Can a state use consumer protection laws to punish patent trolls?
The Washington State Senate Law and Justice Committee is considering penalizing patent trolling. The committee recently discussed a proposed ‘patent troll prevention act’ in a work session on October 2, 2014. The bill in its current form would create a new consumer protection law to fine patent infringement in bad faith. Violators could face a fine of up to $25,000.
The bill outlines a number of factors that a court may consider in determining whether an assertion of patent infringement has been made in bad faith. For example, bad faith may be shown when a person asserting the claim: should have known the assertion was meritless, provides inadequate information in the initial demand letter, or fails to provide basic patent information on request. A court may also consider the reasonableness of the asserting party’s diligence in comparing the ‘infringing’ activity and the patent, and the reasonableness of proposed licensing fees or timeframes. The bill also lists factors which indicate good faith, including diligence, timeliness, and reasonableness. It also names three types of patent holders that are presumed to act in good faith: an investor in the patent, an original assignee, or a university.
Vermont enacted similar legislation this year. This new legislation has not been directly litigated, but a recent Vermont case illustrates relevant issues. Two main issues in this Vermont case might be brought to challenge the Washington draft legislation: federal preemption and federal subject matter jurisdiction.
In Vermont v. MPHJ Tech. Invs. LLC, the state tried to use consumer protection laws to fine a ‘patent troll’. The attorney general of Vermont brought suit under state consumer protection laws, alleging MPJH sent letters that contained threatening, false, and misleading statements to Vermont businesses and non-profit organizations. MPJH removed the case to federal court, asserting federal question and diversity jurisdiction. The district court, however, rejected MPJH’s federal preemption defense and remanded the case for lack of subject matter jurisdiction because the complaint did not raise a substantial question of federal patent law. The district court found that even though MPJH’s letters concerned patents, the State was simply targeting bad faith conduct. The Federal Circuit declined to review the district court order because orders remanding cases back to state courts are not reviewable on appeal.
In Washington, if the ‘patent troll prevention act’ were to be litigated, a court could, like Vermont, carve out a specific exception to federal preemption. Generally, federal law preempts state-law tort liability when a patent-holder contacts a party to assert a patent claim in good faith. A court could also simply deny a motion to remove to the Federal Circuit.