BILL ANALYSIS Ó
SENATE JUDICIARY COMMITTEE
Senator Hannah-Beth Jackson, Chair
2015 - 2016 Regular Session
SB 681 (Hill)
Version: February 27, 2015
Hearing Date: April 28, 2015
Fiscal: Yes
Urgency: No
TH
SUBJECT
Civil Law: Patents
DESCRIPTION
This bill would make it unlawful to send a written communication
stating that the recipient may have infringed on a United States
patent if, in bad faith, the sender makes specified statements,
seeks compensation for specified conduct, or fails to include
specified information in the communication. This bill would
also provide specific remedies for sending such unlawful
communications, and would specify that those remedies may only
be obtained by the Attorney General or an attorney acting on
behalf of the state.
BACKGROUND
In recent years, much attention has been focused on the business
model practiced by certain firms that make money not by
producing goods, but by licensing patent use or asserting patent
claims against other companies that produce goods using patented
technologies and methods. The activities of these so-called
"patent trolls," "non-practicing entities," or "patent
monetization entities" are thought by some to be harming
innovation and causing the market as a whole to reduce venture
investing and research and development spending. Whether or not
these entities actually harm the market is a hotly debated
topic, as is the nature of what - if anything - should be done
about it. Indeed, even the definition of who constitutes a
non-practicing entity is contentious, with some commentators
pointing out that the concept may include universities that
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license use of their patents.
This bill would create a new civil infraction designed to
address the problems caused by non-practicing entities that
allege patent infringement claims in bad faith. The bill would
make it unlawful to send a written communication stating that
the recipient is or may be infringing, or has or may have
infringed, on a United States patent if the sender of the
communication, in bad faith, makes a specified statement, seeks
compensation for specified conduct, or fails to include
specified information in the communication. As a remedy, the
bill would provide that a person who sends a communication in
violation of these provisions may be enjoined and is liable for
a civil penalty of up to $2,500 for each violation. Such
remedies may be sought solely by the Attorney General or an
attorney acting on behalf of the state. This bill would
additionally provide that it shall be an affirmative defense
that the sender did not act in bad faith if the sender
demonstrates that the statement, representation, or omission at
issue was a mistake made in good faith.
CHANGES TO EXISTING LAW
Existing federal law , the United States Constitution, reserves
to Congress the power "to promote the progress of science and
useful arts, by securing for limited times to authors and
inventors the exclusive right to their respective writings and
discoveries." (U.S. Const., art. I, Sec. 8.)
Existing federal law , the Patent Act, provides for the issuance
of patents to any person who invents or discovers any new and
useful process, machine, manufacture, or composition of matter,
or any new and useful improvement thereof. (35 U.S.C. Sec.
101.)
Existing law , the Unfair Competition Law, renders an individual
liable for any unlawful, unfair or fraudulent business act or
practice and any unfair, deceptive, untrue or misleading
advertising. (Bus. Prof. Code Sec. 17200.)
Existing law provides that one who willfully deceives another
with intent to induce him to alter his position to his injury or
risk, is liable for any damage which he thereby suffers. (Civ.
Code Sec. 1709.)
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This bill would render it unlawful for a person, in connection
with the assertion of a United States patent, to engage in a
pattern or practice of sending written communications that state
or represent that the recipient is or may be infringing, or has
or may have infringed, the patent and is liable or owes
compensation to another, if specified conditions are met.
This bill would specify that it is unlawful for the sender of
the written communication to make, in bad faith, any of the
following statements or representations:
that the sender has the right to license or enforce the patent
at the time the communications are sent, if the sender is not
a person with that right;
that a civil action asserting a claim of infringement of the
patent has been filed against either the recipient or against
other persons;
that legal action for infringement of the patent will be taken
against the recipient;
that the sender is the exclusive licensee of the patent
asserted in the communications;
that persons other than the recipient purchased a license for
the patent asserted in the communications;
that persons other than the recipient purchased a license, and
the sender does not disclose that the license is unrelated to
the alleged infringement or the patent asserted in the
communications;
that an investigation of the recipient's alleged infringement
has occurred; or
that the sender, or an affiliate of the sender, previously
filed a civil action asserting a claim of infringement of the
patent based on the activity that is the subject of the
written communication when the sender knew that the activity
was held, in a final determination, not to infringe the
patent.
