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What is the patent demand letter problem?

Last updated 4/17/2015

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A “demand letter” can be generally described as a communication sent by a patent owner to a potential licensee or an alleged infringer prior to any institution of a lawsuit. As AIPLA testified before the Senate Judiciary Committee on December 17, 2013:

It is difficult to use a single definition for the term “demand letter” because such letters are sent with a variety of legitimate purposes. A patent owner may send a genuine inquiry letter to find out whether a product includes his patent with no threat or intention of future litigation. They may send an offer of licensing in order to begin negotiations, which may later result in a threat of litigation for failure to accept or comply with a licensing agreement. A patent owner may also send a letter stating that the patent owner believes there is infringement and threatens to file suit to defend its rights if the infringing action is not stopped or a royalty paid. These are all essential enforcement tools for patent owners, and they allow many patent disputes to be resolved long before court intervention is necessary.

A tactic perceived by many to be particularly harmful is the practice of sending multiple patent demand letters to small businesses or downstream users of patented technology in order to extract settlements and, in many cases, without any intention of ever filing a lawsuit.  These recipients often have few resources and little experience with patent law, and may therefore agree to pay a settlement or licensing fee even where no infringement has actually taken place or the asserted patent may be invalid.

Abusive or bad faith demand letters are being addressed in a number of ways. Congress is considering legislative proposals that would establish that a demand letter cannot serve as evidence of willful infringement unless certain information is included in the letter, or by specifying the Federal Trade Commission (FTC) should investigate the widespread sending of patent demand letters as a deceptive trade practice under the FTC Act.

The FTC already has asserted its consumer protection authority against at least one PAE. On November 6, 2014, MPHJ Technology Investments, LLC settled FTC charges that the company used “deceptive sales claims and phony legal threats in letters that accused thousands of small businesses around the United States of patent infringement.” The Final Order settling the charges was approved by the FTC on March 17, 2015. The final order can be found here​.

Abusive demand letters also are getting attention at the state level.  Recently several attorneys general have pursued state law actions against certain patent owners for abusive litigation behavior. Additionally, at least 18 states have enacted laws in the past few years that seek to curb the practice of abusive demand letters, most under the state’s consumer protection laws, and many other states have introduced similar legislation.  While these state laws are generally directed to curb abusive behavior, they vary widely and have created some uncertainty with respect to obligations and potential liability for those making assertions of infringement or offers to license.

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