A bill to curb demand letter abuse called the Targeting Rogue and Opaque Letters Act of 2014 is being considered by the US House of Representatives. The bill, known as the TROL Act, was introduced by Lee Terry, a Republican from Nebraska, and was passed by the energy and commerce committee’s subcommittee on commerce, manufacturing and trade by a vote of 13 to 6 on June 10.
The bill would give the Federal Trade Commission and state attorneys a general power to impose penalties on firms acting in bad faith. It would make it “an unfair or deceptive act or practice” to engage in a “pattern or practice of sending written communications” alleging patent infringement if certain conditions apply.
Associations back bill
The TROL Act received praise from some associations. Fifteen letters or statements of support were sent to the subcommittee, including from The Coalition For 21st Century Patent Reform, the American Intellectual Property Law Association (AIPLA), the Biotechnology Industry Organization, Innovation Alliance, Intellectual Property Owners Association, and The Software Alliance.
In the AIPLA letter, Todd Dickinson, then executive director of the association (he has since resigned), said the approach in the draft bill is consistent with AIPLA’s position that a number of the most troubling and visible abusive practices may be dealt with under the laws governing consumer fraud and deceptive practices.
“AIPLA believes that the most concerning activity captured in the current debate concerning patent litigation reform is actually taking place prior to the institution of a lawsuit, specifically the widespread sending of demand letters containing vague allegations and minimal information,” said Dickinson in a statement. “We believe that this activity should be treated like other acts of consumer fraud and deceptive trade practices, and we commend the Subcommittee for taking an approach that seeks to target the abusive behavior in this manner while not inhibiting free speech or legitimate patent licensing and enforcement.”
Other observers believe the approach of targeting more focused legislation seems sensible. Attempts to pass comprehensive patent reform foundered in May, when Senator Patrick Leahy withdrew his Patent Transparency and Improvements Act, saying that there was “not sufficient support behind any comprehensive deal”. Leahy has since blamed Senate Majority Leader Harry Reid for forcing his hand and said he hopes to resuscitate his attempt to get reform passed.
“I am furious with what happened,” Leahy told the Burlington Free Press in July. “We worked so hard to get a coalition. Harry Reid and a couple of others said, ‘We won’t let it come to the floor.’ I think that’s wrong, but I’m not going to give up.”
This was a big turnaround from the optimism over patent reform at the end of 2013 when the Senate passed Senator Bob Goodlatte’s Innovation Act. The chance of passing comprehensive reform seems dead for now, however, meaning some are pinning their hopes on less wide-ranging reform.
Many different bills have been introduced to tackle patent reform. Before the TROL Act, 14 bills had been introduced during this Congress. Speaking to Managing IP in June before the TROL bill was introduced, Andy Baluch, a partner at Foley & Lardner, said a slimmed down version of patent reform still had a chance of progressing, in particular a bill targeted at demand letters.
The TROL bill is similar to reform that has been passed by various state attorneys general. According to Patent Progress, 15 states have signed reform into law acting against bad faith patent infringement assertions. A further 11 have either passed reform that is waiting to be passed into law or have passed reform in one house of legislature.
Baluch said a federal bill to tackle demand letters would be more efficient that individual states all passing their own reform that may differ slightly from state to state.
“Especially from a compliance standpoint, if I as a patent attorney am advising a client on what needs to be in their good faith licensing request being sent out to potential licensees – ie, potential infringers – you would have to do a 50-state survey to ensure that you are in compliance if you are sending them to recipients across the country,” said Baluch. “It would be much simpler and efficient for there to be a single uniform law that everyone looks to at the federal level.”
“Worse than no legislation”
Not all appreciate the TROL Act, however. In the debate on July 9, Democrat Representatives Henry Waxman and Jan Schakowsky opposed parts of the bill, saying that it does not adequately solve the problem.
Schakowsky, who is the ranking member of the subcommittee, criticised the preemption of state laws aimed at preventing abusive enforcement. Those Representatives raising objections noted states are taking steps to clamp down on patent trolls and suggested Congress should not impede these efforts.
Representative Peter Welch said he was worried passage of the TROL Act “is going to become an excuse for the Senate not to act on what is a comprehensive Bill that was a bipartisan-strong vote passed by the House of Representatives."
Baluch at Foley & Lardner agreed that a slimmed down bill may come at the expense of a comprehensive one.
“For those who want to see the patent laws change more fundamentally it is in their interest that the two hanging fruits of demand letters and increased transparency are not addressed as a one-off thing but rather as part of more sweeping legislation. But, if the broader thing cannot be done, I think we should try to choose what can be done – don’t let the perfect be the enemy of the good.”
Some opponents of the TROL Act say they are not necessarily opposed to slimmed-down patent reform – just not this one. The Computer & Communications Industry Association (CCIA), for example, called it “bad legislation”, saying it would actually empower trolls.
“As much as businesses need tools to combat patent trolls, this legislation is worse than no legislation,” said CCIA patent counsel Matt Levy in a statement. “To curb the patent trolls’ business model, reform legislation must include tools to level the litigation playing field. Otherwise patent trolls will still have the leverage to misuse the system to extort quick legal settlements. This bill would also preempt the pro consumer laws enacted by 15 states and being considered in over a dozen other states. Tying the hands of state attorneys general trying to protect their citizens is not an effective way to deal with patent trolls.”
The CCIA noted that the Federal Trade Commission had also weighed in against the TROL Act because it would weaken its ability to curb abuse by changing the current standard of “consumer harm” for action to also require them to show bad faith intent when cracking down on patent trolls. Levy concluded that it was a “well-intentioned, but dangerous, bill”.
