By: Alexander Tranquill

When did patent trolling become so hard? At first, it seemed like the perfect business model—patent trolls, or non-practicing entities (NPEs), could simply scoop up idle patents for cheap, then turn around and assert these patents against unsuspecting companies in an infringement lawsuit. Best of all, NPEs could do all this without ever having to spend money to develop or practice (use) the patented technology. While the NPE model is completely legitimate, it is often looked down on as being adverse to the goals of patent law. Still, with little intervention from federal lawmakers, states lawmakers have stepped in, passing legislation to curb the damaging impact of NPEs on innovating companies. However, the constitutionality of these state-level measures have come under scrutiny in the pending case Micron Technology v. Longhorn IP. Now, the Federal Circuit must weigh in on whether these laws can withstand constitutional scrutiny. 

In 2023, an Idaho district court concluded that a state law aimed at disincentivizing NPE infringement claims passed constitutional muster. Specifically, the statute at issue made it “unlawful for a person to make a bad faith assertion of patent infringement in a demand letter, a complaint, or any other communication.” The constitutional challenge to this Idaho law sprang out of a patent infringement claim asserted by Longhorn IP against Micron. However, Micron had already been sued by an affiliate of Longhorn under the very same patent infringement theory, subsequently prevailing in the suit. Therefore, Longhorn saw the current litigation as a “bad faith assertion” of patent infringement, counterclaiming against Longhorn under the Idaho statute currently at issue. Because the district found the law constitutional, Longhorn appealed the ruling to the Federal Circuit. Ultimately, the upcoming Federal Circuit decision will hinge on federal preemption of state patent laws, while also implicating equivalent laws in thirty other states with its decision. 

Overall, the governance of patent law is allocated to Congress and the federal government. Specifically, under Article I of the Constitution, Congress holds the power “[t]o promote the Progress of Science and useful Arts.” Furthermore, the Constitution’s Supremacy Clause ensures that federal law takes precedence over conflicting state laws. Therefore, the question for the Federal Circuit in Micron is whether the Idaho law conflicts with federal patent law. However, this federal “preemption” question is not so simple since not every state law relating to patents is considered “in conflict” with the federal patent system. Instead, this issue often hinges on obstacle preemption, where a state law will be deemed unconstitutional if it stands “as an obstacle to the accomplishment and execution of the full purpose and objectives of Congress.” In this way, the Micron decision centers on whether the Idaho law squares with the goals of the federal patent system. While the standard for obstacle preemption is often viewed as malleable, one thing is clear from past precedent: federal courts are loath to uphold laws that upset the patent bargain. 

Thomas Jefferson once famously uttered “ideas should freely spread from one to another over the globe.” However, the patent system devised by the Founding Fathers represents a major exception to Jefferson’s rule. Instead, the federal patent system represents a necessary evil, illustrating a societal bargain artfully designed to promote science and the useful arts. As conceived, the patent system offers inventors a temporary monopoly over their creations, while ensuring the public receives the benefit of the invention following the expiration of the patent term. Essentially, this system builds a database of knowledge for the public, helping others to innovate while also rewarding inventors for their contribution.  

The importance of upholding the patent bargain has been cited implicitly and explicitly by federal courts when ruling on preemption questions. First, in Bonito Boats, the Supreme Court invalidated a Florida statute that made it unlawful to copy the hull design of a vessel manufactured by another party. The Court reasoned that the patent system rests on a delicate “balance between the need to encourage innovation and the avoidance of monopolies which stifle competition.” The Florida statute upset this balance by granting “patent-like protection[s] to boat designs not protectable by patent laws,” thus resulting in anti-competitive effects in the boat industry and upsetting the patent bargain as a result. Further, in Kewanee Oil, the Supreme Court upheld state trade secret laws, which provided trade secret protections to patent eligible subject matters. However, unlike Bonito Boats, the Court focused on promoting innovation, concluding that the remedies under the law still protect innovation while doing little to dissuade parties from seeking patent protection. Thus, the state trade secret laws at issue in Kewanee failed to upset the patent bargain, and the law was found to be constitutional. 

Like these cases dealing with preemption, the Federal Circuit in Micron will likely be influenced by the goals of the patent bargain. Again, our Constitution makes only one demand to U.S. lawmakers: “[t]o promote the Progress of Science and the useful Arts.” The Idaho law at issue in Micron specifically targets parties that assert patent infringement in bad faith; however, the impact of these baseless, bad-faith claims often have a chilling effect on innovation. Generally, when an NPE brings suit against a company, they will both demand a payment to settle the pending lawsuit and threaten costly litigation in the alternate. Therefore, even if the defendant determines they are likely to prevail on the merits of a claim, the most economical option may be to cede to the NPEs original monetary request, thus avoiding litigation costs. 

Overall, this system, with its looming litigation costs, produces conditions that allow the NPE-model to thrive. Further, these additional costs serve as a marketplace barrier for innovating companies, while also disincentivizing these companies from investing in research and development over the fear of being sued. In a research study performed in 2014, patent trolls were found to have destroyed over $60 billion annually in company wealth. Thus, as demonstrated by these inflated numbers, the economic incentive for NPEs to bring meritless claims in hopes of a quick settlement is huge. The Idaho law at issue in Micron simply tries to curb this incentive by requiring a bond to be paid by the NPE prior to litigation. The effect mitigates meritless claims by requiring a large upfront payment to use the court system. Thus, unlike Bonito Boats, where that state statute was found to harm innovation by protecting unpatentable subject matters and fostering anti-competitive behavior as a result, the law at issue in Micron actually provides a shield, seeking to reduce the number of meritless suits that are thrown at our innovating companies. In fact, the Patent Act already includes an enhanced damages provision for exceptional cases; therefore, by attempting to curtail NPEs’ effect on our businesses, the goals of the Idaho law are very much in-line with the federal directive. Overall, while the laws at issue in Micron may incidentally chill the number of filed patent infringement claims (as claimed by Longhorn), the law still promotes innovation by protecting our companies from bad-faith patent assertion. Overall then, it appears likely that the Federal Circuit will affirm the district court ruling, allowing states to use legislation to shield their most valuable companies from NPEs.

#patentlaw #NPEs #federalpreemption