Under existing law, the Public Utilities Commission has regulatory authority over public utilities, including gas corporations.

The Corporation Tax Law allows various deductions in computing the income that is subject to the taxes imposed by those laws, and in modified conformity with federal law, allows a deduction for ordinary and necessary expenses carrying on a trade or business. Existing law provides that no deduction is allowed for any fine or similar penalty paid to a government for the violation of any law.

This For the taxable year beginning on January 1, 2015, this bill would not allow a deduction under the Corporation Tax Law for expenses or expenditures by Pacific Gas and Electric Company a gas corporation that the Public Utilities Commission identified in a specific decision relative to the operation of its natural gas transmission system pipelines. decision to penalize the gas corporation for a natural gas safety violation. For any taxable year for which those expenses or expenditures are paid or incurred, the bill would require Pacific Gas and Electric Company a gas corporation to provide with the return a certification, under penalty of perjury, that none of those expenses or expenditures were taken into account, directly or indirectly, in determining the amount of income of the company, gas corporation, or any other related taxpayer, that is subject to tax under the Corporation Tax Law, for that taxable year. By expanding the scope of the crime of perjury, this bill would impose a state-mandated local program.

The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

This bill would provide that no reimbursement is required by this act for a specified reason.

This bill would declare that it is to take effect immediately as an urgency statute.

Under existing law, the Public Utilities Commission has regulatory authority over public utilities, including gas corporations.

The Corporation Tax Law allows various deductions in computing the income that is subject to the taxes imposed by those laws, and in modified conformity with federal law, allows a deduction for ordinary and necessary expenses carrying on a trade or business. Existing law provides that no deduction is allowed for any fine or similar penalty paid to a government for the violation of any law.

This bill would not allow a deduction under the Corporation Tax Law for expenses or expenditures for plant and equipment by Pacific Gas and Electric Company that the Public Utilities Commission determined in a specific decision should be borne by the shareholders of the utility, and not the utilitys ratepayers, because of the utilitys numerous violations of law relating to the public safety. The bill would additionally not allow a deduction for amounts that the Public Utilities Commission ordered Pacific Gas and Electric Company to pay to reimburse the commission for its costs incurred in investigating and enforcing violations of law by the utility relating to public safety. identified in a specific decision relative to the operation of its natural gas transmission system pipelines. For any taxable year for which those expenses or expenditures are paid or incurred, the bill would require Pacific Gas and Electric Company to provide with the return a certification, under penalty of perjury, that none of those expenses or expenditures were taken into account, directly or indirectly, in determining the amount of income of the company, or any other related taxpayer, that is subject to tax under the Corporation Tax Law, for that taxable year. By expanding the scope of the crime of perjury, this bill would impose a state-mandated local program.

This bill would declare that it is to take effect immediately as an urgency statute.

Existing federal law provides for the issuance and enforcement of patents, makes a person who actively induces infringement of a patent liable as an infringer, and establishes rights and remedies for infringement of patents.

This bill would make it unlawful to engage in a pattern or practice of sending written communications, stating that the recipient, as defined, is or may be infringing, or has or may have infringed, on a United States patent if the sender of the communication makes a specified false statement or representation in bad faith, fraudulently seeks compensation for specified conduct, or fraudulently conceals or omits specified information in the communication.

The bill would provide that a person who sends a communication in violation of these provisions may be enjoined and is liable for a civil penalty of up to $2,500 for each violation. The bill would also specify that its provisions are only enforceable by the Attorney General or by General, an attorney acting on behalf of the state. state, or a district attorney, county counsel, city attorney, or city prosecutor in this state. The bill would specify that it does its provisions do not impair or impede any other rights, causes of action, claims, or defenses available under other law and that the remedies provided for under its provisions are cumulative with any other remedies available under other law.

Existing federal law provides for the issuance and enforcement of patents, makes a person who actively induces infringement of a patent liable as an infringer, and establishes rights and remedies for infringement of patents.

This bill would make it unlawful to send a engage in a pattern or practice of sending written communication communications, stating that the recipient, as defined, is or may be infringing, or has or may have infringed, on a United States patent if the sender of the communication, in bad faith, communication makes a specified statement, false statement or representation in bad faith, fraudulently seeks compensation for specified conduct, or fails to include fraudulently conceals or omits specified information in the communication. The bill would establish an affirmative defense if the sender of the communication demonstrates that the statement, representation, or omission was a mistake made in good faith. The

The bill would provide that a person who sends a communication in violation of these provisions may be enjoined and is liable for a civil penalty of up to $2,500 for each violation. The bill would also specify that its provisions are only enforceable by the Attorney General or by an attorney acting on behalf of the state. The bill would specify that it does not impair or impede any other rights, causes of action, claims, or defenses available under other law and that the remedies provided for under its provisions are cumulative with any other remedies available under other law.

Existing federal law provides for the issuance and enforcement of patents, makes a person who actively induces infringement of a patent liable as an infringer, and establishes rights and remedies for infringement of patents.

This bill would make it unlawful to send a written communication stating that the recipient, as defined, is or may be infringing, or has or may have infringed, on a United States patent if the sender of the communication, in bad faith, makes a specified statement, seeks compensation for specified conduct, or fails to include specified information in the communication. The bill would establish an affirmative defense if the sender of the communication demonstrates that the statement, representation, or omission was a mistake made in good faith. The bill would provide that a person who sends a communication in violation of these provisions may be enjoined and is liable for a civil penalty of up to $2,500 for each violation. The bill would also specify that its provisions are only enforceable by the Attorney General or by an attorney acting on behalf of the state.

SENATE COMMITTEE ON

Senator Ricardo Lara, Chair

2015 - 2016 Regular Session

SB 681 (Hill) - Vehicles: right turn violations

This bill meets the criteria for referral to the Suspense File.

Bill Summary:

SB 681 would reduce the base fine from $100 to $35 for turning right on a red light, or turning left from a one-way street onto another one-way street, without coming to a complete stop.

Fiscal Impact:

Unknown, significant loss of state and local penalty assessment revenues. As noted in the Background section below, many of the penalty assessments, fines, and fees added onto the base fine for convictions of traffic infractions are dependent upon the amount of the base fine. Reducing the base fine for failure to stop before turning right on a red light, or turning left from a one-way street onto another one-way street, would result in the following reductions in fine and fee revenues for each conviction:

• State Penalty Assessment: reduction of $60 per conviction. (State Penalty Fund, distributed to nine other Special Funds, and county General Fund)
• County Penalty Assessment: reduction of $42 per conviction. (various Special Funds)
• Court Construction Penalty Assessment: reduction of $30 per conviction. (various Special Funds supporting court facilities)
• Proposition 69 DNA Penalty Assessment: reduction of $6 per conviction. (primarily state or local DNA Identification Fund)
• DNA Identification Fund Penalty Assessment: reduction of $24 per conviction. (primarily state DNA Identification Fund)
• Emergency Medical Services Penalty Assessment: reduction of $12 per conviction. (primarily Maddy EMS Fund)
• State Surcharge: reduction of $13 per conviction (state General Fund)

The Department of Motor Vehicles (DMV) has conviction data indicating that over 300,000 annual red light violations were reported to them for assessment of a violation point in recent years (356,000 in 2015 and 305,000 in 2014). Staff notes, however, that there is no reliable statewide data on the number of red light violations that are a result of a driver turning right on a red light. For every 10,000 violations subject to a reduced base fine, there would be a total reduction of $1.74 million in state and local penalty assessment revenues. (General Fund, various Special Funds, and local funds)

Background:

Existing law requires a driver to stop at an intersection when faced with a steady red light or red arrow, and to remain stopped until an indication to proceed is shown. Except where a sign is in place prohibiting a turn, a driver facing a red light who has come to a complete stop may turn right or turn left from a one-way street onto another one-way street. A driver making such a turn must yield right-of-way to pedestrians in an adjacent crosswalk and to vehicles approaching until the driver can proceed with reasonable safety. Failure to stop at a red light is an infraction punishable by a base fine of $100. Failure to yield right-of-way to pedestrians or approaching vehicles when making a turn after coming to a complete stop is an infraction punishable by a base fine of $35.

In addition to base fines for traffic violations, existing law imposes numerous additional penalty assessments, fees, and surcharges for convictions of these infractions, which significantly increases the total bail owed as a result of violations. For example, the total bail on a violation with a base fine of $35 is $238, and the total bail on a violation with a base fine of $100 is $490 (not including fees associated with traffic violator schools). Existing law specifies a complex process for the distribution of fine and fee revenues to numerous state and local funds. Some of these add-on fines and fees were enacted to fund specific activities, such as emergency medical services or DNA-related activities, while others support general court operations, court facilities construction, or state and local general funds.

The following assessments and fees are a flat charge per conviction: a $4 Emergency Medical Air Transportation Penalty Assessment; a $40 Court Operations Assessment; A $30 Conviction Assessment Fee; and a $1 Night Court Fee. The following charges, however, are dependent upon the base fine:
- State Penalty Assessment: $10 for every $10 of a base fine*
- County Penalty Assessment: $7 for every $10 of a base fine*
- Court Construction Penalty Assessment: $5 for every $10 of a base fine*
- Proposition 69 DNA Penalty Assessment: $1 for every $10 of a base fine*
- DNA Identification Fund Penalty Assessment: $4 for every $10 of a base fine*
- Emergency Medical Services Penalty Assessment: $2 for every $10 of a base fine*
- State Surcharge: 20% of a base fine
(* the base fines are rounded up to the next $10 increment for purposes of calculating the assessment)

Proposed Law:

SB 681 would specify that failure to come to a complete stop at an intersection when facing a steady red light prior to turning right, or turning left from a one-way street onto another one-way street, is an infraction punishable by a base fine of $35.

Related Legislation:

AB 1191 (Shelley), Chap 852/1997, increased the base fine for red light signal violations to $100.

AB 909 (Hill), which was vetoed by Governor Schwarzenegger in 2010, would have reduced the base fine from $100 to $35 for turning right on a red light, or turning left from a one-way street onto another one-way street, without coming to a complete stop. The veto message included the following:

A driver running a red-light, whether they are traveling straight, or turning right, makes a very dangerous traffic movement that endangers the nearby motoring public, bicyclists, and pedestrians. Modifying existing law to make red-light violations from a right turn less egregious sends the wrong message to the public that California is tolerant of these types of offenses. It is our responsibility to protect the motoring public and not increase the risk of traffic collisions.

