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Patent Legislation Gives FTC Power to Regulate Demand Letters


Written by Andrew Baluch
Posted: March 31, 2014 @ 8:46 am
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Senator Claire McCaskill (D-MO).

On Thursday, March 27, 2014, the Senate Judiciary Committee held another meeting on patent reform legislation.  A markup of Senator Leahy’s bill (S. 1720, “Patent Transparency and Improvements Act”) may happen as early as this week.  During Thursday’s meeting Senator Leahy, who Chairs the Committee, indicated a willingness to incorporate in his bill other provisions from Senator Cornyn’s and Senator Hatch’s bills.

Momentum is clearly building for more patent legislation, but the myriad bills and provisions make it difficult even for folks close to Capitol Hill to keep track of them all.  To fill that need, today’s post is part of a series of articles based on the white paper, Patent Reform 2014.  IPWatchdog.com has already published articles on Joinder of Interested Parties and Loser-Pays Fee-Shifting. Today’s focus is on the proposed FTC enforcement provisions found in several pending bills.

In September 2013, Senator Klobuchar’s staff circulated draft language that would require the FTC to initiate a rulemaking proceeding, in accordance with 5 U.S.C. §553, to prohibit the assertion or enforcement of patents in a manner that is an unfair method of competition, or unfair or deceptive act or practice, under section 5 of the Federal Trade Commission Act (15 U.S.C. 45).

Also in September 2013, Sen. Hatch’s staff circulated draft language that would make the “widespread sending” of bad-faith demand letters an unfair or deceptive trade practice within the meaning of section 5(a)(1) of the Federal Trade Commission Act.  Communications which “falsely threaten” legal action, or “lack a reasonable basis in fact or law,” or are “likely to materially mislead” the recipient would be subject to enforcement by the Federal Trade Commission (FTC).

Senator Leahy’s S. 1720 (as introduced) contains a demand-letter provision that is substantially similar to the one in Sen. Hatch’s circulated draft, and includes the same “widespread sending,” “falsely threaten,” “lack reasonable basis in fact or law,” and “likely to materially mislead” language.

Representative Goodlatte’s H.R. 3309 (as passed) contains a “sense of Congress” that states that “purposely evasive demand letters to end users” is an abuse of the patent system, a deceptive practice, and an “exceptional” circumstance.

Senator McCaskill introduced S. 2049 in February 2014 which would require the FTC to promulgate rules to prohibit unfair and deceptive acts and practice in the sending of patent demand letters, including requiring each such letter to identify the patent number, the claims, a description of the manufacturer and model number of each accused product or service, notice that the recipient may have the right to have the manufacturer defend against the infringement, the identity of the person with the right to enforce (including each owner, co-owner, assignee, exclusive licensee, and entity with the authority to enforce the patent, and the ultimate parent entity), any FRAND licensing commitments, any basis for a specific license amount, and each PTO proceeding or litigation involving the patent.  Bad faith assertion would be enforceable by the FTC or attorney general of a State in federal court.

A comparison of the Leahy and McCaskill demand-letter provisions is shown below.

Leahy – S. 1720 [introduced]

McCaskill – S. 2049 [introduced]

Applies to the widespread sending of written communications that state that the intended recipients or any affiliated persons are infringing or have infringed the patent and bear liability or owe compensation to another. Applies to the sending of written communication that states that the intended recipient of the written communication, or any person affiliated with the intended recipient, is infringing or may be infringing the patent of and bears liability or owes compensation to another.
Defines “affiliated person” as a person affiliated with the intended recipient of a written communication. [No such provision]
[No such provision] Requires the FTC to promulgate rules establishing that a written communication must contain the patent number, the patent claims allegedly infringed, a description of the manufacturer and model number of each accused product or service, notice that the recipient may have the right to have the manufacturer defend against the infringement, the identity of the person with the right to enforce (including each owner, co-owner, assignee, exclusive licensee, and entity with the authority to enforce the patent, and the ultimate parent entity), any FRAND licensing commitments, any basis for a specific license amount, and each PTO proceeding or litigation involving the patent.
[No such provision] Allows the FTC to exempt written communication between parties regarding existing licensing agreements, and any other written communication, that the FTC determines is not necessary for the protection of consumers or within the scope of the purposes of this Act.
It shall be an unfair or deceptive act or practice, if— The FTC’s rules shall specify the actions that constitute an unfair or deceptive assertion, including
(1) the communications falsely threaten that administrative or judicial relief will be sought if compensation is not paid or the infringement issue is not otherwise resolved; (1) an assertion that falsely threatens administrative or judicial relief will be sought if compensation is not paid or the infringement is not otherwise resolved;
(2) the assertions contained in the communications lack a reasonable basis in fact or law, including, for example, because–(A) the person asserting the patent is not a person, or does not represent a person, with the current right to license the patent to, or to enforce the patent against, the intended recipients or any affiliated persons; or(B) the communications seek compensation on account of activities undertaken after the patent has expired; (2) an assertion that lacks a reasonable basis in fact or law;
(3) the content of the written communications is likely to materially mislead a reasonable recipient, including, for example, because the content fails to include such facts reasonably necessary to inform the recipient of—(A) the identity of the person asserting a right to license the patent to, or enforce the patent against, the intended recipient or any affiliated person;(B) the patent issued by the United States Patent and Trademark Office alleged to have been infringed; and

