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Vt. Leads Effort To Stop Nuisance Patent Lawsuits

Patent law is traditionally the domain of the federal government. But recently, patent litigation has become such a nuisance that state officials have looked for ways to address the problem.

Jon Bruning, the attorney general of Nebraska, last month sent a letter to the law firm of Farney Daniels warning it to leave Nebraska businesses alone.

Farney Daniels represents companies like the one that claims to own the concept of scanning documents to email. Bruning warned the firm that it would face serious consequences under state law if it engaged in “baseless harassment” of businesses or pursued “costly and destructive litigation.”

Nebraska is the second state where officials have tried to shield businesses from frivolous lawsuits by patent holders. Bruning credits Vermont Attorney General William Sorrell for drawing his attention to the problem. Sorrell filed a lawsuit in May against the scanner patent company after it threatened Vermont businesses and two charities.

Both men’s interest in the issue is driven by grass-roots outrage over the growth of patent litigation, which used to be mostly confined to large firms in patent-dependent industries such as pharmaceuticals. Today, companies of all sizes in a variety of industries face patent threats. These patent trolls are a new breed of patent litigators, whose only business model is to threaten firms that accidentally infringe their patents.

Vermont has emerged as a hotbed of anti-troll activism, led by an ad-hoc coalition of Vermont businesses, represented by attorney Peter Kunin. This year, the legislature passed an anti-patent-troll bill.

“Vermont has a history of political activism by companies,” Kunin said. “Companies like Ben & Jerry’s demonstrated to the business community at large that if there’s something really wrong with the system, you don’t have to take it.”

The ringleader of Vermont’s anti-troll coalition was one of Kunin’s longtime clients. This tech company has about 100 employees, and it was first threatened by a patent holder about five years ago. That was bad enough. The firm’s outrage grew when threats against the firm’s clients started to cost it business.

“We had two projects that we were close to doing,” said the firm’s chief financial officer, who spoke on the condition of anonymity because he fears retaliation from trolls. “Then our clients contacted us saying, ‘We’re being threatened by patent trolls.’ “ Both projects were canceled.

“I couldn’t believe this kind of thing was allowed in this country,” the executive said. “I’ve had dialogue with many of these guys. They know how costly litigation is. You can’t get a judge to rule without spending a million dollars. So someone says, ‘Hey, you can spend that or pay us $100,000 and we’ll go away.’ Based on principle, we haven’t settled. It’s maddening.”

Convinced the system needed to change, the executive talked to Vermont’s elected officials. When the governor’s office got similar complaints from other businesses, it passed the comments along. Soon the tech firm emerged as a de facto leader of the state’s anti-troll movement.

Kunin played an essential role in organizing the anti-troll coalition. “Kunin was working with me on our specific issue,” the CFO said. But he also provided legal advice to other businesses. When other Kunin clients were threatened with patent litigation, he made introductions.

The tech CFO organized a coalition of about a dozen Vermont tech and e-commerce companies. The firms pooled their money and hired Kunin to craft a legal strategy. They “felt a deep sense of anxiety and frustration with the legal system and powerlessness,” Kunin said. “The patent system is a federal system. The challenge was is there anything we can do under Vermont state law without being preempted by federal law?”

“We came up with a legal theory under Vermont’s Consumer Protection Act,” he said. “If a troll makes a threat in bad faith, that is a violation of state consumer protection laws,” which also protect Vermont businesses against frivolous legal threats.

“The patent system is federal, but it works hand in glove with state law,” Kunin said. For example, he noted, questions about who owns a patent are generally litigated under state law. The sale and licensing of patents are often governed by state laws.

Kunin and his clients began talking to elected officials about their idea. “We’re a small state,” he said. “Our governor, our senators, our legislators, they’re easy to talk to. They’re willing to listen to the business community.”

Kunin testified about the legislation in April, and it passed handily in May.

Vermont’s legislation gives the recipient of a “bad faith” accusation of patent infringement the right to counter-sue.

Possible signs of bad faith include a lack of specificity about an alleged infringement, demands for excessive licensing fees and unreasonably short deadlines for payment. Firms that do not use the technology claimed by the patent — a.k.a. trolls — are also more vulnerable to accusations of bad-faith litigation.

The idea of using state laws as a club against patent trolls is so new that it hasn’t yet been tested in court. There’s a possibility that the Vermont legislation will fall prey to preemption, the legal principle that bars states from interfering with the enforcement of federal law.

“I don’t think it’s necessarily preempted,” said Camilla Hrdy, a legal scholar at Yale. Federal courts have generally allowed the states to police bad-faith patent assertions, but only if the state courts apply the same legal standards that would apply in federal courts.

Hrdy predicts that if a “patent is obviously invalid or plainly not infringed,” accusations of bad faith are likely to stick against the patent holder. In less clear-cut cases, the stricter federal standards may work in the patent holder’s favor.

The idea of using state consumer protection law against patent trolls could spread. Bruning said he has been evangelizing the idea to his peers in other states.

“The attorneys general, we know each other well,” Bruning said. “There are good friends across party lines.”

Bruning is slated to lead the intellectual property committee of the National Association of Attorneys General next year. He plans to make the fight against patent trolling the “primary issue.”

“It’s a transfer of wealth that occurs via a perversion of the court system,” he said.

If the other 48 states follow Vermont and Nebraska’s lead, it could make the legal system much less hospitable to patent trolls. Trolling takes advantage of economies of scale. A trolling firm can send out thousands of demand letters, counting on the fact that some fraction of the recipients will settle to avoid the hassle and expense of hiring a lawyer. And because few of the cases go to trial, the cost to the troll can be very low.

If other states adopt anti-troll measures, that calculus could change. Suddenly, sending out a thousand demand letters would trigger responses from dozens of state attorneys general, who have the resources and expertise to fight back. Trolls could be forced to respond to dozens of subpoenas and appear in dozens of state courts to address charges that they were engaging in bad-faith litigation.

“This isn’t a Republican or Democratic issue,” said Bruning, a Republican. “Companies that aren’t violating anyone’s patents are settling these cases just to avoid the cost of litigation. That’s not what the courts are designed for.”