Staff Comments:

This bill would decrease the base fine for what many consider to be a less dangerous form of red light violation than running straight through an intersection or turning left on red. The author contends that previous legislation that increased the base fine for a red light violation to $100 was intended to target straight through and left turn on red violations since they are the most dangerous violations at intersections, but that the measure inadvertently made right turn violations subject to the same increased base fine. By reducing the base fine for rolling right turns, this bill is intended to ensure the penalty matches the severity of the offense.

The DMV reports the following conviction data on the number of red light violations that were reported to them for assessment of a violation point: 356,376 total convictions in 2014, and 304,970 total convictions in 2015. Staff notes that there is no reliable statewide data on the number of red light violations that are a result of a driver turning right on a red light. The author has provided data from cities where red light enforcement cameras have been installed that indicates an average of 40% of tickets issued for red light violations are a result of drivers failing to stop before turning right on red (nearly 97,000 out of a total of approximately 243,000 citations issued through red light cameras in 2014). It is unclear that this percentage would be applicable statewide due to variations in enforcement across jurisdictions, but it appears safe to assume that the reduced base fines in this bill would apply to citations numbering in the tens of thousands in a given year.

Bill history: Staff notes that this bill was originally introduced as a measure to address problems related to “patent trolls,” which was approved by this Committee last May. The measure was subsequently amended on the Senate Floor to instead address a corporation tax issue by denying a business expense deduction for a fine imposed on the Pacific Gas and Electric Company by the California Public Utilities Commission. That version of the bill was eventually reported out of this Committee pursuant to Senate Rule 28.8. SB 681 was subsequently amended on January 5, 2016 to remove those provisions and insert the current language proposing to reduce the base fine for “rolling” turns on a red light.

-- END --

SENATE COMMITTEE ON TRANSPORTATION AND HOUSING

Senator Jim Beall, Chair

2015 - 2016 Regular

Bill No: Hearing Date: 1/12/16

SUBJECT: Vehicles: right turn violations

DIGEST: This bill reduces the base fine for “rolling right turn” violations.

ANALYSIS:

Existing law requires a driver to stop at a red light and prohibits the driver from proceeding until given an indication to do so. Failing to stop at a red light is a violation carrying a base fine of $100, as well as a violation point.

Unless there is a sign prohibiting it, a driver may turn right at a red light after coming to a complete stop. A driver may also turn left from a one-way street onto another one-way street, after coming to a complete stop, during a red light. Stopping but then proceeding to make an unsafe turn — for example, by failing to yield to a pedestrian in the crosswalk — carries a $35 base fine and a violation point.

The state Judicial Council annually adopts a uniform traffic penalty schedule for all non-parking infractions outlined in the Vehicle Code. Existing law establishes the base fine for red-light violations at $100; due to additional surcharges, penalties, and assessments, a $100 base fine is equivalent to a total of $541.

This bill provides that turning right on a red light, or turning left from a one-way street onto another one-way street, without first coming to a complete stop, is a violation carrying a base fine of $35.

COMMENTS:

1. Purpose. According to the author, the 1997 legislation increasing the base fine for red light violations from $35 to $100 (see “Related Legislation” below) was targeted at straight-through and left-turn violations, which are the most dangerous violations at intersections. This issue has gained increased attention over the years with the proliferation of red-light cameras. In addition, red-light ticket fines have increased dramatically; in 1997, the total price of a red-light violation was around $100, while now it exceeds $500. The author states that this amount is excessive for a “rolling right turn” on red, a maneuver that is not overtly dangerous. This bill would reduce the base fine to $35, for a total of $289.
2. The author cites Judicial Council data indicating that in many municipalities, the majority of red-light violation tickets are issued for right-turn violations. Additionally, a 2008 Los Angeles Times study revealed that 80% of red-light camera tickets are issued not to drivers running straight through intersections, but to drivers making rolling right turns. People making right turns are generally going at a low speed, and resulting accidents tend to be much less serious in nature. By reducing the base fine for rolling right turns, this bill helps ensure the penalty matches the offense.
3. Violation points. DMV assigns violation points against an individual’s driver’s license for certain traffic offenses to identify a driver as a negligent operator. Violation points vary with the gravity of the offense; for example, a “fix-it” ticket does not count for any violation points, a speeding ticket counts for one violation point, and driving while under the influence of alcohol or drugs counts for two violation points. DMV may suspend an individual’s driver’s license for six months if he or she receives four points in one year, six points in two years, or eight points in three years. An individual may request a DMV hearing to avoid a license suspension. Existing law assigns one violation point to red-light offenses; this bill would not change that provision.
4. What about pedestrian safety? Existing law requires a driver to yield to a pedestrian in a crosswalk or intersection. Existing law also requires a driver to come to a complete stop before making a turn on a red light. While this bill reduces the fine for a rolling right turn, it does not make a rolling right turn legal, nor does it affect the pedestrian right-of-way statute.
5. One more try. The author carried a nearly identical bill to this bill in 2010 (see “Related Legislation” below), which was vetoed by Governor Schwarzenegger. The veto message stated that “Modifying existing law to make red-light violations from a right turn less egregious sends the wrong message to the public that California is tolerant of these types of offenses. It is our responsibility to protect the motoring public and not increase the risk of traffic collisions.” The author states that rolling right turns are far less serious than straight-through violations and therefore should carry lesser penalties.
6. Gut-and-amend. This bill originally pertained to tax deductions for gas corporations. It was amended on January 5 to relate to red-light violations.
7. Double referral. This bill has also been referred to the Appropriations Committee, should this committee pass it today.

Related Legislation:

AB 1191 (Shelley, Chapter 852, Statutes of 1997) — increased the base fine for red-light signal violations from $35 to $100.

AB 909 (Hill) —vetoed by Governor Schwarzenegger in 2010; would have reduced the base fine for “rolling right turn” violations back to $35.

FISCAL EFFECT: Appropriation: No Fiscal Com.: No Local: Yes

POSITIONS: (Communicated to the committee before noon on Wednesday,

January 6, 2016.)

SUPPORT:

AAA Northern California, Nevada, and Utah

Automobile Club of Southern California

National Motorists Association

Safer Streets L.A.

1 individual

OPPOSITION:

None received

-- END --

 THIRD READING  

Bill No: SB 681

Author: Hill (D), et al.

Amended: 8/31/15

Vote: 27 - Urgency

PRIOR VOTES NOT RELEVANT

SENATE GOVERNANCE & FIN. COMMITTEE: 4-2, 7/15/15

AYES: Hertzberg, Beall, Lara, Pavley

NOES: Nguyen, Moorlach

NO VOTE RECORDED: Hernandez

SENATE APPROPRIATIONS COMMITTEE: Senate Rule 28.8

SENATE FLOOR: 25-14, 9/3/15 (FAIL)

AYES: Allen, Beall, Block, De León, Glazer, Hall, Hancock, Hernandez, Hertzberg, Hill, Hueso, Jackson, Lara, Leno, Leyva, Liu, McGuire, Mendoza, Mitchell, Monning, Pan, Pavley, Roth, Wieckowski, Wolk

NOES: Anderson, Bates, Berryhill, Cannella, Fuller, Gaines, Huff, Moorlach, Morrell, Nguyen, Nielsen, Runner, Stone, Vidak

NO VOTE RECORDED: Galgiani

SUBJECT: Corporation taxes: deduction: gas corporations

SOURCE: Author

DIGEST: This bill prohibits a gas corporation from claiming a deduction against its income for tax purposes for expenses or expenditures identified by the California Public Utilities Commission (CPUC) in a decision to penalize the corporation for a natural gas safety violation.

Senate Floor Amendments of 8/31/15 delete references to the Pacific Gas and Electric Company (PG&E), and replace with general references to “a gas corporation, as defined in Section 222 of the Public Utilities Code,” or “gas corporation”.

ANALYSIS:

Existing law:

1. Allows taxpayers engaged in a trade or business to deduct from taxable income for state and federal purposes all expenses that are considered ordinary and necessary in conducting that trade or business.

2. Allows taxpayers to deduct most fines or penalties paid to government for compensatory, non-punitive actions such as amounts paid subject to civil litigation.

3. Prohibits taxpayers from deducting fines and penalties paid to government for violating the law.

4. Allows deductions for fines and penalties paid to non-government entities, such as a fine on a professional athlete violating codes of conduct.

5. Prohibits professional sports franchise owners from deducting fines and penalties imposed by the professional sports league that includes that franchise (AB 877, Bocanegra, Chapter 792, Statutes of 2014).

This bill:

1. Prohibits a gas corporation, as defined by the Public Utilities Code, from deducting expenses or expenditures identified by the California Public Utilities Commission in a decision to penalize the corporation for a natural gas safety violation, including:

   1. Future gas infrastructure improvements related to transmission pipeline safety,

   2. Bill credits for gas ratepayers, and

   3. Implementing other pipeline safety remedies.

2. Requires a gas corporation to certify under penalty of perjury that it did not take any of the above expenses into account in determining its income for any taxable year in which they incur or pay the expenses listed above.

3. Applies commencing in the 2015 taxable year.

4. Contains legislative findings and declarations regarding deducting fines and penalties, and stating that its provisions are declaratory of existing law.

Background

On September 9, 2010, a pipeline owned and operated by PG&E exploded in the Crestmoor neighborhood of San Bruno, California. This disaster killed eight people, injured 58, destroyed 38 homes, and caused extensive property damage. PG&E’s regulator, CPUC, subsequently found that the utility had not made the proper investments in gas transmission infrastructure despite rates designed to generate revenue necessary to do so. CPUC initially proposed a fine of $1.4 billion: $950 million as a criminal penalty for the General Fund, $400 million credit to rate payers, and $50 million in remedies to enhance pipeline safety. CPUC eventually fined PG&E $1.6 billion: $850 million for gas safety improvements paid by shareholders, $400 million to ratepayers in a one-time bill credit, $300 million to the state's general fund as a fine, and $50 million toward various pipeline safety-related remedies. In a subsequent letter, Commissioners stated “every dollar the Commission ordered (PG&E’s) shareholders pay in the final decision was intended to penalize PG&E for its egregious actions and legal violations.” PG&E has also been indicted by a federal grand jury, and faces civil litigation as well.

