On May 16, Gov. Mary Fallin signed into law an act that is designed to discourage bad faith allegations of patent infringement. Traditionally, patent infringement litigation was primarily fought between marketplace competitors — often large companies with competing products and patent portfolios. Unwary consumers were rarely involved in patent litigation.
Over the past several decades, however, a new business model has developed around the threatened enforcement of patents. Like the mythical green creature guarding a bridge and demanding fees from travelers, “patent trolls” are individuals or companies who seek to enforce patent rights against accused infringers in an attempt to collect license fees or royalties.
Patent trolls (sometimes referred to as a “non-practicing entity”) do not manufacture products covered by the asserted patent and are usually disconnected from the scientific development that led to the patent. In many cases the patent at issue was obtained by the patent troll through the auction of an intellectual property portfolio following the collapse of a high-tech company.
The standard patent troll runs a high-volume business that relies on the complicated and expensive nature of patent infringement litigation. It may take an experienced attorney many hours just to perform a preliminary evaluation of the merits of an infringement claim. Recognizing that many businesses and individuals do not have the capacity to investigate and sustain a prolonged patent infringement defense, the patent troll sends lots of demand letters to unsuspecting recipients who were unaware of the asserted patent. These demand letters often include a subtle suggestion that infringement may have occurred and advise the recipient of the opportunity to license the asserted patent.
Successful patent trolls have priced the license at an amount that is less than the cost to investigate and defend the lawsuit. Faced with the certain costs of defending a patent infringement case and the uncertain outcome of complicated litigation, many accused infringers fall victim to the troll and pay the demanded ransom to be released from the claim.
This isn’t a small problem. President Barack Obama recently weighed in on the subject, and a commonly cited study by Boston University professors James Bessen and Michael Meurer estimates that the direct costs to defendants from patent troll claims totaled about $29 billion in 2011.
Although patent litigation remains within the exclusive province of the federal courts, the new Oklahoma law follows other consumer protection initiatives and creates causes of action based on the bad faith assertion of a patent infringement claim.
Generally, the Oklahoma law prohibits sending an infringement notice that falsely states that litigation has been filed against the recipient, that presents a pattern of threatened litigation with no litigation actually filed, or that makes assertions that lack a reasonable basis in fact or law.
The lack of a “reasonable basis in fact or law” can be established by showing that: the person or entity asserting the patent does not have the right to enforce or license the patent; the asserted patent has been previously determined to be invalid; the demand for fees relates to activities that occurred after the asserted patent expired; or the demand fails to include the identity of the person asserting the patent, the patent number, or the factual basis for the allegation of infringement. Although most patent troll demand letters already identify the subject patent and the name of the entity asserting the patent, the requirement for an explanation of the factual basis for the infringement contentions will force the patent troll to at least conduct a preliminary infringement analysis before sending the letter.
Notably, the new law does not prohibit the assertion of patent infringement by someone who owns or has the right to enforce a patent, as long as the assertion of infringement is not made in bad faith. The new law also exempts from liability any written or electronic communication that is sent by an institution of higher education, a technology transfer organization in connection with an institute of higher education, or a patent owner who is using the patent in connection with “substantial research, development, production, manufacturing, processing or delivery of products or materials.” These exceptions will allow universities and legitimate “practicing” entities to continue to enforce their patents and commercialize their patented technology.
The new Oklahoma law takes effect Nov. 1, and permits the attorney general or private plaintiffs to seek remedies for violations of these provisions. Private plaintiffs may seek to recover from the patent troll damages, costs, reasonable attorneys’ fees, and punitive damages in an amount equal to $50,000 or three times the total damages, costs and fees, whichever is greater.
It’s tough to predict whether the Oklahoma law will be effective at discouraging patent trolls from sending demand letters to Oklahomans. A carefully worded demand letter might comply with the provisions of the law and still expose Oklahoma companies and citizens to threats of patent litigation. With the president and Congress also weighing in on the cost of patent trolls, the Oklahoma law may soon be preempted by federal action.
David M. Sullivan is a director at Crowe & Dunlevy and chair of the law firm’s Intellectual Property Practice Group.