Ohio Considers Joining the Fight Against Patent Trolls

Author: Jon Kelly, Associate Member, University of Cincinnati Law Review

Patent trolls have become a serious headache for small businesses, and states are beginning to fight them without the federal government.  The Ohio General Assembly is currently debating House Bill 573 (H.B. 573), which would allow patent holders to sue patent trolls for “bad faith” claims.[1] Although Ohio has a strong interest in preventing patent trolls from hindering small businesses’ operations, it is uncertain whether the federal government’s exclusive jurisdiction over patent law would preempt H.B. 573 and prevent state courts from accepting patent abuse cases under the law. Considering the current state of relevant case law, however, Ohio’s H.B. 573 should survive any preemption challenge because the law does not attempt to validate patents themselves, but instead sanctions the conduct of patent trolls.

Patent Trolls Do Not Live Under Bridges

Although patent trolls cannot be found in the Brothers Grimm storybook, they are just as nasty. Patent trolls (sometimes referred to as “patent holding companies”) are firms that do not actually sell or produce anything; instead, the trolls buy patents in order to extort licensing fees by threatening businesses with litigation over the use of the patents. These licensing-fee extortions usually manifest themselves in vague demand letters stating that the target business has infringed on the troll’s patent and that the target must begin paying a licensing fee to avoid litigation.[2] Vague or unreasonable demands, or a clear indication that the holding company made no effort to inform the business how or even whether it had infringed the patent, usually make these infringement claims “bad faith,” especially if the underlying infringement claim lacks merit.

Whether the demand has merit or not, many small businesses find it easier to pay the licensing fees rather than litigate the infringement claim.[3] But if a targeted company decides not to pay the fee, it finds itself in limbo. If the patent troll then brings a lawsuit, it will be expensive to litigate;[4] but even if the troll does not sue, the target company’s operations will likely suffer. Unsure of whether there will be future legal action over its refusal to pay the licensing fee, the company must adjust its hiring and investment plans while waiting to see if the threat of litigation is legitimate. Because unemployment rates stay high when businesses cannot hire and invest, the economy suffers as a result of this possible litigation. Patent trolls are therefore bad for economic growth, and why states such as Ohio want to sanction bad faith claims of patent infringement through laws like H.B. 573.

H.B. 573

            Several states have already passed laws that target patent trolls, including Virginia, Georgia, and Tennessee.[5] Similarly, Ohio’s H.B. 573 would allow the targets of bad faith assertions of patent infringement to sue patent trolls in state court. Under H.B. 573, a target must prove that the patent troll (or whoever made the claim) made a bad faith assertion of patent infringement. If the court finds that the patent troll made the infringement claim in bad faith, the troll would be liable for damages and subject to an injunction preventing him from making further claims over the patent. The bill would also empower the Ohio Attorney General to investigate possible patent trolls and, if necessary, commence a suit to enjoin the troll from future bad faith accusations.[6] The current draft of the bill contains a non-exhaustive list of relevant factors that courts could use in analyzing a bad faith assertion claim, including: whether the initial demand letter lacked the relevant information concerning the patent in dispute and any responses to requests for the information were not timely; whether the demand for licensing fees gave an unreasonably short time for response; whether the licensing fee demanded was unreasonable; whether the claim of infringement was deceptive; whether the claim was meritless or the asserter should have known it was meritless; or whether the asserter made similar claims at other times that were meritless or lacked relevant information in their demand letters.[7]

H.B. 573 is not a clear-cut answer to a clear-cut problem, however. One implication of a bill that sanctions bad faith claims is the potential for a chilling effect on individuals and entities that address legitimate patent infringement claims. With the potential for state-law-based torts, these businesses may have to reconsider whether they have a claim strong enough to avoid a countersuit under H.B. 573 when making their assertions in demand letters. However, the bill could also be seen as merely forcing patent holders to perform due diligence before bringing an infringement claim.[8] The chilling effects of the bill are mere possibilities, and curbing abuse of the patent system is a pressing problem for the economy in general. Because states are thus justified in their desire to limit patent troll activity, the real question is whether or not they have the authority to enforce those limits.

Federal Patent Law

            No federal law grants standing to sue patent holders for making “bad faith” claims. While most areas of law allow states to legislate where the federal government is silent, patent law does not. Section 1338 of Title 28 of the United States Code gives the federal courts original jurisdiction over any civil action arising under any act of Congress related to patents.[9] The statute also specifically prohibits states from exercising jurisdiction over patent claims.[10] Even if Ohio’s law managed to fill gaps in current federal law without directly contradicting it, federal law could preempt H.B. 573. This could happen if, for example, a court determined that federal patent law already covered a tort claim directly related to harassing license-fee demand letters.