(C) the reasons for the assertion that the patent may be or may have been infringed.

(3) an assertion that is likely to materially mislead a reasonable intended recipient.
The engaging of a person in an act or practice described in subsection (b) shall be treated as a violation of a rule defining an unfair or deceptive act or practice described under section 18(a)(1)(B) of the Federal Trade Commission Act (15 U.S.C. 57a(a)(1)(B)). A violation of a rule promulgated under this Act shall be treated as a violation of a rule defining an unfair or deceptive act or practice under section 18(a)(1)(B) of the Federal Trade Commission Act (15 U.S.C. 57a(a)(1)(B)).
The Federal Trade Commission shall enforce this section in the same manner, by the same means, and with the same jurisdiction, powers, and duties as though all applicable terms and provisions of the Federal Trade Commission Act (15 U.S.C. 41 et seq.) were incorporated into and made a part of this section. The Commission shall enforce this Act in the same manner, by the same means, and with the same jurisdiction, powers, and duties as though all applicable terms and provisions of the Federal Trade Commission Act (15 U.S.C. 41 et seq.) were incorporated into and made a part of this Act.
Any person who engages in an act or practice described in subsection (b) shall be subject to the penalties and entitled to the privileges and immunities provided in the Federal Trade Commission Act (15 U.S.C. 41 et seq.). Any person who violates this Act shall be subject to the penalties and entitled to the privileges and immunities provided in the Federal Trade Commission Act (15 U.S.C. 41 et seq.).
[No such provision] Allows enforcement in federal district court by the attorney general of a State, or an official or agency of a State, as parens patriae, who has reason to believe that an interest of the residents of that State has been or is threatened or adversely affected by engagement of any person subject to a rule promulgated under this Act in a practice that violates the rule.
Nothing in any amendment made by this section shall be construed to limit the authority of the Federal Trade Commission under any other provision of law or to provide the Federal Trade Commission with any additional authority. Nothing in this Act shall be construed as limiting or otherwise affecting in any way—(1) any other authority of the [Federal Trade] Commission; or (2) the application of title 35, United States Code, or any other provision of law relating to patents.
[No such provision] For purposes of bringing any civil action [in federal district court], nothing in this Act shall be construed to prevent an attorney general of a State from exercising the powers conferred on the attorney general by the laws of that State to conduct investigations, to administer oaths or affirmations, or to compel the attendance of witnesses or the production of documentary and other evidence.

 

About the Author

Andrew S. Baluch is a registered patent attorney and special counsel with the Washington, DC office of Foley & Lardner LLP. He is also a Professorial Lecturer in Law at the George Washington University Law School where he teaches international and comparative patent law. Previously, Mr. Baluch served in the White House office of the Intellectual Property Enforcement Coordinator (IPEC) and before this as expert legal advisor to the Undersecretary of Commerce for Intellectual Property and Director of the U.S. Patent & Trademark Office. He also previously served as a law clerk in the U.S. Court of Appeals for the Federal Circuit. He can be reached at abaluch@foley.com.


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18 comments
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  1. This is just hillarious

    Next thing they’ll want the earth and moon too from poor patent holders

    I imagine such letter conforming with the proposed legislation – it’ll be thicker than my phd thesis

    Why not abolish patents outright ?

  2. One caught in filter:

    I am all for flushing out unfair and deceptive practices.

    But let’s separate out the Large Corporation “Troll” boogeyman infestations.

    How does one “falsely threaten” a right to sue? Unless we radically change patent law itself, the right to sue is part of the patent grant. Anyone having that patent grant has the right to sue (and the concomitant right to choose not to sue – for whatever reason). This can only translate to another weakening of the power of the patent grant. We (inadvertently?) seek to lessen the threat of the stick of patent law. Having only carrots, but no sticks will eviscerate patent law in the real world.

