As lawsuits over ambiguous patent infringements become a growing concern in several states, including Texas, committees in the Texas Legislature are reviewing the issue this interim.
The issue involves patent assertion entities (PAEs) acquiring vaguely worded patents for products or processes they do not produce or use, then sending demand letters threatening to sue companies whose practices they consider an infringement of the patents. These PAEs are sometimes referred to as patent “trolls” by those who oppose their activities. Some consider these activities to be a form of patent abuse, while others say PAEs can have legitimate claims and should be able to enforce their rights as patent holders.
One concern is that many companies receiving demand letters pay settlements to PAEs rather than risk costly lawsuits, even when going to court could result in the invalidation of the patents. Many PAEs based in Texas file suits with the U.S. District Court for the Eastern District of Texas, which has often ruled in favor of plaintiff PAEs, according to a report by PricewaterhouseCoopers.
The Texas House Committee on Technology, which discussed the issue at a hearing in April, is charged this interim with examining “whether abuses in the patent system interfere with the goal of expanded opportunity and innovation for Texas businesses and whether actions by the state can address any such abuses.” The Senate Committee on State Affairs also is charged with reviewing the effects of PAEs in Texas this interim.
A challenge for policymakers is protecting businesses from losing money unnecessarily to PAEs, while preserving the rights of legitimate patent holders who assert infringements in good faith. Some states have tried to protect companies and consumers by defining what constitutes “bad faith” patent assertions. For example, Vermont has enacted a law that, in part, provides criteria for determining whether a patent assertion has been made in bad faith, such as by sending demand letters with deceptive or baseless claims.
The extent of states’ authority to regulate such matters is unclear because patent law is a federal issue under the U.S. Constitution. Some say that even if states do have the authority to determine what constitutes a “good faith” or “bad faith” claim, federal legislation is needed to ensure that Texas is on a level playing field with other states in patent enforcement. In Congress, lawmakers from Texas have proposed legislation to address patent abuse, including the Patent Abuse Reduction Act of 2013, introduced by Sen. John Cornyn and heard by the Judiciary Committee in December. It would require that infringement claims be more transparent, specific, and substantive.
In Texas, one avenue discussed for implementing state legislation on PAEs is to amend the Texas Deceptive Trade Practices ‒ Consumer Protection Act (DTPA) to specify factors that suggest “bad faith” conduct in patent infringement claims. The DTPA, under Business and Commerce Code, sec. 17.41, aims to “protect consumers against false, misleading business practices, unconscionable actions, and breaches of warranty.”
Supporters of state legislative efforts to curb activities of PAEs say legislation is needed to protect legitimate business operations from the financial threat these entities pose. They say that software companies, part of a growing industry in Texas, are primary targets of PAEs. Some small businesses receiving demand letters have had to alter their work practices to avoid costly litigation. Texas has become a focal point of a nationwide patent abuse problem, with the U.S. District Court for the Eastern District of Texas in 2013 hearing about 1,400 patent cases, or about a quarter of all U.S. cases. Supporters say that judges often allow cases to go before juries that are not well prepared to determine whether claims were made in good faith, showing that the judicial system is not properly equipped to deal with the unique challenges posed by patent abuse. In addition, because patent holders sue not only companies but end users of technology, individuals in Texas also need protection from PAEs, supporters say.
Opponents of state legislative efforts to curb activities of PAEs say that overly broad legislation could hurt entities trying to protect legitimate patents. In particular, inventors and start-up companies must be able to exercise their rights as patent holders, and distinguishing between “good faith” and “bad faith” patent assertions can be difficult and subjective. The patent system was established to protect intellectual property rights, and rash legislative action could easily erode that protection. Opponents say current law rightly puts the power into the hands of the judicial system to determine which patent assertions are legitimate and which are not. In addition, they say, it is not clear that the states have the authority to regulate patents under the U.S. Constitution.
by Mary Beth Schaefer