this way, “So-called patent trolls stifle innovation and harm our economy by making dubious claims of patent infringement and using the threat of expensive litigation to extort money from small businesses and nonprofits. We have received many complaints from these businesses and nonprofits, our constituents, who are desperate for relief from the misuse of the patent system. While these threats were once focused on tech businesses, they are now levied at all manner of businesses, including banks, hospitals, restaurants and hotels.”

Additionally, the AGs requested that any final legislation include four main components: 1) Confirmation of state enforcement authority 2) Clarification of state-court jurisdiction over bad-faith demand letters 3) Transparency for patentees that send demand letters 4) Patent litigation reform.

There is renewed hope after the Republican election wave last week that patent reform legislation will be a priority for the next Congress. The House passed a bill at the end of 2013 but the Democrats in the Senate failed to pass any legislation, when Sen. Reid pulled it from consideration. It will be up to the new, Republican-led Congress to address this critical issue. Until then state attorneys general will remain the best line of defense to protect the potential of American innovation from patent trolls.