Vermont Declares War On Patent Trolls; Passes New Law And Sues Notorious Patent Troll

from the wow dept

I've always liked the state of Vermont -- but mainly because it was a nice place to visit. But, now the state appears to be declaring war on patent trolls. A new anti-patent trolling law has been quietly enacted, H.299, which targets patent trolls. Or, as it says "bad faith assertions of patent infringement." It does this by amending the state's consumer protection laws, to give tools to judges to recognize when patent litigation is done in bad faith (i.e., for trolling, rather than legitimate reasons). Eric Goldman summarizes the law this way:

Vermont’s law (H.299, to be codified at 9 V.S.A. § 4195-4199) is entitled “Bad Faith Assertions of Patent Infringements.” However, it doesn’t define “bad faith patent assertion.” Instead, it enumerates factors to help judges distinguish legitimate from illegitimate patent assertions. Factors that suggest a bad faith patent assertion include not identifying the patent(s)-at-issue, the patent owner, and exactly how the recipient’s behavior violates the patent; demanding too quick a response or too much money; and making deceptive or meritless assertions. Factors that suggest a legitimate patent assertion include commercializing the patented invention; being either the original inventor (i.e., not having bought the patent for assertion purposes) or an educational institution; and having successfully enforced the patent in court.

The law would allow those threatened by trolls to sue back and seek damages, even if no lawsuit has been filed. In other words, it helps those who are being shaken down and don't want to settle. That's a nice feature, but there are some reasons to be skeptical. It also allows the state Attorney General to go after patent trolls. While the law may scare of some patent trolls, I think Eric Goldman is right that a state-based solution is neither a good idea for this, nor is it probably legal. Patent law is a federal law, and federal preemption likely means that state laws that impact patents aren't allowed. This tries to hide it as a consumer protection law, which is an interesting strategy, but I could easily see this law being tossed out.

Of course, even before the law was officially on the books, it looks like Vermont's Attorney General has already sued a patent troll under existing consumer protection laws (raising questions as to why the new law is necessary). In this case, the troll is one we've written about a few times. Remember the series of rotating shell companies that had claimed that businesses who had a networked scanner need to pay $1,000 per employee? Yeah, that one.

The Vermont Attorney General claims that many of the statements made in the threat letters sent out by the rotating set of shell companies include "deceptive statements" and "deceptive practices" that violate consumer protection laws:

Defendant engaged in unfair trade practices in commerce in violation of the Vermont Consumer Protection Act, 9 V.S.A. § 2453(a) including:

a. Stating that litigation would be brought against the recipients, when Defendant was neither prepared nor likely to bring litigation;
b. Using legal counsel to imply that Defendant had performed a sufficient pre-suit investigation, including investigation into the target business and their potentially infringing activities, that would be required to justify filing a lawsuit;
c. Targeting small businesses that were unlikely to have the resources to fight patent-litigation, or even to pay patent counsel;
d. Sending letters that threatened patent-infringement litigation with no independent evidence that the recipients were infringing its patents;
e. Shifting the entire burden of the pre-suit investigation onto the small businesses that received the letters;
f. Propounding burdensome information demands on any business that claimed not to infringe the patents; and
g. Using shell corporations in order to hide the true owners of the patents, avoid liability, and encourage quick settlements.

Defendants engaged in deceptive trade practices in commerce in violation of the Vermont Consumer Protection Act, 9 V.S.A. §2453(a), by making deceptive statements in the threatening letters which would likely lead consumers to believe the following:

a. Defendant would sue the target business if they did not respond within two weeks;
b. Defendant would sue the target business if they did not pay money;
c. Defendant had a reasonable basis for identifying the target businesses as infringing its patents;
d. Subsidiary Shell LLCs were exclusive licencees able to enforce the patents;
e. Target companies were within the sending Shell LLC's alleged area of exclusivity;
f. Defendant's licensing program had received a positive response from the business community;
g. Many or most businesses were interested in promptly purchasing a license from Defendant;
h. Based on prior licensing agreements, the fair price of a license was between $900 and $1200 per employee;
i. Target businesses were receiving a third letter, which refers to two prior letters, when in many cases recipients had received no prior letters.

The lawsuit also claims that lawyer Jay Mac Rust is really the person who owns the patents via the company MPHJ. As you may recall, last month we wrote about Mac Rust after Joe Mullin at Ars Technica interviewed him in connection with the case. At the time, Mac Rust claimed that he was just one lawyer working for the owner of the patent, but who handled the "irate" recipients. So it's interesting to see the claim that he's really the guy behind MPHJ. As we've noted, there's long been an assumption that the use of shell companies is often done to hide the fact that it's the patent lawyers themselves who own the patents being used.

The use of consumer protection law in response to patents is an interesting strategy. I'm skeptical as to how well it will actually work in court, but there's no denying that many of the claims made in threat letters are, in fact, untrue and could be deemed deceptive (this kind of thing might work against copyright trolls as well). No matter what, this is going to be a key case to follow.