Because California law conforms to federal law regarding expense deductions, the Franchise Tax Board (FTB) would follow the Internal Revenue Service’s (IRS’s) determination regarding whether a fine is deductible for state purposes. Section 162(f) of the Internal Revenue Code simply states “No deduction shall be allowed … for any fine or similar penalty paid to a government for the violation of any law.” Federal regulations and an extensive body of case law generally holds that compensatory, non-punitive damages paid to government are deductible, such as civil judgment where the government recovers actual damages and court costs from taxpayer. Other important factors include the severity of the conduct, and whether the penalty was punitive or compensatory in nature, among others. As such, the tax treatment of fines and penalties can be different according to the facts and circumstances of each case. In its letter to IRS Commissioner John Koskinen, CPUC Commissioners state that their intent in levying the penalty against PG&E was punitive, not compensatory. However, absent legislation, the deductibility of the penalty for federal or state purposes will remain unknown because any information on PG&E’s return is protected by taxpayer confidentiality laws.

Comments

SB 681 alters long-standing tax law that applies to almost all taxpayers because of a singular event. While the damage to lives and property of the San Bruno pipeline explosion is horrific, changing tax law may not be the appropriate way to sanction gas corporations. CPUC could have simply increased the non-deductible penalty amount payable to the General Fund instead. On the other hand, SB 681 is not unprecedented; AB 877 responded to the National Basketball Association’s fine against Donald Sterling in a very similar way.

California law does not automatically conform to changes to federal tax law, except under specified circumstances. Instead, the Legislature must affirmatively conform to federal changes. Generally, when the federal government changes its tax laws, California catches up by enacting its own legislation in subsequent years to reduce differences between the two codes, thereby easing the tax preparation burden on taxpayers, tax preparers, and the Franchise Tax Board. As discussed above, IRS may allow the deduction based on its interpretation of current law as applied to CPUC’s fine, but if SB 681 is enacted, the same deduction denied for state tax purposes may be allowed for federal.

FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes Local: Yes

SUPPORT: (Verified 9/1/15)

California Public Utilities Commission

OPPOSITION: (Verified 9/1/15)

California Taxpayers Association

ARGUMENTS IN SUPPORT: According to the author, “The CPUC’s decision to apply the majority of the PG&E’s penalty to safety improvements and bill reduction rather than sending it to the General Fund was not made to reduce PG&E’s financial responsibility for the gas explosion that killed 8 and leveled a neighborhood, but to ease the burden faced by PG&E’s customers who continue to pay PG&E to bring its neglected gas system to an acceptable safety standard. The CPUC made it clear to the IRS and the FTB that the penalty for this tragedy should not be considered a business expense but a punishment. This bill is meant to ensure that FTB will be able to carry out the CPUC’s intention to levy an historic penalty against PG&E for its negligence.”

ARGUMENTS IN OPPOSITION: According to the California Taxpayers Association, “Current law authorizes individuals and corporations to take tax deductions for the payment of monetary damages in legal cases. The principles of sound tax policy dictate that tax law should be uniform and applied equitably to all taxpayers, but this bill proposes to use California’s Revenue and Taxation Code as a weapon against one taxpayer, running counter to 30 years of strong public policy regarding applying principles of tort law to the tax code. Taxpayers should have assurance that tax laws apply uniformly to all in the state, and should be able to predict how the law will be applied to them. Targeting a single company by altering tax law after the fact sets a dangerous precedent that will have a chilling effect on any business considering operating in California. [Additionally] California conforms to the federal rule allowing deductions for ordinary and necessary business expenses, which includes the payment of monetary damages in legal cases. Deductions prohibited by this bill will continue to be allowed under federal law, thus creating a state and federal difference.”

Prepared by: Colin Grinnell / GOV. & F. / (916) 651-4119

9/4/15 8:41:50

**** END ****

 THIRD READING  

Bill No: SB 681

Author: Hill (D), et al.

Amended: 8/31/15

Vote: 27 - Urgency

PRIOR VOTES NOT RELEVANT

SENATE GOVERNANCE & FIN. COMMITTEE: 4-2, 7/15/15

AYES: Hertzberg, Beall, Lara, Pavley

NOES: Nguyen, Moorlach

NO VOTE RECORDED: Hernandez

SENATE APPROPRIATIONS COMMITTEE: Senate Rule 28.8

SUBJECT: Corporation taxes: deduction: gas corporations

SOURCE: Author

DIGEST: This bill prohibits a gas corporation from claiming a deduction against its income for tax purposes for expenses or expenditures identified by the California Public Utilities Commission (CPUC) in a decision to penalize the corporation for a natural gas safety violation.

Senate Floor Amendments of 8/31/15 delete references to the Pacific Gas and Electric Company (PG&E), and replace with general references to “a gas corporation, as defined in Section 222 of the Public Utilities Code,” or “gas corporation”.

ANALYSIS:

Existing law:

1. Allows taxpayers engaged in a trade or business to deduct from taxable income for state and federal purposes all expenses that are considered ordinary and necessary in conducting that trade or business.

2. Allows taxpayers to deduct most fines or penalties paid to government for compensatory, non-punitive actions such as amounts paid subject to civil litigation.

3. Prohibits taxpayers from deducting fines and penalties paid to government for violating the law.

4. Allows deductions for fines and penalties paid to non-government entities, such as a fine on a professional athlete violating codes of conduct.

5. Prohibits professional sports franchise owners from deducting fines and penalties imposed by the professional sports league that includes that franchise (AB 877, Bocanegra, Chapter 792, Statutes of 2014).

This bill:

1. Prohibits a gas corporation, as defined by the Public Utilities Code, from deducting expenses or expenditures identified by the California Public Utilities Commission in a decision to penalize the corporation for a natural gas safety violation, including:

   1. Future gas infrastructure improvements related to transmission pipeline safety,

   2. Bill credits for gas ratepayers, and

   3. Implementing other pipeline safety remedies.

2. Requires a gas corporation to certify under penalty of perjury that it did not take any of the above expenses into account in determining its income for any taxable year in which they incur or pay the expenses listed above.

3. Applies commencing in the 2015 taxable year.

4. Contains legislative findings and declarations regarding deducting fines and penalties, and stating that its provisions are declaratory of existing law.

Background

On September 9, 2010, a pipeline owned and operated by PG&E exploded in the Crestmoor neighborhood of San Bruno, California. This disaster killed eight people, injured 58, destroyed 38 homes, and caused extensive property damage. PG&E’s regulator, CPUC, subsequently found that the utility had not made the proper investments in gas transmission infrastructure despite rates designed to generate revenue necessary to do so. CPUC initially proposed a fine of $1.4 billion: $950 million as a criminal penalty for the General Fund, $400 million credit to rate payers, and $50 million in remedies to enhance pipeline safety. CPUC eventually fined PG&E $1.6 billion: $850 million for gas safety improvements paid by shareholders, $400 million to ratepayers in a one-time bill credit, $300 million to the state's general fund as a fine, and $50 million toward various pipeline safety-related remedies. In a subsequent letter, Commissioners stated “every dollar the Commission ordered (PG&E’s) shareholders pay in the final decision was intended to penalize PG&E for its egregious actions and legal violations.” PG&E has also been indicted by a federal grand jury, and faces civil litigation as well.

Because California law conforms to federal law regarding expense deductions, the Franchise Tax Board (FTB) would follow the Internal Revenue Service’s (IRS’s) determination regarding whether a fine is deductible for state purposes. Section 162(f) of the Internal Revenue Code simply states “No deduction shall be allowed … for any fine or similar penalty paid to a government for the violation of any law.” Federal regulations and an extensive body of case law generally holds that compensatory, non-punitive damages paid to government are deductible, such as civil judgment where the government recovers actual damages and court costs from taxpayer. Other important factors include the severity of the conduct, and whether the penalty was punitive or compensatory in nature, among others. As such, the tax treatment of fines and penalties can be different according to the facts and circumstances of each case. In its letter to IRS Commissioner John Koskinen, CPUC Commissioners state that their intent in levying the penalty against PG&E was punitive, not compensatory. However, absent legislation, the deductibility of the penalty for federal or state purposes will remain unknown because any information on PG&E’s return is protected by taxpayer confidentiality laws.

Comments

SB 681 alters long-standing tax law that applies to almost all taxpayers because of a singular event. While the damage to lives and property of the San Bruno pipeline explosion is horrific, changing tax law may not be the appropriate way to sanction gas corporations. CPUC could have simply increased the non-deductible penalty amount payable to the General Fund instead. On the other hand, SB 681 is not unprecedented; AB 877 responded to the National Basketball Association’s fine against Donald Sterling in a very similar way.

California law does not automatically conform to changes to federal tax law, except under specified circumstances. Instead, the Legislature must affirmatively conform to federal changes. Generally, when the federal government changes its tax laws, California catches up by enacting its own legislation in subsequent years to reduce differences between the two codes, thereby easing the tax preparation burden on taxpayers, tax preparers, and the Franchise Tax Board. As discussed above, IRS may allow the deduction based on its interpretation of current law as applied to CPUC’s fine, but if SB 681 is enacted, the same deduction denied for state tax purposes may be allowed for federal.

FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes Local: Yes

SUPPORT: (Verified 9/1/15)

California Public Utilities Commission

OPPOSITION: (Verified 9/1/15)

California Taxpayers Association

ARGUMENTS IN SUPPORT: According to the author, “The CPUC’s decision to apply the majority of the PG&E’s penalty to safety improvements and bill reduction rather than sending it to the General Fund was not made to reduce PG&E’s financial responsibility for the gas explosion that killed 8 and leveled a neighborhood, but to ease the burden faced by PG&E’s customers who continue to pay PG&E to bring its neglected gas system to an acceptable safety standard. The CPUC made it clear to the IRS and the FTB that the penalty for this tragedy should not be considered a business expense but a punishment. This bill is meant to ensure that FTB will be able to carry out the CPUC’s intention to levy an historic penalty against PG&E for its negligence.”

