BILL ANALYSIS Ó ----------------------------------------------------------------- |SENATE RULES COMMITTEE | SB 681| |Office of Senate Floor Analyses | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ----------------------------------------------------------------- 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 SENATE APPROPRIATIONS COMMITTEE: 7-0, 5/28/15 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. ANALYSIS: SB 681 Page 2 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 SB 681 Page 3 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 determination; SB 681 Page 4 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, SB 681 Page 5 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. 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 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. Comments SB 681 Page 6 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 SB 681 Page 7 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 collected. * Unfair Competition Law Fund SUPPORT: (Verified5/29/15) None received SB 681 Page 8 OPPOSITION: (Verified5/29/15) 3M BIOCOM Biotechnology Industry Organization California Life Sciences Association Caterpillar 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 **** END ****