Arizona has become the 29thstate to prohibit the bad faith assertion of patents.
Patent Assertion Entities (PAEs) derive their income not from selling a product or a service but from demanding patent royalties. When weak patents are asserted to obtain royalty payments under threat of suit, the enforcement entities are referred to as “patent trolls.” The drag on the economy from paying royalties to patent trolls is substantial. A 2012 study found PAEs received $29 billion in 2011. Executive Office of the President, “Patent Assertion and US Innovation” (June 2013) at 9.
The new Arizona statute, comparable to laws enacted in Vermont, Florida and other states, makes certain conduct a deceptive trade practice for which private parties (or the state Attorney General) can sue. The statute can be triggered by transmitting any communication asserting patent infringement before or after a lawsuit has been filed. By creating collateral litigation over the bad faith assertion or settlement of patent claims, the law could have the unintended consequence of increasing the cost of patent litigation and creates a new layer of uncertainty for anyone seeking to enforce a patent.
To avoid one factor indicating bad faith, the statute requires a demand to contain “facts relating to the specific areas in which the target’s product, service or technology infringes the patent”. The term “specific areas” has no well understood definition. Presumably, the legislature intended for the demand letter to include an infringement analysis identifying where each element of the patent claim can be found in the accused apparatus or method.
The statute also recognizes as a factor indicating good faith that the patent, or a substantially similar patent (an undefined term), has been successfully enforced through litigation. A patent owner anxious to avail herself of this remedy may choose to litigate to a conclusion rather than initiate settlement discussions.
To establish one factor indicating good faith, the statute requires that the patent, or a substantially similar patent (another undefined term), has been “successfully enforced through litigation.” The necessary “success” may require a patent owner to litigate to a conclusion rather than settle. This is contrary to the well-established practice of encouraging settlement to avoid misallocation of judicial resources.
The Arizona legislature also provided that a demand letter should explain why standing exists if the patent office assignment system does not identify the person asserting the patent infringement as the owner. This could create a trap for the unwary if the patent owner does not confirm that all assignments in the chain of title have been properly recorded.
There is litigation pending regarding whether this type of law impermissibly intrudes on the right of the federal government to define patent rights. So far that preemption issue has not been determined by the courts.
In the meantime, a patent owner in Arizona should document at least the following steps when asserting patent rights (or attempting to settle a patent claim) in any communication except a document filed in federal court.
- Confirm that you are the owner of record in the patent office records;
- Confirm neither you nor any previous owner of the patent has brought an unsuccessful infringement claim in the past;
- Include your name, address and the patent number;
- Describe how each element in the patent claim is embodied in the accused product or method (this may include defining key terms in the patent claim);
- Allow a reasonable period of time for a response;
- Identify any information regarding the accused infringement that you have been unable to confirm as true (for example, someone’s confidential manufacturing methods); and
- Describe your substantial investment in the patent or in the production or sale of a product covered by the patent.