PROTECTING WISCONSINITES FROM TROLLS: THE FEDERAL CIRCUIT'S 'BAD FAITH' PREEMPTION AND ITS RESTRICTIVE EFFECT.

• Author: Salomone, Andrew

Introduction I. The State's efforts to ward off Patent Assertion Entities A. Wisconsin's Anti-PAE Statute II. The Problem of Preemption: Can States Successfully draft Anti-PAE Legislation? A. The Supreme Court's Likely Preemption Analysis B. The Federal Circuit's "Bad Faith" Preemption Standard III. Analysis: Preemption the States' Anti-PAE Legislation A. Wisconsin's Anti-PAE Statute is Likely Preempted Under the Federal Circuit's Standard but Likely Not Under the Supreme Court's Standard B. Jurisdictional Implications and the Conundrum for State Legislators Conclusion Introduction

So-called patent trolls are widely recognized as a pesky problem within the domain of patent law. (1) Also known as patent assertion entities ("PAEs"), patent trolls are the legal owners or licensees of patents who, rather than practice or license their patented inventions, exist chiefly to "sue, or collect money by threatening to sue, companies for infringing the patents they own." (2)

While PAEs are not always of the harassing and unsavory variety, this comment focuses on those undesirable PAEs that seek to assert patent rights in a harassing manner. (3) In this context, PAEs assert patent rights (4) via a patent notification letter that threatens an expensive patent infringement suit if the accused infringers do not settle with the PAEs for the alleged infringement, where the settlement sum demanded is modest enough to force accused infringers into settlement but large enough to inflict great financial burden to the alleged infringers. (5) For smaller businesses, the problem becomes even more pronounced by unfamiliarity with patent law. (6) In the absence of any meaningful federal legislative response to PAEs, (7) states have enacted legislation of their own, what I call "anti-PAE statutes," in an effort to ward off patent trolls and protect their constituents. (8)

In this comment, I use Wis. Stat. Ann. [section] 100.197 ("Wisconsin's anti-PAE statute") (9) to demonstrate the significant degree to which the Federal Circuit's current preemption regime restricts states' abilities to regulate the behavior of PAEs. In Part II, I summarize Wisconsin's legislative response to PAEs. (10) In Part III, I contrast the Federal Circuit's preemption doctrine and the Supreme Court's doctrine as it relates to state laws similar to anti-PAE statutes. (11) Paying particular attention to Wisconsin's patent notification statute, I provide a brief preemption analysis in Part IV. (12) Finally, in Part V, I conclude by arguing that the severe consequences of the Federal Circuit's standard, as demonstrated by its likely preemptive effect on Wisconsin's anti-PAE statute, highlight the need for the emergence of the Supreme Court's preemption analysis in the context of state laws touching on patents. (13)

1. The State's Efforts to Ward off Patent Assertion Entities

   In 2013, Vermont became the first state to make a legislative effort to ward off PAEs. (14) Vermont's anti-PAE statute creates a civil cause of action for recipients of demand letters that assert patent rights in bad faith. (15) Following Vermont's lead, at least thirty other states have passed some form of anti-PAE statutes. (16) Some states regulate PAEs' trolling behavior by prohibiting any bad faith assertions of patent rights, (17) while others limit the applicability of the statute to only those assertions made by non-practicing entities. (18) Some states only permit the state attorney general to bring suit against the bad faith patent holder, (19) rather than create a private cause of action.

   1. Wisconsin's Anti-PAE Statute

   In 2014, Wisconsin enacted its own anti-PAE statute (20) to prevent Wisconsin businesses from being "extorted by..... patent troll[s]" and ensure that targets of infringement letters can make "informed decision[s]" regarding patent infringement allegations. (21) To achieve this objective, Wisconsin's anti-PAE statute creates a cause of action for "targets" (22) against PAEs who fail to meet requirements for "patent notifications." (23) In particular, any patent notification must include certain information to enable the recipient to make an informed decision regarding the claim, (24) without including any "false, misleading, or deceptive information." (25) Should a patent notification lack the requisite information, a target can request such information, after which a patent holder has thirty days to remedy the defective patent notification before facing liability. (26) Importantly, Wisconsin's anti-PAE statute makes no distinction between a patent holder's good or bad faith in sending a patent notification letter--both good and bad faith actors are treated the same. (27)

