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Sen. McCaskill Introduces Bill to Regulate Patent Infringement Demand Letters

February 26, 2014. Sen. Claire McCaskill (D-MO) and Sen. John Rockefeller (D-WV) introduced S 2049 [LOC | WW | TLJ], the "Transparency in Assertion of Patents Act".

This bill would direct the Federal Trade Commission (FTC) to write and enforce rules regarding unfair and deceptive practices in the sending of demand letters alleging patent infringement, and setting pleading like requirements for these letters. The bill would not preempt any state laws. It would give the states concurrent enforcement authority. It would create no private right of action.

The bill was referred to the Senate Commerce Committee (SCC), which promptly scheduled a mark up session for Wednesday, March 5, 2014. One consequence of such a hurried mark up is that opponents are left without sufficient time to mount a lobbying campaign against the bill.

Groups and Members of Congress who advocate the enactment of legislation to address abusive practices by "patent trolls" often cite the sending of abusive demand letters that allege patent infringement as one of the worst activities of these "patent trolls". They state that these letter are often sent in bulk, are vaguely worded, and/or are false or misleading.

HR 3309 [LOC | WW], the "Innovation Act", the patent bill passed by the House in December 5, 2013, does not address pre-litigation demand letter practices. Rather, it focuses on litigation procedure, including pleading requirements, limitations upon discovery, and fee shifting.

HR 3309 would amend 35 U.S.C. § 285 to provide that "The court shall award, to a prevailing party, reasonable fees and other expenses incurred by that party in connection with a civil action in which any party asserts a claim for relief arising under any Act of Congress relating to patents, unless the court finds that the position and conduct of the nonprevailing party or parties were reasonably justified in law and fact or that special circumstances (such as severe economic hardship to a named inventor) make an award unjust."

The just introduced S 2049, in contrast, does not address litigation procedure, but does address demand letters.

Sen. Claire McCaskill

Sen. McCaskill's Explanation. Sen. McCaskill (at right) stated in a release that "Patent trolls are stifling innovation, endangering jobs, and harming businesses and consumers". She added that her bill "will send a message to these bottom feeders".

Her release also contains this: "Patent trolls, formally known as patent assertion entities (PAEs), are companies that purchase patents and monetize them by demanding licensing fees or settlements-usually under the threat of litigation-from unsuspecting businesses using similar technologies. Unlike some businesses that assert patent rights over patents that they own and use, PAEs do not produce any goods or services with their patents."

Her release continues that "Until recently, the rampant growth of PAE demands was limited to patents in the technology sector, with PAEs aggressively targeting innovative technology startup companies that could be seen as violating the relevant patent. In a troubling development, PAEs have begun demanding payments from end users-including coffee shops and brick-and-mortar retailers-that use common technologies such as online shopping carts, Wi-Fi, and office scanners."

Sen. McCaskill also expressed concern that senders of demand letters are now targeting "small businesses, which often do not have the resources to engage in protracted and costly patent litigation. To bilk settlements or licensing fees out of small businesses, PAEs will sometimes send thousands of these demand letters-regardless of whether the targeted companies have actually violated any patents-threatening litigation for alleged patent infringement."

Moreover, "Despite their threats, these PAEs may have no intention of actually filing a lawsuit, and sometimes misrepresent or obfuscate the patents they own in the demand letters hoping only to intimidate a small business into making a payment for the alleged-but often not real-violation of a patent."

Bill Summary. This bill would require that the FTC write and enforce rules that regulate the content of demand letters that allege patent infringement.

The bill provides that the FTC "shall promulgate rules to prohibit unfair or deceptive acts and practices in the sending of written communication that states that the intended recipient of the written communication, or any person affiliated with the intended recipient, is infringing or may be infringing the patent of and bears liability or owes compensation to another."

The bill would not only prohibit unfair or deceptive demand letters. It would also set forth the mandatory requirements for the contents of patent infringement demand letters. These resemble heightened pleading requirements. Indeed, S 2049's enumeration of the mandatory elements of a demand letter resembles HR 3309's heightened pleading requirements.

The just introduced bill states that demand letters "must contain" a "detailed description of -- (A) each patent allegedly infringed, including the patent number; and (B) each claim of each patent that is allegedly infringed".

Demand letters must also contain "a clear, accurate, and detailed description, such as the manufacturer and model number, of each product, device, business method, service, or technology that allegedly infringes ..."

Demand letters must also contain "a clear, accurate, and detailed description of how a product, device, business method, service, or technology ... allegedly infringes a patent or claim ..."

Demand letters must also contain notice that the recipient may have the right to have the manufacturer of the allegedly infringing product defend against the alleged infringement. Demand letters must also contain "a description of any licensing commitment or obligation, such as reasonable and non-discriminatory terms, that applies to a patent or claim".

The bill would also ban falsely threatening litigation. Although, this is always a slippery concept that is difficult to regulate. Also, the bill would ban making assertions that lack a reasonable basis in fact or law.

The FTC would have authority to write rules under the quicker and simpler Administrative Procedure Act (APA) process, rather than under the Magnuson Moss process.

The bill would give the FTC civil enforcement authority for violation of rules promulgated under this new rule making authority. The bill would also give enforcement authority to states.

(Published in TLJ Daily E-Mail Alert No. 2,632, February 27, 2014.)