August 28, 2014

Legislative Update – North Carolina The Abusive Patent Assertions Act, H.B. 1032

GREENSBORO, NC (July 18, 2014) – Patent trolls, also referred to as patent assertion or non-practicing entities, have been the subject of debate in recent years. Studies suggest that these companies cost the U.S. economy $29 billion in direct legal costs each year. A May 2014 study by Catherine Tucker, a professor of marketing at MIT’s Sloan School of Business, found that venture capital investment “would have likely been $21.772 billion higher [over the last five years] but for litigation brought by [these] frequent litigators.” Instead of contributing to the U.S. innovation ecosystem, patent trolls use aggressive tactics in an effort to scare targets into paying licensing fees or entering into settlements. Patent trolls often threaten to sue hundreds or thousands of companies at once, sending demand letters that often are vague and provide little notice to these companies.

To help combat this pressure on innovation in North Carolina, the North Carolina General Assembly (NCGA) has introduced House Bill 1032, titled the Abusive Patent Assertions Act (“the Bill”) introduced on May 15, 2014. This legislation attempts to “prevent the abusive use of patents.” If enacted, the Bill would be part of the North Carolina Unfair and Deceptive Trade Practices Act in North Carolina General Statutes §§ 75-1.1., et seq., making it unlawful for a person to assert patent infringement in bad faith.

The Bill is intended to act as a deterrent to patent trolls by providing a civil cause of action (and associated remedies) to patent troll targets. As discussed below, the Bill outlines a series of requirements for a patent demand. If a demand fails to comply with the Bill, the target would have a right to sue for compensatory and exemplary damages as well as attorneys fees. In litigation, violations of the Bill may be raised as a counterclaim.

Generally, the Bill defines a “demand” as any “letter, e-mail, or other communication asserting or claiming that a target has engaged in patent infringement or should obtain a license to a patent.” The Bill makes it “unlawful for a person to make a bad-faith assertion of patent infringement.”

Pre-Demand Requirements:

The Bill requires that persons sending demands must “conduct an analysis comparing the claims in the patent to the target’s products, services, and technology.” If this analysis is not done before sending the demand, then the trial court may consider this as evidence of a bad-faith assertion of infringement. If such an analysis was completed, failure to “identify specific areas in which the products, services, and technology are covered by the claims in the patent” is further evidence of a bad-faith assertion of patent infringement.

Demand Requirements:

  • Pursuant to the Bill, a demand must contain all of the following information:
  • The patent application number or patent number;
  • The name and address of the patent owner or owners and assignee or assignees, if any;
  • Factual allegations concerning the specific areas in which the target’s products, services, and technology infringe the patent or are covered by specific, identified claims in the patent; and
  • If the United States Patent and Trademark Office’s assignment system does not identify the person asserting the patent as the owner, an explanation of why the person making the assertion has standing.

Bad Faith:

The Bill provides a non-exclusive list of acts or omissions that the court may consider as evidence that a bad-faith assertion of patent infringement has been made. For example, if the demand does not include all of the required information and the person asserting ownership fails to provide the information in a reasonable amount of time, the Court can consider such failure as evidence of a bad-faith assertion of patent infringement.

The Bill would restrict parties issuing demand letters from demanding “payment of a license fee or a response within an unreasonable amount of time.” Additional evidence of bad faith includes:

  • The asserting person offers to license the patent for an amount that is not based on a reasonable estimate of the value of the license, or the person offers to license the patent for an amount that is based on the cost of defending a potential or actual lawsuit;
  • The claim or assertion of patent infringement is meritless, and the person knew or should have known that the claim or assertion is meritless; or the claim or assertion relies on an interpretation of the patent that was disclaimed during prosecution, and the person making the claim or assertion knows or should have known about the disclaimer, or would have known about the disclaimer if the person reviewed the patent’s prosecution history;
  • The claim or assertion of patent infringement is deceptive;
  • The asserting person or his or her subsidiaries or affiliates has previously or concurrently filed or threatened to file one or more lawsuits based on the same or similar claim of patent infringement, and (i) those threats or lawsuits lacked the requisite information described above, or (ii) the person attempted to enforce the claim of patent infringement in litigation, and a court found the claim to be meritless;
  • The person making the claim or assertion sent the same demand or substantially the same demand to multiple recipients and made assertions against a wide variety of products and systems without reflecting those differences in a reasonable manner in the demands;
  • The person making the claim or assertion is aware of, but does not disclose, any final, non-final, or preliminary post-grant finding of invalidity or unpatentability involving the patent; or
  • The person making the claim or assertion seeks an injunction when that is objectively unreasonable under the law.

Defenses:

Pursuant to the Bill, the following circumstances may give rise to a showing that the assertion of patent infringement was not made in bad faith:

  • The asserting person engages in a good-faith effort to establish that the target has infringed the patent and to negotiate an appropriate remedy;
  • The asserting person makes a substantial investment in the use of the patent or in the production or sale of a product or item that the person reasonably believes is covered by the patent;
  • The asserting person is either (i) the inventor or joint inventor of the patent or, in the case of a patent filed by and awarded to an assignee of the original inventor or joint inventor, the original assignee or (ii) an institution of higher education or a technology transfer organization owned or affiliated with an institution of higher education; or
  • The asserting person has demonstrated good-faith business practices in previous efforts to enforce the patent, or a substantially similar patent, or has successfully enforced the patent, or a substantially similar patent, through litigation.

Exemptions:

The Bill does not apply to infringement demands made by or on behalf of institutions of higher education based in North Carolina, non-profit research organizations based in North Carolina, or operating entities and any affiliates. Furthermore, the Bill does not apply to demands concerning specific types of subject matter (such as plant patents).

Damages:

The Bill provides that a successful party may recover compensatory damages, costs and fees (including reasonable attorneys’ fees), and exemplary damages of $50,000 or three times the total of its damages, costs and fees, whichever is greater. The Bill also provides for injunctive relief.

The Bill allows interim relief in the form of a bond of up to $500,000, or an amount equal to a good-faith estimate of the target’s fees and costs to litigate the infringement claim. Such a bond would be required following a showing, by the target, of a reasonable likelihood that the assertion of infringement is in bad faith.

H.B. 1032 passed the House on June 3, 2014, and is currently pending in the Senate. Patterson + Sheridan will continue to follow the legislation and provide updates as developments occur.

About Patterson + Sheridan

Patterson + Sheridan is a full-service intellectual property law firm, providing a range of IP services including patent preparation and prosecution, post-grant proceedings, trademark and copyright, counseling and strategic insight, and IP litigation and disputes. As one of the nation’s leading patent firms, Patterson + Sheridan prosecutes hundreds of patents every year for some of the world’s largest companies. The firm serves clients in complex industries, including, communications technologies, complex software and IT, consumer products, electronics and semiconductor technologies, biotechnology and pharmaceuticals, chemical, clean technologies financial technology and business methods, industrial products, the Internet, medical devices and procedures, nanotechnologies, oil & gas services, and optics. For more information, visit www.pattersonsheridan.com.


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