State legislation targeting “patent trolls” has been signed into law in Vermont and is pending in several other states. The legislation is in response to the practice of patent holders who focus on the soft targets of end users of patents, demanding low-dollar damages in exchange for settlements, or those who file a host of nuisance suits that will be costly to defend, in anticipation of settlement.
It is important to recognize that trolls are not the problem. Rather, they are a symptom of larger issues in the litigation system. The high cost of litigation, and a remedy system offering excessive damages, enables patent holders to threaten frivolous litigation and bargain for excessive settlements.
In fact, aggravating factors within the patent system, such as an abundance of overbroad patents, and the particularly high cost of patent litigation, actually mirror the dynamics found throughout the civil litigation system. However, there is one big difference between patent law and the rest of the civil justice system. Whereas most flaws in the civil justice system are amendable to remedy via state legislation, patent law is exclusively a federal question according to the terms of the federal Constitution.
As a result, targeting frivolous patent demand letters through state legislation cannot address the underlying issues of patent law that incentivize the bottom-feeding patent trolls, and instead is likely to do more harm than good.
First, it is difficult to define what is being targeted. The proposed legislation delineates a list of factors to be considered by a state court as evidence of whether a person has made a “bad faith” assertion of patent infringement. It includes factors like the degree of detail provided in the patent demand letter and whether the entity making the demand is an actual inventor.
However, the single most important factor in determining whether a patent infringement claim is made in bad faith is whether the claim itself has merit. Regardless of whether the enforcement of the patent is socially beneficial, if the claim is potentially valid under federal substantive patent law, it cannot be deemed a bad faith claim.
A significant factor contributing to the patent troll phenomenon is a proliferation of overbroad patents, particularly in the IT industry. But these are potentially valid claims that need to be evaluated on their merits in order to determine whether the claim is made in bad faith. Whether the claim is meritless is a question of federal law, and not one that state court judges are well equipped to handle.
There are a variety of things going on at the federal level that have the potential to shift incentives on bad actors:
- The Judicial Conference’s Committee on Federal Rules of Practice and Procedure has published proposed revisions to strengthen the pleading requirements in patent lawsuits.
- Two cases pending at the US Supreme Court could expand the discretion of judges to award fees to prevailing defendants in patent cases that are determined to be meritless.
- Legislation or rule-making reducing litigation discovery costs and/or providing for more equitable sharing of discovery costs could also improve the incentive structure of patent litigation.
Whereas solutions at federal level have the potential to improve predictability and discourage frivolous demands, state legislation instead has the potential to compound the problem of frivolous litigation with more litigation. The potential of attorney fees, triple damages, and “exemplary damages” to be awarded by state court judges who typically lack any experience in evaluating patent claims has the potential to increase, not decrease, patent litigation.