ARGUMENTS IN OPPOSITION: According to the California Taxpayers Association, “Current law authorizes individuals and corporations to take tax deductions for the payment of monetary damages in legal cases. The principles of sound tax policy dictate that tax law should be uniform and applied equitably to all taxpayers, but this bill proposes to use California’s Revenue and Taxation Code as a weapon against one taxpayer, running counter to 30 years of strong public policy regarding applying principles of tort law to the tax code. Taxpayers should have assurance that tax laws apply uniformly to all in the state, and should be able to predict how the law will be applied to them. Targeting a single company by altering tax law after the fact sets a dangerous precedent that will have a chilling effect on any business considering operating in California. [Additionally] California conforms to the federal rule allowing deductions for ordinary and necessary business expenses, which includes the payment of monetary damages in legal cases. Deductions prohibited by this bill will continue to be allowed under federal law, thus creating a state and federal difference.”

Prepared by: Colin Grinnell / GOV. & F. / (916) 651-4119

9/1/15 21:38:12

**** END ****

 THIRD READING  

Bill No: SB 681

Author: Hill (D), et al.

Amended: 7/16/15

Vote: 27 - Urgency

PRIOR VOTES NOT RELEVANT

SENATE GOVERNANCE & FIN. COMMITTEE: 4-2, 7/15/15

AYES: Hertzberg, Beall, Lara, Pavley

NOES: Nguyen, Moorlach

NO VOTE RECORDED: Hernandez

SENATE APPROPRIATIONS COMMITTEE: Senate Rule 28.8

SUBJECT: Corporation taxes: deduction: public utilities

SOURCE: Author

DIGEST: This bill prohibits the Pacific Gas & Electric Company (PG&E) from claiming a deduction against its income for tax purposes for fines imposed on it by the California Public Utilities Commission (CPUC) in its case regarding the San Bruno pipeline explosion.

ANALYSIS:

Existing law:

1. Allows taxpayers engaged in a trade or business to deduct from taxable income for state and federal purposes all expenses that are considered ordinary and necessary in conducting that trade or business.

2. Allows taxpayers to deduct most fines or penalties paid to government for compensatory, non-punitive actions such as amounts paid subject to civil litigation.

3. Prohibits taxpayers from deducting fines and penalties paid to government for violating the law.

4. Allows deductions for fines and penalties paid to a non-government entities, such as a fine on a professional athlete violating codes of conduct.

5. Prohibits professional sports franchise owners from deducting fines and penalties imposed by the professional sports league that includes that franchise (AB 877, Bocanegra, Chapter 792, Statutes of 2014).

This bill:

1. Prohibits PG&E from deducting the following amounts amount it pays or incurs identified by the CPUC in its “Decision on Fines and Remedies to be Imposed on Pacific Gas & Electric Company for Specified Violations in Connection with the Operations and Practices of its Natural Gas System Pipelines.”

1. $850 million in future gas infrastructure improvements related to transmission pipeline safety,

2. $400 million in bill credits for gas ratepayers, and

3. $50 million to implement other remedies.

2. Requires PG&E to certify under penalty of perjury that it did not take any of the above expenses into account in determining its income.

Background

On September 9, 2010, a pipeline owned and operated by PG&E exploded in the Crestmoor neighborhood of San Bruno, California. This disaster killed eight people, injured 58, destroyed 38 homes, and caused extensive property damage. PG&E’s regulator, CPUC, subsequently found that the utility had not made the proper investments in gas transmission infrastructure despite rates designed to generate revenue necessary to do so. CPUC initially proposed a fine of $1.4 billion: $950 million as a criminal penalty for the General Fund, $400 million credit to rate payers, and $50 million in remedies to enhance pipeline safety. CPUC eventually fined PG&E $1.6 billion: $850 million for gas safety improvements paid by shareholders, $400 million to ratepayers in a one-time bill credit, $300 million to the state's general fund as a fine, and $50 million toward various pipeline safety-related remedies. In a subsequent letter, Commissioners stated “every dollar the Commission ordered (PG&E’s) shareholders pay in the final decision was intended to penalize PG&E for its egregious actions and legal violations.” PG&E has also been indicted by a federal grand jury, and faces civil litigation as well.

Because California law conforms to federal law regarding expense deductions, the Franchise Tax Board (FTB) would follow the Internal Revenue Service’s (IRS’s) determination regarding whether a fine is deductible for state purposes. Section 162(f) of the Internal Revenue Code simply states “No deduction shall be allowed … for any fine or similar penalty paid to a government for the violation of any law.” Federal regulations and an extensive body of case law generally holds that compensatory, non-punitive damages paid to government are deductible, such as civil judgment where the government recovers actual damages and court costs from taxpayer. Other important factors include the severity of the conduct, and whether the penalty was punitive or compensatory in nature, among others. As such, the tax treatment of fines and penalties can be different according to the facts and circumstances of each case. In its letter to IRS Commissioner John Koskinen, CPUC Commissioners state that their intent in levying the penalty against PG&E was punitive, not compensatory. However, absent legislation, the deductibility of the penalty for federal or state purposes will remain unknown because any information on PG&E’s return is protected by taxpayer confidentiality laws.

Comments

SB 681 alters long-standing tax law that applies to almost all taxpayers because of a singular event. While the damage to lives and property of the San Bruno pipeline explosion is horrific, is changing tax law the appropriate way to sanction PG&E? CPUC could have simply increased the non-deductible penalty amount payable to the General Fund instead. On the other hand, SB 681 is not unprecedented; AB 877 responded to the National Basketball Association’s fine against Donald Sterling in a very similar way.

California law does not automatically conform to changes to federal tax law, except under specified circumstances. Instead, the Legislature must affirmatively conform to federal changes. Generally, when the federal government changes its tax laws, California catches up by enacting its own legislation in subsequent years to reduce differences between the two codes, thereby easing the tax preparation burden on taxpayers, tax preparers, and the Franchise Tax Board. As discussed above, IRS may allow PG&E to claim the deduction based on its interpretation of current law as applied to CPUC’s fine, but if SB 681 is enacted, the same deduction denied for state tax purposes may be allowed for federal.

FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes Local: Yes

SUPPORT: (Verified 8/18/15)

None received

OPPOSITION: (Verified 8/18/15)

California Taxpayers Association

ARGUMENTS IN SUPPORT: According to the author, “The CPUC’s decision to apply the majority of the PG&E’s penalty to safety improvements and bill reduction rather than sending it to the General Fund was not made to reduce PG&E’s financial responsibility for the gas explosion that killed 8 and leveled a neighborhood, but to ease the burden faced by PG&E’s customers who continue to pay PG&E to bring its neglected gas system to an acceptable safety standard. The CPUC made it clear to the IRS and the FTB that the penalty for this tragedy should not be considered a business expense but a punishment. This bill is meant to ensure that FTB will be able to carry out the CPUC’s intention to levy an historic penalty against PG&E for its negligence.”

ARGUMENTS IN OPPOSITION: According to the California Taxpayers Association, “Current law authorizes individuals and corporations to take tax deductions for the payment of monetary damages in legal cases. The principles of sound tax policy dictate that tax law should be uniform and applied equitably to all taxpayers, but this bill proposes to use California’s Revenue and Taxation Code as a weapon against one taxpayer, running counter to 30 years of strong public policy regarding applying principles of tort law to the tax code. Taxpayers should have assurance that tax laws apply uniformly to all in the state, and should be able to predict how the law will be applied to them. Targeting a single company by altering tax law after the fact sets a dangerous precedent that will have a chilling effect on any business considering operating in California. [Additionally] California conforms to the federal rule allowing deductions for ordinary and necessary business expenses, which includes the payment of monetary damages in legal cases. Deductions prohibited by the this bill will continue to be allowed under federal law, this creating a state and federal difference.”

Prepared by: Colin Grinnell / GOV. & F. / (916) 651-4119

8/19/15 20:43:04

**** END ****

SENATE COMMITTEE ON GOVERNANCE AND FINANCE

Senator Robert M. Hertzberg, Chair

2015 - 2016 Regular

Corporation taxes: deduction: public utilities (Urgency)

Denies business expense deduction for fine imposed on PG&E by the California Public Utilities Commission.

Background and Existing Law

On September 9^th, 2010, a pipeline owned and operated by the Pacific Gas and Electric (PG&E) Company exploded in the Crestmoor neighborhood of San Bruno, California. This disaster killed eight people, injured 58, destroyed 38 homes, and caused extensive property damage. PG&E’s regulator, the California Public Utilities Commission (CPUC), subsequently found that the utility had not made the proper investments in gas transmission infrastructure despite rates designed to generate revenue necessary to do so. CPUC initially proposed a fine of $1.4 billion: $950 million as a criminal penalty for the General Fund, $400 million credit to rate payers, and $50 million in remedies to enhance pipeline safety. CPUC eventually fined PG&E $1.6 billion: $850 million for gas safety improvements paid by shareholders, $400 million to ratepayers in a one-time bill credit, $300 million to the state's general fund as a fine, and $50 million toward various pipeline safety-related remedies. In a subsequent letter, Commissioners stated “every dollar the Commission ordered (PG&E’s) shareholders pay in the final decision was intended to penalize PG&E for its egregious actions and legal violations.” PG&E has also been indicted by a federal grand jury, and faces civil litigation as well.

Current federal and state laws generally allow taxpayers engaged in a trade or business to deduct all expenses that are considered ordinary and necessary in conducting that trade or business, unless specifically excluded by statute, such as fines and penalties paid to government for violating the law. Under federal and state laws, taxpayers can deduct fines or penalties paid to a non-government entity, such as a fine on a professional athlete violating codes of conduct; however, last year, the Legislature prohibited professional sports franchise owners from deducting fines and penalties imposed by the professional sports league that includes that franchise (AB 877, Bocanegra, 2014). The author wants to ensure that PG&E won’t be able to deduct fines imposed by CPUC on PG&E due to the San Bruno pipeline explosion.

Proposed Law

Senate Bill 681 states that for purposes of deducting regular business expenses for state tax purposes, expenses or expenditures for plant and equipment by Pacific Gas and Electric Company that the Public Utilities Commission determined in Decision 15-04-024 (April 9, 2015), “Decision on Fines and Remedies to be Imposed on Pacific Gas and Electric Company for Specific Violations in Connection with the Operation and Practices of its Natural Gas Transmission System Pipelines,” should be borne by the shareholders of the utility, and not the utility’s ratepayers, because of the utility’s numerous violations of law relating to public safety. The measure also states amounts that the Public Utilities Commission, in Decision 15-04-024, ordered Pacific Gas and Electric Company to pay to reimburse the commission for its costs incurred in investigating and enforcing a violation of law relating to public safety by the utility.