Filed Under: attorney general, consumer protection, jay mac rust, networked scanners, patent trolls, patents, scanning, vermont
Companies: mphj, paperless post

Patent Troll Shell Companies Shake Down Small Businesses For $1k Per Employee For Using Network Scanner

from the shakedown dept

In the latest example of just how broken our patent system is, Joe Mullin has an excellent and detailed article unveiling one of the latest patent trolling scams: using some vague and highly questionable patents, combined with a series of shell companies, to send out tons of letters to small businesses, demanding approximately $1,000 per employee from any company that has a scanner connected to a network which has a "scan to email" function (as most new scanners do). The story is bizarre and complex, but that's part of the "game" that the trolls are playing to try to hide their trail.

Go read the long version, but the more compact version is that it appears that patent trolls are learning from some of the "innovations" of today's copyright trolling programs in which the focus is to broadly hit a ton of small possible "licensees" in the hopes that a reasonable percentage pays up. Traditionally, patent trolling mostly focused on larger companies with big bank accounts, thinking that most would rather just pay up than deal with the lawsuit. But this new generation is even more nefarious. The example in the article is a series of ridiculous patents originally granted to "Laurence Klein," which lawyers are now claiming cover using a scanner that's connected to the internet to email a scan. Here are the patents in question:

• US Patent 6,185,590: Process and architecture for use on stand-alone machine and in distributed computer architecture for client server and/or intranet and/or internet operation environments
• US Patent 6,771,381: Distributed computer architecture and process for virtual copying
• US Patent 7,477,410: Distributed computer architecture and process for virtual copying
• US Patent 7,986,426: Distributed computer architecture and process for document management

The article talks about how a company called Project Paperless LLC started sending around threat letters about those patents, telling companies that they had to pay $1,000 per employee if they had a scanner that was networked and had such a feature -- which scanners from HP, Brother, Xerox and Canon all do. But, rather than go after those companies, the patent troll in this case claims that any company using one of their scanners is liable and has to pay these outrageous sums. One of the companies who received the notice, BlueWave Computing, led by Steven Vicinanza, decided this was ridiculous and fought back, following the Drew Curtis / Fark "How to fight patent trolls" plan to a tee: he pointed out he didn't infringe, made it very, very clear he would fight this to the end and that he was going to make it as painful as possible for the troll. While Paperless Post sued BlueWave, it quickly backed down and dropped the lawsuit two weeks later, leading BlueWave to issue a press release (continuing with the Fark plan of publicizing the result).

While all this was happening, there was also an ongoing effort by some unnamed people to expose Project Paperless' effort and to show that the patents aren't valid.

Among the things they discovered was that it appeared that some of the partners in the law firm that "represented" Project Paperless, likely had an ownership interest in the patents. Hill, Kertscher, and Wharton, LLP is the firm, and research suggested that partners Steven Hill and Scott Wharton had holding companies, Bonita Sunrise and Wexford Holdings, that at least partially owned the patents. Given that exposure, plus the success of BlueWave in fighting loudly, what happened next was only too predictable: Project Paperless wrapped up its various lawsuits and... "sold" the patents to MPHJ Holdings, whose ownership is completely unclear. Soon after that, a whole series of companies popped up sending letters to companies demanding similar per-employee-payments for network-connected scanners. Among the companies Mullin uncovered doing this: AccNum, AllLed, AdzPro, CalNeb, ChaPac, FanPar, FasLan, FulNer, GosNel, and HunLos. Note a similarity in the style of all of those names?

Mullin includes a (redacted) threat letter from AllLed as an example. He also has the transcript of his phone call with the number listed on the letters (it's the same number on all the letters):

As for the phone number on the letters, 855-744-2360—I called it. The conversation was not enlightening.

"Thank you for calling the legal department," said a youngish-sounding man. "This is Kevin, how can I help you?"

I was calling about a letter I was holding from AllLed, I explained. Kevin asked for my letter's "file number," which was the one thing I couldn't give him—it would have revealed the source from whom I had received the letter. I told Kevin I was a writer who had been given the letter by someone else. All I wanted to do was contact AllLed, LLC directly—so how could I do that?

"We don't have any information on the entities that send the letter," he said. It was just an answering service. "We don't have their contact information."

"Well, who are you the 'legal department' for?" I asked.

"Hmmm," said Kevin. "Legal department."

"I don't get it—is 'Legal Department' a real company?" I persisted.

"Hmmm," said Kevin again. "We're just Legal Department."

"Well, you work for someone, right? What company do you work for?"

"This is Legal Department. That's all we can say."

As Mullin notes, this isn't a one-off case, either. There have been a growing number of similar attempts by patent trolls to go after large numbers of people or companies further down the supply chain, clearly following the traditional trolling strategy of just seeking lots of "settlements" from people who can't afford a lawsuit and don't understand the specifics.

No matter how you look at this, though, it's yet another example of how the patent system is completely broken. It hearkens back to the 19th century when scam artists roamed the countryside hitting up farmers for "licenses" for "patents" on common farm equipment. At that time, they were called patent sharks, and Congress actually changed the rules on what could be patented to fix the problem. Of course, today Congress isn't known for actually fixing problems.

Filed Under: networked scanning, patents, scanners, shell companies
Companies: accnum, adzpro, allled, bluewave, bonita sunrise, calneb, chapac, fanpar, faslan, fulner, gosnel, hill kertscher wharton, hunlos, paperless post, wexford holdings