interpreting state law narrowly, court denies bad faith patent assertion claim

Digital Ally, Inc. v. Utility Associates, Inc., 2017 WL 1197561, No. 14-2262-CM (D. Kan. Mar. 30, 2017)

The parties compete in the market for in-car video and surveillance systems (which makes the court’s conclusion below that they’re not competitors a bit odd—the court really seemed annoyed with the plaintiff’s arguments, which may have led it to stampede its conclusions).  Digital Ally sued Utility for antitrust violations, bad faith assertion of patent infringement, false advertising, tortious interference, defamation, and trade secret misappropriation; the court granted summary judgment in Utility’s favor.

Utility owns a patent “directed to a system for capturing, transmitting, and storing potential evidentiary video and related information in mobile environments which is transferred to a home base data repository for archival, retrieval, and evidentiary use.” In 2013, Utility mailed letters to potential customers who were at that time customers of competing suppliers stating that it owned the patent, and that:

As your office considers the purchase of mobile video surveillance systems for its public safety operations, you should consider the consequences of purchasing such mobile video surveillance systems from third parties that are not licensed under the Boykin patent. If your office purchases mobile video systems that are covered by the claims of the Boykin patent and that are not licensed under the Boykin patent, [you are] liable for patent infringement as a result of [your] use of such infringing mobile video surveillance systems. Infringement may subject [you] to an injunction against further use of the infringing mobile video surveillance systems and may result in an award of damages not less than a reasonable royalty, treble damages, attorney fees, and prejudgment interest. Moreover, Utility is entitled to collect damages directly from the user of the infringing mobile video surveillance systems leaving [you] left with whatever value any indemnity from the seller of the infringing mobile video surveillance systems might be worth if the seller does not have substantial financial resources.

Therefore, in order to avoid the adverse consequences that may result from the purchase of infringing and unlicensed mobile surveillance systems, your office should consider purchasing its mobile video surveillance system needs from Utility.

In June 2014, Utility issued a press release stating that it was suing Digital for patent infringement, though it didn’t file the lawsuit until 8 days later.  Utility’s CEO also sent a message to Digital’s lender, Hudson Bay, stating that Utility had filed a patent infringement suit against Digital and that he’d like to “walk over and have a chat about what you plan to do with the Digital Ally assets if they default on your loan. … Reasonable chance your workout team will contact me sooner or later, so might as well start a dialogue now.” [Wow.] Hudson Bay didn’t respond.  Digital filed a petition for inter partes review of all claims of the patent, and the PTAB found claims 1–7, 9–10, 12–25 to be unpatentable, declining to review claim 8 and finding claim 11 not unpatentable.

The antitrust claims failed because they’re antitrust claims.

Digital alleged that Utility sent “demand letters to Digital customers threatening them with suit for patent infringement in bad faith and in violation of [GA. CODE ANN. § 10-1-27A (2014) ] despite knowing that the patent was potentially invalid and not knowing whether Digital’s products violated the patent.” That statute prohibits any person from making a bad faith assertion of patent infringement. It defines “demand letter” as “a letter, e-mail, or other written communication asserting or claiming that the target has engaged in patent infringement.” It defines “target” as any person “[w]ho has received a demand letter or against whom an assertion or allegation of patent infringement has been made...has been threatened with litigation or against whom a lawsuit has been filed alleging patent infringement” or “whose customers have received a demand letter asserting that use of such person’s product, service, or technology infringes a patent.” If the letter does not contain the patent number, contact information for the patent holder, and factual allegations describing how the target is infringing the patent, the court may consider those facts as evidence that bad faith assertion occurred. Courts can also consider other factors, such as whether the assertion of patent infringement is meritless, and whether the patent holder knew or should have known it was meritless.

The court found that the Georgia law wasn’t retroactive, and Utility’s letters were sent before it became effective.  Also, the court found that the letters weren’t “demand letters,” because they didn’t assert current liability for patent infringement.  [That … seems like not the reading of the letters that Utility intended when it sent them.]  “They do not claim that any entity is currently liable for patent infringement. They merely suggest that recipients consider investigating whether products they are purchasing fall under the claims of the patent, and that if so, recipients investigate whether their supplier is licensed or needs to be.” Digital didn’t provide testimony from any recipients explaining their interpretation of the letters.

The court also found that subjective and objective bad faith was required to avoid a conflict with federal patent law. Under federal law, “a competitive commercial purpose is not of itself improper, and bad faith is not supported when the information [in the notice] is objectively accurate.” “Sending notices can prevent an entity from later asserting a defense of lack of knowledge in a patent infringement case based, for example, on induced patent infringement.”  Under the Georgia statute, if the letters were demand letters, some factors would support a finding of bad faith, including an absence of “factual allegations concerning the specific areas in which the target’s products, services, and technology infringe the patent or are covered by the claims in the patent.” However, “there was no reason for defendant to do research about whether individual letter recipients were purchasing products covered by the patent, because the purpose of the letter was to inform recipients of defendant’s rights under the patent and to try to win their business.”  Lack of pre-mailing analysis of each recipient’s products to determine whether they were covered by the patent could also indicate bad faith, but “this factor would more appropriately fit with the scenario where a patent holder sent demand letters to a competitor, not a potential customer,” or if the defendant had suggested that recipients should take a license.

False advertising: Digital argued that Utility’s letters and press releases falsely claimed that plaintiff’s products infringed on the patent, falsely portrayed its financial position, and falsely stated that Utility had sued Digital for patent infringement.  Because of the intersection with patent law, the court applied bad faith despite the lack of a general requirement for Lanham Act false advertising.  Again, the court found no bad faith. “Plaintiff cites no authority suggesting that patent holders are required to investigate whether all prospective infringers of their patent in fact infringe, before sending out notices that they own the applicable patent and intend to enforce their rights under it.”

Also, Digital didn’t show that Utility’s claims were false. The letters informed recipients of Utility’s patent ownership, “include[ed] some puffery regarding the commercial success of the patent, and warn[ed] the recipient that they should ‘consider the consequences of purchasing [products] from third parties that are not licensed under the Boykin patent.’” Nothing there was false.  Nor was the press release.  Among Digital’s objections were the statement that Utility was “concerned that collecting a judgment resulting from a potential successful counter-suit might be in question.”   Digital didn’t show that this expression of concern was a false statement about Digital’s financial position.  And stating that Utility had sued, even when that wasn’t yet true, wasn’t shown to be harmful, especially since Utility sued shortly thereafter. 

Tortious interference claims also failed for want of malice.  And defamation claims failed because of lack of falsity.  Trade secret claims failed because of failure to show damages.