Tennessee and Kentucky Draft Legislation Targeting Patent Trolls

The Tennessee and Kentucky legislatures have proposed bills targeting patent trolls and others who make bad-faith assertions of patent infringement. Patent assertion entities, commonly referred to as “patent trolls,” are those who own patents but do not manufacture the patented products or supply the patented services. Instead, they attempt to collect licensing fees from those practicing the technology covered by their patents, often after making accusations of patent infringement. Because patent litigation typically is complex and wildly expensive, defending even baseless claims can be extremely costly.

There is much discussion on the federal level about stemming baseless suits brought by patent trolls. During the State of the Union address in January, President Obama urged Congress to pass a patent reform bill that allows American businesses to focus on innovation and not be distracted by costly and needless litigation. Congress is currently considering several bills aimed at deterring patent trolls from threatening expensive patent litigation to secure unjustifiable licenses or settlements. Several states, however, have decided not to wait for Congress to pass a bill targeting such activities. Of note, the Kentucky Legislature has drafted legislation aimed at protecting Kentucky businesses and individuals from unfounded accusations of patent infringement. The Tennessee Legislature has proposed similar legislation to protect Tennessee businesses and individuals from such bad acts.

The proposed Kentucky legislation, SB 116, would make bad-faith assertions of patent infringement actionable under the Kentucky Consumer Protection Act. In other words, if a patent holder wrongfully asserts its patent rights, such action would constitute a violation of Kentucky’s consumer protection chapter and could subject the patent holder to the payment of the accused’s damages, attorney’s fees, and exemplary damages equal to $50,000 or three times the total damages, costs, and fees, whichever is greater. SB 116 was passed by the Kentucky Senate on February 25, 2014.

The Tennessee bill, SB 1967/HB 2117, creates an independent cause of action against those making bad-faith assertions of patent infringement. Essentially, any Tennessee business or individual that is threatened with allegations of patent infringement may initiate an action in state court alleging that the patent holder made the allegations in bad faith. The remedies available under this bill are the same as those available under the Kentucky legislation. The stated purpose of the bill is to build an entrepreneurial economy and attract and nurture internet technology and other knowledge-based companies.

Both proposed laws include a factor-based test for courts to utilize when determining whether one has made a bad-faith assertion of patent infringement. The non-exhaustive list of factors courts may consider as evidence of a bad-faith assertion of patent infringement includes sending demand letters that lack basic information about the patent infringement claim, failing to conduct an analysis that compares the patent claims to the accused instrumentalities, and seeking the payment of unreasonable royalties. Under the Kentucky bill, courts may also consider whether the assertion of patent infringement was made by a non-practicing entity—a patent troll. While the Tennessee legislation does not explicitly include this factor, it does state that a patentee’s substantial investment in the use of the patent constitutes evidence that it has not made a bad-faith assertion of patent infringement. Comparable legislation was passed in Vermont last year, and another very similar bill is pending in Maryland.

This legislation may be favorable for many because it seeks to deter patent trolls from asserting baseless claims against Tennessee and Kentucky businesses and individuals. Nevertheless, some patent holders may have concerns about the proposed legislation because even a demand letter may be actionable under both bills. In other words, a patentee that sends a poorly worded letter to a potential infringer may be sued by the potential infringer in state court.

If this legislation passes, it will be more important than ever for patent owners to contact an intellectual property attorney before communicating any accusations of infringement. On the other hand, upon passage of these bills, businesses and individuals in both Kentucky and Tennessee who receive threats of patent infringement should contact an attorney knowledgeable about this area of the law to discuss whether the allegations are actionable.