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Indiana patent law delaying demand letters

April 20, 2016

Since Indiana passed a law in 2015 aimed at curtailing frivolous patent infringement lawsuits, intellectual property attorney Joel Tragesser has not heard much rumbling.

tragesser Tragesser

The silence is a remarkable contrast to the cacophony of voices that erupted a few years ago when an earlier version of the law was floated before the Intellectual Property Section of the Indiana State Bar Association. Tragesser, partner at Quarles & Brady LLP, was section chair at the time and remembered a consensus was difficult to reach with attorneys holding differing views depending on whether they represented plaintiffs or defendants in patent litigation.

While the passage of House Enrolled Act 1102 has not been met with a lot of noise, it is causing attorneys to think twice before sending a letter asserting patent infringement. Lawyers now have to consider the requirements of patent laws that have bloomed in many states and the potential ramifications of being found in violation.

Indiana is not the only state stepping into the patent arena, a place where the federal government has been granted exclusive authority by the Constitution. Since Vermont passed a pair of laws in 2013 that included provisions addressing bad-faith assertions of patent infringement, 28 other states including Indiana have followed with similar legislation.

Each state statute is a little different and, with the exception of Vermont, the courts have not offered any opinions or provided any direction about these laws. So, Tragesser said, lawyers have to figure out how to write the letters on their own.

Tragesser said until the Indiana law gets challenged, applied or enforced, attorneys will have no guidance when navigating the state’s patent statute.

The uncertainty could inadvertently harm inventors and small businesses that hold and utilize their patents.

Indiana, like the other states with patent statutes, was attempting to counter the rise in patent litigation brought by non-practicing entities. Although the definition of these entities can vary, typically they are businesses that own patents but do not use the patented inventions. Instead, they wield the protection to extract licensing fees from other businesses.

These NPEs, sometimes referred to as patent trolls, usually send demand letters that assert the recipients are violating the patent and must pay a licensing fee or face an infringement suit. Primarily, the letters are sent to end users, such as small businesses, who opt to pay the requested fee rather than incur the cost of a court battle.

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Patent holders have to be more careful and more prepared when sending a cease-and-desist letter to ensure it does not violate the new Indiana statute, said Reid Dodge, associate in the intellectual property litigation group at Faegre Baker Daniels LLP. This will require more resources and could raise the cost of asserting a patent.

“I think this law, however well-intentioned, could end up disproportionately hurting individuals and smaller companies seeking to enforce their patents,” Dodge said. “On the other hand, this law has the potential to provide the intended benefit of preventing bad actors from sending a multitude of letters to various companies in the hopes of extorting some sort of payout.”

Changing the equation

Authored by Rep. Eric Koch, R-Bedford, the law prohibits an individual from asserting a claim of patent infringement in bad faith and permits the courts to hand the plaintiff the defendant’s bill for attorney fees and litigation expenses.

Indiana’s patent statute, in particular, targets the fraudulent demand letters. It outlines the information that the written communication must contain such as identifying the specific product or service that is covered by the claims in the patent.

gallagher-douglas-mug Gallagher

In describing Indiana’s law, Douglas Gallagher, patent attorney at Bingham Greenebaum Doll LLP, explained “the state is carrying a big monetary stick.”

When it took effect July 1, 2015, the law changed the equation for patent assertion, Gallagher said. Prior to the statute, NPEs might have sent a bunch of letters and if a handful of end users wrote checks, that was considered successful. But now the risk is higher since one of the recipients may invoke the law and challenge the validity of the patent.

The law does not spell out how much detail the patent holder should include in the letter, which could make asserting a protection more difficult. As Tragesser explained, too much information could allow the recipients to forum shop and file a federal lawsuit seeking declaratory judgment in the District Court of their choice.

“The power to choose the forum is an important strategic consideration and the Indiana statute may shift this advantage away from the patent owner,” Tragesser wrote in an email.

Not black and white

An analysis of the year 2015 by RPX Corp. charted a rebound in patent litigation by non-practicing entities. These businesses filed a total of 3,621 cases last year, a 20 percent increase from 2014. Filings by NPEs skyrocketed from 768 in 2010 to the peak of 3,734 in 2013.

The surge in filings may be the result of a change to the Federal Rules of Civil Procedure that raised the pleading requirement for patent cases. Prior to Dec. 1, 2015, patent owners could allege infringement by essentially filling in a couple of blanks on the single-page Form 18. Now Rule 84 has been abolished so plaintiffs have to provide more details about their patents and highlight which claims are being violated.

Fourth-quarter litigation in 2015 increased 20 percent compared to the final quarter of 2014, according to an analysis by Unified Patents. The surge has been countered with a decline in 2016. Compared to the final quarter of 2015, filings at the start of this year fell 28 percent.

The increase in infringement litigation as well as the jump in small businesses and end users getting threatening demand letters has raised awareness of non-practicing entities. However, not all NPEs are bad actors as shown by the Indiana law, which made a carve-out for universities that are by definition non-practicing entities, but are generally not engaging in bad behavior.

“Whether an NPE is a bad actor is not a black-and-white issue,” Dodge said. “It’s more nuanced.”

He also questioned whether the state legislatures needed to address bad NPE activity since the courts have been handling the issue. For example, he noted Octane Fitness, LLC v. ICON Health & Fitness, Inc., 134 S. Ct. 1749 (2014), and Highmark Inc. v. Allcare Health Mgmt. Sys., 134 S. Ct. 1744 (2014), altered the framework for obtaining attorney fees, which could deter bad-actor patent enforcement.

Gallagher agreed the brakes need to be tapped.

He, too, pointed to recent patent rulings from the Supreme Court of the United States, such as Alice Corp. v. CLS Bank International, 573 U.S._, 134 S.Ct. 2347 (2014), as well as the still-new America Invents Act that made fundamental changes to the U.S. patent system. The ramifications of these events will take time to determine, and while the states with patent laws could be a testing ground of sorts, he advocated a wait-and-see approach.

In the interim, IP attorney Tyler Droste of Gutwein Law in Indianapolis is advising his clients to try kindness. When clients discover their patents are being infringed, he writes a “make-aware letter” rather than a demand letter. In fact, he counsels business owners to first make a personal phone call to the other owner.

Many times, Droste said, the infringer made an honest mistake, not knowing the patent existed, rather than it being a willful act. The result is often an amicable resolution.

“I don’t think anybody wants to get involved with any litigation,” Droste said. “They would rather put the money into their company.”•

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