Legislation passed the House unanimously last month that, if signed into law, would protect business-owners from frivolous lawsuits by predatory patent-holding companies — often referred to as “patent trolls.” The bill now awaits action in the Senate.
Patent trolls assert patents on commonly used technologies (e.g. the aggregation of news stories into podcasts, sending photocopies to email, scanning documents to email, the use of shopping carts on a website, etc.) and then sue other companies for “infringing” on their patents in an attempt to collect fees.
These companies (non practicing entities, or NPEs) don’t actually otherwise manufacture products or provide services themselves — they exist for the sole purpose of suing other companies, who are then put in the untenable position of defending themselves against these meritless claims or settling out of court. With litigation in these cases running into the hundreds of thousands (or in some cases, millions) of dollars, it’s usually cheaper for a company to just settle than to pay the exorbitant costs associated with proving their innocence.
In the event that a targeted company makes the decision to defend itself against a baseless charge of patent infringement and eventually prevails, the victory is a hollow one. Honor and innocence may be restored, but at a cost which then comes out of the company’s bottom line and costs that are passed along to the consumer. Patent trolls use the costs associated with the litigation to force settlements from the operating companies, and for smaller companies, it could result in shuttering their business.1
Currently, there is no legal mechanism for the injured company to recoup the enormous expense associated with defending its innocence; in North Carolina, we do not have a “loser-pays” system. In an attempt to deter these predatory practices, House Bill 1032 changes North Carolina’s Unfair and Deceptive Trade Practices Act to allow for the civil punishment of clear and demonstrable “bad faith” patent infringement litigation.
In one case, SAS, a leading developer of analytics software based in Cary, spent $8 million defending itself in one such case; while SAS eventually prevailed, the patent troll had assets of only $800. This new legislation would allow victims to “pierce the corporate veil” and pursue remedies beyond the assets of a cash-poor shell company and hold the individuals behind the patent-holding companies personally liable for any awards. And to deter future abuse, companies facing an invalid claim of patent infringement in a lawsuit would be given the opportunity to seek triple the level of damages as well as attorney’s fees in state court.
And under the legislation, a patent-holding company bringing an infringement suit would be required to post a bond of up to $500,000 before ever entering a courtroom. Legal fees that go unpaid for 30 days would be taken from the bond. HB1032 would protect legitimate patent-holding companies who may take up patent rights litigation. This legislation gives the court another tool in curbing unfair and deceptive trade practices in North Carolina.
23 states have introduced similar patent abuse legislation.
Patent law is generally under federal jurisdiction and Congress is currently considering a bill addressing some aspects of patent abuse. H.R. 845 (SHIELD Act) is designed to make patent infringement suits less attractive. But with the bill stalled in the Senate in its second version, it has fallen to the states to get out in front of these abuses and take action locally.
1. SAS press release: “SAS Supports White House Efforts to Curtail Patent Trolls“