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Federal Court Case Tests Strength of NC’s Intellectual Property Laws

| Tort Reform & Legal Climate

Editor’s note: Interested in aligning with other North Carolina job creators to shape a top-10 business legal climate here in our state? Contact NC Chamber Legal Institute President Ray Starling to learn what you stand to gain from your engagement and support.

A case unfolding in the U.S. District Court for the Middle District of North Carolina has invited our interest and involvement here at the NC Chamber Legal Institute (CLI). Its proceedings will test the application, scope, and validity of a key aspect of our state’s intellectual property laws: the Abusive Patent Assertion Act (APAA). This important legislation was passed in 2014, with the support of the NC Chamber, to strengthen legal recourse for businesses and individuals targeted by predatory patent trolls while discouraging the kind of rampant patent abuse that can severely tarnish a state’s business legal climate.

The case in question, NAPCO, Inc v. Landmark Technology A, LLC, commenced in January when NAPCO, Inc. – a North Carolina corporation specializing in custom product packaging – filed a complaint against Landmark Technology A, LLC – a limited liability corporation describing its business model as “patent licensing.” The suit was filed only after Landmark sought patent license fees from NAPCO stemming from an alleged charge of patent infringement. Landmark’s infringement allegation centered on a patent which the company claims is foundational in the processing of certain e-commerce transactions, including those conducted on websites associated with NAPCO.

NAPCO contends in their case filings, however, that Landmark and its affiliates have engaged in a pattern of abusive and legally unfounded infringement allegations against hundreds of job creators, from Fortune 500 corporations to small “Mom and Pop” operations, and that these actions violate North Carolina’s version of the APAA. NAPCO’s filings further seek to invalidate multiple Landmark patent claims while pursuing a declaratory ruling that NAPCO’s websites do not, in fact, infringe on the Landmark patent in question. The CLI has joined aligned organizations in an amicus brief supporting NAPCO’s key assertions. This brief contends that Landmark’s dubious tactics amount to unlawful abuse of its patent holdings and exemplify “the dark underbelly of the patent system.” Learn more

Landmark, for its part, has moved to dismiss NAPCO’s claims. The company asserts, among other things, that the Constitution’s Supremacy Clause preempts the APAA and invalidates the act in total due to the APAA’s lack of a severability clause. This, perhaps, is what makes this case most relevant to business: The defendant is asking the federal district court to not just nullify the applicability of the APAA in this case, but to invalidate the entire APAA statutory scheme.

NAPCO v. Landmark will test the overall balance and strength of our state’s patent system, which is vital for determining the legitimacy of claims to the ideas and inventions that power competitive advancements. Strong, clear, consistently applied patent laws are crucial for business vitality; they fuel innovation by giving inventors, designers, and other conceptual trailblazers a reasonable degree of certainty that they will reap the fruits of their successful ideas. Patent abuse, therefore, harms not only those entities it targets directly; worse, it discourages the pioneering spirit that, in recent years, has transformed our state from a regional player into the best place in the nation to grow a business.

Companies that engage in such harmful patent abuse are characterized as non-practicing entities (NPEs) or, more aptly, as “patent trolls.” These shrewd entities operate by obtaining patent rights with little to no interest in using them for their intended purpose. Instead, they exploit them as snares to lure unsuspecting targets into a legal and financial pitfall. The troll “business” model centers on presenting their patents as significantly broader in scope than originally conceived, then contriving dubious infringement allegations to generate a payday. Potential targets of this abuse include any business or individual the troll can allege, however weakly, to be using their “patented” process or invention. In most cases, the troll’s tenuous infringement claim is first presented as a demand for license fees, as occurred in the events precipitating NAPCO v. Landmark. If the alleged infringer resists this unscrupulous gambit, the troll can always seek their payment in the courts.

NPEs are essentially a joint ransom venture masquerading as a business, so they need not worry whether litigation might disrupt their operations or damage their reputation. However, they understand that legitimate businesses can and do suffer disruption and damage from litigation, often regardless of the facts in a case. Thus, patent trolls engineer their schemes around a carefully calculated asking price that’s high enough to secure a sizeable payday but modest enough that the target accepts it as the desirable alternative to court. A troll striking on a winning formula with a specific patent achieves a sustainable and well-paying – if ethically bankrupt – stream of new “business” income. They then go about perfecting their tactics for exploiting this income source, endangering more targets. Sufficiently clever trolls can amass funds that allow them to easily cover the occasional court costs when the rare target decides to resist.

Like ransomware, this easy-money scheme has attracted its fair share of practitioners here in North Carolina, which is why the General Assembly saw fit to pass the APAA back in 2014. The act provides that, upon the showing of a “reasonable likelihood” that a “bad-faith assertion of patent infringement” has been made, the claimant may be required to post a bond in an amount equal to the cost of defending the litigation. This provision, by itself, puts the patent troll’s skin in the game, immediately making their scheme decidedly less attractive. The APAA reinforces this provision by authorizing specific awards for entities found to be the targets of abuse; these awards include costs and fees, injunctive relief, and the greater of either treble damages or $50,000. To further disincentivize trolling, the act empowers the State Attorney General to open an independent investigation into alleged patent abuse.

It must be stated that there is nothing unethical about protecting a legitimate claim to intellectual property. On the contrary, enabling such efforts is as important as stopping patent trolls. Companies like Coca-Cola are famous for their extraordinary measures to safeguard proprietary formulas. On the other side of that coin are aspirin, escalator, and cellophane – everyday items that were once protected, but that became genericized because the holders of intellectual property rights neglected or chose not to defend them. The CLI believes patent laws must be strong enough to distinguish legitimate protection attempts from troll tactics – and to champion the former while penalizing the latter.

The stakes in NAPCO v. Landmark are significant, and not just for the businesses involved. The outcome will, in no small way, shape future applications of intellectual property laws in our state. The CLI will keep a close watch on this case and update you with any major developments. We stand ready to intervene further if we have reason to believe our intervention will help shape a positive outcome for business.


Ray Starling
NC Chamber Legal Institute