Not too long ago, if you talked to a U.S. senator or congressperson about innovation policy, the eyes of all but a few would glaze over at the first mention of the word “patents” — widely considered to be among the most boring subjects in the world. The topic generated even less interest from constituents than local library bonds.
Today, however, many of the 535 members of the U.S. Congress have become ardent advocates of patent reform — as have an increasing number of the 50 state legislatures and attorneys general (AGs) in America. In fact, the AGs of Nebraska, Vermont, and Missouri met at a roundtable event in New York City in early February to discuss the patent troll problem.
What accounts for the sudden change?
In large measure, it’s due to the behavior of patent trolls such as MPHJ Technologies Investments LLC. The attorneys general of several states have alleged that MPHJ has engaged in deceptive practices by sending demand letters to thousands of Mom and Pop businesses, claiming they were violating MPHJ’s patent rights by using common scan-to-email technology. MPHJ then demanded these businesses pay up to $1,000 per employee or else face a patent infringement suit in federal court.
Naturally, many of these business owners started protesting loudly to their elected officials and demanding action — as did representative trade groups such as the National Federation of Independent Businesses and National Restaurant Association. In our view, the actions of patent trolls against small businesses have been a major factor in damaging the reputations of the majority patent owners and giving the patent system itself a bad name.
All of which helps to explain the flurry of activity recently both in Congress and at the state level to rein in these patent trolls.
At the federal level, the Innovation Act (H.R. 3309), passed late last year in the House, does try to address patent troll behavior. But it also contains provisions that harm legitimate innovators, especially startup businesses. We’ll discuss these concerns in future blog posts as the Senate begins marking up its version of the bill.
At the state level, AGs have found consumer protection laws to be very effective tools in fighting patent trolls. As Massachusetts Attorney General Martha Coakley recently said:
“State consumer protection laws prohibit false, misleading, deceptive, and unfair statements in commerce. When a patent troll sends a letter to a small company, non-profit, start-up, or even a well-established company that asserts claims to property that the troll knows to be false, or threatens legal action that the troll has no intent of bringing, in order to extort money, that is against the law.”
To date, the AGs and state legislatures in nine states (and counting) have filed suits and drafted laws taking aim at patent trolls.
Vermont Attorney General Bill Sorrell was the first to use his state’s consumer protection law to combat the abusive practices of patent trolls, who often hide behind an alphabet soup of shell companies. His May 2013 lawsuit against MPHJ — and the state legislature’s later passage of the “Bad Faith Assertions of Patent Infringement Act” — quickly became a model for action in Nebraska, Massachusetts, Minnesota, South Carolina, Missouri, Oregon, and Kentucky.
But the biggest success so far may have been New York, where state Attorney General Eric Schneiderman signed a consent decree with MPHJ in January of 2013 requiring it to repay all the money it received from businesses in the state. In its demand letters to businesses, MPHJ had falsely claimed that it had analyzed each target company’s scanning systems and determined it to be in violation of its patents. In fact, MPHJ had merely sent form letters to hundreds of firms of a certain size and industry classification without uncovering evidence of infringement. (We note that many of the points made in the consent decree align with Conversant’s Patent Licensing Principles.)
What’s more, said Attorney General Schneiderman’s office:
“MPHJ falsely told businesses that most other businesses it had previously contacted had acquired licenses when in fact only a handful of businesses had done so. MPHJ also provided misleading information about the fees that the (few) prior licensees had paid. And MPHJ falsely threatened to sue hundreds of businesses if they did not respond to its letters within two weeks; in fact, it has never filed a patent lawsuit against a New York business.”
The National Association of Attorneys General has established a working group that will continue to work on methods of protecting businesses and consumers from patent trolls. The larger goal, says Massachusetts AG Martha Coakley, is to “thwart the abuse of the intellectual property system by bad actors while preserving the incentive to innovate.”