This bill would specify that it is unlawful for the sender of
the written communication to seek, in bad faith, compensation
for any of the following:
a patent claim that has been determined to be unenforceable or
invalid against the recipient in a final determination;
activity undertaken by the recipient after expiration of the
patent asserted in the communication; or
activity of the recipient that the sender knew was authorized,
with respect to the patent claim that is the subject of the
communication, by a person with the right to license the
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patent.
This bill would specify that it is unlawful for the sender of
the written communication to fail, in bad faith, to include any
of the following in the communication:
the identity of the person asserting a right to license the
patent to, or enforce the patent against, the recipient,
including the identity of any parent entity and the ultimate
parent entity of the person, unless that person is a public
company and the name of the public company is identified;
identification of at least one patent issued by the United
States Patent and Trademark Office alleged to have been
infringed;
identification, to the extent reasonable under the
circumstances, of at least one product, service, or other
activity of the recipient that is alleged to infringe the
identified patent;
a description, to the extent reasonable under the
circumstances, of how the product, service, or other activity
of the recipient infringes an identified patent and patent
claim; or
a name and contact information for a person the recipient may
contact about the assertions or claims relating to the patent
contained in the communications.
This bill would provide that it is an affirmative defense that
the sender of the written communication did not act in bad faith
if the sender demonstrates that the statement, representation,
or omission was a mistake made in good faith, as specified.
This bill would provide that a person who sends a communication
in violation of its provisions may be enjoined in a court of
competent jurisdiction and is liable for a civil penalty not to
exceed two thousand five hundred dollars ($2,500) for each
violation, as specified.
This bill would provide that, notwithstanding any other law, the
Attorney General or an attorney acting on behalf of the state
shall have the sole authority to enforce its provisions, and
that it shall not be construed to create a private right of
action.
This bill would also define the following terms:
"final determination" means, with respect to the invalidity or
unenforceability of a patent, that the invalidity or
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unenforceability has been determined by a court of the United
States or the United States Patent and Trademark Office in a
final decision that is unappealable or for which any
opportunity for appeal is no longer available; and
"recipient" means a person who purchases, rents, leases, or
otherwise obtains a product or service in the commercial
market that is not for resale in the commercial market and
that is, or later becomes, the subject of a patent
infringement allegation.
COMMENT
1.Stated need for the bill
The author writes:
Patents are essential to encouraging innovation, especially in
the information technology and knowledge-based fields that
drive much of California's economy. The protections afforded
by the federal patent system create an incentive to invest in
research and innovation, which creates jobs and raises income.
At the same time, a number of states are seeking to address
bad faith patent activities, such as the mailing of abusive
demand letters. Patent assertion entities (PAEs) generally
are holding or "shell" companies that don't manufacture
anything but hold a number of patents, typically purchased
legally from bankrupt firms. They make their money by sending
threatening letters to companies claiming they have been
violating one or more of their (often vaguely defined)
patents. The letters say that if the companies pay the
license fees to use their patents, they won't be sued. Often,
PAEs target small- to medium-sized businesses that cannot
afford to fight lengthy court battles, so they willingly pay
the amount demanded to settle out of court. PAEs usually
request unreasonable fees in light of the alleged infractions
and often fail to give companies any details about what the
patent in question actually covers or how they allegedly
infringed upon it.