State Revenue Impact

Due to the measure’s limited scope, Franchise Tax Board cannot estimate the revenue for SB 681 without potentially violating taxpayer confidentiality laws. However, SB 681 would deny approximately $1.3 million in normally deductible expenses, which when multiplied by California’s corporation tax rate of 8.84% equals $115 million.

Comments

1. Purpose of the bill. According to the author, “The CPUC’s decision to apply the majority of the PG&E’s penalty to safety improvements and bill reduction rather than sending it to the General Fund was not made to reduce PG&E’s financial responsibility for the gas explosion that killed 8 and leveled a neighborhood, but to ease the burden faced by PG&E’s customers who continue to pay PG&E to bring its neglected gas system to an acceptable safety standard. The CPUC made it clear to the IRS and the FTB that the penalty for this tragedy should not be considered a business expense but a punishment. This bill is meant to ensure that FTB will be able to carry out the CPUC’s intention to levy an historic penalty against PG&E for its negligence.”

2. Special treatment. As a general matter in tax law, taxpayers can deduct fines and penalties levied by government when no violation of the law occurred. Taxpayers can also deduct business expenses incurred to improve physical infrastructure, such as pipelines. SB 681 would alter these standards that apply to almost all taxpayers because of a singular event. While the damage to lives and property of the San Bruno pipeline explosion is horrific, is changing tax law meant to apply equally to all taxpayers the appropriate way to sanction PG&E? CPUC could have simply increased the non-deductible penalty amount payable to the General Fund instead. On the other hand, SB 681 is not unprecedented; AB 877 responded to the National Basketball Association’s fine against Donald Sterling in a very similar way. The Committee may wish to consider whether amending tax law is the best response to this tragedy.

3. Follow the lead. Generally, FTB would follow IRS’s determination regarding whether a fine is deductible for state purposes. Section 162(f) of the Internal Revenue Code simply states “No deduction shall be allowed … for any fine or similar penalty paid to a government for the violation of any law.” Federal regulations and an extensive body of case law generally holds that compensatory, non-punitive damages paid to government are deductible, such as civil judgment where the government recovers actual damages and court costs from taxpayer. Other important factors include the severity of the conduct, and whether the penalty was punitive or compensatory in nature, among others. As such, the tax treatment of fines and penalties can be different according to the facts and circumstances of each case. In its letter to IRS Commissioner John Koskinen, CPUC Commissioners state that their intent in levying the penalty against PG&E was punitive, not compensatory. However, absent legislation, the deductibility of the penalty for federal or state purposes will remain unknown because any information on PG&E’s return is protected by taxpayer confidentiality laws.

4. Reverse nonconformity. California law does not automatically conform to changes to federal tax law, except under specified circumstances. Instead, the Legislature must affirmatively conform to federal changes. Generally, when the federal government changes its tax laws, California catches up by enacting its own legislation in subsequent year to reduce differences between the two codes, thereby easing the tax preparation burden on taxpayers, tax preparers, and the Franchise Tax Board. As discussed above, IRS may allow PG&E to claim the deduction based on its interpretation of current law as applied to CPUC’s fine, but if SB 681 is enacted, the same deduction denied for state tax purposes may be allowed for federal.

5. Another way? SB 681 refers to Section §162(a) of the Internal Revenue Code (IRC) when denying a deduction for state purposes; however, PG&E could be applying IRC §162(f), §167, or §179, depending on the nature of the expense. Instead of referring to federal law, the Committee may wish to consider amending SB 681 to instead enact a stand-alone section of the Corporation Tax stating that expenses of expenditures resulting from the CPUC’s decision are not deductible for state tax purposes.

6. To tell the truth. The tax return of a firm as sophisticated as PG&E will be long and complex. As such, it may be difficult for FTB to easily determine whether PG&E complies with SB 681 should it be enacted. The Committee may wish to consider requiring any taxpayer to additionally certify under penalty of perjury that it didn’t claim any expenses affected by the bill.

7. 2/3. Because SB 681 denies a normally deductible business expense, it increases a tax on any taxpayer for purposes of Section Three of Article XIIA of the California Constitution. As such, Legislative Counsel has keyed the measure a 2/3 vote.

8. Urgency. In order for the bill to apply in the current taxable year, and to ensure the effectiveness of PG&E decisions, SB 681 contains an urgency clause, and is keyed a 2/3 vote.

Support and Opposition

(7/9/15)

Support: None received.

Opposition: California Taxpayers Association.

-- END --

 THIRD READING  

Bill No: SB 681

Author: Hill (D)

Amended: 5/5/15

Vote: 21

SENATE JUDICIARY COMMITTEE: 5-1, 4/28/15

AYES: Jackson, Hertzberg, Leno, Monning, Wieckowski

NOES: Anderson

NO VOTE RECORDED: Moorlach

SENATE APPROPRIATIONS COMMITTEE: 7-0, 5/28/15

AYES: Lara, Bates, Beall, Hill, Leyva, Mendoza, Nielsen

SUBJECT: Civil law: patents

SOURCE: Author

DIGEST: This bill makes it unlawful to send a written communication stating that the recipient may have infringed on a United States patent if, in bad faith, the sender fraudulently or falsely makes specified statements, seeks compensation for specified conduct, or fails to include specified information in the communication. This bill provides specific remedies for sending such unlawful communications, and specifies that those remedies may only be obtained by the Attorney General or an attorney acting on behalf of the state.

ANALYSIS:

Existing federal law:

1. Reserves to Congress, under the United States Constitution, the power “to promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries.” (U.S. Const., art. I, Sec. 8.)

2. Provides for the issuance of patents, under the Patent Act, to any person who invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof. (35 U.S.C. Sec. 101.)

Existing state law:

1. Renders an individual liable, under the Unfair Competition Law, for any unlawful, unfair or fraudulent business act or practice and any unfair, deceptive, untrue or misleading advertising. (Bus. Prof. Code Sec. 17200.)

2. Provides that one who willfully deceives another with intent to induce him to alter his position to his injury or risk, is liable for any damage which he thereby suffers. (Civ. Code Sec. 1709.)

This bill:

1. Renders it unlawful for a person, in connection with the assertion of a United States patent, to engage in a pattern or practice of sending written communications that state or represent that the recipient is or may be infringing, or has or may have infringed, the patent and is liable or owes compensation to another, if specified conditions are met.

2. Provides that that it is unlawful for the sender of the written communication described above to make, in bad faith, any of the following statements or representations, knowing those statements or representations are false:

• that the sender has the right to license or enforce the patent at the time the communications are sent, if the sender is not a person with that right;

• that a civil action asserting a claim of infringement of the patent has been filed against either the recipient or against other persons;

• that legal action for infringement of the patent will be taken against the recipient;

• that the sender is the exclusive licensee of the patent asserted in the communications;

• that persons other than the recipient purchased a license for the patent asserted in the communications;

• that persons other than the recipient purchased a license, and the sender does not disclose that the license is unrelated to the alleged infringement or the patent asserted in the communications;

• that an investigation of the recipient’s alleged infringement has occurred; or

• that the sender, or an affiliate of the sender, previously filed a civil action asserting a claim of infringement of the patent based on the activity that is the subject of the written communication when the sender knew that the activity was held, in a final determination, not to infringe the patent.

3. Provides that it is unlawful for the sender of the written communication described above to fraudulently seek compensation for any of the following:

• a patent claim that has been determined to be unenforceable or invalid against the recipient in a final determination;

• activity undertaken by the recipient after expiration of the patent asserted in the communication; or

• activity of the recipient that the sender knew was authorized, with respect to the patent claim that is the subject of the communication, by a person with the right to license the patent.

4. Provides that it is unlawful for the sender of the written communication described above to fraudulently conceal or omit to include any of the following information from the communication when that information is readily available to the sender at the time the communication is sent:

• the identity of the person asserting a right to license the patent to, or enforce the patent against, the recipient, including the identity of any parent entity and the ultimate parent entity of the person, unless that person is a public company and the name of the public company is identified;

• identification of at least one patent issued by the United States Patent and Trademark Office alleged to have been infringed;

• identification, to the extent reasonable under the circumstances, of at least one product, service, or other activity of the recipient that is alleged to infringe the identified patent;

• a description, to the extent reasonable under the circumstances, of how the product, service, or other activity of the recipient infringes an identified patent and patent claim; or

• a name and contact information for a person the recipient may contact about the assertions or claims relating to the patent contained in the communication.

5. Provides that a person who sends a communication in violation of its provisions may be enjoined in a court of competent jurisdiction and is liable for a civil penalty not to exceed two thousand five hundred dollars ($2,500) for each violation, as specified.

6. Provides that the Attorney General or an attorney acting on behalf of the state shall have the sole authority to enforce its provisions, and that it shall not be construed to create a private right of action.

7. States that its provisions shall not be construed to impair or impede any other rights, causes of action, claims, or defenses available under other law, and that remedies provided in this bill are cumulative with any other remedies available under other law.

Background

In recent years, much attention has been focused on the business model practiced by certain firms that make money not by producing goods, but by licensing patent use or asserting patent claims against other companies that produce goods using patented technologies and methods. The activities of these so-called “patent trolls,” “non-practicing entities,” or “patent monetization entities” are thought by some to be harming innovation and causing the market as a whole to reduce venture investing and research and development spending. Whether or not these entities actually harm the market is a hotly debated topic, as is the nature of what – if anything – should be done about it. Indeed, even the definition of who constitutes a non-practicing entity is contentious, with some commentators pointing out that the concept may include universities that license use of their patents.

This bill creates a new civil infraction designed to address the problems caused by non-practicing entities that allege patent infringement claims in bad faith. As a remedy, this bill provides that a person who sends a communication in violation of its provisions may be enjoined and is liable for a civil penalty of up to $2,500 for each violation, but specifies that such remedies may be sought solely by the Attorney General or an attorney acting on behalf of the state.

Comments

The author writes:

Patents are essential to encouraging innovation, especially in the information technology and knowledge-based fields that drive much of California’s economy. The protections afforded by the federal patent system create an incentive to invest in research and innovation, which creates jobs and raises income.

