Friday, May 9, 2014

South Carolina Looks to Follow Vermont's Lead in Fighting Patent Trolls- Using State Law

A bill pending in the South Carolina General Assembly that would make "bad faith assertions of patent infringement" an "unfair trade practice" under South Carolina law got a "jurisdictional boost" from a recent Opinion and Order issued by a Vermont Federal Court judge.

Background


The actions of patent-assertion entities (PAEs) that purportedly own patents and use litigation and the threat of litigation to enforce them are well-documented.  (For a brief description of the topic and some additional resources, click here). PAEs are referred to by their detractors as "patent trolls."

As a general proposition, patent law is exclusively federal in nature.  Congress has given the U.S. district courts original and exclusive jurisdiction, pursuant to 28 U.S. Section 1338, over any civil action related to patents. As a result, litigation involving the validity, infringement, and enforcement of patents must take place in federal district court.

Vermont's Efforts to Combat PAEs 


Despite the federal nature of patent law, the State of Vermont decided to try to use state law (on two fronts) to fight back against certain practices that take place prior to the initiation of patent infringement litigation.

Act No. 44


On May 22, 2013, Vermont enacted Act. No. 44 creating a private right of action and giving the attorney general civil enforcement action authority in the event of "bad faith assertions of patent infringement." Vermont was the first state to enact such a law, and several states have followed suit.

Act No. 44 does not define "bad faith assertions," but instead provides a court with a number of factors to be considered as evidence: a demand letter lacking the number of the held patent or factual allegations regarding the specific areas in which the demand letter recipient (the "target") infringes the patent; failure to conduct a due diligence comparison of the patent with the target's products, services, or technology; the demands in the letter are unreasonable; or the assertions made in the letter are meritless or deceptive.  The Act also lists a number of factors to be considered in order to determine that a holder has not made a bad faith assertion of patent infringement.

Vermont v. MPHJ Technology Investments, LLC


On the same day, the Vermont Attorney general served a company called MPHJ Technology Investments, LLC (MPHJ) with a Complaint filed in Vermont state court and alleging violations of the Vermont Consumer Protection Act. Of note, the lawsuit did not allege a violation of the statutory provisions created by Act. No. 44. 

As described more fully in the Complaint, MPHJ  and its subsidiaries sent a series of letters to various Vermont businesses regarding ownership of certain email scanning patents and demanding that the recipients purchase licenses or face infringement lawsuits.

The Complaint alleged that these letters were "false, deceptive and misleading" because (among other things): 1) MPHJ did no due diligence to determine whether "the recipients were likely infringers"; 2) small businesses in commercial fields unrelated to patent law were targeted; 3) contrary to its letters, MPHJ did not actually receive "a positive response regarding its licensing programs";  4) very few recipients had purchased licenses (not "many" or "most" as claimed in the letters); and 5) MPHJ had not filed a single lawsuit to enforce its patents.

MPHJ removed the case to Federal Court, based on federal question and diversity jurisdiction. Judge Sessions found no basis for federal court jurisdiction, and remanded the case to state court. First, Vermont's VCPA claim did not arise under federal patent law or create a substantial federal question. Broad brush, the claim that MPHJ acted in bad faith doesn't depend on any determination of federal law, but "is about consumer protection, not about patents."

With respect to diversity (which requires an action between "citizens of different states"), the State of Vermont is not considered a "citizen" for purposes of 28 U.S.C. Section 1332, and the Court rejected MPHJ's argument that the citizens of Vermont (not the State) were the "real parties in interest" in the case.  (For more on recent U.S. Supreme Court jurisprudence addressing "real party in interest" allegations, click here).

The case will now proceed toward a decision on the merits in state court. For a more complete description of the Vermont district court decision, please see this Corporate Counsel article.

South Carolina's Proposed Law


In December of last year, Representative Kirkman Finlay prefiled  H4371.  This legislation, which has been passed by the House, is currently being considered by the South Carolina Senate.  (The legislation underwent substantial revision in subcommittee, and in its current form is quite different from the version posted online).

H4371, entitled the "Bad Faith Assertion of Patent Infringement Act," makes sending a demand letter "alleging patent infringement in bad faith" an "unfair trade practice" under Section 39-5-20 of the South Carolina Unfair Trade Practices Act, and provides the remedies that exist currently in the SCUTPA. Like the Vermont law, the legislation gives the Attorney General the ability to bring actions to enforce the Act and provides both a number of factors for a court to consider as evidence that a "bad faith assertion of patent infringement" has taken place, as well as those factors tending to demonstrate that a person has not made such a bad faith assertion.

Conclusion


Should H4371 become law, plaintiffs in those state court actions filed to enforce its provisions will undoubtedly rely in part on the reasoning employed by Judge Sessions in challenging removal. One question that has not been addressed yet is whether the "bad faith" standard established by or applied according to a state law like Act No. 44 or H 4371 would be preempted by federal patent law.  See Globetrotter Software, Inc. v. Elan Computer Group, Inc.