Patent Trolls and Preemption

In September 2012, eighty-one companies with nonsensical names such as CleOrv, DucPla, and EntNil began sending letters to over 16,000 businesses throughout the United States. The letters stated that the sender was the “licensing agent” for several U.S. patents that cover the use of an office scanner to send documents via e-mail. The letters noted that the recipient “almost certainly uses” that technology and that, accordingly, the recipient “should enter into a license agreement with us at this time” at a “fair price” of approximately $1,200 per employee. Many recipients of that letter received two subsequent letters from a Texas-based law firm, Farney Daniels. The first letter noted that the matter had been referred to the firm and that its representation “can involve litigation.” The second letter stated bluntly that “if we do not hear from you within two weeks from the date of this letter, our client will be forced to file a Complaint against you for patent infringement in Federal District Court.” This second letter also included a draft complaint against the recipient.

It turns out that CleOrv, DucPla, EntNil, and the other companies asserting patent infringement are all subsidiaries of another company, MPHJ Technology Investments, which is controlled by a Texas lawyer named Jay Mac Rust. Patent holders such as MPHJ have been called “bottom feeder” patent trolls: They assert patents against numerous potential infringers, relying on the high cost of threatened litigation to extract quick settlements. Notably, bottom feeder trolls such as MPHJ have begun to target not the manufacturers of allegedly infringing technology, but the businesses, organizations, and individuals who are the end users of that technology. For instance, patent trolls have sent letters to thousands of hotels and restaurants, claiming that those businesses committed patent infringement by using wireless technology to make Internet service available to their customers. Another patent troll sent letters to numerous construction companies claiming infringement of a patent on the use of a “moisture removal system”—that is, a fan—to dry lumber during construction.

These enforcement campaigns are troubling because, if the patents are as broad as their owners claim, they may be invalid due to the Patent Act’s requirements of novelty and nonobviousness. Yet the nature of the enforcement behavior is also disturbing. Many demand letters are sent to entities, such as nonprofits, municipal governments, and small businesses that are unfamiliar with patent litigation and that may find it too costly to investigate the merit of the patent claims or to fight the infringement allegations. Indeed, the letters sent by bottom feeders are designed to intimidate the recipient into quickly purchasing a license. MPHJ’s lawyers, for example, threatened to file suit unless the recipient responded within two weeks. But those threats often are deceptive or false. MPHJ, for instance, did not file a single infringement suit for several months after the final letters were sent, suggesting that it never intended to litigate at all. When MPHJ finally did file suit, it did so only after numerous state attorneys general had begun investigating the company’s enforcement tactics.

In response to these campaigns, legislatures in over half the states have passed statutes outlawing certain acts of patent enforcement. In a majority of those states, the new laws are modeled after a statute first adopted in Vermont, which prohibits “bad faith” assertions of patent infringement. Other states have outlawed assertions that “contain false, misleading, or deceptive information” or have defined specific acts as illegal, such as making infringement assertions that “lack a reasonable basis in fact or law” or failing to provide, in a letter alleging patent infringement, “factual allegations” about how, exactly, the recipient infringes the patent. Most of the new statutes create a private right of action for the targets of unlawful infringement assertions and all of the statutes allow for enforcement by state officials, such as the state attorney general. In addition, state attorneys general have begun to use long-existing state laws, such as consumer protection statutes and deceptive trade practices laws, to challenge schemes of patent enforcement.

Although patents are usually thought to be the domain of the federal government alone, Congress has only recently begun to consider bills that would outlaw unfair or deceptive patent demand letters. The states’ growing role in the patent system is reflected on the website of the U.S. Patent and Trademark Office, which counsels persons who receive demand letters that are “deceptive, predatory, or in bad faith” to, among other things, “fil[e] a complaint with your state attorney general’s office.” The states, by taking aggressive steps to regulate patent enforcement, are thus poised to erode the federal government’s monopoly over the patent system.

Doctrines of federal constitutional law, however, may invalidate the new state statutes and limit the law enforcement authority of state officials. For decades, businesses and individuals accused of patent infringement have tried to assert state law tort claims against overzealous patent holders, but the U.S. Court of Appeals for the Federal Circuit, which has exclusive appellate jurisdiction over patent cases, has held that those claims are mostly preempted by the federal Patent Act. According to the Federal Circuit, to avoid preemption, the accused infringer must prove not only the elements of its state law claim, it must also prove, by clear and convincing evidence, (1) that the patent holder’s infringement allegations were “objectively baseless,” meaning that no reasonable litigant could have expected to succeed, and (2) that the patent holder made its infringement allegations with knowledge of their inaccuracy or with reckless disregard for their accuracy. Cases challenging the constitutionality of the new state statutes and state law enforcement actions are just getting underway. But the Federal Circuit’s two-part test will almost certainly prohibit the states from condemning any but the most frivolous assertions of patent infringement. This Article argues, however, that the Federal Circuit’s preemption rule is wrong as a matter of doctrine, is misguided as a matter of policy, and ignores important lessons from the history of patent enforcement.

As a matter of doctrine, courts usually identify the Constitution’s Supremacy Clause as the source of preemption law, and the Federal Circuit has sometimes invoked the Supremacy Clause as grounds for immunizing acts of patent enforcement from state law liability. A closer examination of Federal Circuit case law, however, reveals that the most significant constitutional barrier to state regulation of patent enforcement is not preemption pursuant to the Supremacy Clause; it is the Federal Circuit’s erroneous interpretation of the First Amendment’s Petition Clause.

