State Laws on Patent Demand Letters are Unnecessary Threats to the Innovation Economy

In a recent Wall Street Journal op-ed, Steve Malanga praised the 27 states that have passed legislation that “make it easier for a state’s attorney general to pursue actions against knowingly false claims made by so-called patent trolls.” He claimed that these “states have made a good start in restoring a sense of fairness and proportion to patent litigation.” Unfortunately, the exact opposite is the case, and this fractured patchwork of legislation threatens the certainty and consistency required for inventors and businesspersons to bring to market new patented innovations. This was exactly the problem the Framers of the Constitution recognized and sought to prevent by placing the authority to secure patents in Congress and in the federal courts.

Before addressing the constitutional and economic issues, let’s first distinguish reality from myth about patent litigation today. Malanga justifies these state laws by claiming that states lack the tools necessary to combat abusive behavior that never even reaches the courtroom. The common example is that a company sends thousands of misleading letters accusing people of patent infringement, extorting an easy settlement without any intention of going to trial. One notorious company, MPHJ Technology Investments, did exactly this in recent years.

To assess this concern, we need to put it in context. Every year, several thousand lawsuits are filed in the U.S. alleging infringement of some of the millions of patents in existence. As award-winning economist Zorina Khan has shown, this is entirely within normal historical litigation rates reaching back to the early 19th century; other historians have found that today’s patent litigation rates are minuscule compared to the number of lawsuits filed in the late 19th century. Tellingly, proponents of these state laws have identified only a handful of patent owners who have engaged in deceptive practices in sending demand letters. By any standard, there is no proven systemic problem in patent litigation that justifies new legislation that makes changes to the patent system for all patent owners.

Even if there were a proven, larger problem of bad behavior, Malanga’s own examples belie his claim that this justifies new state laws. As evidence for why these new laws are needed, he cites cases filed by the attorneys general in Vermont and Minnesota against MPHJ. But these were legal actions brought under preexisting consumer protection laws. In fact, no case has ever been brought by anyone under any of the 27 state laws enacted in the past couple years, which Malanga claims are needed to combat an alleged tidal wave of abusive litigation practices. To date, these new state laws have been invoked only three times by private defendants, and only as counterclaims in actual lawsuits.

Moreover, just like the states, the Federal Trade Commission (FTC) is already empowered under existing consumer protection laws to police misleading communications sent by unscrupulous companies like MPHJ. Just as Vermont and Minnesota went after MPHJ under their existing consumer protection laws, the FTC successfully investigated MPHJ under its authority to combat “unfair or deceptive acts or practices in or affecting commerce.” Setting aside the broader question of whether competition laws are appropriate or should be applied to patented innovation in these contexts, the fact is that these laws are on the books and have already been used to sanction the few instances of bad behavior. The TROL Act, which is making its way through the House, presents a responsible federal approach that clarifies, rather than expands, the FTC’s role in combatting such abusive conduct.

These 27 state laws are not merely unnecessary because they aim at a relatively small target already addressed by preexisting laws, they are in fact a threat to America’s innovation economy. Patent owners legitimately rely on demand letters to communicate with potential licensees and to resolve infringement disputes without going to court. These new laws apply to all patent owners, imposing different standards for liability and different criminal and civil penalties.

This directly undermines the reason the Framers placed in the Constitution the power in Congress to secure patent rights under federal law. The Framers recognized that patents are property rights sold and licensed in a national market and that patented innovation would not be created and would not benefit consumers if its owners faced the vagaries of differing state laws with differing rights and liabilities. The success of the federal patent system in driving America’s innovation economy for over two hundred years is a testament to the importance of this insight.

These 27 state laws, on the other hand, turn this national system on its head, imposing varying legal requirements and liabilities on patent owners across the country. For instance, these laws vary in their specific obligations and many of them never define what it means to send a misleading (“bad faith”) demand letter. Even worse, Alabama makes it a crime to “continuously and willfully” send demand letters in “bad faith,” but Alabama also fails to define what this means. These piecemeal state laws with conflicting civil and criminal sanctions threaten to fracture and undermine America’s nationwide innovation economy from Washington to Florida.

Throwing 27 monkey wrenches into the carefully balanced machinery of America’s innovation economy is exactly what the Framers intended to prevent when they created a national system of property rights in innovation secured under federal law in federal court. We should not let individual states jeopardize our nationwide patent system, which for more than two centuries has formed the bedrock of our innovation economy.

Adam Mossoff is Professor of Law at George Mason University School of Law, and he testified before the House Energy and Commerce Committee on the TROL Act in 2014. Devlin Hartline is Assistant Director of the Center for the Protection of Intellectual Property at Mason Law.

Morning Consult