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Steptoe | Tactics for Trolls: States Continue to Combat Bad Faith Demands

If you are aware of the existence of so-called “patent trolls,” then you are likely aware that becoming the target of one can be a costly proposition. Even if your company has not yet been the target of one of these entities, a high likelihood exists that such a demand letter may arrive in your office eventually. The state of Washington is testing its legislature’s efforts to combat the tactics of these trolls with the filing of a lawsuit against Landmark Technology. See State of Washington v. Landmark Technology A, LLC.1  In filing the Complaint, Washington state claims it filed this action “on behalf of the persons residing in the State,” to enforce the provisions of the Washington Consumer Protection Act (CPA) and the Patent Troll Prevention Act (PTPA).2

Washington state entered the fight against patent trolls, sometimes referred to as Patent Assertion Entities (PAE) or Non-Practicing Entities (NPE), with the passage of Washington’s PTPA in 2015. Patent Trolls are often companies that exist solely to assert patents. They do not themselves research, design, or create products or provide services, nor do they at any time intend to do so. Instead, their business model focuses on the acquisition of patents from other companies, many of which are undergoing financial hardship or bankruptcy. Then, the troll uses the acquired patent rights to demand money from companies based on alleged infringement of those newly acquired patents. The tactics used by these NPEs, which often include harassment of companies unable to defend themselves without considerable expense, have led many states to pass laws against what some consider predatory behavior.

Since Vermont passed the first state law against allegedly abusive patent practices in 2013, more than thirty states have passed legislation to curb so-called abusive licensing demands. Many of these efforts focus on what states characterize as bad-faith demands. Landmark Technology has been targeted repeatedly by state anti-troll laws, but has so far emerged relatively unscathed by challenging the constitutionality of anti-troll statutes, arguing that these state-level laws are preempted by federal patent law and invalid under the Constitution’s Supremacy Clause (Art. VI, cl. 2) and by pointing to Federal Circuit precedent. See, e.g., Napco, Inc., v. Landmark Technology A, LLC;3 see also Landmark Technology, LLC, v. Azure Farms, Inc.4

In previous battles, including some involving Landmark Technology, courts have been reluctant to invalidate state laws and prefer instead to defer to the standards announced by the Federal Circuit in its 2004 decision in Globetrotter Software, Inc. v. Elan Computer Grp., Inc.5 In Globetrotter, the Federal Circuit considered its standard for tort liability for pre-litigation communications alleging patent infringement. (discussing Prof’l Real Estate Investors, Inc. v. Columbia Pictures Indus., Inc.6). In Globetrotter, the Court considered state-law counterclaims of tortious interference with prospective economic advantage and unfair competition in the face of allegations of patent infringement in Globetrotter’s e-mail and letters. The Federal Circuit held that for pre-litigation communications to be subject to tort liability, the communications must have been made in bad faith and be “objectively baseless.” In other words, the court needed to see clear and convincing evidence that the party alleging patent infringement had no reasonable basis to believe that the target of their communications infringed the patents at issue. The Court noted that their “decision to permit state-law tort liability for only objectively baseless allegations of infringement rests on both federal preemption and the First Amendment.”

In the case brought by Washington state, Landmark alleged infringement of a patent (US Pat. No. 7,010,508) for which the USPTO had granted a review under the transitional program for covered-business-method (CBM) patents. See Ebay Enter., Inc. Petitioner v. Lawrence B. Lockwood Pat. Owner.7 The Washington Complaint points to statements made by the Patent Trial and Appeal Board (PTAB) in their decision granting the CBM review that “on the present record, we determine that the subject matter of claim 1, as a whole, does not recite “a technological feature that is novel and unobvious over the prior art,” and is therefore not a technological invention.” According to the Washington Attorney General, this statement means that the patent is invalid. Although the PTAB granted a review under the CBM program, the parties settled before PTAB ruled on the ultimate question of patentability, and thus the ‘508 patent was not technically invalidated.

In its complaint, Washington state alleges violations of its PTPA and hopes that PTAB’s statement, and Washington’s interpretation of the practical meaning thereof, supports the position that Landmark’s allegations of patent infringement are both in bad faith and objectively baseless. Washington’s case has already been removed to federal court and will be heard by the US District Court for the Western District of Washington.8 To be successful, the state of Washington needs the District Court to interpret PTAB’s statement as a finding of invalidity for the ‘508 patent or at least that such a statement should have placed Landmark on notice that should they assert this patent again, the courts would invalidate it. At the very least, such a decision will help clarify the “objectively baseless” requirement confirmed in Globetrotter.

Companies creating or utilizing technology should watch this evolving trend when considering states in which they incorporate or domicile their principle place of business, as some states may be more aggressive in protecting their resident businesses from these trolling entities. Landmark Technology is one of many such entities that has been very successful using troll tactics. As an example, Landmark issued 1,892 separate patent assertion demand letters to 1,176 different target companies in 48 states, all based on the ‘508 patent and all in the 18 months preceding the Washington lawsuit. Landmark likely hopes many of those targets will settle rather than litigate. Until the Federal Circuit revisits their Globetrotter decision or Congress takes up the issue, companies targeted by these demand letters need to be able to quickly evaluate if such a demand is in bad faith and “objectively baseless” to avoid long and expensive litigation. The outcome of the Washington state case may help your company and its chosen legal team in their efforts.

Authors:

  • Craig A. Hoovler, Associate
  • John Caracappa, Partner

Compliments of Steptoe & Johnson LLP – a member of the EACCNY.

1 Case No. 21-2-06348-5 (King Co. Sup. Ct. May 13, 2021).
2 RCW ch. 19.86; RCW ch. 19.350.
3 Case No. 1:21-CV-00025, Dkt. 18 (M.D.N.C. April 9, 2021).
4 Case No. 3:18-cv-1568-JR (D. Or.  Mar. 24, 2020) (District Court judge refusing to strike down anti-troll law after a magistrate judge ruled it unconstitutional).
5 362 F.3d 1367 (Fed. Cir. 2004).
6 508 U.S. 49, 57, 113 S.Ct. 1920, 123 L.Ed.2d 611 (1993).
7 No. CBM2014-00025, 2014 WL 2150045, at *1 (P.T.A.B. May 20, 2014).
8 Case No. 2:21-CV-00728 (W.D.Wa. June 2, 2021).