Under an orthodox, Supremacy Clause-based preemption analysis, state laws regulating patent enforcement likely avoid preemption. Although the state laws create some disuniformity in the patent system, they arguably do not conflict with the core objectives of federal patent law, such as incentivizing invention and inducing the disclosure of inventions. And it is difficult to say that federal law fully occupies the field of patent-enforcement regulation: The Patent Act is entirely silent on the issue of unfair or deceptive enforcement—it neither condemns nor immunizes it. Moreover, courts have consistently refused to find field preemption of state law tort claims that impose liability on patent holders. Rather than analyzing preemption under the Supremacy Clause, however, the Federal Circuit has imported as its preemption test the nearly insurmountable requirements imposed by the Supreme Court on plaintiffs who seek to inflict antitrust liability on defendants based on those defendants’ pursuit of litigation. This doctrine, often called the Noerr-Pennington doctrine (or Noerr doctrine, for short), stems from the Supreme Court’s interpretation of the federal antitrust statute, the Sherman Act, in the light of the First Amendment’s Petition Clause.

To strip an antitrust defendant of the immunity conferred by the Noerr doctrine, the plaintiff must show that the defendant’s underlying lawsuit was a “sham” by proving both that the lawsuit was objectively baseless and that it was filed with the subjective intent to impair competition. The Federal Circuit, in adopting as its preemption rule the same requirements of objective baselessness and subjective bad intent, has thus expanded Noerr immunity by allowing patent holders to invoke the doctrine to avoid any type of civil liability, not just liability under the antitrust laws, based on any conduct related to patent enforcement, not just the pursuit of litigation. This expansion of Noerr immunity is a mistake. Letters sent from one private party to another, such as letters threatening patent infringement litigation, are not “petition[s]” to “the government” within the meaning of the First Amendment. Moreover, the Federal Circuit’s use of Noerr as a preemption rule gets the federalism analysis exactly backwards. The Supreme Court has often articulated a presumption against preemption, but the Federal Circuit insists that a patent holder seeking to avoid preemption “has a heavy burden to carry.”

The Federal Circuit’s erroneous expansion of Noerr immunity is not only wrong as a matter of doctrine, it also has several destructive policy implications. For instance, it grants patent holders a license to lie in their demand letters, so long as those letters also contain objectively plausible allegations of infringement. Thus, patent holders can lawfully send letters stating that many recipients have already purchased licenses to the asserted patents even if, in fact, few if any recipients have done so. And patent holders can lawfully claim that the validity of the asserted patents have been upheld in court or in reexamination at the Patent and Trademark Office, even if that is not true. In addition, because the Federal Circuit purports to derive its Noerr-based immunity standard from the First Amendment, that standard makes it unconstitutional for not just states but also the federal government to condemn any but the most fantastical allegations of patent infringement. Thus, although the President, members of Congress, and the Federal Trade Commission have all recently voiced concerns about “patent trolls,” Federal Circuit law significantly limits the regulatory options.

Fortunately, history provides a useful lesson on how courts can strike an appropriate balance between protecting patent holders from liability when they make legitimate allegations of infringement and punishing patent holders when they engage in unfair or deceptive enforcement tactics. Specifically, a long line of federal judicial decisions—which the Federal Circuit has mostly ignored—addresses the precise question of when a patent holder may be held liable for its enforcement conduct. As early as the nineteenth century, courts sitting in equity enjoined patent holders from making infringement assertions in bad faith, which could be established through evidence of the patent holder’s “malicious intent.” Although a patent holder’s intent is a subjective question, courts often inferred subjective intent from objective evidence, such as the patent holder’s threatening a large number of accused infringers and the patent holder’s failure to follow its threats with actual lawsuits. This flexible, equity-based immunity standard—as opposed to the rigid two-part test mandated by the Federal Circuit—would empower all three branches of government at both the state and federal levels to impose reasonable restrictions on patent enforcement. At the same time, cases in which enforcement conduct was enjoined under the traditional standard were usually egregious and often involved claims that were objectively weak on the merits, so a revitalized good faith immunity doctrine would protect patent holders’ ability to provide legitimate notice of their patent rights.

This Article is the first to consider whether the new state statutes are constitutional. By showing how current Federal Circuit doctrine could quash those innovative reforms, and by offering an alternative to the Federal Circuit’s onerous Noerr-based immunity rule, this Article contributes to an important and on-going policy conversation as additional states, as well as the federal government, contemplate steps to fight abusive patent enforcement.

This Article will begin in Part I by outlining the state laws relevant to patent enforcement, including the new state statutes. Part II will then explore the bodies of federal law that potentially nullify those state laws, namely, preemption doctrine under the Supremacy Clause and doctrines of petitioning immunity derived from the First Amendment. Part III will reexamine the relevant Federal Circuit case law, showing that the key limit on the states’ ability to regulate patent enforcement is not preemption but the Federal Circuit’s flawed interpretation of the First Amendment. Part IV will explore the practical consequences of conferring broad immunity on patent holders’ assertions of infringement, highlighting the limited power that both state governments and the federal government have under Federal Circuit law. Finally, Part V will outline ways in which Federal Circuit law should be reformed to provide governments the ability to outlaw unfair and deceptive schemes of patent enforcement.