Patent Trolls: Can You Sue Them for Suing or Threatening to Sue You?
Much of the recent discussion about dealing with abusive litigation and licensing campaigns by so-called patent trolls and other non-practicing entities (NPEs) has focused on one of two things: (1) legislative attempts in Congress and the states to pass new laws, or amend the Patent Act, to make life more difficult for trolls; and (2) court decisions such as the Supreme Court’s recent opinions in Octane Fitness and Highmark, which significantly relaxed the standard for awarding attorney fees under 35 U.S.C. § 285 against anyone, including trolls, accused of filing meritless cases or engaging in abusive litigation tactics. Often overlooked is a third category—whether a party subjected to a suit or licensing campaign by a patent troll may have a basis for going on the offensive, by asserting claims or counterclaims seeking damages or other relief. That third option is the subject of this article.
Companies facing threatened or actual lawsuits by patent trolls are often in a difficult position, one that many patent trolls intentionally create and exploit. As part of their strategy, trolls typically try to leverage the high cost of patent litigation into profits for themselves by (1) asserting patents against persons who have a relatively low stake in the accused infringing activity and, thus, less incentive to fight; and (2) settling with as many targets as possible for amounts that are modest or small relative to the extremely high cost of most patent litigation. Companies on the receiving end of this strategy often feel compelled to pay what they see as unreasonable settlement demands, even if they believe they do not infringe or have reason to question the validity of the asserted patent.
One key to success for patent trolls is their advantage in who has what to lose. As the plaintiff or licensee, trolls have mostly upside potential in the recovery of license fees or damages. Targets of that strategy have mostly the downside—the potential of having to pay license fees or damages and substantial attorney fees to boot if they choose to fight. Legislation and court decisions aimed at shifting fees to the prevailing party level this playing field a little, by giving trolls some potential downside and potentially lessening the downside for the targets. But with fee shifting as the only option, targets still have no real upside, and the field can remain tilted in favor of the trolls.
Victims of abusive patent assertion tactics may have another option—to go on the offensive and seek damages against the party engaged in the abuse. By asserting a viable claim or counterclaim, the target of a patent assertion campaign can level the playing field a bit more, by giving the troll more potential downside and the target a potential upside. As explained below, such claims must normally clear a fairly high hurdle—requiring proof of “bad faith.” But the possibility is something companies and their lawyers should evaluate and consider when faced with a suit or threat of suit from a patent assertion entity.
The Requirement of Showing Bad Faith
The right to file suit for patent infringement in the federal courts is generally protected under the First Amendment as part of the constitutional right to petition the government for redress of grievances. Globetrotter Software, Inc. v. Elan Computer Grp., Inc., 362 F.3d 1367, 1375–77 (Fed. Cir. 2004). The Supreme Court first recognized that the First Amendment right to petition government extends to the right to file suit in federal court in the anti-trust and labor contexts. See E. R.R. Presidents Conference v. Noerr Motor Freight, Inc., 365 U.S. 127 (1961); United Mine Workers v. Pennington, 381 U.S. 657 (1965). This so-called Noerr-Pennington doctrine, however, does not protect “sham” litigation, i.e., litigation that is both objectively baseless and subjectively brought for an ulterior motive, such as to interfere with the business relationships of a competitor. Prof’l Real Estate Investors, Inc. v. Columbia Pictures Indus., Inc., 508 U.S. 49, 60–61 (1993).
The Federal Circuit has applied the Noerr-Pennington doctrine to patent suits, holding that federal patent law preempts any state law cause of action that would impose liability for a patent holder’s “good faith conduct” in asserting its patent rights. Globetrotter Software, 362 F.3d at 1374; Zenith Elec. Corp. v. Exzec, Inc., 182 F.3d 1340, 1353–54 (Fed. Cir. 1999). The Federal Circuit affirmed, however, that the doctrine does not bar claims where the patent holder’s assertion activity amounts to “bad faith.” Based on Noerr-Pennington, the court held that to establish the requisite “bad faith,” a claimant must allege and prove that the assertion of patent rights was objectively and subjectively baseless, in that the patent was either “obviously invalid or plainly not infringed,” and that the patentee knew or should have known that to be the case. Globetrotter Software, 362 F.3d at 1374–75. Further, the court held that the Noerr-Pennington doctrine extends to protect pre-litigation conduct, such as sending letters accusing a person of infringement and threatening suit. Id. at 1376. Thus, any state law claim or counterclaim asserted against a patent troll for abusive litigation or pre-litigation activities must be accompanied by pleading allegations of both objective and subjective bad faith sufficient to overcome the immunity recognized in Globetrotter Software and other cases.
