North Carolina became the latest state to take a stand against patent trolls when NC Governor Pat McCrory signed a new law last week aimed at preventing bad faith assertions of patent infringement. Patent trolls (more officially called "patent assertion entities" or "non-practicing entities") are known for sending very vague letters, with often meritless claims, to other businesses in the hopes of extorting a settlement to avoid the nuisance of a lawsuit.
Patent trolling, long the bane of the technology industry, has been the subject of discussions at the federal level for some time. However, in recent years, patent trolls started targeting small and medium businesses in all industries, particularly in the retail and banking sectors. The practice of sending vague demand letters to hundreds of businesses at a time prompted increasing scrutiny by state governments, leading to enactment of similar legislation in Georgia, Idaho, Maine, Maryland, Oregon, South Dakota, Tennessee, Utah, Vermont, Virginia, and Wisconsin. Thirteen other states are also considering similar bills.
Vermont Attorney General (AG) Bill Sorrell made headlines last year when he filed a suit under his state's existing consumer protection law against MPHJ Technology, Inc. for sending demand letters to at least 75 small businesses in Vermont alleging infringement of patents related to scanning documents and sending them via email. It was the first known effort by an attorney general to use state consumer protection law in the realm of patent litigation, and a few attorneys general in other states have filed similar suits or opened investigations against patent trolls since then.
While Attorneys General already had authority to investigate or sue patent trolls under existing consumer protection laws, many bills in this new wave of state legislation provide a private right of action to the target companies receiving demand letter shakedowns. A company alleging patent infringement must comply with certain requirements in their demand letter, such as the patent number, and factual and specific allegations regarding the alleged infringement, and more timely responses to clarification requests from the target. Failure to comply allows a target to bring an action against the patent troll in state court and could result in the troll having to pay the target company damages, equitable relief, attorney's fees, and exemplary damages.
We may never see a target company or State AG actually sue a patent troll under one of these laws. States are hoping that by putting the threat of suit in place, it might deter some patent trolls from sending meritless demand letters in the first place. The bigger message that I take away from this latest action by the states is that it reflects the growing frustration with lack of legislative action at the Federal level. For the moment, that effort is on hold. Even if these new state laws work fully, there is still need for meaningful legislative reforms from Congress—sooner rather than later.