David Balto is a former policy director of the Federal Trade Commission, attorney-adviser to Chairman Robert Pitofsky, and antitrust lawyer at the U.S. Department of Justice. He has been a senior fellow at the Center for American Progress and has worked with the International Center on Law and Economics, both of which receive funding from many organizations including Google. Mr. Balto has also published research and authored scholarship for Google on technology policy topics, but the opinions here are his own.
Justice Brandeis called the states "laboratories of democracy" and it was an astute observation, because some of the most effective regulation comes first from the states. And perhaps we have an excellent example with Vermont's efforts to rein in patent trolls.
In the past month, Vermont passed legislation creating a right to sue for "bad faith assertion" of patent infringement and also brought its first suit against a patent troll. Wasting no time, Vermont's attorney general sued patent troll MPHJ Technology Investments LLC on the same day the anti-troll legislation was to be signed into law.
Vermont's suit against MPHJ will be important in determining what tools are available to fight abusive patent troll behavior. The case will pose a question on the role of consumer protection laws and patent law. Fortunately, Vermont has chosen the right case to test these issues.
Vermont's complaint against MPHJ shows a scheme to use the threat of patent litigation to extort thousands of dollars from small businesses throughout Vermont. MPHJ seems to have little desire to actually test its patents in trial. Neither MPHJ nor its 40 shell companies have filed a suit in any state, despite over 130 days passing since Vermont businesses began receiving letters that they would be sued if they did not respond within two weeks.
In fact, the patents at issue have never had their validity tested. The previous owner of the patents voluntarily dismissed infringement suits before a determination of validity could be made.
Vermont's case against MPHJ is strong because of how far MPHJ has strayed from legitimate practices of firms trying to assert patent rights. MPHJ's demand letters claimed that many businesses have responded to its licensing program allowing it to determine a good faith rate of $900-$1,200 per employee. This is despite the fact that MPHJ seems to have had a low response rate and the actual average negotiated license rate was below $900.
MPHJ also appears to have done little due diligence that the companies it sent demand letters actually infringed the patents. Despite these facts, the victims of these letters were still pressured to take licenses because just the cost of an opinion from a patent attorney about whether MPHJ's patents were valid and likely to be infringed could exceed the cost of the requested licenses.
It's to Vermont's credit to start tackling the problem of trolls. Now it's time for other states and the Federal Trade Commission use their enforcement powers against unfair and deceptive practices to attack patent trolls.