    But back to the notion of “falsely threaten.” Is this the same as merely not filing suit? It seems that this merely invites a different wording from those ‘damn’ scriveners…. Another layer of being coy – another layer of lack of clarity… (consequences that cannot be said to be entirely unforeseen).

  3. Will this further encourage patent-holders to sue first, ask questions later?
    Then there will be further “alarm” by the anti-patent pundits at the exploding number of patent suits — after Sandisk, the joinder provision of the AIA, and now this.

  4. Moshe at 3: The words of Hippocrates come to mind: (in paraphrase) First, do no harm.

    The modern equivalent can be found in some of the executive orders that circulated in the Claims and Continuations Rules fiasco.

  5. Moshe

    There won’t be exploding number of patent lawsuits if all provisions of the current patent “deform” are passed:
    it will be virtually impossible not only for independents but for small and medium size businesses to enforce their patents against large multinationals.

    And please note – patent “deform” equally applies to practicing and non-practicing entities – so much for “patent troll” rhethoric used to jumpstart this devastating bill…

    I can’t even imagine the amount of money being spent by corporate lobbyists around Wash DC lately…

  6. Anon at 2,
    I think “falsely threaten” refers to the implication that you will take legal action against an entity who is not infringing your patent. In other words, there is no legal basis for suit. This brings us back to the real problem of patent abusers – intimidating non-infringers into accepting out of court settlements.

  7. Benny,

    Intimidation is a concern. But the solution being sought is fraught with peril and with far too much heavy handedness. Many of the solutions being sought are still enmeshed with the Infringers’ Rights type of thinking and even if enacted will likely produce (not so) unforeseen consequences.

    To make it a crime to implicate a legal right to sue that comes with a patent grant is not the answer.

  8. Benny

    have you ever tried to “intimidate” a large corporation like Cisco or Apple or Microsoft or HP ?

    Try it

  9. Angry,
    Better you should ask, has any corporation ever tried to intimidate us? And how much does it cost us in attorneys fees to prove that we are not infringing their patent?
    Our company operates on ethical principles, we would never send a demand letter unless we were 100 percent certain a patent of ours was being infringed. The companies you mentioned aren’t in that league.

  10. Benny

    and if you hide your encrypted code inside tamper-protected chips how can they possibly know if you infringe or not ?
    Same goes the opposite way – you can’t be 100% sure until you get to see the code
    and if it’s not your code but some nuts and bolts then it’s pretty obvious if you infringe or not

  11. Angry,
    We do hide our code in protected chips, and we don’t file software patents for the reasons you correctly pointed out in your post.
    It is the knurled flange brackets and method patents that we deal with, and some attorneys manage to obfuscate the claims so much that it is difficult for either side to know if our device infringes a competitors’ patent. Sometimes our competitors’ tactic is “guilty unless proven innocent”.

  12. Benny,

    Your bias is showing.

  13. Well Benny

    claims do not exist separately from patent specification – the description of preferred embodiment

    writing broadest possible claims is what patent attorneys do – it is OK as long as they are still supported by the patent specification in addition to be novel over prior art and non-obvious

  14. Anon,
    Yes it is. I am biased against patent attorneys who are incapable of writing a claim in plain, unambiguous English, who do violence to our language, and who write “ground engaging rotary propelling device” instead of “wheel”. (actual case – I could provide the reference). Yes I know a patent is a legal and not a technical document , but “legalese” is not a synonym for “poor communication skills”.

  15. Ay yay yay. So many Noerr-Pennington-type First Amendment issues lurking in these proposed legislative fixes.

  16. Benny,

    Again, your desire belies the fact that even though you say you recognize that a patent is a legal document, that your wish the document was different transcends the reasons for those differences.

    You are tilting at windmills.

    Just because you do not understand ‘legalese’ does not make that ‘legalese’ “poor,” nor more importantly, inappropriate.

    What you consider plain and unambiguous is in truth fraught with ambiguity. Your inability to respect the legal side of the equation (as I have pointed out previously, feet in two worlds are required) is what seems to consistently set us in opposition. Once again, I must admonish you for your bias.

  17. Anon,
    You are telling me that patent attorneys always write clear and concise claims, and never attempt to confuse or obfuscate with obtuse language.
    Obviously you and I do not consult the same patent databases.
    I am aware, though, that not everything gets past the examiners.

  18. Benny,

    I am telling you that a legal document is written to be a legal document.

    Why are you still trying to pretend that it is something else?