State Policy Update: Anti-patent troll laws and what they mean for startups

By Abby Rives, IP Counsel, Engine Advocacy & Foundation

In a series of State Policy Updates, we are exploring how state initiatives are impacting the innovation happening in startup ecosystems across the country. While much of Engine’s work centers on policy advocacy and education in the federal landscape, state-based policymakers impact startup formation and growth through their own work. We’re tracking what’s working for startups, what’s falling short, and what federal policymakers can learn from their state-level counterparts.

At the end of October, a court in Washington state advanced a lawsuit under its anti-patent troll law which should positively impact the viability and effectiveness of similar laws that penalize bad faith patent assertion. This State Policy Update explores these laws — which have been passed in more than thirty states and are sometimes referred to as “anti-troll” or “patent troll prevention” laws — unpacks ongoing litigation in Washington and North Carolina, and addresses how they can deter misuse of the patent system to benefit U.S. startups and small businesses.

Background on state “patent troll prevention” laws.

Patent assertion entities (PAEs). These companies — variously referred to as PAEs, “patent trolls,” or non-practicing entities — are in the business of asserting patents. Instead of making and selling new products or services, they sue or threaten to sue other companies for infringement — often making vague, baseless threats of infringement based on low-quality patents. Since patent litigation is so expensive and risky, many PAEs have found ways to misuse the patent system and coerce startups into paying nuisance value settlements just to resolve meritless threats.

Patent demand letters. PAEs file about 60 percent of the patent lawsuits in the U.S. But a substantial amount of patent assertion happens outside the public eye, through demand letters asserting the recipient is infringing or that it needs to take a license to avoid litigation. There are plenty of legitimate reasons to correspond about patents and licensing — for example, companies ask patent owners for licenses to interesting new technology, parties resolve genuine disputes outside of court, and business partners negotiate cross-licenses and joint ventures. But, unfortunately, PAEs routinely send demand letters without a sound basis, for example accusing companies of infringement without learning how the accused product works or asserting invalid or expired patents.

State patent assertion laws. While patent law is usually left to the federal government, since 2013 over 30 states have passed unfair competition and deceptive practices laws aimed at protecting local companies from abusive patent assertion. Each state differs, but at a high-level, these laws create penalties for bad faith demand letters. The state government and/or private parties can sue PAEs that assert in bad faith, for example, if they send demand letters that lack specific facts about infringement or falsely claim a lawsuit has already been filed. The purpose is to discourage people from sending these sorts of abusive letters and to give targets a tool to fight back.

What’s happening with these state laws?

Right now, a very prolific PAE — Landmark Technology A — is being sued in Washington state and North Carolina for alleged violations of each state’s patent troll prevention law. There is a lot at play in these cases, both because the outcome could impact scores of small businesses accused of infringing a low-quality patent and because the cases test features of these state laws.

The two lawsuits emerged from a recent 18-month period when Landmark sent more than 1,800 demand letters to nearly 1,200 companies, alleging that websites with generic customer login pages infringed a Landmark-owned patent. Even though that patent was seemingly written with loan processing in mind, Landmark effectively claimed that it owned the idea of logging into a website. And in 2014 the U.S. patent office had even concluded Landmark’s patent was likely invalid. Yet, as Washington’s Attorney General put it, Landmark was using the patent to approach “virtually any small business with a website, seemingly at random,” and demand $65,000.

In January 2021, NAPCO — a North Carolina-based company that manufactures custom packaging — filed a complaint arguing Landmark’s demand letters ran afoul of North Carolina’s Abusive Patent Assertion Act. And in May 2021, Washington’s Attorney General filed a similar suit under his state’s Patent Troll Prevention Act. (And several others have since chimed in to support NAPCO’s case, including North Carolina’s AG, Acushnet, Garmin, Red Hat, SAS Institute, Symmetry, the North Carolina Retail Merchants Association, the North Carolina Technology Association, and the North Carolina Chamber Legal Institute.)

Landmark asked the judges to dismiss both suits, but both courts have so far rejected Landmark’s arguments that these state laws are unconstitutional and that all patent assertion is protected by the First Amendment. Each of those court orders delves into constitutional details we will not unpack here. But as the courts allow these cases to continue, the North Carolina judge acknowledged “that bad-faith infringement claims can harm North Carolina companies by coercing businesses ‘to settle and to pay a licensing fee even if the claim is meritless,’” and the Washington judge likewise noted “‘abusive patent litigation, especially the assertion of bad faith infringement claims, can harm Washington’s economy.’”

From here, each case will proceed through discovery and towards trial. If the plaintiffs prevail then Landmark could be ordered to stop sending these demand letters, pay back companies it wrongfully targeted, and pay fees or damages incurred by the parties.

Why does this matter to startups?

Patent troll prevention laws are good for startups and small businesses, so these recent court cases exercising the laws and the judicial decisions preserving them are also a positive development.

First, startups operating on thin margins are more vulnerable to abusive patent assertion. PAEs cost defendants an estimated $29 billion per year, and have a large impact on startups,who report significant operational impacts when they receive demand letters and those letters are a notable deterrent to startup investors.

State patent troll prevention laws are widely cited as discouraging bad faith patent assertion, by creating risk for bad actors and giving victims leverage to fight back. One startup counsel recently described her experience with Florida’s Patent Troll Prevention Act: after her company was sued by a troll, they were able to “quickly use[] the law” to “turn[] our case around.” She explained how these laws are “trying to prevent bad-faith assertion by [PAEs]. And for us, it resulted in quick settlement, we paid zero dollars, and we did not sign any confidentiality provisions. Once we came to the [PAE] with claims under Florida’s new law, they came to the negotiating table and wanted to get rid of us very quickly.”

Those sorts of experiences are backed up by data confirming how laws to combat abusive patent assertion benefit startups. One study showed employment at high-tech startups increased an average of 4.4 percent in states that passed these laws, and it found that passing these anti-trolling laws corresponds to an increase in venture capital funding in states with established VC presence.

Even though patent law is typically the domain of the federal government, this is a noteworthy area where states can leverage unfair competition laws to protect startups from abusive patent assertion and low-quality patents, and boost their startup ecosystems in the process.

Disclaimer: This post provides general information related to the law. It does not, and is not intended to, provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.

Engine is a non-profit technology policy, research, and advocacy organization that bridges the gap between policymakers and startups. Engine works with government and a community of thousands of high-technology, growth-oriented startups across the nation to support the development of technology entrepreneurship through economic research, policy analysis, and advocacy on local and national issues.