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Patent Demand Letter Hearing in House Shows Difficulty in Drafting Targeted Bill

Wednesday, May 28, 2014

By Tony Dutra  

May 22 --Legislation to address abuses in patent infringement lawsuit filings and litigation proceedings stalled on May 21. Legislation to address abuses in lawsuit-threatening demand letters rose in its place to become a priority to many.

But if a May 22 hearing in the House is any indication, “threading the needle”--heard at least a half-dozen times--by targeting misleading and fraudulent behavior by so-called patent trolls without a chilling effect on the legitimate exercise of patent property rights is no less daunting. A stakeholder panel was about equally divided between wanting a broader and narrower focus in provisions of a draft bill distributed the previous week by Rep. Lee Terry (R-Neb.).

“From the testimony today, I think you'll find about six issues on just basic nuances of the wording,” Terry said to reporters after the meeting. But, he said, the Senate Judiciary Committee's decision the previous day that it could not work out a compromise on a litigation abuse bill “puts us in a position where we have to do something.”

Terry said he was hoping the language could be worked out so that he could introduce a bill formally before the end of June, but he admitted that might be optimistic.

“No piece of legislation is perfect,” Rep. Jerry McNerney (D-Calif.) said late in the session. So to gauge how far the current draft is from where the subcommittee needs to be in the end, he asked for an up-or-down vote, from each of six witnesses, on the draft as is.


“Frankly, all Americans deserve protection from fraud.”
Jon Potter, Application Developers Alliance, on why the draft doesn't go far enough

No one answered in one word. And most concerning for the likelihood of reaching a compromise, Adam Mossoff, professor of law at George Mason University, Arlington, Va. and Jon Potter, president and co-founder of the Application Developers Alliance--at opposite ends of the policy spectrum--both said no.

Federal and State Enforcement

The legislation at issue here would call for the Federal Trade Commission to regulate demand letters--typically sent to small retailers or individuals who are assumed to use an unaltered, off-the-shelf product that the patent owner alleges would infringe.

In the absence of federal enforcement, states' attorneys general have been moving ahead to curb the practice under consumer protection laws and in light of new state legislation. On May 14, Oklahoma became the 11th state to enact legislation targeted to stopping the demand-letter practice (86 PTD, 5/5/14).

Terry chairs the Subcommittee on Commerce, Manufacturing and Trade of the House Energy and Commerce Committee, which held a hearing on April 8 to discuss a possible bill (68 PTD, 4/9/14). He published his draft of a “Bill to Enhance Federal and State Enforcement of Fraudulent Patent Demand” on May 16 in preparation for the May 22 hearing (96 PTD, 5/19/14).

In general, the bill defines the conditions for finding bad-faith sending of a demand letter and enables both federal and state enforcement of such abuses.

At the federal level, it would make clear that engaging in those activities is presumptively “an unfair or deceptive act or practice” under Section 5(a)(1) of the Federal Trade Commission Act, 15 U.S.C. §45(a)(1). The act would preempt state laws, but it would allow state attorneys general to enforce the terms of the bill, on behalf of any of the state's citizens.

Issues of Debate

Following are the four main issues that separated the witnesses at the hearing.

• Detailed disclosure. Section 2(a) targets patent owners who “engage in a pattern or practice of sending written communications to consumers, end users, or systems integrators that state or imply that the recipients are or may be infringing, or have or may have infringed, the patent and bear liability or owe compensation to another,” when the letter contains one of 17 different attributes that could conceivably be fraudulent or misleading as assertions or by their omission.


“Notice letters and licensing communications are an important part of the U.S. patent system.”
Alex Rogers, Qualcomm Inc., on why the draft goes too far

For example, letters may falsely claim the patent has been litigated against others or may omit the fact that some manufacturers of infringing products have a license to the patent.

However, according to Mossoff, the disclosure requirements might be considered “compelled speech” and run afoul of related First Amendment jurisprudence by the Supreme Court.

