Intellectual Property, Patents, State Attorneys General, Technology

Vermont Declares War On Patent Trolls; Passes New Law And Sues Notorious Patent Troll

It's open season on patent trolls in Vermont.

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I’ve always liked the state of Vermont — but mainly because it was a nice place to visit. But, now the state appears to be declaring war on patent trolls. A new anti-patent trolling law has been quietly enacted, H.299, which targets patent trolls. Or, as it says “bad faith assertions of patent infringement.” It does this by amending the state’s consumer protection laws, to give tools to judges to recognize when patent litigation is done in bad faith (i.e., for trolling, rather than legitimate reasons)…

Eric Goldman summarizes the law this way:

Vermont’s law (H.299, to be codified at 9 V.S.A. § 4195-4199) is entitled “Bad Faith Assertions of Patent Infringements.” However, it doesn’t define “bad faith patent assertion.” Instead, it enumerates factors to help judges distinguish legitimate from illegitimate patent assertions. Factors that suggest a bad faith patent assertion include not identifying the patent(s)-at-issue, the patent owner, and exactly how the recipient’s behavior violates the patent; demanding too quick a response or too much money; and making deceptive or meritless assertions. Factors that suggest a legitimate patent assertion include commercializing the patented invention; being either the original inventor (i.e., not having bought the patent for assertion purposes) or an educational institution; and having successfully enforced the patent in court.

The law would allow those threatened by trolls to sue back and seek damages, even if no lawsuit has been filed. In other words, it helps those who are being shaken down and don’t want to settle. That’s a nice feature, but there are some reasons to be skeptical. It also allows the state Attorney General to go after patent trolls. While the law may scare of some patent trolls, I think Eric Goldman is right that a state-based solution is neither a good idea for this, nor is it probably legal. Patent law is a federal law, and federal preemption likely means that state laws that impact patents aren’t allowed. This tries to hide it as a consumer protection law, which is an interesting strategy, but I could easily see this law being tossed out.

Of course, even before the law was officially on the books, it looks like Vermont’s Attorney General has already sued a patent troll under existing consumer protection laws (raising questions as to why the new law is necessary). In this case, the troll is one we’ve written about a few times. Remember the series of rotating shell companies that had claimed that businesses who had a networked scanner need to pay $1,000 per employee? Yeah, that one.

The Vermont Attorney General claims that many of the statements made in the threat letters sent out by the rotating set of shell companies include “deceptive statements” and “deceptive practices” that violate consumer protection laws:

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Defendant engaged in unfair trade practices in commerce in violation of the Vermont Consumer Protection Act, 9 V.S.A. § 2453(a) including:

a. Stating that litigation would be brought against the recipients, when Defendant was neither prepared nor likely to bring litigation;
b. Using legal counsel to imply that Defendant had performed a sufficient pre-suit investigation, including investigation into the target business and their potentially infringing activities, that would be required to justify filing a lawsuit;
c. Targeting small businesses that were unlikely to have the resources to fight patent-litigation, or even to pay patent counsel;
d. Sending letters that threatened patent-infringement litigation with no independent evidence that the recipients were infringing its patents;
e. Shifting the entire burden of the pre-suit investigation onto the small businesses that received the letters;
f. Propounding burdensome information demands on any business that claimed not to infringe the patents; and
g. Using shell corporations in order to hide the true owners of the patents, avoid liability, and encourage quick settlements.

Defendants engaged in deceptive trade practices in commerce in violation of the Vermont Consumer Protection Act, 9 V.S.A. §2453(a), by making deceptive statements in the threatening letters which would likely lead consumers to believe the following:

a. Defendant would sue the target business if they did not respond within two weeks;
b. Defendant would sue the target business if they did not pay money;
c. Defendant had a reasonable basis for identifying the target businesses as infringing its patents;
d. Subsidiary Shell LLCs were exclusive licencees able to enforce the patents;
e. Target companies were within the sending Shell LLC’s alleged area of exclusivity;
f. Defendant’s licensing program had received a positive response from the business community;
g. Many or most businesses were interested in promptly purchasing a license from Defendant;
h. Based on prior licensing agreements, the fair price of a license was between $900 and $1200 per employee;
i. Target businesses were receiving a third letter, which refers to two prior letters, when in many cases recipients had received no prior letters.

The lawsuit also claims that lawyer Jay Mac Rust is really the person who owns the patents via the company MPHJ. As you may recall, last month we wrote about Mac Rust after Joe Mullin at Ars Technica interviewed him in connection with the case. At the time, Mac Rust claimed that he was just one lawyer working for the owner of the patent, but who handled the “irate” recipients. So it’s interesting to see the claim that he’s really the guy behind MPHJ. As we’ve noted, there’s long been an assumption that the use of shell companies is often done to hide the fact that it’s the patent lawyers themselves who own the patents being used.

The use of consumer protection law in response to patents is an interesting strategy. I’m skeptical as to how well it will actually work in court, but there’s no denying that many of the claims made in threat letters are, in fact, untrue and could be deemed deceptive (this kind of thing might work against copyright trolls as well). No matter what, this is going to be a key case to follow.

The full text of the case, and links to more TechDirt stories, on the next page…

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