Facing Down the Trolls: States Stumble on the Bridge to Patent-Assertion Regulation

Table of ContentsI. Introduction 2024II. The Patent Ecosystem 2028A. Participants in the Patent Ecosystem 2028B. The Patent-Assertion Entity Dialectic 2031III. State Bad-Faith Assertion Legislation 2033IV. Federal Preemption Law Generally 2035V. Federal Preemption in Patent Law 2037A. Implied Preemption of State Law 2038B. The U.S. Court of Appeals for the Federal Circuit's Preemption Standard 20421. The Right of Patent Promotion 20442. The Federal Bad-Faith Standard 2046a. The Objective-Baselessness Prong 2048b. The Subjective Bad-Faith Prong 2049VI. Analyzing the Vermont Law Under the Federal Preemption Standard 2051A. Federal Law Does Not Preempt the Field of Bad-Faith Patent Assertion Legislation 2051B. The Vermont Law Conflicts with FederalPatent Law ........20541. The Vermont Factor That Survives Preemption Review 20562. The Vermont Factor That Might Survive Preemption Review 20573. Preempted Vermont Factors 2061a. Deceptive Patent Assertions 2062b. Unreasonable Demands 2064c. Insufficient Investigation 2066d. Demand Letters with Insufficient Information 2068VII. States Should Not Define Bad Faith 2070VIII. Inoperability Does Not Destroy the Law's Ability to Combat PAEs 2073IX. Conclusion 2074I. IntroductionOver the course of nine months ending in early 2013, MPHJ Technology Investments, LLC (MPHJ) sent over sixteen thousand letters to small businesses throughout the United States.1 MPHJ chose these businesses from a commercial database with the intent to target employers of fewer than one hundred individuals.2 The letters claimed that each business was "likely' infringing MPHJ's patents covering the use of a scanner to send documents over a network to a computer.3 After receiving very few responses, MPHJ's attorney sent a second round of letters demanding that the businesses prove noninfringment, enter a licensing agreement, or face potential litigation.4 Still receiving little response, the attorney sent more letters threatening that "if we do not hear from you within two weeks from the date of this letter, our client will be forced to file a Complaint against you for patent infringement."5 Rather than respond to MPHJ's threats, many businesses complained to state attorneys general, which provoked state6 and federal investigations of MPHJ's campaign.7A heated debate exists regarding whether patent-assertion campaigns, like MPHJ's demand-letter campaign, are-on the one hand-legal uses of federally created patent rights or-on the other-abusive business practices.8 The issue is before Congress, where many patent reform bills have recently been introduced.9 In the summer of 2013, state legislators entered the debate when Vermont passed a first-of-its-kind law prohibiting "bad faith" patent assertions.10 Despite criticism that federal law governs patent rights and preempts states from regulating patent assertions in this way,11 on February 25, 2014, Oregon followed Vermont's lead by unanimously passing a structurally and substantively similar law.12 By September 2014, fourteen other states had passed laws modeled on Vermont's regulation of badfaith patent assertions.13By regulating patent assertions, Vermont, Oregon, and the replica state laws14 test a very fine line between a patent holder's right to exclude others from infringing its patents and a state's consumer protection obligation. …