Carving Out State Protections in Patent Enforcement

We have previously posted on proposed federal and state legislation aimed at addressing the toll of patent troll litigation on the U.S. economy. To date, twenty-five states have passed or are considering legislation aimed at curbing bad-faith patent assertion through state law, either based in consumer protection or through laws directed at bad business practices. From Vermont, one of the first states to adopt such legislation, MPHJ Technology Investments LLC (“MPHJ”), an alleged patent troll, seeks the opinion of the Court of Appeals for the Federal Circuit on the issue of federal patent law preemption.

The majority of the state legislation passed or considered provides for dual public and private efforts to curb bad-faith assertion of patents, as either the attorney general or an individual who received the demand letter may bring suit against the patent owner: Alabama, Connecticut, Georgia, Kansas, Maine, Maryland, Missouri, New Hampshire, New Jersey, Pennsylvania, South Carolina, South Dakota, Tennessee, Vermont, and Wisconsin. Some states, such as Mississippi  and Utah, only provide for private actions, while others, such as Virginia, provide for only state enforcement by the attorney general. Most states also provide various other remedies, including the requirement that patent owners post bonds, permitting attorney generals to seek an injunction against further bad faith letters, or costs, fees, or punitive damages.

Vermont enacted its consumer protection based bill on May 5, 2013, and its attorney general brought suit against MPHJ in Vermont state court on May 8, 2013. MPHJ sought removal to federal court on the basis of federal law preemption. The district court remanded the case to state court, noting that Vermont was “targeting bad faith conduct irrespective of whether the letter recipients were patent infringers or not, on the basis that MPHJ’s bad faith conduct would be unlawful even if MPHJ’s patents were valid and the conduct was directed toward actual patent infringers.” The district court determined that it did not have jurisdiction because federal law was not “necessarily raised” on the face of Vermont’s complaint. Rather, the complaint was grounded in consumer protection, not patent validity or infringement determinations, and Vermont sought only to punish false statements, e.g., whether infringement investigations had been performed or whether the majority of letter recipients took a license. Accordingly, MPHJ could raise federal patent law preemption in state court as a defense to “state-law tort liability for a patent-holder’s good faith conduct in communications asserting infringement of its patent and warning about potential litigation,” but such defense is only available for acts not constituting bad faith by the patent owner.

As other states follow Vermont’s lead in passing and enforcing these protections, lawmakers are well-advised to draft carefully worded statutes that do not trespass on federal patent laws, while patent owners are best advised to craft careful patent enforcement strategies that account for applicable state consumer protection.

Gibbons will continue to monitor how state and federal government balance patent owners’ rights with consumer protection.

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