Potential Causes of Action
Unfair and deceptive trade practices. One promising cause of action for attacking abusive tactics by patent trolls is offered by laws prohibiting unfair competition or unfair or deceptive trade practices. The Federal Circuit held in Mirafi, Inc. v. Murphy, 928 F.2d 410 (Fed. Cir. 1991), that “bad faith infringement litigation [such as knowingly asserting an invalid patent] . . . could violate North Carolina’s Unfair Competition Statute.” That North Carolina statute closely mirrored Section 5(a) of the Federal Trade Commission Act, which prohibits “[u]nfair methods of competition . . . and unfair or deceptive acts or practices in or affecting commerce.” 15 U.S.C. § 45(a)(1). The court held that bad-faith patent litigation, where a patentee initiates litigation on a patent he or she knows to be invalid or not infringed, could constitute an unfair act or practice in violation of the statute.
A few federal district courts have come to similar conclusions regarding claims under various state laws prohibiting unfair or deceptive trade practices. Clearplay, Inc. v. Nissim Corp., No. 07-81170-CIV, 2011 WL 3878363, at *3 (S.D. Fla. Sept. 2, 2011) (bad-faith assertion of patent could support claim under Florida Deceptive and Unfair Trade Practices Act); Alien Tech. Corp. v. Intermec, Inc., No. 3:06-CV-51, 2008 WL 504527, at *4 (D.N.D. Feb. 20, 2008) (showing of bad-faith publication of patent in the marketplace would avoid federal preemption of claim under the Washington Consumer Protection Act); In re Innovatio IP Ventures, LLC Patent Litig., 921 F. Supp. 2d 903, 906 (N.D. Ill. 2013) (dismissing unfair competition claim under California Business & Professions Code section 17200 for failure to allege facts showing that PAE’s licensing campaign was a sham or in bad faith); DeSena v. Beekley Corp., 729 F. Supp. 2d 375, 401 (D. Me. 2010) (bad-faith conduct in connection with patent would avoid federal preemption of claim under the Maine Uniform Deceptive Trade Practices Act).
These state laws, and the elements necessary to state a claim under them, vary from one state to the next. Many, like the Federal Trade Commission Act and the North Carolina statute, broadly proscribe “unfair or deceptive acts or practices” in commerce. N.C. Gen. Stat. § 75-1.1(a) (2013). The California statute prohibits “any unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue or misleading advertising.” Cal. Bus. & Prof. Code § 17200 (2013). Other state laws are limited to the protection of consumers or require some consumer nexus. Still others apply more narrowly to unfair competition. Thus, the viability of a claim under a particular state law will depend in the first instance on the elements required under that state’s statute. If those elements are met and there is sufficient evidence to prove that the troll acted in bad faith, the claim should be allowed to proceed, and not preempted by federal patent law.
A recent example of one such suit is the State of Vermont’s suit against patent troll MPHJ Technology Investments, LLC. Vermont sued MPHJ in 2013, under Vermont’s Consumer Protection Act, 9 Vt. Stat. Ann. § 2453 (2013), which mirrors the Federal Trade Commission Act and prohibits “[u]nfair methods of competition in commerce, and unfair or deceptive acts or practices in commerce.” The State alleged that MPHJ’s patent assertion campaign, directed at hundreds or thousands of Vermont businesses, amounted to unfair and deceptive acts and practices under the statute. Vermont’s complaint alleges that MPHJ, acting through 40 shell subsidiaries and its attorneys, sent a series of letters to Vermont businesses threatening suit if the businesses did not agree to pay for a license. The suit alleges that the letter campaign constituted an unfair and deceptive trade practice because, among other things, the letters threatened suit when the defendants were neither prepared nor likely to bring litigation (and never had); the letters falsely implied that their counsel had performed an adequate pre-suit investigation to determine likely infringement; the campaign targeted small businesses that were unlikely to have the resources to fight patent litigation or pay counsel; the letters made unreasonable demands for information and shifted the burden onto businesses to prove they were not infringing; MPHJ used shell corporations to hide the true owners of the patents; and the letters contained numerous deceptive statements.