Questions Answered in the Courts

            Although there is no case law directly related to federal preemption of other state patent troll statutes, the relevant case law suggests that federal patent law would not preempt Ohio’s H.B. 573. In Christianson v. Colt Industries Operating Corp., the Supreme Court held that determining whether an action “arises under” federal patent law depends on whether a well-pleaded complaint requires answering a substantial question of patent law. In turn, a complaint raises a “substantial question” of patent law if “patent law is a necessary element to one of the claims.”[11]  Last year, in Gunn v. Minton the Supreme Court elaborated on the question of whether a state-based claim would require removal to federal court. In Gunn, a client sued his attorney for malpractice in a patent case. The Court held that when deciding whether federal jurisdiction lies over any state-based claim, a court must determine whether the federal issue is “(1) necessarily raised, (2) actually disputed, (3) substantial, and (4) capable of resolution in federal court without disrupting the federal-state balance approved by Congress.”[12] The Court held that state courts could answer hypothetical questions of patent law when resolving the state-based claim, since the hypothetical answer would have no effect on federal law.[13] Suits brought under H.B. 573 would likely fail the third prong of the Gunn test (substantiality), and thus would not be preempted by federal patent law. Courts might look to the merits of a patent when evaluating a claim under H.B. 573, but these inquiries would only be hypothetical judgments on the merits, and so would not risk preemption by federal law under Christianson or Gunn.

More recently, the U.S. district court in Vermont held in Vermont v. MPHJ Technology Investments that the state’s consumer protection claim against a patent troll did not meet the Christianson standard of raising a substantial question of patent law, and remanded the case to state court.[14] In MPHJ Technology Investments, the state claimed that excessive use of identical and vague patent infringement demand letters had involved threatening and misleading information. The court found both that a claim based on state law would not necessarily raise a federal question of patent law and that the state law claim would not be substantial so as to require removal to federal court.[15] As the court explained:

The State’s claims do not challenge the validity or scope of MPHJ’s patents nor do they require any determination of whether infringement has actually occurred. Instead, the State is targeting bad faith conduct irrespective of whether the letter recipients were patent infringers or not, on the basis that MPHJ’s bad faith conduct would be unlawful even if MPHJ’s patents were valid and the conduct was directed toward actual patent infringers.[16]

This holding speaks directly to the issue confronting Ohio H.B. 573 because the cause of action created by the bill would target bad faith accusations of patent infringement. While the consumer protection statute at issue in MPHJ was not patent-specific like H.B. 573, the federal courts in Ohio would be right to follow its reasoning. The holding in MPHJ is consistent with the Gunn test’s substantial-question prong, as would suits brought under H.B. 573, where state courts would only decide hypothetical questions of a patent’s merits, and not adjudicate the patent’s legitimacy. The bill also explicitly denies having applicability to claims under federal patent infringement law, thus assuring that a court would find that H.B. 573 is not preempted by federal law.[17]

Conclusion

There are strong policy arguments for allowing businesses to sue patent trolls with bad faith infringement claims. Although H.B. 573 might have a slight chilling effect on legitimate patent holders, keeping businesses safe from harassing demand letters and infringement assertions outweighs any potential chilling effect. Preemption should not be a concern either. Considering that the claim created by H.B. 573 avoids actual questions of federal patent law, federal law is not likely to preempt it. H.B. 573 does not ask courts to address patent validity, but rather allows them to sanction the devious business practice of a handful of companies. Should the issue of subject matter jurisdiction arise after H.B. 573 becomes law, courts would be right in following the Vermont district court’s reasoning and allowing the state to exercise jurisdiction over the claim. If H.B. 573 becomes law, patent trolls should beware, because the bill will be here to stay.

[1] H.B. 573, 130th Gen. Assemb., Reg. Sess. (Ohio 2014).

[2] Dan Miller, A New Ohio Weapon Against Patent Trolls, Technology Law Source (July 28, 2014), http://www.technologylawsource.com/2014/07/articles/intellectual-property-1/a-new-ohio-weapon-against-patent-trolls/.

[3] Dan Miller, A New Ohio Weapon Against Patent Trolls, Technology Law Source (July 28, 2014), http://www.technologylawsource.com/2014/07/articles/intellectual-property-1/a-new-ohio-weapon-against-patent-trolls/.

[4] According to the American Intellectual property Association the average cost of a patent lawsuit is $1.6 million through discovery and $2.8 million through final deposition. Chris Neumeyer, Managing Costs of Patent Litigation, IP Watchdog (Feb. 5, 2013, 10:30 AM), http://www.ipwatchdog.com/2013/02/05/managing-costs-of-patent-litigation/id=34808/ February 5, 2014.

[5] Melanie Chernoff, New State Laws Target Patent Trolls, OpenSource.com (June 9, 2014), http://opensource.com/law/14/6/new-state-laws-target-patent-trolls.

[6] H.B. 573, 130th Gen. Assemb., Reg. Sess. (Ohio 2014).

[7] Id.

[8] Over sixty percent of patent litigation is brought by patent holding companies. Chris Neumeyer, Managing Costs of Patent Litigation, IP Watchdog (Feb. 5, 2013, 10:30 AM), http://www.ipwatchdog.com/2013/02/05/managing-costs-of-patent-litigation/id=34808/ February 5, 2014.

[9] 28 U.S.C. § 1338(a) (2011).

[10] Id.

[11] Christianson v. Colt Industries Operating Corp., 486 U.S. 800, 809 (1988). The Court’s ruling brought the reading of §1338’s “arising under,” to identical usage as that found in § 1331.

[12] Gunn v. Minton, 133 S.Ct. 1059, 1065 (2013).

[13] Id.

[14] Vermont v. MPHJ Tech. Inv., No. 2:13-CV-170, 2014 WL 1494009 (D. Vt. Apr. 14, 2014).

[15] Id.

[16] Id. at *6.

[17] H.B. 573, 130th Gen. Assemb., Reg. Sess. (Ohio 2014).

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