State legislation aimed at reining in so-called patent trolls that thrive solely by suing businesses has passed its first hurdle and could move to the House floor next week.
The legislation has broad industry support from a coalition that likens the litigation tactics of patent trolls to extortion.
The coalition pushing for the bill against patent trolls – the less-derogatory name is nonpracticing entities, or NPEs – includes software giants SAS and Red Hat and groups such as the North Carolina Chamber, North Carolina Technology Association and North Carolina Bankers Association. No opposition to the legislation has surfaced.
“I don’t think that patent trolls really have a lobbyist,” joked Rep. Tom Murry, the Wake Republican who is the bill’s primary sponsor.
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Among other things, the bill would entitle companies victimized by frivolous demands or lawsuits from NPEs to obtain attorney’s fees and treble damages. It would also make it easier for companies to collect such awards by preventing the people behind NPEs from being judgment-proof by hiding behind shell companies that have no assets other than patents.
SAS is all too familiar with this phenomenon.
The Cary-based company was once awarded $135,000 in costs after prevailing against a lawsuit filed by an NPE. But SAS found that the NPE had only several hundred dollars in assets – even though the principals behind the NPE had extracted $85 million in settlements from a host of other businesses, said John Boswell, SAS’ chief legal officer.
Murry and supporters of the bill say it’s needed more than ever because Congress’ efforts to tackle NPEs at the national level have stalled. A bill that would make life more difficult for NPEs was passed by the House in December, but the Senate version was shelved earlier this week.
Since last year, 12 states have passed laws designed to curb NPEs, according to The Wall Street Journal.
“This issue is moving across the country rapidly,” said Murry, who added that it is especially crucial in North Carolina because of the high concentration of technology companies.
NPEs don’t make any products or provide any services; they just own patents. Their business model relies on pursuing patent infringement claims against other businesses, extracting cash from them largely because their targets often decide that settling is cheaper than going to court even if the claim is frivolous.
“No insurance company will write a policy to defend against patent litigation, because it is such a ubiquitous problem,” Boswell said.
Some NPEs have acquired portfolios of patents, while others are businesses that have sold off their product lines to focus on exploiting their patents.
The bill would move to the House floor next week if it wins the recommendation of a House judiciary committee, which is scheduled to consider it on Tuesday. . The Commerce and Job Development Committee endorsed the bill by a voice vote this week.
A similar measure in the Senate is part of a larger tort reform package being considered by a judiciary committee.
The House bill is designed to prevent NPEs from abusing the patent system without penalizing regular companies that rely on the protections afforded by their patents. It specifically exempts universities, nonprofit research organizations and “operating entities” – the opposite of a Non-Practicing Entity – from the sanctions it calls for.
The legislation “ensures that those that are legitimately seeking to enforce their patents have nothing to fear,” said Chris Matton, general counsel for Raleigh telecommunications company Bandwidth.
Although patent litigation is waged in federal court, the bill devises “an elegant way of getting state law into the game, defending innovative companies against patent trolls,” Matton said.
For example, companies targeted by NPEs in “bad faith” could seek attorney’s fees and damages in state court, and the people behind the NPEs could be personally liable for any awards. It would also deter NPEs from sending “demand letters,” which often precede lawsuits, that accuse companies of infringing a patent and demanding that they license the invention.
“The real value in this legislation is all the North Carolina companies that will be not be sued because North Carolina will be an inhospitable place for patent trolls to operate,” Boswell said.