BILL ANALYSIS                                                                                                                                                                                                    

          |SENATE RULES COMMITTEE            |                        SB 681|
          |Office of Senate Floor Analyses   |                              |
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                                   THIRD READING 

          Bill No:  SB 681
          Author:   Hill (D)
          Amended:  5/5/15  
          Vote:     21  

           SENATE JUDICIARY COMMITTEE:  5-1, 4/28/15
           AYES:  Jackson, Hertzberg, Leno, Monning, Wieckowski
           NOES:  Anderson
           NO VOTE RECORDED:  Moorlach

           AYES:  Lara, Bates, Beall, Hill, Leyva, Mendoza, Nielsen
           SUBJECT:   Civil law: patents

          SOURCE:    Author

          DIGEST:  This bill makes 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 fraudulently  
          or falsely makes specified statements, seeks compensation for  
          specified conduct, or fails to include specified information in  
          the communication.  This bill provides specific remedies for  
          sending such unlawful communications, and specifies that those  
          remedies may only be obtained by the Attorney General or an  
          attorney acting on behalf of the state.



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          Existing federal law:

          1)Reserves to Congress, under the United States Constitution,  
            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.)

          2)Provides for the issuance of patents, under the Patent Act, 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 state law:

          1)Renders an individual liable, under the Unfair Competition  
            Law, for any unlawful, unfair or fraudulent business act or  
            practice and any unfair, deceptive, untrue or misleading  
            advertising.  (Bus. Prof. Code Sec. 17200.)

          2)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.)

          This bill:

          1)Renders 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.

          2)Provides that that it is unlawful for the sender of the  
            written communication described above to make, in bad faith,  
            any of the following statements or representations, knowing  


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            those statements or representations are false:

                 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.

          1)Provides that it is unlawful for the sender of the written  
            communication described above to fraudulently seek  
            compensation for any of the following:

                 a patent claim that has been determined to be  
               unenforceable or invalid against the recipient in a final  


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                 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 patent.

          1)Provides that it is unlawful for the sender of the written  
            communication described above to fraudulently conceal or omit  
            to include any of the following information from the  
            communication when that information is readily available to  
            the sender at the time the communication is sent:

                 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 communication.

          1)Provides 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,  


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            as specified.

          2)Provides that 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.

          3)States that its provisions shall not be construed to impair or  
            impede any other rights, causes of action, claims, or defenses  
            available under other law, and that remedies provided in this  
            bill are cumulative with any other remedies available under  
            other law.


          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  
          license use of their patents.

          This bill creates a new civil infraction designed to address the  
          problems caused by non-practicing entities that allege patent  
          infringement claims in bad faith.  As a remedy, this bill  
          provides that a person who sends a communication in violation of  
          its provisions may be enjoined and is liable for a civil penalty  
          of up to $2,500 for each violation, but specifies that such  
          remedies may be sought solely by the Attorney General or an  
          attorney acting on behalf of the state.



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          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  
            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  


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            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.

          Related/Prior Legislation

          AJR 9 (Chang, 2015) makes specified findings regarding patents  
          and patent litigation, and urges 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.  The bill is  
          pending referral in the Senate Rules Committee.

          FISCAL EFFECT:   Appropriation:    No          Fiscal  
          Com.:YesLocal:   No

          According to the Senate Appropriations Committee:

           Potential increases in workload resulting in costs potentially  
            in excess of $150,000 (Special Fund*) to the Attorney  
            General's office to the extent new cases arise that cannot  
            viably be litigated under the provisions of the Unfair  
            Competition Law.  

           Potentially increase in General Fund revenues to the extent  
            civil penalties of up to $2,500 per violation are imposed and  

          * Unfair Competition Law Fund

          SUPPORT:   (Verified5/29/15)

          None received


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          OPPOSITION:   (Verified5/29/15)

          Biotechnology Industry Organization
          California Life Sciences Association
          Qualcomm, Inc.
          Silicon Valley Leadership Group 
          Tessera Technologies, Inc.
          Texas Instruments

          Prepared by:Tobias Halvarson / JUD. / (916) 651-4113
          5/30/15 18:03:43

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