While California's unfair competition law is broad, it does
not appear to have been applied in the context of patent
demand letters. Furthermore, as demand letters are
pre-lawsuit communications that receive heightened protection
under the First Amendment's right to petition the courts and
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right to free speech, it is unclear whether the [Unfair
Competition Law], which does not contain a scienter
requirement, could withstand constitutional scrutiny when
applied to demand letters. By contrast, SB 681 makes clear
what practices are prohibited and, consistent with the
Constitution, requires "bad faith" on the part of the sender.
SB 681 empowers the Attorney General to seek a civil penalty
from any person or entity that sends bad faith demand letters
to the end users of a product or service. This narrowly
tailored bill prohibits specific misrepresentations (such as a
false claim that legal action has been taken against the
recipient), omissions (such as failing to identify the number
of the allegedly infringed patent), and abusive practices
(such as seeking compensation based on a patent previously
found invalid) that patent trolls have used against
unsophisticated persons and businesses.
2.Evidence of Problematic Behavior
This bill is premised on the proposition that non-producing
patent holders who make money by licensing their patents
(non-practicing entities) are harmful to the marketplace, and
that some who engage in this business model carry out their
activities in a manner that borders upon fraud. As noted above,
these premises are highly contested among scholars and
commentators. For example, one recent opinion piece in the Wall
Street Journal states:
Patent-reform activists point out that the number of patent
lawsuits has increased by about 60 [percent] since 2000, which
they cite as evidence that there is a serious problem with the
patent system. But does the uptick in lawsuits actually
indicate such a problem?
In short, no. It might instead reflect a healthy, dynamic
economy. Rapid technological advances have spurred more
innovation and patents, and courts are now clarifying the
nature and boundaries of intellectual property and contract
rights. (Stephen Haber and Ross Levine, The Myth Of the
Wicked Patent Troll (June 29, 2014) <
http://www.wsj.com/articles/stephen-haber-and-ross-levine-the-m
yth-of-the-wicked-patent-troll-1404085391> [as of Apr. 16,
2015].)
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A counterpoint piece in the Harvard Business Review illustrates
the opposing position, stating:
But there is evidence of significant harm. The White House
and the Congressional Research Service both cited many
research studies suggesting that patent litigation harms
innovation. And three new empirical studies provide strong
confirmation that patent litigation is reducing venture
capital investment in startups and is reducing R&D spending,
especially in small firms.
. . .
The economic burden of today's patent lawsuits is, in fact,
historically unprecedented. Research shows that patent trolls
cost defendant firms $29 billion per year in direct
out-of-pocket costs; in aggregate, patent litigation destroys
over $60 billion in firm wealth each year.
. . .
[A]cross a significant number of studies using different
methodologies and performed by different researchers, a
consistent picture is emerging about the effects of patent
litigation: it costs innovators money; many innovators and
venture capitalists report that it significantly impacts their
businesses; innovators respond by investing less in [research
and development] and venture capitalists respond by investing
less in startups. (James Bessen, The Evidence Is In: Patent
Trolls Do Hurt Innovation, Harvard Business Report (Nov. 2014)
<
https://hbr.org/2014/07/the-evidence-is-in-patent-trolls-do-hur
t-innovation> [as of Apr. 16, 2015].)
Yet a third article takes a more nuanced view:
One common criticism of [non-practicing entities] (however
that term is defined) is that they initiate patent
infringement lawsuits seeking to enforce patents of dubious
quality or with questionable infringement claims, and then
settling for amounts far less than the defendants' litigation
costs. The story is that NPEs (non-practicing entities) take
strategic advantage of the notoriously high cost of patent
litigation, which requires several million dollars in
attorneys' fees to litigate through the close of discovery.
There is a little firm empirical evidence supporting this
scenario of the combination of dubious patent assertions with
low settlement demands. There is evidence that NPEs settle
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more quickly compared to other patent holders, which could
indicate the possibility of nuisance settlements. But there
is also evidence that the patents asserted by NPEs are similar
to patents asserted by practicing entities. There is some
evidence that the most litigious NPEs lose more often when the
cases are taken to a final judgment, but like other types of
complex civil litigation, the vast majority of patent cases
settle before judgment. (David Schwartz and Jay Kesan,
Analyzing the Role of NPEs in the Patent System <
http://patentlyo.com/patent/2012/08/
analyzing-the-role-of-npes-in-the-patent-system.html> [as of
Apr. 16, 2015].)
