Driven by concerns about abusive tactics employed by so-called patent trolls, a total of 27 states, including nine this year, have passed laws requiring patent licensing demand letters to include basic information about allegations of infringement and barring "unreasonable" demands for payment.
Since Vermont passed the first such law in 2013, suits directly alleging violations of them have been few and far between. But accused infringers in a handful of cases have turned the tables on patentees they believed were engaged in abusive tactics by filing counterclaims under the state patent laws or related statutes, leading the plaintiffs to swiftly dismiss the suits.
John Goetz of Fish & Richardson PC, who represented Sumitomo Electric Lightwave Corp. in one case involving North Carolina's law, said that the law was a very useful part of the defense.
"If the goal of the North Carolina Legislature was to beat back abusive patent litigation, they've done it," he said.
When Sumitomo was accused of patent infringement by Cirrex Systems, Sumitomo asserted a counterclaim under the North Carolina Abusive Patent Assertions Act. The plaintiff soon agreed to dismiss the suit without any payment by Sumitomo, and Goetz said that the counterclaim played a key role in the outcome.
"We felt strongly that this was a bad faith, meritless case and we wanted to use all of the tools at our disposal to resolve it as quickly as possible," he said.
The North Carolina law, which includes a provision that would have required Cirrex to post a bond to cover penalties if it were ultimately found to have violated it, "was an additional arrow in our quiver and gave us initial leverage," he said.
There have not been a may cases filed under the state laws to date, "but in my experience, it was certainly very helpful," he said.
In a similar case this fall, software company Demandware Inc. was accused of patent infringement by ArrivalStar SA and responded by filing counterclaims under Florida's Patent Troll Prevention Act. A few weeks later, ArrivalStar agreed to dismiss the suit, a result Demandware's CEO described in a statement at the time as "a victory over patent trolls."
Since patent infringement falls under federal law, most of the state laws are directed only at abusive practices in demand letters, which the states have maintained falls under their consumer protection powers. Many of the laws are modeled on existing state consumer protection statutes, but are specifically tailored to address misleading or fraudulent patent licensing demand letters.
Some accused infringers have found that even in states that don't have laws targeting abusive demand letters, the state consumer protection statutes have proven just as effective.
When mobile payments company LevelUp was accused of patent infringement by a nonpracticing entity known as eCharge Licensing LLC, it responded by filing suit first in the District of Massachusetts, seeking declaratory judgment that it did not infringe the patents.
Although Massachusetts does not have a specific statute dealing with abusive patent enforcement, LevelUp also alleged in the complaint that eCharge violated the state's general consumer protection statute by making "frivolous" patent infringement assertions despite knowing that its patents were invalid or not infringed. After the judge refused to dismiss the suit, the case settled.
The terms of the settlement are confidential, but LevelUp General Counsel Brian Carroll said in an interview that it authorizes LevelUp to say publicly that it has never paid any company to settle a patent suit.
The state law counterclaims were an important part of the successful outcome for LevelUp, Carroll said, adding that he would recommend that other companies facing infringement suits that they strongly believe are frivolous or in bad faith consider filing similar claims.
"If you're going to truly be aggressive and fight, the most aggressive thing you can do is bring a state law claim," he said.
Philip Swain of Foley Hoag LLP, who represented LevelUp, said that the case shows that specific state laws dealing with abusive patent litigation may not be necessary in some states for companies to get successful results.
"You can accomplish the same things as a lot of the anti-troll statutes through a strong consumer protection statute," he said.
Nevertheless, although the early cases have settled quickly, companies that invoke state law counterclaims in patents suits have to be prepared to fight, since the application of the laws is largely untested. If a patent owner digs in and litigates, resolving the state law claim that the infringement allegations are baseless could raise the issue of whether the state statutes are preempted by federal patent law, or turn into a battle over the underlying infringement allegation.
"It would be really hard to litigate this without litigating whether the infringement claim has merit or not," Carroll said.
The success some companies have had at invoking the state laws to put pressure on patent owners to settle could inspire greater use of state laws, many of which have been in effect for only a few months, said Matt Levy, patent counsel at the Computer & Communications Industry Association, who has closely followed the state legislation.
"It's still a little early to have a feel for what the impact is," he said. "My sense is that a lot of people don't know that these laws exist."
The 15 states that include a bond provision in their abusive patent litigation laws could be especially effective. Requiring those accused of violating the law to post a bond of up to $250,000 to cover penalties if they lose could prompt many companies to walk away from their infringement allegations, Levy said.
"Companies that are trying to monetize patents through enforcement and need to keep costs down often don't have money for a bond, so that could be a big deterrent," he said.
The state laws were largely designed to target companies that became notorious for sending vague demand letters to scores of small businesses alleging that they infringe patents and threatening to sue if they didn't quickly pay a licensing fee. MPHJ Technology Investments LLC, which sent more 16,000 such letters, became a poster child for the issue, and has reached settlement with several state attorneys general, although those deals typically did not involve patent-specific state statutes.
Swain said that even if there haven't been many cases brought under the laws, having them on the books may be tamping down such widespread demand letter campaigns. He noted that several years ago, he heard from nine or 10 clients independently who had gotten demand letters from MPHJ, but hasn't heard from any clients that have received such letters for over a year.
"The really aggressive trolls with really specious claims have been slowed down," he said.
While only a few suits have invoked the laws in litigation so far, Swain said he expects that number to grow.
"I think there will be more defendants with resources to assert counterclaims and take them all the way to the mat," he said.
--Editing by Katherine Rautenberg.
