Vermont and Nebraska Attorneys General Take Patent Trolls Head On

Vermont Attorney General William H. Sorrell and Nebraska Attorney General Jon Bruning

In 1790, a Vermont farmer named Samuel Hopkins patented a new process for making potash. It was patent No. 1 – the first patent issued in the United States. That was over two centuries and eight million patents ago. But this past spring, Vermont marked another first for patents: the first state attorney general to sue a so-called “patent troll” for allegedly violating the state’s consumer protection law.

What is a patent troll? The term “patent troll” is commonly used to describe businesses that don’t invent or manufacture anything (also referred to as non-practicing entities, or NPEs), but instead acquire patents with the aim of making money by asserting claims of patent infringement. Earlier this year, President Obama described patent trolls as companies that “don’t actually produce anything themselves,” and instead develop a business model “to essentially leverage and hijack somebody else’s idea and see if they can extort some money out of them.” And patent trolls do not only target manufacturers or sellers of products. Small businesses, retailers, and non-profit organizations have also been targeted with demands for licensing fees for the use of common, everyday technology, such as scanners and Wi-Fi networks.

The patent troll business model works because defending patent infringement lawsuits is disastrously expensive, particularly for small businesses. A company accused of patent infringement can easily spend thousands of dollars just getting preliminary legal advice about the scope of the patent and its validity. Successfully defending a lawsuit may cost a million dollars or more. And, though the patent laws make some provision for awarding attorneys’ fees, a party that defeats a patent troll in court has little hope of getting its money back. Patent trolls generally operate through undercapitalized shell companies that are effectively judgment-proof. No surprise, then, that targets of patent trolling often shell out a few thousand dollars to settle claims of patent infringement – however dubious – instead of risking an expensive legal battle.

Patent rights are valuable and important, and of course many assertions of patent infringement are legitimate. In recent years, however, business owners, journalists, lawyers, academics, and government officials have recognized that some patent-related conduct causes competitive harm and imposes real financial burdens. The threat of patent litigation can cost jobs and even shutter the doors of some small businesses. Other businesses spend money on legal fees and licensing fees – money that could have been spent on growing the business or paying salaries. These concerns have led to repeated calls for new federal legislation designed to curb frivolous patent-infringement claims. The Federal Trade Commission has also announced an inquiry into patent trolling.

Those of us who work in state attorneys general offices may think that patent trolling, however troubling, can only be addressed at the federal level. Certainly, many proposed reforms would have to be adopted by Congress or pursued by federal agencies. But state attorneys general also have an important role to play, particularly when assertions of patent infringement are advanced in a way that is unfair or deceptive. This type of conduct may violate state consumer protection law or other state laws. Conduct that is potentially unfair or deceptive includes: making false or deceptive statements in demand letters; targeting large numbers of businesses with demand letters with little or no investigation about whether the targeted businesses are actually infringing; intentionally targeting small businesses that may not have the resources to dispute a claim; and threatening litigation when no litigation is planned. The closest corollary in established consumer protection law may be unfair debt collection practices. A debt collector may have a valid legal debt, but engage in unfair collection practices that scare or confuse consumers into paying amounts of money that may not be justified, based on threats of consequences that are, in reality, unlikely to arise. Likewise, assertions of patent infringement may be deceptive or unfair without regard to the validity of the patent.

This type of conduct led Vermont, in May, to file suit under state consumer protection law against an alleged patent troll. The lawsuit, Vermont v. MPHJ Technology, Inc., is the first effort by an attorney general to use state consumer protection law to stop a patent troll. The defendant in the case sent letters to scores of small businesses in Vermont (and hundreds more nationwide) claiming to have a patent on a process for scanning a document and attaching it to an email via a network. The recipients, some of which were non-profits, were asked to provide extensive paperwork to prove that they were not infringing the patents, and if they could not do so, were asked to purchase “licenses” costing approximately $1,000 per employee.

Vermont’s complaint in MPHJ alleges that the letters contained false and misleading statements about, among other things, the asserted value of the license and the response the sender had received from the business community. Vermont also alleges that the letters’ threats of imminent litigation were false. The case was filed in state court, but the defendant removed it to federal court. The defendant has also moved to dismiss for lack of personal jurisdiction. Vermont’s motion to remand as well as the defendant’s motion to dismiss, are both pending in federal court. Stay tuned.

Nebraska Action

After receiving complaints from businesses and nonprofits, Nebraska initiated an investigation into Farney Daniels, the law firm working hand-in-hand with MPHJ and Activision TV in patent demand letter schemes. On July 18, Nebraska sent Farney Daniels a civil investigative demand, as well as a cease-and-desist order that directed it to stop sending threatening demand letters to Nebraska consumers and businesses. Nebraska’s order cited concerns under both the Consumer Protection Act and the Uniform Deceptive Trade Practices Act. Farney Daniels responded by adding members of the Nebraska Attorney General’s Office as parties to a patent lawsuit brought on behalf of Activision TV in federal court.

While Nebraska’s motion to dismiss in that case is still pending, MPHJ filed a motion to intervene in the matter. Despite Farney Daniels’ previous insistence that the Activision lawsuit was not about patent trolling, it now wants to bring one of the nation’s most well-known patent trolls into the case. Patent trolls represent a clear threat to Nebraskans. Farney Daniels and its patent troll client have doubled-down in their attempt to escape this office’s investigation, but Nebraska will not be intimidated or deterred.

The threatening demand letters sent on behalf of Activision TV in Nebraska alleged violations of “digital signage” patents, but follow a similar pattern of solicitation as those by MPHJ—the letter first comes from the business, and then is followed up by a letter from Farney Daniels if the business does not respond. Ironically for a company alleging intellectual property violations, Activision has recently been accused of violating the intellectual property of Activision Publishing, a video game publisher, in California federal court, by use of its trademarked name. Pursuant to a recently-filed stipulation between the parties, Activision TV will stop using the name “Activision” in the future.

Vermont Legislature

The Vermont Legislature also took steps this year to address patent trolling. Prompted by complaints from Vermont businesses and their lawyers, the Legislature passed Act 44, which supplements the remedies already available under existing consumer protection law. In addition to giving the attorney general additional enforcement authority, the Act provides a private cause of action for businesses that receive a demand letter. Under the law, the sender may be required to post a bond in the event that a court determines that the letter sent or lawsuit commenced was done in bad faith. There are several factors, focused primarily on the transparency and disclosure of information made by the sender, that a court is asked to consider when determining whether a sender acted in bad faith. The legislation also contains additional cost-shifting and damages provisions.

In short, although federal patent reform is crucial, states don’t have to stand by and wait for federal action. State attorneys general should continue to look for innovative solutions to address the harms caused by patent trolling.

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Vermont Attorney General Sorrell
Vermont Attorney General Sorrell
Nebraska Attorney General Jon Bruning
Nebraska Attorney General Jon Bruning

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