MPHJ removed the suit to federal court, but the U.S. District Court for the District of Vermont remanded the case to state court after finding that there was no federal question or diversity jurisdiction. Vermont v. MPHJ Tech. Invs., LLC, No. 2:13-cv-00170-wks (D. Vt. Apr. 14, 2014), ECF No. 61. The district court held that the State’s claims for unfair and deceptive practices were based solely on state law and that while MPHJ may have a defense that the good-faith assertion of patent rights is protected by federal patent law and the First Amendment, the existence of a federal defense does not confer removal jurisdiction on federal courts.
State statutory anti-troll causes of action. Several states have adopted laws providing for private causes of action against trolls or others for sending bad-faith or abusive patent assertion letters. Vermont passed the first such law in 2013, Bad Faith Assertion of Patent Infringements, 9 Vt. Stat. Ann. §§ 4195–4199 (2013). The Vermont statute includes a list of factors to determine what constitutes bad-faith patent assertion, including sending assertion letters that fail to identify the patent at issue, the owner, or exactly how the target’s product infringes the patent; demanding an unreasonably fast response or unreasonably large license fees; and making false or deceptive statements. Wisconsin and Oregon have enacted similar statutes, both providing private causes of action for what the laws determine to be bad-faith or abusive patent assertion letters. 2014 Or. Laws 1540; 2014 Wis. Sess. Laws 498.
On August 28, 2014, Illinois passed an amendment to its Consumer Fraud and Deceptive Business Practices Act banning patent assertion letters that (1) falsely threaten litigation; (2) make assertions that lack a reasonable basis in fact because the asserting party does not have the right to license the patent, or the patent has expired or been held invalid; or (3) fails to include sufficient information regarding the patent owner or the specific features of the accused product alleged to be covered by the claims in the patent. See 815 Illinois Comp. Stat. 505/2RRR. The law provides for a private cause of action and enforcement by the Illinois attorney general.
Tortious interference. Tortious interference claims could be asserted against patent trolls where their conduct is directed at actual or potential customers or business partners and has interfered with those relationships. A typical example is where a troll sends infringement letters to customers, claiming that a product they are using infringes the troll’s patent. Such claims could be sustained if they meet the state law elements and the troll acted in bad faith by asserting objectively and subjectively baseless claims. In Zenith Electronics Corp. v. Exzec, Inc., 182 F.3d at 1347, 1355 (Fed. Cir. 1999), for example, the Federal Circuit upheld a state law tortious interference claim based on allegations that the patent holder made statements to the target’s customers to the effect that the target infringed the patent holder’s patent and could not design around the patent, knowing that such statements were false. See also OpenLCR.Com, Inc. v. Rates Tech., Inc., 112 F. Supp. 2d 1223 (D. Colo. 2000) (threatening and instituting patent litigation in bad faith supports state law claim for tortious interference with contractual relationships and prospective business advantage).
Business disparagement. Business disparagement or trade disparagement claims may also be available where the troll’s licensing letters or public statements are disseminated to third parties, falsely accuse the alleged infringer, and damage its reputation or relationships or both. Again, the plaintiff would need to show bad faith and meet the elements of the particular state law governing the claims. See, e.g., Zenith Elec. Corp., 182 F.3d at 1347, 1355 (upholding Lanham Act and state unfair competition claims against patent holder for trade libel and product disparagement for allegedly false allegations of infringement made to customers).
Unjust enrichment. Unjust enrichment is another fairly broad cause of action available in many states and could be asserted against abusive trolls, depending on the circumstances. In Illinois, for example, the cause of action requires proof that “the defendant has unjustly retained a benefit to the plaintiff’s detriment, and that defendant’s retention of the benefit violates the fundamental principles of justice, equity, and good conscience.” Gagnon v. Schickel, 2012 Ill. App. Ct. 120645 ¶ 25, 983 N.E.2d 1044, 1052 (2012). In addition, to avoid federal preemption, a plaintiff would need to plead and prove that the troll acted in bad faith.
Civil conspiracy. Many states also allow causes of action for civil conspiracy. Again using Illinois as an example, the elements of a claim for civil conspiracy are (1) a combination of two or more persons, (2) for the purpose of accomplishing by some concerted action either an unlawful purpose or a lawful purpose by unlawful means, (3) in the furtherance of which one of the conspirators committed an overt tortious or unlawful act. Fritz v. Johnston, 209 Ill. 2d 302, 317, 807 N.E.2d 461 (2004). Depending on the circumstances, this may be a viable cause of action in a suit challenging abusive troll tactics. In addition to the above elements, proof of bad faith would be required to avoid federal preemption.
