Senate Panel Takes on Patent Troll Demand Letters

Exploring government registry to improve transparency

The Senate's commerce committee jumped into the fight against patent trolls, holding a hearing on demand letters, the most reviled tactic used by patent assertion entities to extract license fees.

Thursday’s hearing comes as lawmakers begin to close in on legislation introduced recently by House judiciary chairman Bob Goodlatte (R-Va.) and a comparable bill promised by Senate judiciary chairman Pat Leahy (D-Vt.).

Tens of thousands of demand letters are sent to end users and small businesses each year, often for everyday technology or products that have already licensed the technology. One PAE, for example sent 13,000 demand letters to Cisco customers for using one of its products.

Demand letters “often don’t contain the most basic information,” like who owns the patent or even what it is, said Sen. McCaskill (D-Mo.), chair of the subcommittee on consumer protection, product safety and insurance. “Recipients are left in the dark, not knowing whether to settle or fight the claim.”

McCaskill said she is exploring limited legislation that would set up a government registry of demand letters to make the practice more transparent for companies that meet a certain threshold.

"By some estimates, patent trolls are sending well over 100,000 demand letters a year, impacting a wide swath of innovative startups and other small businesses,” McCaskill said.

Lary Sinewitz, evp of BrandsMart USA, told lawmakers that his company, which operates 11 stores in Florida and Georgia, had received six demand letters in the past few years, including one that was only two paragraphs long. Over the past 10 years, the company has spent more than $500,000 on legal fees and settlements.

“It’s all about fairness, that’s all we’re asking for,” said Sinewitz, who called for greater and truthful disclosure in letters.

The growing practice of using demand letters to extract license fees from smaller businesses and end users has become the prime concern of the marketing, advertising and retail industries, often victims of demand letters.

“We think patent assertion letters are the biggest problem for the marketing business, because by the time the letter gets there, our members don't have the resources to tough it out for three or four year battle. That is where our problem has to be fixed. There have to be some restraints so they can't do it with impunity,” said Dick O’Brien, evp of the 4A's.

More than 20 groups that are members of the Stop Patent Abuse Now (Span) coalition, including the 4A's, the National Retail Federation, the Association of National Advertisers and the Direct Marketing Association, would like to see stronger language in the pending patent reform bills to reassert the Federal Trade Commission’s authority to go after demand letters as an unfair and deceptive practice.

“If there ever was an unfair or deceptive practice, it's a patent troll assertion letter,” O’Brien said.

So far the FTC hasn’t exercised its authority with demand letters, but it has opened an investigation into patent troll practices as a prelude to a report.

“I believe the FTC does have the authority to act, but a little nudge wouldn’t be the worst thing in the world,” said Julie Samuels, a senior staff attorney with the Electronic Frontier Foundation, who also holds the Mark Cuban chair to eliminate stupid patents.

Meanwhile, several states have already gone after demand letters as unfair and deceptive. Vermont, for example, took action against MPHJ Technologies, which demanded $1,000 per employee anytime a person scanned a document to email.

“My office and other state Attorneys General have declared a bipartisan, multi-state war on patent trolls,” Nebraska attorney general Jon Bruning told the subcommittee, adding that demand letters probably violate most state consumer protection statutes. “We are planning to introduce a bill in our legislature which will further focus on patent abuse. But we need Congress to lead.”

Most of the hearing was spent beating up on patent trolls and demand letters, with the exception of Adam Mosoff, s professor at George Mason University’s school of law. He warned that any systemic changes in the patent system “would only weaken patents and hamper the U.S. innovation economy.” He also argued that the anecdotal evidence of demand letters shouldn’t be the basis for Congress to pass new laws.

Sen. Kelly Ayotte (R-N.H.) was also worried that Congress could go too far. “We’re blessed to have many great innovators. How do we make sure we’re not harming legitimate innovators? We have to get that right.”

But McCaskill, who took a hard line during the hearing against demand letters, wasn’t buying it. “We’re talking about bottom feeders and scam artists,” she said.

As for nudging the FTC, McCaskill said she believed it had the authority to go after demand letters, but that she’s waiting for the agency to produce its report before urging enforcement action. “I’m a big fan of local law enforcement. I think a lot of the work can be done on a state-by-state basis.”