N.C. federal court upholds state's anti-'patent troll' law

REUTERS/Andrew Kelly
  • Law doesn't unconstitutionally ban speech
  • Focus on NPEs doesn't violate Equal Protection Clause
  • Statute isn't preempted by federal patent law

(Reuters) - A North Carolina federal court upheld the state's law targeting non-practicing entities that make bad faith patent-infringement claims, rejecting a challenge by NPE Landmark Technology in the first case to weigh in on the law's validity.

Among other things, the North Carolina Abusive Patent Assertions Act (APAA) doesn't violate the First Amendment of the U.S. Constitution or the Constitution's Equal Protection Clause, U.S. District Judge Thomas Schroeder in Durham said Thursday, denying Landmark's attempt to escape a claim brought by NAPCO Inc, which Landmark had targeted with a demand letter alleging infringement.

NAPCO's attorney Richard Matthews of Williams Mullen said in a Friday email that his team was pleased with the ruling and looks forward to enforcing NAPCO's rights under the APAA.

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North Carolina Attorney General Josh Stein said in a Friday statement that he was also pleased with the decision. The state filed an amicus brief in the case defending the law.

"These patent trolls leech resources from our growing tech industry, and this ruling upholding state law will protect innovators in our state and give them back the time and resources to create and grow," Stein said.

Landmark's attorneys Samuel Long of Shumaker Loop & Kendrick and John Lee of Banie & Ishimoto didn't immediately respond to a request for comment.

Sparta, N.C.-based NAPCO owns the website binders.com, which sells binders. Durham, N.C.-based Landmark sent NAPCO a letter last year alleging it infringed a Landmark e-commerce patent and demanding $65,000 for a license. NAPCO sued Landmark in January, arguing Landmark asserts baseless infringement claims against small companies to extract settlements and accusing it of violating the APAA.

The APAA, enacted in 2014, was meant to address alleged "patent trolls" and bars a person from making a "bad faith assertion of patent infringement." More than 30 states have passed similar laws.

Landmark moved to dismiss NAPCO's APAA claim, arguing among other things that the statute is an unconstitutional restriction on free speech and conflicts with federal law.

Schroeder rejected Landmark's motion and affirmed the statute's validity on Thursday.

Schroeder said the statute doesn't violate the First Amendment because it only regulates fraudulent false statements, which are unprotected, and has a rational basis.

"Here, the Act does not regulate all assertions of patent infringement but only 'bad faith' ones," Schroeder said. "Given this, the Act proscribes certain communications containing specific content precisely because of the 'distinctively proscribable content' of that communication."

Landmark had also argued that the law violates the Equal Protection Clause because it applies to "non-operating entities" while exempting others such as universities and nonprofit research groups.

"Since the Act's stated purpose is to protect North Carolina citizens from 'bad faith' assertions of patent infringement, this disparate treatment of different categories of patent owners makes no rational sense," Landmark argued.

But Schroeder said Landmark "misstates the full extent of the Act's purpose," which targets non-practicing entities because "preexisting remedies did not serve as a deterrent to abusive patent assertion entities who have limited liability, as these companies may hold no cash or other assets."

Moreover, the APAA isn't preempted by federal law, Schroeder said, noting that it adopts federal patent law's standard of proof and that although its bad-faith standard differs from federal law's, its factors "are not mandatory requirements for individuals asserting patent infringement and do not present a clear conflict."

Schroeder also rejected Landmark's argument that NAPCO failed to plead the essential elements of an APAA claim.

The case is NAPCO Inc v. Landmark Technology A LLC, U.S. District Court for the Middle District of North Carolina, No. 1:21-cv-00025.

For NAPCO: Kelly Cameron of Waldrep Wall Babcock & Bailey and Richard Matthews of Williams Mullen

For Landmark: Samuel Long of Shumaker Loop & Kendrick and John Lee of Banie & Ishimoto

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Blake Brittain reports on intellectual property law, including patents, trademarks, copyrights and trade secrets. Reach him at blake.brittain@thomsonreuters.com