At the same time, a number of states are seeking to address bad faith patent activities, such as the mailing of abusive demand letters. Patent assertion entities (PAEs) generally are holding or “shell” companies that don’t manufacture anything but hold a number of patents, typically purchased legally from bankrupt firms. They make their money by sending threatening letters to companies claiming they have been violating one or more of their (often vaguely defined) patents. The letters say that if the companies pay the license fees to use their patents, they won’t be sued. Often, PAEs target small- to medium-sized businesses that cannot afford to fight lengthy court battles, so they willingly pay the amount demanded to settle out of court. PAEs usually request unreasonable fees in light of the alleged infractions and often fail to give companies any details about what the patent in question actually covers or how they allegedly infringed upon it.

While California’s unfair competition law is broad, it does not appear to have been applied in the context of patent demand letters. Furthermore, as demand letters are pre-lawsuit communications that receive heightened protection under the First Amendment’s right to petition the courts and right to free speech, it is unclear whether the Unfair Competition Law, which does not contain a scienter requirement, could withstand constitutional scrutiny when applied to demand letters. By contrast, SB 681 makes clear what practices are prohibited and, consistent with the Constitution, requires “bad faith” on the part of the sender.

SB 681 empowers the Attorney General to seek a civil penalty from any person or entity that sends bad faith demand letters to the end users of a product or service. This narrowly tailored bill prohibits specific misrepresentations (such as a false claim that legal action has been taken against the recipient), omissions (such as failing to identify the number of the allegedly infringed patent), and abusive practices (such as seeking compensation based on a patent previously found invalid) that patent trolls have used against unsophisticated persons and businesses.

Related/Prior Legislation

AJR 9 (Chang, 2015) makes specified findings regarding patents and patent litigation, and urges the President and the Congress of the United States to craft a balanced and workable approach to reduce incentives for and minimize abusive and frivolous patent litigation while ensuring that legitimate patent enforcement rights are protected and maintained. The bill is pending referral in the Senate Rules Committee.

FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes Local: No

According to the Senate Appropriations Committee:

• Potential increases in workload resulting in costs potentially in excess of $150,000 (Special Fund*) to the Attorney General’s office to the extent new cases arise that cannot viably be litigated under the provisions of the Unfair Competition Law.

• Potentially increase in General Fund revenues to the extent civil penalties of up to $2,500 per violation are imposed and collected.

* Unfair Competition Law Fund

SUPPORT: (Verified 5/29/15)

None received

OPPOSITION: (Verified 5/29/15)

3M

BIOCOM

Biotechnology Industry Organization

California Life Sciences Association

Caterpillar

Qualcomm, Inc.

Silicon Valley Leadership Group

Tessera Technologies, Inc.

Texas Instruments

Prepared by: Tobias Halvarson / JUD. / (916) 651-4113

5/30/15 18:03:43

**** END ****

SENATE COMMITTEE ON APPROPRIATIONS

Senator Ricardo Lara, Chair

2015 - 2016 Regular Session

SB 681 (Hill) - Civil law: patents

This bill meets the criteria for referral to the Suspense File.

Bill Summary:

SB 681 would make it unlawful to send a written communication that states or represents that the recipient may have infringed on a United States patent if the sender, in bad faith, makes specified statements, seeks compensation for specified conduct, or fails to include specified information in the communication. This bill would specify that its provisions are only enforceable by the Attorney General, but does not impair or impede any other claims or defenses available under other law.

Fiscal Impact:

• Potential increase in workload resulting in costs potentially in excess of $150,000 (Special Fund*) to the Attorney General’s office to the extent new cases arise that cannot viably be litigated under the provisions of the Unfair Competition Law.

• Potential increase in General Fund revenues to the extent civil penalties of up to $2,500 per violation are imposed and collected.

*Unfair Competition Law Fund

Background:

Existing federal law, the Patent Act, provides for the issuance of patents to any person who invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof. (35 U.S.C. § 101.)

Existing state law pursuant to the Unfair Competition Law, renders an individual liable for any unlawful, unfair, or fraudulent business act or practice and any unfair, deceptive, untrue or misleading advertising. (Business and Professions Code § 17200.)

According to the Senate Judiciary Committee analysis of this bill:

“In recent years, much attention has been focused on the business model practiced by certain firms that make money not by producing goods, but by licensing patent use or asserting patent claims against other companies that produce goods using patented technologies and methods. The activities of these so-called “patent trolls,” “non-practicing entities,” or “patent monetization entities” are thought by some to be harming innovation and causing the market as a whole to reduce venture investing and research and development spending. Whether or not these entities actually harm the market is a hotly debated topic, as is the nature of what – if anything – should be done about it. Indeed, even the definition of who constitutes a non-practicing entity is contentious, with some commentators pointing out that the concept may include universities that license use of their patents. This bill would create a new civil infraction designed to address the problems caused by non-practicing entities that allege patent infringement claims in bad faith.”

Proposed Law:

This bill would render it unlawful for a person, in connection with the assertion of a United States patent, to engage in a pattern or practice of sending written communications that are sent in bad faith that state or represent that the recipient is or may be infringing, or has or may have infringed, the patent and is liable or owes compensation to another, if specified conditions are met. This bill:

• Provides that a person who sends a communication in violation of its provisions may be enjoined in a court of competent jurisdiction and is liable for a civil penalty not to exceed $2,500 for each violation, as specified.

• Provides that the penalty collected in an action by the Attorney General or an attorney acting on behalf of the state shall be paid to the General Fund.

• Provides that the Attorney General or an attorney acting on behalf of the state shall have the sole authority to enforce its provisions, and that it shall not be construed to create a private right of action.

• Provides that the bill’s provisions shall not be construed to impair or impede any other rights, causes of action, claims, or defenses available under other law.

• Provides that the remedies provided in this bill are cumulative with any other remedies available under other law.

Related Legislation:

AJR 9 (Chang) 2015 would make specified findings regarding patents and patent litigation, and would urge the President and the Congress of the United States to craft a balanced and workable approach to reduce incentives for an minimize abusive and frivolous patent litigation while ensuring that legitimate patent enforcement rights are protected and maintained. This bill is pending in the Assembly Judiciary Committee.

Staff Comments:

The Department of Justice has reported that the provisions of this measure would result in an unquantifiable but potentially significant fiscal impact to the extent additional claims are brought to or initiated by the Attorney General under the specified provisions of this bill. While the bill clarifies that its provisions do not bar claims under California’s Unfair Competition Law (UCL), due to the complex legal framework and available legal defenses, to the extent claims are not viable under the UCL, additional claims under the provisions of this bill could result.

-- END --

SENATE JUDICIARY COMMITTEE

Senator Hannah-Beth Jackson, Chair

2015 - 2016 Regular Session

Bill No: SB 681 (Author:Hill)

Amended: Version: February 27, 2015

Hearing Date: April 28, 2015

Fiscal: Yes

Urgency: No

Consultant: TH

SUBJECT

Civil Law: Patents

DESCRIPTION

This bill would make it unlawful to send a written communication stating that the recipient may have infringed on a United States patent if, in bad faith, the sender makes specified statements, seeks compensation for specified conduct, or fails to include specified information in the communication. This bill would also provide specific remedies for sending such unlawful communications, and would specify that those remedies may only be obtained by the Attorney General or an attorney acting on behalf of the state.

BACKGROUND

In recent years, much attention has been focused on the business model practiced by certain firms that make money not by producing goods, but by licensing patent use or asserting patent claims against other companies that produce goods using patented technologies and methods. The activities of these so-called “patent trolls,” “non-practicing entities,” or “patent monetization entities” are thought by some to be harming innovation and causing the market as a whole to reduce venture investing and research and development spending. Whether or not these entities actually harm the market is a hotly debated topic, as is the nature of what – if anything – should be done about it. Indeed, even the definition of who constitutes a non-practicing entity is contentious, with some commentators pointing out that the concept may include universities that license use of their patents.

This bill would create a new civil infraction designed to address the problems caused by non-practicing entities that allege patent infringement claims in bad faith. The bill would make it unlawful to send a written communication stating that the recipient is or may be infringing, or has or may have infringed, on a United States patent if the sender of the communication, in bad faith, makes a specified statement, seeks compensation for specified conduct, or fails to include specified information in the communication. As a remedy, the bill would provide that a person who sends a communication in violation of these provisions may be enjoined and is liable for a civil penalty of up to $2,500 for each violation. Such remedies may be sought solely by the Attorney General or an attorney acting on behalf of the state. This bill would additionally provide that it shall be an affirmative defense that the sender did not act in bad faith if the sender demonstrates that the statement, representation, or omission at issue was a mistake made in good faith.

CHANGES TO EXISTING LAW

Existing federal law, the United States Constitution, reserves to Congress the power “to promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries.” (U.S. Const., art. I, Sec. 8.)

Existing federal law, the Patent Act, provides for the issuance of patents to any person who invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof. (35 U.S.C. Sec. 101.)

Existing law, the Unfair Competition Law, renders an individual liable for any unlawful, unfair or fraudulent business act or practice and any unfair, deceptive, untrue or misleading advertising. (Bus. Prof. Code Sec. 17200.)

Existing law provides that one who willfully deceives another with intent to induce him to alter his position to his injury or risk, is liable for any damage which he thereby suffers. (Civ. Code Sec. 1709.)

This bill would render it unlawful for a person, in connection with the assertion of a United States patent, to engage in a pattern or practice of sending written communications that state or represent that the recipient is or may be infringing, or has or may have infringed, the patent and is liable or owes compensation to another, if specified conditions are met.

This bill would specify that it is unlawful for the sender of the written communication to make, in bad faith, any of the following statements or representations:

• that the sender has the right to license or enforce the patent at the time the communications are sent, if the sender is not a person with that right;

• that a civil action asserting a claim of infringement of the patent has been filed against either the recipient or against other persons;

• that legal action for infringement of the patent will be taken against the recipient;

• that the sender is the exclusive licensee of the patent asserted in the communications;

• that persons other than the recipient purchased a license for the patent asserted in the communications;

• that persons other than the recipient purchased a license, and the sender does not disclose that the license is unrelated to the alleged infringement or the patent asserted in the communications;

• that an investigation of the recipient’s alleged infringement has occurred; or

• that the sender, or an affiliate of the sender, previously filed a civil action asserting a claim of infringement of the patent based on the activity that is the subject of the written communication when the sender knew that the activity was held, in a final determination, not to infringe the patent.