Some commentators suggest that the reason such diametrically
opposed viewpoints on the issue of patent litigation abuse have
emerged is because "patent litigators appear to be polarizing
into a plaintiffs' bar and a defense bar." (Id.) Others
suggest the debate is more about gaining a competitive advantage
in the marketplace:
There is one basic reason behind the attacks on [patent]
trolls: Big Money. Many patent-intensive products . . . are
produced by big corporations that license many patents. . . .
These corporations can make higher profits the less they pay
to use patented technology they do not own, and higher profits
still by paying nothing at all. . . . some corporations are
looking to gain a competitive edge by changing the rules of
the game. The strategy is to pass patent-reform legislation
that weakens the negotiating position of patent holders.
Corporations that pay large sums for patented technologies
will point to lawsuits, trolls and anything else that will
encourage lawmakers to pass such reforms. (Haber and Levine,
The Myth Of the Wicked Patent Troll.)
Given the significant disagreement over whether abusive patent
lawsuits are, indeed, a problem, the Committee may wish to study
this issue in more depth before weighing curative legislation.
3.Existing Legal Remedies
According to the California Chamber of Commerce, this bill
"seeks to prohibit . . . abusive conduct by prohibiting a person
from engaging in a pattern or practice of sending [patent
infringement] communications in bad faith." In general, it
renders unlawful certain statements when made in bad faith, such
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as claims that the sender has a right to enforce a patent when
he or she does not, as well as efforts to seek compensation for
patent claims that have been determined to be unenforceable or
invalid. This sort of conduct may already be prohibited by the
State of California's robust consumer protection laws.
California's Unfair Competition Law (UCL), as an example,
renders an individual liable for any unlawful, unfair or
fraudulent business act or practice and any unfair, deceptive,
untrue or misleading advertising. (Bus. Prof. Code Sec. 17200.)
In describing the unfair competition law's broad scope, the
Supreme Court explained "it does not proscribe specific
practices. Rather . . . it defines unfair competition to
include any unlawful, unfair or fraudulent business act or
practice. Its coverage is sweeping, embracing anything that can
properly be called a business practice and that at the same time
is forbidden by law." (Cel-Tech Communications, Inc. v. Los
Angeles Cellular Telephone Co. (1999) 20 Cal.4th 163, 180
(internal quotation marks and citations omitted).) Importantly,
the UCL's "statutory language referring to any unlawful, unfair
or fraudulent practice makes clear that a practice may be deemed
unfair even if not specifically proscribed by some other law."
(Id.) "[T]he Legislature . . . intended by this sweeping
language to permit tribunals to enjoin on-going wrongful
business conduct in whatever context such activity might occur.
Indeed, . . . the section was intentionally framed in its broad,
sweeping language, precisely to enable judicial tribunals to
deal with the innumerable new schemes which the fertility of
man's invention would contrive." (Id.) On its face, the UCL
would appear to already capture the sort of dishonest business
practice this bill intends to prohibit. (See Patent Trust v.
Microsoft Corp. (2007, SD Cal) 525 F.Supp.2d 1200 (upholding
defendant's fraudulent act or practice UCL counterclaim against
patent assertion entity).) Similarly, to the extent a
non-practicing entity's more egregious "bad faith"
communications constitute willful efforts to deceive others with
an intent to induce them to alter their position to their
detriment, California's civil fraud statute may already provide
adequate relief. (See Civ. Code Sec. 1709.)
4.Impact to Existing Remedies
As noted in Comment 3, California's existing consumer protection
laws may already provide relief to individuals and businesses
harmed by "bad faith" patent assertions and demands. While
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intended to provide additional relief to aggrieved parties, this
bill may actually harm the ability of individuals to bring
claims against those who assert patent claims in bad faith.
