Last year, Willimantic’s Savings Institute Bank & Trust received a letter from an attorney claiming it was using ATMs that violated a series of patents held by a Delaware company because the machines used an Internet connection to process transactions.
The letter, from Automated Transactions LLC, threatened a lawsuit if a settlement or sublicensing agreement wasn’t reached. Savings Institute’s CEO Rheo Brouillard said the company demanded $27,000, a sizable chunk of change for a small community lender.
But Brouillard, according to written testimony he recently provided to the state legislature’s Judiciary Committee, said he knew the claim was bogus. Even if Automated Transactions did own the patents, his banks’ ATMs use a direct telephone-line connection, not the Internet, so they refused to enter settlement talks.
Thirty other Connecticut banks received similar letters, including one lender that didn’t even have an ATM, industry sources say.
Brouillard said his and other community banks fell victim to a patent troll, a derisive term used to describe a business whose main source of income is leveraging its patent portfolio to force settlements or licensing agreements with other companies, typically through so-called “demand letters” threatening legal action.
Such “non-practicing” entities, which don’t make products with their patents, have come under scrutiny as Congress considers tighter regulations on trolls to prevent frivolous lawsuits often targeted at small businesses.
The U.S. House of Representatives has already passed a bill that promotes further transparency in patent ownership, and now state lawmakers are considering similar legislation.
“Unless this practice is stopped, there will continue to be others who find this form of legal extortion quite lucrative,” Brouillard said in his testimony submitted during a recent Judiciary Committee public hearing on a patent reform bill. “Patent trolls like ATL prey on smaller companies, not just banks, believing these companies lack the resources to fight back.”
Patent trolls stand in contrast to companies that use patents to make or sell products, sometimes called “practicing entities,” which are the types of businesses state and federal legislation seek to offer increased protections.
The Connecticut Business and Industry Association (CBIA), restaurants, hotels, bankers, food makers and others have come out in support of federal and state legislation that would require demand letters to contain more detailed information and give judge’s the ability to consider more factors in a patent lawsuit.
Connecticut’s Senate Bill 258, modeled after a Vermont law passed last year, would allow a court to consider whether the company suing for patent infringement has made a “bad faith” claim.
That determination could be made by assessing whether the patent troll, or its lawyer, analyzed a company’s products — like SI’s ATMs — to see if they actually violated certain patents.
Other bad faith considerations would include whether the patent holder:
• Demanded payment or response within an unreasonable timetable;
• Made similar past claims in other courts that were found to be meritless;
• Made a substantial investment in the use of the patent or products it covers.
The bill, which passed the Judiciary Committee last week, would require patent holders who file bad faith claims to post a bond up to $250,000 to cover a defendant’s expected legal costs. The court could also award victorious defendants punitive damages of up to $500,000.
The bill would also give the state’s Attorney General power to sue any company that violates the stricter standards.
It’s practically impossible to know exactly how often patent trolls issue demand letters. Most companies that receive them likely don’t disclose it publicly.
And while lawsuits are public record, the courts don’t distinguish whether a plaintiff is a troll. Most experts who track patent suits must pore through individual cases and do additional research to determine if the filer is a non-practicing entity.
Even if they identify a case of interest, the outcome is often kept secret, said Christopher C. Barry, a PwC partner in Boston, who is a patent lawsuit expert. In 2012, U.S. patent lawsuits increased 29 percent to an all-time high of 5,189 cases, according to PwC. Barry said he expects the number will increase again this year, but at a slower rate.
Meanwhile, not everyone favors the Connecticut proposal. PhRMA, a national association that represents biopharmaceutical companies, testified against the bill.
Biopharma companies are the second most common filer of patent lawsuits, according to PwC, responsible for 13 percent of cases between 1995 and 2012. PhRMA said it supports cracking down on perceived trolls, but it’s worried a growing number of state laws could create confusing overlap with federal law and do more harm than good.
“Broadly outlining what is, and is not, acceptable for patent enforcement practices in a single state ignores the very fragile and fractured nature of the innovation ecosystem in the U.S.,” PhRMA said in written testimony to the Judiciary Committee.
Meanwhile CBIA, which counts biopharma firms among its members, wants to see some changes to the bill.
CBIA lobbyist Eric George said they would like a specific carve-out pertaining to the federal Hatch-Waxman Act, which streamlines litigation involving generic-drug makers.
CBIA also wants to allow judges to consider whether a patent holder has been “vague” in its assertion, rather than just “deceptive,” a change George said would strengthen the law because deception is a higher bar to prove.
“We need to discourage these frivolous claims and harassment of legitimate businesses,” George said.
