Recall back in June of last year (many of us had not yet received our full complement of COVID vaccinations) I wrote about the then recently filed so-called “patent troll” case entitled NAPCO v. Landmark Technology A, LLC (Case No. 1:21-cv-00025, M.D.N.C.). Recent developments in that case merit another look.
As a brief recap, Landmark held three related patents, the oldest of which dates back to 1984 and the most recent in 2006, which it has primarily, and perhaps exclusively, used to assert patent infringement claims. Landmark’s patent claims make virtually any company engaging in e-commerce subject to an allegation of patent infringement.
Between the three patents, Landmark has filed a total of 128 infringement claims, mostly against small and medium-sized companies. All have ended in settlement. According to the Washington Attorney General, Landmark has issued demand letters alleging patent infringement to 1,176 companies, typically seeking a $65,000 fee to “license” the patent. Most settle for $15,000 to $20,000. Since defense of a patent infringement case can run well north of $500,000, a lot of companies view a $20,000 demand to be the more prudent response.
Landmark is what is known as a non-practicing entity or NPE, in that it owns but does not use the patent in any product it manufactures or process it utilizes. NPEs are also pejoratively referred to as patent trolls. A patent troll generally has no assets of consequence other than the patents that it alleges are being infringed. It manufactures nothing, provides no services to clients, and provides few or no jobs. Its business is, evidently, filing patent claims, and then offering to settle the claim for a fraction of the cost of defense. It is an offer the targeted companies have a difficult time rejecting, irrespective of the merits of the alleged infringement. The amount of money NPEs have collected from their targets represent resources that might otherwise be invested in additional innovation, rather than as a “tax” payable to the NPE.
The problem of patent trolls had gotten so severe that in 2014 the N.C. General Assembly passed legislation to discourage the practice. The law is known as the Abusive Patent Assertions Act (“APAA”) codified at G.S. 75-140, et seq. Among other things, the APAA provides that the targeted company can collect trebled damages, costs of litigation and attorneys’ fees. It also has a provision whereby a targeted company can ask the court to require of the defendant NPE a bond for “an amount equal to a good-faith estimate of the target’s expected fees and costs and amounts reasonably likely to be recovered” under the provisions of the Act, to a limit of $500,000. The $500,000 cap may not be overly generous as the cost of defending patent infringement litigation commonly exceeds that amount by a large margin.
The bond provision is unusual for a number of reasons. Bonds are typically required of plaintiffs, not defendants, and the calculation of the bond amount explicitly invites attorneys’ fees, which is unusual in North Carolina law. But the genius of the bond provision is the fact that when it is invoked, the NPE has to put “skin in the game.” The economics of patent trolling depends on the NPE not having to have skin in the game. (If you’re waiting for an Eastern NC farm boy’s joke about pork skins, you will have to keep waiting. It is difficult to joke about such serious matters.)
The recent development worthy of your attention is a motion by NAPCO requesting that a bond be posted. Before deciding whether to grant the motion, the U.S. District Court judge ordered the parties to brief several issues for his consideration, including whether the bond amount can exceed defendant’s valuation or assets, whether the bond provision is constitutional, and whether the calculation for the bond amount pertains to the costs of the APAA litigation or to the costs of the threatened infringement litigation.
An additional question involves an ongoing action against Landmark brought by the Attorney General of Washington. In that case, the State of Washington seeks civil penalties under that state’s patent troll legislation, restitution to all targeted companies of all amounts received in settlements, attorney fees and costs, and an injunction preventing Landmark from continuing to assert its patent.
Resolution of these issues, of course, will greatly influence or potentially end the case. It could also bankrupt Landmark. In any event, a requirement that Landmark acquire a bond could make their business model a lot less appealing. NPEs typically are thinly capitalized and have few tangible assets. Just the cost for a bond might strain the resources available to an NPE. Of course, this cost assessed against a defendant who has not been determined to be liable will also be a factor in an analysis of the constitutionality of the APAA’s bond provision. Since the APAA contains no severability clause, if the bond provision is found to be unconstitutional, the entire Act may be stricken.
Last June, the Chamber Legal Institute joined NC Chamber Members SAS Institute and Red Hat, along with the North Carolina Retail Merchants Association and the North Carolina Technology Association, in an amicus curiae brief opposing Landmark’s motion to dismiss claims brought by NAPCO. It has again joined in a follow-up amicus curiae brief on issues posed by the judge in his briefing order on NAPCO’s motion for a bond.
The practice of patent trolling has become more common over time, as it has proven quite lucrative. If a NPE settles 1,000 demand letters at an average of $15,000 per demand, well, you do the math. Good work if you can get it, but bad for innovation and the economy. Experience tells me these NPEs are very likely to purport less about “protecting intellectual property” once the settlement gravy train stalls out. Let’s hope that happens soon.