Daniel Nazer, at the Electronic Frontier Foundation, said he was glad Congress wants to respond to deceptive letters from non-practising entities such as MPHJ wasting time and money.
“But the TROL Act is not the right approach,” he said in a blog post. “As currently drafted, the act would make it explicit that certain kinds of misrepresentations are unfair business practices under section 5 of the Federal Trade Commission (FTC) Act. But the FTC already has authority to target deceptive patent trolls. Indeed, it is currently investigating MPHJ. Worse, the TROL Act expressly preempts a number of recent state laws regarding demand letters (this means the federal law replaces the state laws and renders them a nullity). We see little value in striking down over a dozen state laws only to give the FTC authority it likely already has.”
Nazer added that “it is extremely important that the TROL Act does not become a substitute for change”. He claimed that many of the strongest opponents of patent reform are supporting the TROL Act.
“We suspect this is not because they care about the bill itself. Rather, they are hoping that this bill will provide political cover—an illusion of action—that they can use to frustrate broader reform,” he said.
Pause in reform “not a bad thing”
While supporters of comprehensive patent reform are disappointed that a wide-ranging bill failed – and are indifferent or even hostile to a slimmed down bill targeting demand letters – some seasoned IP observers believe the Senate did the right thing to put patent reform on ice for now.
David Kappos, partner at Cravath Swaine & Moore and former director of the USPTO, told Managing IP that the pause in the push for comprehensive reform is “on balance is not a bad thing”. He explained: “Reform is good but it has to be smart reform. And you only know it is smart reform after you have listened to the stakeholders.”
This is something of which Kappos has first-hand experience, having been director of the USPTO when the America Invents Act was passed. He said it is hard to get patent legislation to a point where it helps the people you want to help without hurting everybody else disproportionately.
Universities and small companies came forward to speak out against Leahy’s reform bill while it was being debated. They were concerned about the undesirable consequences of fee shifting if it applies to both plaintiffs and defendants.
“If you are a coffee shop in Vermont and you get a patent infringement threat from a patent troll and your patent attorney tells you, ‘You know what, if we fight this and we are wrong you are not only going to have to pay your own lawyers’ fees and damages but you are going to have to pay the other party’s lawyers’ fees,’ you may get even more people, more coffee shop owners in Vermont, saying, ‘I want nothing to do with this, just send them the check for $10,000.’ So you have got to be really careful with these things.”
After the Supreme Court rejected the strict test for fee shifting in favour of a more flexible standard in its Octane Fitness v Icon Health and Fitness decision in April some hoped that passing reform would be easier because it potentially removed this issue from the discussion. It did not turn out that way, despite some cases already granting motions to shift. Baluch at Filey & Lardner noted that the Supreme Court decision makes fee shifting easier but does not provide much guidance.
“It will take time to figure out exactly what the Supreme Court did,” said Baluch. “They effectively provided no guidance whatsoever on what constitutes an exceptional case. Potentially those who have resisted the legislative fee shifting provision might have second thoughts because at least the fee shifting provision in the legislation provides some objective criteria for when fees would shift. The Supreme Court’s Octane decision provides very little guidance to parties and lower courts and this is going to play out for some time.”
During the discussions over Representative Leahy’s patent reform bill, concerns were also raised over the covered customer stay provision that would transfer suits to a supposedly better-suited party. Kappos said this makes sense when protecting a party that is merely using a product off a shelf, like a coffee shop owner with wifi.
“The problem is when you go any further that that, you actually quickly create significant risk for the entire patent system because you start telling patentees who they can sue and who they can’t sue among all the parties who are adding technical value to an invention or product. Once you do that, you are meddling with the centre piece of the patent system and I think that is where a lot of folks stood up and said: ‘This is going to get really dangerous.’”
Kappos is not opposed to patent reform, however. “I want the US patent system to have the highest overall credibility in the world and to get there I want abusers to find out that the system is not easy to abuse and I agree that for that for that to happen legislation is needed,” he said.
He sees no problem with a covered customer stay provision that is tailored to “mere retailers and quintessential inn keepers and coffee shop owners” or fee shifting that targets egregious parties. “Both of these provisions are good provisions but they require a lot of fine tuning to get them right,” Kappos said.
Further, Kappos believes that a third area that would be good for reform to target is guidance relative to discovery. He believes it would be useful to control the costs of litigation by controlling the cost of discovery.
“I have said for a long time I don’t think micromanagement of the courts makes sense and that the federal judicial conference should be given an opportunity to implement broad guidance from Congress,” said Kappos. “Nonetheless, it would be good to get that broad guidance from Congress going to the courts and let them do what they do, which is implement more consistent rules that ensure patent discovery is more controlled than it currently is and disputes can be resolved more efficiently.”
Overall, Kappos believes time should be taken for further consideration of the ramifications of reform before Congress can pass a comprehensive bill. He suggests lawmakers should read the Government Accountability Office’s report on patent litigation, which suggested patent trolls were not driving the growth in patent litigation. In the meantime, a smaller bill still remains a possibility.
“I certainly would not be surprised to see a slimmed down bill that covers some of the core issues that are less problematic, less controversial and I think that would be great. You take all the shrillness of the debate, you listen to what is sensible in it and you try to continuously tune the system in order to work out and assist with those parts of the debate that actually are sensible,” said Kappos.
However, time is running out in this Congress and the will to get something passed may no longer exist. Republicans are confident of taking the Senate in the midterm elections in November, which would give them control of both houses of Congress. Democrats had been strong supporters of some of the more controversial provisions, such as fee shifting and pleading standards. Republicans may not have the appetite to compromise on these issues if they think they can wait a few months to pass reform more along the lines of what they want.
