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Polis, Marino, and Deutch Introduce Demand Letter Transparency Act to Tackle Growing Problem of Patent Trolls

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Washington, Nov 19, 2013 | comments

Today, Representatives Jared Polis (D-CO) and Tom Marino (R-PA), along with Rep. Ted Deutch (D-FL) introduced the Demand Letter Transparency Act to tackle the growing problem of patent trolls. Increasingly, businesses of every size are finding themselves on the receiving end of patent infringement demand letters. These letters, which seemingly come out of nowhere, often make allegations that the use of everyday technology, such as wireless email, digital video streaming, and the interactive web, is in violation of a patent holders’ rights. While it is estimated that the Patent Assertion Entities (PAEs) behind these demand letter lose 92% of the merits judgments in courts, retailers, advertisers, marketers, and other often simply settle these nuisance claims rather than running the risk of complicated, expensive, and protracted discovery and litigation in federal court.

According to the Congressional Research Service, PAEs generated $29 billion in direct costs from defendants and licensees in 2011, a 400% increase over $7 billion in 2005. Another study reported that 62% of all patent suits filed in 2012 were brought by PAEs.

Businesses are increasingly coming under attack by entities abusing current patent law by sending vague, overbroad and threatening demand letters to businesses that are playing a vital role in our economy. As a result of this threat of litigation, consumers are forced to pay more and many companies are diverting significant dollars from R&D and other activities promoting job growth to simply cover their increasing legal fees,” said Rep. Jared Polis. “The Demand Letter Transparency Act strikes the right balance in protecting the rights of legitimate patent holders to enforce their patents while protecting consumers and businesses against non-legitimate abusers of the patent system.”

“Chairman Goodlatte’s Innovation Act makes significant strides to dismantle the fraudulent business model that is otherwise known as “patent trolling. I believe it is imperative that we also take on the issue of demand letters, which is at the very root of the problem,” stated Rep. Marino. “Demand letters target family-owned businesses and entrepreneurs who are essential for creating jobs and generate revenue for the economy.  Small businesses in my district cannot afford the legal fees associated with litigation and they should not have to sacrifice valuable resources to defend themselves against such vague and unsubstantiated claims.   Shell companies and trial lawyers are running amuck, frauding the courts and businesses alike. It is time Congress address this hostile practice.”

“Intimidating small businesses, entrepreneurs, and nonprofits with vague demand letters has become one of the most common ways that patent trolls take advantage of the lack of transparency in our patent system,” said Congressman Ted Deutch. “The targets of these demand letters are often left to decide whether or not to enter into expensive litigation without knowing any of the details regarding the patent in question, whose rights are being infringed, or how often similar demand letters are sent. I am pleased to join Reps. Polis and Marino to introduce a bipartisan bill that uses to transparency to solve a growing problem.”

The Demand Letter Transparency Act aims to assist small companies and end users who lack the money, time, and resources to fight demand letters they receive from PAE’s by putting additional information about the PAEs claims at their fingertips enabling them to determine whether to ignore, settle with or defend against assertions made by a PAE. It would be a very necessary first line of defense before they are forced to spend valuable resources to hire a patent specialist. This bill will help erase the “asymmetry of information” problem, collect data, improve transparency, and promote information sharing among those who receive demand letters from non-legitimate companies who hide behind vague, overboard and threatening demand letters. Specifically, the bill would:

  • Increase disclosure requirements of PAEs by requiring any entity, which is not an original inventor or University, that sends a specified amount of demand letters relating to a patent issued during any 365-day period, to submit to the Patent and Trademark Office (PTO) certain information relating to the patent (including patent being asserted, ultimate parent entity, the number of entities they sent a demand letter to, and information pertaining to litigation or PTO review relating to such patent) and to file an exemplary copy of such demand letter with the PTO. Further it provides courts with discretion to sanction an entity that brings an alleged patent infringement case and does not meet the demand letter disclosure requirements above.
  • Create a demand letter database at the PTO, in consultation with the Attorney General and Federal Trade Commission, that would be a publically accessible and searchable.
  • Increase demand letter requirements for any entity sending a demand letter to help a patentee identify the patents and claims. The demand letter shall include identification of each patent allegedly infringed, each claim of infringement, the accused instrumentality, as well as an explanation of each element of the claim within the accused instrumentality, how each element is infringed and a greater description of alleged direct infringement. The letter also must include identification of any case or post-grant administrative action relating to any of the patents, and further specificity relating to the ownership of any patent allegedly being infringed upon. The legislation also requires such entities sending a demand letter to include a statement that the recipient is not required to respond to the letter by law and provide information to recipients regarding accessing the demand letter database established under this legislation. Further it provides penalties for non-compliance.
  • Codifies the FTC’s authority to enforce violations of the bill’s requirements under its existing authority.   Specifically, it defines entities that fail to contain proper standards in their demand letters or fail to submit their demand letters to the PTO as “unfair and deceptive act of practices.”

The legislation is supported by a variety of businesses and organizations including Dish Network, Public Knowledge, the National Restaurant Association, Application Developers Alliance, the Electronic Frontier Foundation, the National Retail Federation, the Direct Marketing Association, the Mobile Marketing Association, and the Association of American Advertising Agencies.

"DISH applauds Rep. Polis and Rep. Marino for introducing the Demand Letter Transparency Act.  The bipartisan legislation, if passed, will help spur innovation, and address the growing problem of patent trolls," said Jeffrey Blum, Senior Vice-President and Deputy General Counsel.