As a threshold matter, it should be noted that while this bill
prohibits a detailed and extensive set of practices, the bill's
provisions may only be enforced by a very limited group of
attorneys acting on behalf of the state, including the attorney
general. The Innovation Alliance, writing in support, states
that this bill "would allow enforcement by the state attorney
general only. This will ensure the law is fairly enforced
against abusers, and not be used as a weapon by private parties
to penalize legitimate patent owners for asserting their
rights." Section 3273.7(b) of the bill states "notwithstanding
any other law, the Attorney General or an attorney acting on
behalf of the state shall have the sole authority to enforce
this title. This title shall not be construed to create a
private right of action." This restriction on enforceability
significantly undercuts the bill's remedial aims. Depending on
funding, staffing levels, and other enforcement priorities, the
attorney general and designated attorneys acting on behalf of
the state may be unwilling or unable to prosecute offenders and
enforce the practices prohibited by this bill.
More importantly, by explicitly prohibiting these specific
patent assertion related acts, this bill might actually deprive
California residents of certain remedies available to them under
existing law, particularly claims based on violations of the
Unfair Competition Law (UCL). The Supreme Court has held that:
[a]lthough the unfair competition law's scope is sweeping, it
is not unlimited. Courts may not simply impose their own
notions of the day as to what is fair or unfair. Specific
legislation may limit the judiciary's power to declare conduct
unfair. If the Legislature has permitted certain conduct or
considered a situation and concluded no action should lie,
courts may not override that determination. When specific
legislation provides a safe harbor, plaintiffs may not use the
general unfair competition law to assault that harbor.
(Cel-Tech Communications, Inc. v. Los Angeles Cellular
Telephone Co. (1999) 20 Cal.4th 163, 182 (internal quotation
marks and citations omitted).)
This bill's limited remedies provision may be interpreted as
providing just this sort of legislative safe harbor. By
restricting enforcement authority to the attorney general and
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designated attorneys acting on behalf of the state, a reviewing
court may be inclined to dismiss private party UCL claims based
on activities that also fall within the scope of this bill. As
the Court has observed, "[a] plaintiff may . . . not plead
around an absolute bar to relief simply by recasting the cause
of action as one for unfair competition." (Id.) Explicitly
barring plaintiffs from maintaining a private right of action in
this bill may render similar UCL claims as attempts to "plead
around" this bill's remedies limitations, thus eliminating
causes of action that may be available under existing law.
The Committee may want to consider the following amendments to
ensure that this bill does not deprive California residents of
remedies they currently have under existing law.
Suggested Amendments :
On page 4, line 12, strike "Notwithstanding any other law,
the" and insert "The"
On page 4, following line 15, insert "(c) Nothing in this
title shall be construed to impair or impede any other rights,
causes of action, claims, or defenses available under other
law. The remedies provided in this title are cumulative with
any other remedies available under other law."
5.Federal Preemption
The United States Constitution grants exclusive authority to
Congress for the regulation of patents and copyrights. Article
I, Section 8 states that Congress shall have the power "to
promote the progress of science and useful arts, by securing for
limited times to authors and inventors the exclusive right to
their respective writings and discoveries." Patents are issued
pursuant to the federal Patent Act by the U.S. Patent and
Trademark Office, and the adjudication of patents is handled
exclusively in the federal courts. The constitutional grant of
exclusive authority over patents to Congress may ultimately
preempt California laws designed to protect individuals and
businesses from bad faith patent claims and demands.
The U.S. Supreme Court has held that the federal patent system:
is one in which uniform federal standards are carefully used
to promote invention while at the same time preserving free
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competition. Obviously a State could not, consistently with
the Supremacy Clause of the Constitution, extend the life of a
patent beyond its expiration date or give a patent on an
article which lacked the level of invention required for
federal patents. To do either would run counter to the policy
of Congress of granting patents only to true inventions, and
then only for a limited time. Just as a State cannot encroach
upon the federal patent laws directly, it cannot, under some
other law, such as that forbidding unfair competition, give
protection of a kind that clashes with the objectives of the
federal patent laws. (Sears, Roebuck & Co. v. Stiffel Co.