   At present, there is very little case law in which Wisconsin's anti-PAE statute is asserted, much less adjudicated. (28) Two district court opinions, both authored by Chief Judge Griesbach of the Eastern District of Wisconsin, provide some insight into the operation of the statute. (29) In Great Lakes Mfg. v. Londerville Steel, the patent holder was successful in satisfying the requirements of Wisconsin's anti-PAE statute, thus prompting the dismissal of the claim for "failure to state a claim." (30) In Energy Bank v. Orion Energy Systems, the plaintiff filed a complaint in state court asserting Wisconsin's anti-PAE statute, and the defendant removed to federal court after asserting that Wisconsin's anti-PAE statute was preempted. (31) The court declined to remand the case to state court after finding that removal was proper on the basis of exclusive federal jurisdiction. (32) Because the opinion simply denied the motion to remand, the case offers no substantive discussion of Wis. Stat. Ann. [section] 100.197 or whether preemption would actually result. (33)

   In both Great Lakes and Energy Bank, the defendants argued that Wisconsin's anti-PAE statute was preempted by federal law, (34) but both courts resolved the cases without directly addressing the issue of preemption. (35) As a result, the issue of whether Wisconsin's anti-PAE statute is preempted remains an open question. Moreover, the issue of preemption remains an open question for state anti-PAE statutes in general.

2. The Problem of Preemption: Can States Successfully Draft Anti-PAE Legislation?

   States seeking to take legislative action against PAEs face an obvious threshold barrier: the doctrine of federal preemption. The federal preemption doctrine, which finds its roots in the Supremacy Clause of the United States Constitution, operates to prevent states from legislating in areas where Congress possesses the exclusive right to legislate. (36) It is well understood that patent law is exclusively within the domain of the federal government. (37) As such, any state law aimed at curbing PAEs, or any other patent-related objective for that matter, is subject to implied preemption. (38) Critically, courts have determined that the Patent Act does not impliedly preempt the entire field of patent law, which theoretically leaves states some room to legislate, albeit subject to conflict preemption. (39)

   1. The Supreme Court's Likely Preemption Analysis

      The Supreme Court has had an opportunity to address federal preemption in the context of patent law on a number of occasions but never in the context of anti-PAE statutes. (40) The Court's early jurisprudence, particularly in Allen v. Riley, strongly suggests that states may be permitted to "'enact police regulations for the protection and security of their citizens' so long as the regulations [are] not 'so great..... as to be regarded as oppressive and unreasonable'..... [or] interfere with the right of a patentee to sell or assign his patent......" (41) In Allen, the Court determined that a Kansas statute requiring proof of patent ownership in transactions involving patent rights was a permissible exercise of the state's police power, despite the fact that the law touched on patent rights. (42) The Court noted that "[s]ome fair latitude must be allowed [to] the states in the exercise of their [police] powers on this subject." (43) In particular, states should be allowed to legislate "for the purpose of checking a well-known evil..... [such as] fraud and imposition in regard to the sales of rights under patents" or for the "safeguarding of the interests of those dealing with the assumed owner of a patent......" (44) Under this reasoning, it would seem as though states possess broad discretion to create laws related to patent rights. However, the Supreme Court has not revisited this particular doctrine in some time, but at least one scholar persuasively advocates for Allen's revival. (45)

      More recently, the Supreme Court assessed conflict preemption of state laws touching on federal patent law by asking whether the state law at issue conflicts with the purposes of federal patent law. (46) More specifically, preemption is determined after considering whether the "objectives of patent [law]" and the state law at issue are in conflict. (47) Where the state law "clashes with the objectives of..... federal patent laws," the state law cannot stand. (48)

      In Kewanee Oil Co. v. Bicron Corp., the Supreme Court first articulated the preemption analysis for use in the context of patent law, which was implicitly introduced by the Court in its earlier Sears, Roebuck & Co. decision. (49) As stated by the Kewanee Oil Court, preemption is assessed by examining "the objectives of both the patent and [state] laws" to determine whether "the [state] scheme of protection..... 'clashes with the objectives of the federal patent laws'...... [If the laws clash,] the state law must fall." (50) By this standard, the Kewanee Oil Court sought to determine whether Ohio's trade secret laws were preempted by federal patent laws. (51) The court stated three purposes of patent law: (1) to provide incentive for inventors to invent; (2) to prompt the disclosure of inventions; and (3) to ensure that ideas in the public domain...