Ron Abrams Appears in Demand Letter Bill Would Squelch Worst Patent Trolls

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Demand Letter Bill Would Squelch Worst Patent Trolls

By Ryan Davis

Law360, New York (February 28, 2014, 8:32 PM ET) — A new Senate bill that would establish rules for patent licensing demand letters would effectively curb the most egregious tactic of so- called patent trolls: targeting small companies with vague allegations to extract settlements, attorneys say.

The Transparency in Assertion of Patents Act, introduced Thursday, appears to be on a fast track in the U.S. Senate Commerce Committee, which has set a hearing on it for Wednesday.

By requiring demand letters to include detailed descriptions of the patents at issue and the infringement claims, the bill would short-circuit a strategy favored by the most notorious trolls: making hazy allegations against small companies that have little knowledge of patent law in the hope that they’ll pay up to make the threats go away.

“This is a perfect first step,” Ron Abrams of BG Law LLP said. “It’s hard for anyone to argue that these anonymous, abusive, nonspecific demand letters should be protected.”

The content of demand letters is usually not an issue when nonpracticing entities sue major companies, which have attorneys who can parse the allegations, but a vague threat of a patent lawsuit can frighten smaller companies into settling, attorneys say.

“It really is fundamentally unfair for smaller companies that don’t have in-house counsel and don’t understand what companies can and can’t do in demand letters,” said Mark Scarsi of Milbank Tweed Hadley & McCloy LLP.

The bill appears squarely aimed at companies like MPHJ Technology Investments LLC, which has drawn the ire of state attorneys general across the country for blanketing thousands of companies and nonprofits with letters alleging infringement of its scanner patents, allegedly with little evidence to back up the claims.

Sen. Claire McCaskill, D-Mo., who introduced the bill, held a hearing on patent troll tactics in November, and said she was concerned that MPHJ and companies similar to it made baseless allegations and misrepresented their patents to intimidate companies into paying license fees with threats of litigation. The bill is “really going after the most egregious behavior” and provides welcome guidelines that will hamper their abusive tactics, which should find strong support from lawmakers, Abrams said.

“The true trolls are having a field day right now without any constraints,” he said.

McCaskill’s bill, S.2049, would give the Federal Trade Commission the authority to set rules to prohibit “unfair or deceptive acts” in the sending of demand letters and sets out a list of information that demand letters must include. The list includes a detailed description of the patent at issue and the accused product or service, information about how the letter recipient allegedly infringes, and the name and contact information of the person with the right to enforce the patent.

Letters would also have to disclose whether the patent is subject to any licensing obligations or invalidity challenges at the U.S. Patent and Trademark Office. If the letter proposes that the recipient pay compensation, it would have to include information about how that amount was calculated.

The bill goes further than two other pending patent troll measures in setting requirements for what the letters must include. The Patent Transparency and Improvements Act, which is being considered by the Senate Judiciary Committee, would make “the widespread sending” of demand letters that don’t identify the patent or the patent owner a violation of the Federal Trade Commission Act. Meanwhile, the Innovation Act, which passed the House in December, would bar patent owners from using “purposely evasive demand letters” as basis for alleging willful infringement.

If enacted, the new Senate bill would significantly curb the ability of nonpracticing entities to send out hundreds or thousands of letters at once, since the research involved in including such detailed information would make large demand letter campaigns cost-prohibitive, according to George Medlock of Alston & Bird LLP.

“They would be required to do more work or they will face consequences,” he said. “Will it stop all the letters? No, some will still send letters, but it just won’t be as lucrative for them.”

Medlock noted that Vermont and Oregon had enacted state laws setting requirements for what demand letters should include under state consumer protection laws, and many other states are considering similar measures. The Senate bill appears aimed at doing the same thing on a national level, he said.

The bill sets a penalty of up to $16,000 for each violation, which could amount to a fine of millions of dollars if a company sends out thousands of vague letters.

“Having the penalty on a per-letter basis gives it more teeth in terms of getting penalties against these parties,” Scarsi said.

He noted that giving the FTC the authority to enforce the rules means that they could be adjusted whenever patent trolls change their tactics, without the need for Congress to pass new legislation to deal with new techniques.

“These troll plaintiff lawyers have proven to be a pretty smart bunch, so allowing the FTC to promulgate the rules is a more fluid and flexible approach,” he said.

So while the bill could curb the “shotgun approach” of sending thousands of letters, it may not be the cure-all that the sponsors envision, Marcus Sprow of Foley & Lardner LLP said.

“If there’s any group that can find a way to operate within these strictures, it’s that one,” he said. The bill could cause other problems as well, Sprow said, because in addition to the companies targeted by the sponsors, it would apply to individual inventors and small companies that may not be able to afford to comply with the rules, making it difficult for them to enforce their patents.

Demand letters with infringement allegations as specific as those required by the bill would also likely trigger declaratory judgment jurisdiction, allowing the recipient to sue the sender seeking a finding of noninfringement, he said.