Vermont Declares War on “Patent Trolls” with New State Law and Unprecedented Lawsuit

Non-Practicing Entities (NPEs), or “patent trolls,” are individuals or firms that obtain patents not for exploitation of the underlying invention, but for the purpose of obtaining settlements or court judgments against companies that allegedly infringe the patents.  A recent study estimates that NPEs cost the U.S. economy close to $30 billion a year.  Vermont has recently taken unprecedented action to try and combat NPEs with both a new state law and a lawsuit brought by its Attorney General against a notorious patent troll.

The Vermont statute, “Bad Faith Assertions of Patent Infringements,” allows a private right of action for those threatened by patent trolls to sue for damages, as well as attorney general enforcement against abusive patent infringement claims.  The law, however, doesn’t define “bad faith patent assertions,” but rather enumerates factors to assist judges in distinguishing between good faith and bad faith patent assertions.  Factors indicating bad faith assertions include: not identifying the patent(s)-at-issue, the patent owner, and how the recipient’s behavior violates the patent; demanding too quick a response or too much money; and making deceptive or meritless assertions.  Factors that suggest a legitimate assertion include: commercializing the patented invention; being either the original inventor or an educational institution; and having successfully enforced the patent in court.

Vermont Attorney General William Sorrell didn’t wait for the new law in suing notorious patent troll MPHJ Technology Investments (MPHJ) under Vermont’s then-existing consumer protection laws.  According to the lawsuit, MPHJ bought patents of dubious validity that seemingly cover basic technologies, then sent threatening letters to companies and nonprofits alleging patent infringement and demanding payments of $1,000 per employee.  The suit alleges that MPHJ abused the patent system by collecting settlements from companies by way of infringement claims concerning the dubious patents.

Vermont’s targeting of patent trolls, done largely with the desire to attract new businesses, make it the first state to declare war on NPEs.  While the patent community, including Judge Randall Rader, chief judge of the court of appeals for the federal circuit, has spoken out against patent trolls, it remains to be seen whether Vermont’s new law will survive judicial scrutiny.  Vermont classifies the “Bad Faith Assertions of Patent Infringements” statute as a consumer protection law.  Federal courts have exclusive jurisdiction over patent matters, and state laws impacting patents are likely invalid under federal preemption.  Thus, the new law could very well be nullified under a preemption analysis.  Nonetheless, the Vermont statute may spur similar state action against NPEs nationwide.