This bill would specify that it is unlawful for the sender of the written communication to seek, in bad faith, compensation for any of the following:

• a patent claim that has been determined to be unenforceable or invalid against the recipient in a final determination;

• activity undertaken by the recipient after expiration of the patent asserted in the communication; or

• activity of the recipient that the sender knew was authorized, with respect to the patent claim that is the subject of the communication, by a person with the right to license the patent.

This bill would specify that it is unlawful for the sender of the written communication to fail, in bad faith, to include any of the following in the communication:

• the identity of the person asserting a right to license the patent to, or enforce the patent against, the recipient, including the identity of any parent entity and the ultimate parent entity of the person, unless that person is a public company and the name of the public company is identified;

• identification of at least one patent issued by the United States Patent and Trademark Office alleged to have been infringed;

• identification, to the extent reasonable under the circumstances, of at least one product, service, or other activity of the recipient that is alleged to infringe the identified patent;

• a description, to the extent reasonable under the circumstances, of how the product, service, or other activity of the recipient infringes an identified patent and patent claim; or

• a name and contact information for a person the recipient may contact about the assertions or claims relating to the patent contained in the communications.

This bill would provide that it is an affirmative defense that the sender of the written communication did not act in bad faith if the sender demonstrates that the statement, representation, or omission was a mistake made in good faith, as specified.

This bill would provide that a person who sends a communication in violation of its provisions may be enjoined in a court of competent jurisdiction and is liable for a civil penalty not to exceed two thousand five hundred dollars ($2,500) for each violation, as specified.

This bill would provide that, notwithstanding any other law, the Attorney General or an attorney acting on behalf of the state shall have the sole authority to enforce its provisions, and that it shall not be construed to create a private right of action.

This bill would also define the following terms:

• “final determination” means, with respect to the invalidity or unenforceability of a patent, that the invalidity or unenforceability has been determined by a court of the United States or the United States Patent and Trademark Office in a final decision that is unappealable or for which any opportunity for appeal is no longer available; and

• “recipient” means a person who purchases, rents, leases, or otherwise obtains a product or service in the commercial market that is not for resale in the commercial market and that is, or later becomes, the subject of a patent infringement allegation.

COMMENT

1. Stated need for the bill

The author writes:

Patents are essential to encouraging innovation, especially in the information technology and knowledge-based fields that drive much of California’s economy. The protections afforded by the federal patent system create an incentive to invest in research and innovation, which creates jobs and raises income.

At the same time, a number of states are seeking to address bad faith patent activities, such as the mailing of abusive demand letters. Patent assertion entities (PAEs) generally are holding or “shell” companies that don’t manufacture anything but hold a number of patents, typically purchased legally from bankrupt firms. They make their money by sending threatening letters to companies claiming they have been violating one or more of their (often vaguely defined) patents. The letters say that if the companies pay the license fees to use their patents, they won’t be sued. Often, PAEs target small- to medium-sized businesses that cannot afford to fight lengthy court battles, so they willingly pay the amount demanded to settle out of court. PAEs usually request unreasonable fees in light of the alleged infractions and often fail to give companies any details about what the patent in question actually covers or how they allegedly infringed upon it.

While California’s unfair competition law is broad, it does not appear to have been applied in the context of patent demand letters. Furthermore, as demand letters are pre-lawsuit communications that receive heightened protection under the First Amendment’s right to petition the courts and right to free speech, it is unclear whether the [Unfair Competition Law], which does not contain a scienter requirement, could withstand constitutional scrutiny when applied to demand letters. By contrast, SB 681 makes clear what practices are prohibited and, consistent with the Constitution, requires “bad faith” on the part of the sender.

SB 681 empowers the Attorney General to seek a civil penalty from any person or entity that sends bad faith demand letters to the end users of a product or service. This narrowly tailored bill prohibits specific misrepresentations (such as a false claim that legal action has been taken against the recipient), omissions (such as failing to identify the number of the allegedly infringed patent), and abusive practices (such as seeking compensation based on a patent previously found invalid) that patent trolls have used against unsophisticated persons and businesses.

2. Evidence of Problematic Behavior

This bill is premised on the proposition that non-producing patent holders who make money by licensing their patents (non-practicing entities) are harmful to the marketplace, and that some who engage in this business model carry out their activities in a manner that borders upon fraud. As noted above, these premises are highly contested among scholars and commentators. For example, one recent opinion piece in the Wall Street Journal states:

Patent-reform activists point out that the number of patent lawsuits has increased by about 60 [percent] since 2000, which they cite as evidence that there is a serious problem with the patent system. But does the uptick in lawsuits actually indicate such a problem?

In short, no. It might instead reflect a healthy, dynamic economy. Rapid technological advances have spurred more innovation and patents, and courts are now clarifying the nature and boundaries of intellectual property and contract rights. (Stephen Haber and Ross Levine, The Myth Of the Wicked Patent Troll (June 29, 2014) < http://www.wsj.com/articles/stephen-haber-and-ross-levine-the-myth-of-the-wicked-patent-troll-1404085391> [as of Apr. 16, 2015].)

A counterpoint piece in the Harvard Business Review illustrates the opposing position, stating:

But there is evidence of significant harm. The White House and the Congressional Research Service both cited many research studies suggesting that patent litigation harms innovation. And three new empirical studies provide strong confirmation that patent litigation is reducing venture capital investment in startups and is reducing R&D spending, especially in small firms.

. . .

The economic burden of today’s patent lawsuits is, in fact, historically unprecedented. Research shows that patent trolls cost defendant firms $29 billion per year in direct out-of-pocket costs; in aggregate, patent litigation destroys over $60 billion in firm wealth each year.

. . .

[A]cross a significant number of studies using different methodologies and performed by different researchers, a consistent picture is emerging about the effects of patent litigation: it costs innovators money; many innovators and venture capitalists report that it significantly impacts their businesses; innovators respond by investing less in [research and development] and venture capitalists respond by investing less in startups. (James Bessen, The Evidence Is In: Patent Trolls Do Hurt Innovation, Harvard Business Report (Nov. 2014) < https://hbr.org/2014/07/the-evidence-is-in-patent-trolls-do-hurt-innovation> [as of Apr. 16, 2015].)

Yet a third article takes a more nuanced view:

One common criticism of [non-practicing entities] (however that term is defined) is that they initiate patent infringement lawsuits seeking to enforce patents of dubious quality or with questionable infringement claims, and then settling for amounts far less than the defendants’ litigation costs. The story is that NPEs (non-practicing entities) take strategic advantage of the notoriously high cost of patent litigation, which requires several million dollars in attorneys’ fees to litigate through the close of discovery.

There is a little firm empirical evidence supporting this scenario of the combination of dubious patent assertions with low settlement demands. There is evidence that NPEs settle more quickly compared to other patent holders, which could indicate the possibility of nuisance settlements. But there is also evidence that the patents asserted by NPEs are similar to patents asserted by practicing entities. There is some evidence that the most litigious NPEs lose more often when the cases are taken to a final judgment, but like other types of complex civil litigation, the vast majority of patent cases settle before judgment. (David Schwartz and Jay Kesan, Analyzing the Role of NPEs in the Patent System < http://patentlyo.com/patent/2012/08/ analyzing-the-role-of-npes-in-the-patent-system.html> [as of Apr. 16, 2015].)

Some commentators suggest that the reason such diametrically opposed viewpoints on the issue of patent litigation abuse have emerged is because “patent litigators appear to be polarizing into a plaintiffs’ bar and a defense bar.” (Id.) Others suggest the debate is more about gaining a competitive advantage in the marketplace:

There is one basic reason behind the attacks on [patent] trolls: Big Money. Many patent-intensive products . . . are produced by big corporations that license many patents. . . . These corporations can make higher profits the less they pay to use patented technology they do not own, and higher profits still by paying nothing at all. . . . some corporations are looking to gain a competitive edge by changing the rules of the game. The strategy is to pass patent-reform legislation that weakens the negotiating position of patent holders. Corporations that pay large sums for patented technologies will point to lawsuits, trolls and anything else that will encourage lawmakers to pass such reforms. (Haber and Levine, The Myth Of the Wicked Patent Troll.)

Given the significant disagreement over whether abusive patent lawsuits are, indeed, a problem, the Committee may wish to study this issue in more depth before weighing curative legislation.

3. Existing Legal Remedies

According to the California Chamber of Commerce, this bill “seeks to prohibit . . . abusive conduct by prohibiting a person from engaging in a pattern or practice of sending [patent infringement] communications in bad faith.” In general, it renders unlawful certain statements when made in bad faith, such as claims that the sender has a right to enforce a patent when he or she does not, as well as efforts to seek compensation for patent claims that have been determined to be unenforceable or invalid. This sort of conduct may already be prohibited by the State of California’s robust consumer protection laws.

California’s Unfair Competition Law (UCL), as an example, renders an individual liable for any unlawful, unfair or fraudulent business act or practice and any unfair, deceptive, untrue or misleading advertising. (Bus. Prof. Code Sec. 17200.) In describing the unfair competition law's broad scope, the Supreme Court explained “it does not proscribe specific practices. Rather . . . it defines unfair competition to include any unlawful, unfair or fraudulent business act or practice. Its coverage is sweeping, embracing anything that can properly be called a business practice and that at the same time is forbidden by law.” (Cel-Tech Communications, Inc. v. Los Angeles Cellular Telephone Co. (1999) 20 Cal.4th 163, 180 (internal quotation marks and citations omitted).) Importantly, the UCL’s “statutory language referring to any unlawful, unfair or fraudulent practice makes clear that a practice may be deemed unfair even if not specifically proscribed by some other law.” (Id.) “[T]he Legislature . . . intended by this sweeping language to permit tribunals to enjoin on-going wrongful business conduct in whatever context such activity might occur. Indeed, . . . the section was intentionally framed in its broad, sweeping language, precisely to enable judicial tribunals to deal with the innumerable new schemes which the fertility of man’s invention would contrive.” (Id.) On its face, the UCL would appear to already capture the sort of dishonest business practice this bill intends to prohibit. (See Patent Trust v. Microsoft Corp. (2007, SD Cal) 525 F.Supp.2d 1200 (upholding defendant’s fraudulent act or practice UCL counterclaim against patent assertion entity).) Similarly, to the extent a non-practicing entity’s more egregious “bad faith” communications constitute willful efforts to deceive others with an intent to induce them to alter their position to their detriment, California’s civil fraud statute may already provide adequate relief. (See Civ. Code Sec. 1709.)