Racketeer Influenced and Corrupt Organizations (RICO) Act. RICO claims have also been asserted based on abusive patent troll tactics, but those claims have proved difficult to sustain. Unlike many broad state law claims, the elements of a RICO claim are narrowly defined by statute and include required elements like specific predicate acts of mail or wire fraud, extortion, or other specified criminal activity; proof of a RICO “enterprise”; and proof of a pattern of RICO activity. InInnovatio IP Ventures, LLC Patent Litig., 921 F. Supp. 2d 903 (N.D. Ill. 2013), three major manufacturers of WLAN products, Cisco Systems, Motorola Solutions, and Netgear, filed a 55-count complaint against patent troll Innovatio, alleging that Innovatio’s patent assertion campaign was a sham, was conducted in bad faith, and constituted a pattern of extortion and mail and wire fraud in violation of RICO and various state laws. The court granted Innovatio’s motion to dismiss all of the RICO and state law claims for the plaintiffs’ failure to adequately plead that Innovatio’s patent assertion actions, aimed at some 8,000 end users of Wi-Fi technology, were conducted in bad faith or a sham. While RICO claims may be viable in the right case, the Innovatio case illustrates the difficulty of sustaining such claims based on even somewhat egregious patent troll tactics. See also FindTheBest.com v. Lumen View Tech. LLC, No. 13 Civ. 6521 (DLC), 2014 WL 2050610 (S.D.N.Y. May 19, 2014) (dismissing RICO claims against patent troll for failure to allege predicate acts of mail and wire fraud, extortion, or conspiracy).
Antitrust claims. Alleged infringers frequently file antitrust claims or counterclaims against patentees under the federal antitrust laws. While these are typically limited to claims against competitors, at least one case, OpenLCR.COM, Inc. v. Rates Technology, Inc., 112 F. Supp. 2d 1223 (D. Colo. 2000), sustained antitrust claims against an NPE for attempted monopolization arising out of the NPE’s alleged bad-faith assertion of its patent rights. A class action suit filed in the Eastern District of Louisiana also asserted state and federal antitrust claims against patent troll MPHJ and one of its subsidiaries for engaging in the same kind of patent assertion campaign as the one at issue in the Vermont suit. See Eng’g & Inspection Serv., LLC v. Intpar, LLC & MPHJ Tech. Inv., LLC, No. 13-0801(E.D. La. June 25, 2013). That suit was dismissed for lack of personal jurisdiction; therefore, the court did not reach the issue of whether the complaint stated a valid cause of action. Id., ECF No. 61 (Oct. 9, 2013).
The strength of any potential case will depend on a multitude of factors, the most important being the evidence of bad faith, as well as which federal or state laws may apply. A colorable claim of subjective bad faith—employing the definition from Professional Real Estate Investors quoted above—may be provided by a troll’s pattern of asserting claims without ever allowing them to reach the point of an outcome. A claim of objective bad faith must be based on an examination of whether the troll’s infringement claim is plainly wrong or the patent is obviously invalid. Allegations of bad-faith troll activity sufficient to meet these requirements could be based on a wide array of facts. Factors that have been identified in different cases or state statutes as providing a basis for overcoming the immunity include the following:
a prior court determination that the troll acted in bad faith with respect to the patent at issue;
a prior court or U.S. Patent and Trademark Office determination that the patent at issue is invalid;
evidence that the asserted patent was obviously invalid or plainly not infringed and that the troll knew or should have known that to be the case;
assertion of the patent without an adequate pre-suit investigation of infringement, which might be indicated by assertion activities directed at a large number of defendants where the accused infringement is not based on the same devices;
threats to sue on the patent where the troll has never followed through and has no intent to actually sue;
assertion letters containing false or misleading statements;
assertion letters claiming without adequate basis that the target cannot design around the patent;
assertion entities set up in a manner to hide true ownership of the patent;
a pattern of terminating litigation before any determinations of infringement or invalidity are made.
These and other factors may provide a basis for turning the tables and leveling the playing field, by opening the door to a possibly viable cause of action for damages against anyone engaged in abusive or bad-faith patent assertion activities.