(1964) 376 U.S. 225, 230-231.)
While the Supreme Court has upheld certain state laws that touch
upon patents (see e.g. Kewanee v. Bicron (1974) 416 U.S. 470,
492 (holding that patent law does not preempt trade secret
law)), the reach of federal preemption in this area of law is
unclear. Scholars have noted that whether or not patent
assertion activities - such as the sending of demand letters -
are "legal uses of federally created patent rights or . . .
abusive business practices" is "[a] heated debate" and "test[s]
a very fine line between a patent holder's right to exclude
others from infringing its patents and a state's consumer
protection obligation." (David Johnson, Facing Down the Trolls:
States Stumble on the Bridge to Patent-Assertion Regulation, 71
Wash & Lee L. Rev. 2023, 2025-2027.)
This bill seeks to protect California consumers by prohibiting
patent assertions and claims made in "bad faith." However, in
so doing, California's standard for measuring "bad faith" patent
claims may conflict with federal patent law's protection of a
patent holder's good faith assertions. (See C.R. Bard v. M3
Sys. (Fed. Cir. 1998) 157 F.3d 1340, 1369 ("The law recognizes a
presumption that the assertion of a duly granted patent is made
in good faith; this presumption is overcome only by affirmative
evidence of bad faith.").) Particularly where this bill
requires those who assert patent claims to include specific
information in their written communications, federal law may
preempt California's ability to prohibit certain patent
assertions and claims.
6.Potential Chilling Effect on Patent Assertions
While this bill is intended to protect California businesses and
individuals from bad faith patent assertions and claims, certain
elements of the bill may, in operation, harm legitimate patent
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holders and discourage them from asserting their rights. First,
the requirement that patent holders identify in their written
assertions the identification of an infringed upon patent, the
identification of an infringing product or service, and a
description of how that product or service infringes upon the
patent, may be impossible without first going through limited
discovery. Especially with technological processes and
electronic circuitry, a patent holder might not have enough
information at the claim assertion stage to provide this
information and avoid a counterclaim of acting in "bad faith."
Second, the possibility of enforcement of this bill's provisions
by the Attorney General or others may be used by some entities
to intimidate patent holders, particularly individuals and small
businesses, from protecting their rights by asserting claims to
patented products, technologies, and industrial methods.
Finally, the inclusion of an affirmative defense of "good faith"
may be perceived as shifting the burden away from those bringing
claims under this bill to prove "bad faith," toward the patent
holder having to demonstrate that his or her claim was made in
"good faith."
The Committee may want to consider the following amendments to
ensure patent holders are able to assert their rights in good
faith without exposing themselves to unwarranted liability.
Suggested Amendments :
On page 2, line 25, after "representations" insert "knowing
they are false"
On page 3, line 11, after "communication" insert
"fraudulently"
On page 3, line 11, strike ", in bad faith,"
On page 3, strike lines 20 and 21, and insert "(3) The sender
of the communication fraudulently conceals or omits any of the
following information from the communication, when that
information is readily available to the sender at the time the
communication is sent:"
On page 3, strike lines 38 through 40
On page 4, strike lines 1 through 4
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Support : California Bankers Association; California Chamber of
Commerce; Innovation Alliance; Qualcomm, Inc.; Silicon Valley
Leadership Group
Opposition : None Known
HISTORY
Source : Author
Related Pending Legislation : AJR 9 (Chang) would make specified
findings regarding patents and patent litigation, and would urge
the President and the Congress of the United States to craft a
balanced and workable approach to reduce incentives for and
minimize abusive and frivolous patent litigation while ensuring
that legitimate patent enforcement rights are protected and
maintained.
Prior Legislation : None Known
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