Potter, called that argument “specious,” and he further argued that the bill should require even more disclosure. He said the patent owner must identify infringement at the claim level, not just the patent, and describe “how infringement is occurring.”

• Bad faith requirement. Lois Greisman, associate director of the FTC's Division of Marketing Practices, noted that the commission can obtain injunctive relief and “equitable monetary relief,” but otherwise cannot obtain civil penalties under Section 5. She thus appreciated that the bill would give the FTC that authority as to patent demand letters.

However, she said that the bad faith requirement does not exist for its current enforcement options and said that would hinder its ability to pursue cases here. She was referring specifically to Section 5 of the draft bill, which allows enforcement only when “the sender made such representations with actual knowledge or knowledge fairly implied on the basis of objective circumstances that such representations were false.”

But Alex Rogers, legal counsel at Qualcomm Inc., said that the requirement was the best way to counter the First Amendment concerns that Mossoff had expressed.

• No “catch-all”. Wendy Morgan, chief of the Public Protection Division Office of the Attorney General of Vermont--the first state to pass its own bill--was against the bad faith requirement but wanted something “comparable.” She argued that the bill lacks a “catch-all” phrase, which would allow the FTC and states to bring actions as to patent troll activities that are not expressly listed in Section 2.

“If you have a list, patent trolls will change their behavior,” she said. “So you need the ability to enforce even when they change.”

Robert P. Davis of Venable LLP, Washington, on behalf of the Stop Patent Abuse Now (SPAN) Coalition, agreed. “If certain behavior is not mentioned [in the list], courts will read it out,” he said. Broad language and a catch-all provision are necessary “so it's not limited to what is specifically mentioned.”

Rogers again disagreed. A catch-all “tips the balance too far,” he said. “It creates a chilling effect, particularly for small companies.”

• Protected recipients. Potter would not limit recipients to “consumers, end users, or systems integrators.” “The bill should protect every business from abusive demand letter fraud,” he said. “Frankly, all Americans deserve protection from fraud.” He found little support for that breadth, however.

“Notice letters and licensing communications are an important part of the U.S. patent system,” Rogers said. Since his firm routinely sends such letters to large firms that can potentially use Qualcomm's patented technology, he argued that the list of protected recipients should be contained.

Other Bills on Issue Dormant

Reps. Jared S. Polis (D-Colo.) and Thomas A. Marino (R-Pa.) had testified on the first panel.

The two co-sponsored the Demand Letter Transparency Act (H.R. 3540) that would have required the Patent and Trademark Office to maintain a registry of demand letters and to void a patent owned by a sender in bad faith (224 PTD, 11/20/13). That bill stalled in the House Judiciary Committee which, in pushing its version of a litigation abuse bill, rejected demand letter-related amendments proposed by Polis and Marino.

Their testimony at this hearing served as a preview of the proponents' arguments on the stakeholder panel, with Polis concerned that language in Terry's bill “might take us backward.”

Sen. Claire McCaskill (D-Mo.) introduced a patent demand-letter bill (S. 2049) in the Senate in February (40 PTD, 2/28/14). S. 2049 is similar to Terry's draft.

That bill was referred to McCaskill's Committee on Commerce, Science, and Transportation and has not been acted upon, presumably in deference to the Senate Judiciary Committee's deliberations now tabled.

However, Terry said to reporters after the hearing that he did not expect S. 2049 to be acted upon any time soon, and he said he expected his subcommittee to move more quickly by resolving the “nuances” of his draft.

 

To contact the reporter on this story: Tony Dutra in Washington at adutra@bna.com

To contact the editor responsible for this story: Naresh Sritharan at nsritharan@bna.com


Draft bill is available at http://pub.bna.com/ptcj/TerryDemandLtrBillDraft.pdf.

Subcommittee review information is at http://energycommerce.house.gov/hearing/hr-bill-enhance-federal-and-state-enforcement-fraudulent-patent-demand-letters.

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