 “Patent trolls have placed a restrictive and unnecessary burden on the restaurant and small business community as they look to build towards the future. This continued assault on innovation is draining billions of dollars from our economy and inhibiting job creation. The Demand Letter Transparency Act will help millions of restaurateurs nationwide fight these frivolous claims, and clear the pathway for enhancing their customer experience,” said Scott DeFife, Executive Vice President of Policy and Government Affairs, National Restaurant Association

“The Demand Letter Transparency Act is an important bill that will bring the most abusive actors to account. It will protect innovators, small businesses, and end users who face dangerous patent troll threats. The bill provides a much-needed response to opportunistic patent trolls blanketing the nation with deceptive letters," said Julie Samuels, Senior Staff Attorney for Electronic Frontier Foundation.

A section by section of the bill follows.

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SECTION BY SECTION- POLIS/MARINO DEMAND LETTER TRANPARENCY ACT

Today, too many start-ups and end user businesses, such as restaurants, retailers, and grocery stores, are facing threatening demand letters from Patent Assertion Entities (PAE’s) – who typically do not make or sell anything, but use patents to threaten litigation. Many small companies lack the legal expertise and resources to respond to complex patent infringement claims, and thus, end up devoting significant resources they could be spending on R &D and other business and job growth opportunities, to cover their legal fees. This diversion of resources is harming American innovation, businesses, and consumers, and stifling our economy.

According to a recent study, one third of those responding start-ups had received patent assertions; of those 60% came from entities whose primary business is asserting and litigating patents. The study further found that the cost to startups to defend such patent demands regularly exceeds $100,000, and can ultimately end up reaching millions of dollars in litigation costs.

While other proposals seek to curb abusive patent litigation, this bill will assist the smallest companies who face demand letter challenges (which are not legal complaints) before litigation even commences. This legislation will provide these companies a very necessary first line of defense before they are forced to spend valuable resources to hire a patent specialist.

This legislation aims to assist small companies and end users who lack the money, time, and resources to fight demand letters they receive from PAE’s by putting additional information about the PAEs claims at their fingertips enabling them to determine whether to ignore, settle with or defend against assertions made by a PAE.

This bill will help erase the asymmetry of information problem, collect data, improve transparency, and promote information sharing among those who receive demand letters from non-legitimate companies who hide behind vague, overboard and threatening demand letters.

Section 2: Demand Letter Disclosure

These provisions will ensure improved transparency and accountability in demand letters to the PTO, providing greater certainty to businesses and better reporting of the problem.

  1. Demand letter disclosure related to patent ownership: Requires any entity, that does not meet certain exemptions provided for in the bill and is sending a specified amount of demand letters relating to a patent issued during any 365-day period, to submit to the Patent and Trademark Office (PTO) certain information relating to the patent (including patent being asserted, ultimate parent entity, the number of entities they sent a demand letter to, and information pertaining to litigation or PTO review relating to such patent).
  1. Exemplary copy of demand letter: requires these entities to also file an exemplary copy of such demand letter with the PTO. Any company-specific information included in these demand letters relating to the recipient will be confidentially protected by the PTO.
  1. Non-Compliance Remedies:

a.       Monetary sanctions: provides courts with discretion to sanction an entity that brings an alleged patent infringement case and does not meet the demand letter disclosure requirements above. The court is required to consider good faith mistakes in failing to comply with these demand letter disclosure requirements when determining such sanctions.

  1. Demand letter database: Mandates the establishment by the PTO, in consultation with the Attorney General and Federal Trade Commission, of a publically accessible and searchable database that includes such demand letters. The PTO is responsible for maintaining and updating the database. Any recipient of a demand letter can request the redaction of the company name, company-specific information, or any other company information from the database.

The database will not only assist with information sharing among demand letter receivers, but also provide additional pre-complaint data to relevant agencies and academics to further understand the scope of the problem. Current statistics are only available for patent infringement litigation in federal courts.

Section 3: Demand Letter Requirements

  1. Specific demand letter requirements: provides for increased requirements for any entity sending a demand letter to help a patentee identify the patents and claims. The demand letter shall include identification of each patent allegedly infringed, each claim of infringement, the accused instrumentality, as well as an explanation of each element of the claim within the accused instrumentality, how each element is infringed and a greater description of alleged direct infringement. The letter also must include identification of any case or post-grant administrative action relating to any of the patents, and further specificity relating to the ownership of any patent allegedly being infringed upon. The legislation also requires such entities sending a demand letter to provide information to recipients regarding accessing the demand letter database established under this legislation.

Section 4: Remedies for Non-Compliance

  1. Demand Letter Disclosure Non-compliance: allows a third party recipient of a demand letter who believes the sending entity has not met the disclosure requirements in Section 2, to file a petition with the PTO describing why the requirements that have not been met.
  1. Demand Letter Database Non-compliance: allows a third party recipient of a demand letter who believes the sending entity has not met the demand letter requirements in Section 3, to file a petition with the PTO describing why the requirements that have not been met.
  1. PTO Enforcement: permits the PTO to provide notice that the patent will be voided unless a fee is paid if an entity is found to have failed to comply with the demand letter disclosure requirements or demand letter database requirements within this legislation.   

Section 5

  1. FTC Enforcement: defines entities that fail to contain proper standards in their demand letters or fail to submit their demand letters to the PTO as “unfair and deceptive act of practices.” Codifies the FTC’s authority to enforce violations of the bill’s requirements under its existing authority. 

Section 6

  1. Definitions: clarifies certain definitions under the bill.

Section 7

  1. Effective Date: provides a date certain upon which this legislation will go into effect.
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