4. Impact to Existing Remedies

As noted in Comment 3, California’s existing consumer protection laws may already provide relief to individuals and businesses harmed by “bad faith” patent assertions and demands. While intended to provide additional relief to aggrieved parties, this bill may actually harm the ability of individuals to bring claims against those who assert patent claims in bad faith.

As a threshold matter, it should be noted that while this bill prohibits a detailed and extensive set of practices, the bill’s provisions may only be enforced by a very limited group of attorneys acting on behalf of the state, including the attorney general. The Innovation Alliance, writing in support, states that this bill “would allow enforcement by the state attorney general only. This will ensure the law is fairly enforced against abusers, and not be used as a weapon by private parties to penalize legitimate patent owners for asserting their rights.” Section 3273.7(b) of the bill states “notwithstanding any other law, the Attorney General or an attorney acting on behalf of the state shall have the sole authority to enforce this title. This title shall not be construed to create a private right of action.” This restriction on enforceability significantly undercuts the bill’s remedial aims. Depending on funding, staffing levels, and other enforcement priorities, the attorney general and designated attorneys acting on behalf of the state may be unwilling or unable to prosecute offenders and enforce the practices prohibited by this bill.

More importantly, by explicitly prohibiting these specific patent assertion related acts, this bill might actually deprive California residents of certain remedies available to them under existing law, particularly claims based on violations of the Unfair Competition Law (UCL). The Supreme Court has held that:

[a]lthough the unfair competition law's scope is sweeping, it is not unlimited. Courts may not simply impose their own notions of the day as to what is fair or unfair. Specific legislation may limit the judiciary's power to declare conduct unfair. If the Legislature has permitted certain conduct or considered a situation and concluded no action should lie, courts may not override that determination. When specific legislation provides a safe harbor, plaintiffs may not use the general unfair competition law to assault that harbor. (Cel-Tech Communications, Inc. v. Los Angeles Cellular Telephone Co. (1999) 20 Cal.4th 163, 182 (internal quotation marks and citations omitted).)

This bill’s limited remedies provision may be interpreted as providing just this sort of legislative safe harbor. By restricting enforcement authority to the attorney general and designated attorneys acting on behalf of the state, a reviewing court may be inclined to dismiss private party UCL claims based on activities that also fall within the scope of this bill. As the Court has observed, “[a] plaintiff may . . . not plead around an absolute bar to relief simply by recasting the cause of action as one for unfair competition.” (Id.) Explicitly barring plaintiffs from maintaining a private right of action in this bill may render similar UCL claims as attempts to “plead around” this bill’s remedies limitations, thus eliminating causes of action that may be available under existing law.

The Committee may want to consider the following amendments to ensure that this bill does not deprive California residents of remedies they currently have under existing law.

Suggested Amendments:

On page 4, line 12, strike “Notwithstanding any other law, the” and insert “The”

On page 4, following line 15, insert “(c) Nothing in this title shall be construed to impair or impede any other rights, causes of action, claims, or defenses available under other law. The remedies provided in this title are cumulative with any other remedies available under other law.”

5. Federal Preemption

The United States Constitution grants exclusive authority to Congress for the regulation of patents and copyrights. Article I, Section 8 states that Congress shall have the power “to promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries.” Patents are issued pursuant to the federal Patent Act by the U.S. Patent and Trademark Office, and the adjudication of patents is handled exclusively in the federal courts. The constitutional grant of exclusive authority over patents to Congress may ultimately preempt California laws designed to protect individuals and businesses from bad faith patent claims and demands.

The U.S. Supreme Court has held that the federal patent system:

is one in which uniform federal standards are carefully used to promote invention while at the same time preserving free competition. Obviously a State could not, consistently with the Supremacy Clause of the Constitution, extend the life of a patent beyond its expiration date or give a patent on an article which lacked the level of invention required for federal patents. To do either would run counter to the policy of Congress of granting patents only to true inventions, and then only for a limited time. Just as a State cannot encroach upon the federal patent laws directly, it cannot, under some other law, such as that forbidding unfair competition, give protection of a kind that clashes with the objectives of the federal patent laws. (Sears, Roebuck & Co. v. Stiffel Co. (1964) 376 U.S. 225, 230-231.)

While the Supreme Court has upheld certain state laws that touch upon patents (see e.g. Kewanee v. Bicron (1974) 416 U.S. 470, 492 (holding that patent law does not preempt trade secret law)), the reach of federal preemption in this area of law is unclear. Scholars have noted that whether or not patent assertion activities – such as the sending of demand letters – are “legal uses of federally created patent rights or . . . abusive business practices” is “[a] heated debate” and “test[s] a very fine line between a patent holder’s right to exclude others from infringing its patents and a state’s consumer protection obligation.” (David Johnson, Facing Down the Trolls: States Stumble on the Bridge to Patent-Assertion Regulation, 71 Wash & Lee L. Rev. 2023, 2025-2027.)

This bill seeks to protect California consumers by prohibiting patent assertions and claims made in “bad faith.” However, in so doing, California’s standard for measuring “bad faith” patent claims may conflict with federal patent law’s protection of a patent holder’s good faith assertions. (See C.R. Bard v. M3 Sys. (Fed. Cir. 1998) 157 F.3d 1340, 1369 (“The law recognizes a presumption that the assertion of a duly granted patent is made in good faith; this presumption is overcome only by affirmative evidence of bad faith.”).) Particularly where this bill requires those who assert patent claims to include specific information in their written communications, federal law may preempt California’s ability to prohibit certain patent assertions and claims.

6. Potential Chilling Effect on Patent Assertions

While this bill is intended to protect California businesses and individuals from bad faith patent assertions and claims, certain elements of the bill may, in operation, harm legitimate patent holders and discourage them from asserting their rights. First, the requirement that patent holders identify in their written assertions the identification of an infringed upon patent, the identification of an infringing product or service, and a description of how that product or service infringes upon the patent, may be impossible without first going through limited discovery. Especially with technological processes and electronic circuitry, a patent holder might not have enough information at the claim assertion stage to provide this information and avoid a counterclaim of acting in “bad faith.” Second, the possibility of enforcement of this bill’s provisions by the Attorney General or others may be used by some entities to intimidate patent holders, particularly individuals and small businesses, from protecting their rights by asserting claims to patented products, technologies, and industrial methods. Finally, the inclusion of an affirmative defense of “good faith” may be perceived as shifting the burden away from those bringing claims under this bill to prove “bad faith,” toward the patent holder having to demonstrate that his or her claim was made in “good faith.”

The Committee may want to consider the following amendments to ensure patent holders are able to assert their rights in good faith without exposing themselves to unwarranted liability.

Suggested Amendments:

On page 2, line 25, after “representations” insert “knowing they are false”

On page 3, line 11, after “communication” insert “fraudulently”

On page 3, line 11, strike “, in bad faith,”

On page 3, strike lines 20 and 21, and insert “(3) The sender of the communication fraudulently conceals or omits any of the following information from the communication, when that information is readily available to the sender at the time the communication is sent:”

On page 3, strike lines 38 through 40

On page 4, strike lines 1 through 4

Support: California Bankers Association; California Chamber of Commerce; Innovation Alliance; Qualcomm, Inc.; Silicon Valley Leadership Group

Opposition: None Known

HISTORY

Source: Author

Related Pending Legislation: AJR 9 (Chang) would make specified findings regarding patents and patent litigation, and would urge the President and the Congress of the United States to craft a balanced and workable approach to reduce incentives for and minimize abusive and frivolous patent litigation while ensuring that legitimate patent enforcement rights are protected and maintained.

Prior Legislation: None Known

**************

SENATE JUDICIARY COMMITTEE

Senator Hannah-Beth Jackson, Chair

2015 - 2016 Regular Session

Bill No: SB 681 (Author:Hill)

Amended: Version: February 27, 2015

Hearing Date: April 21, 2015

Fiscal: Yes

Urgency: No

Consultant: TH

SUBJECT

Civil Law: Patents

DESCRIPTION

This bill would make it unlawful to send a written communication stating that the recipient may have infringed on a United States patent if, in bad faith, the sender makes specified statements, seeks compensation for specified conduct, or fails to include specified information in the communication. This bill would also provide specific remedies for sending such unlawful communications, and would specify that those remedies may only be obtained by the Attorney General or an attorney acting on behalf of the state.

BACKGROUND

In recent years, much attention has been focused on the business model practiced by certain firms that make money not by producing goods, but by licensing patent use or asserting patent claims against other companies that produce goods using patented technologies and methods. The activities of these so-called “patent trolls,” “non-practicing entities,” or “patent monetization entities” are thought by some to be harming innovation and causing the market as a whole to reduce venture investing and research and development spending. Whether or not these entities actually harm the market is a hotly debated topic, as is the nature of what – if anything – should be done about it. Indeed, even the definition of who constitutes a non-practicing entity is contentious, with some commentators pointing out that the concept may include universities that license use of their patents.

This bill would create a new civil infraction designed to address the problems caused by non-practicing entities that allege patent infringement claims in bad faith. The bill would make it unlawful to send a written communication stating that the recipient is or may be infringing, or has or may have infringed, on a United States patent if the sender of the communication, in bad faith, makes a specified statement, seeks compensation for specified conduct, or fails to include specified information in the communication. As a remedy, the bill would provide that a person who sends a communication in violation of these provisions may be enjoined and is liable for a civil penalty of up to $2,500 for each violation. Such remedies may be sought solely by the Attorney General or an attorney acting on behalf of the state. This bill would additionally provide that it shall be an affirmative defense that the sender did not act in bad faith if the sender demonstrates that the statement, representation, or omission at issue was a mistake made in good faith.

CHANGES TO EXISTING LAW

Existing federal law, the United States Constitution, reserves to Congress the power “to promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries.” (U.S. Const., art. I, Sec. 8.)

Existing federal law, the Patent Act, provides for the issuance of patents to any person who invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof. (35 U.S.C. Sec. 101.)

Existing law, the Unfair Competition Law, renders an individual liable for any unlawful, unfair or fraudulent business act or practice and any unfair, deceptive, untrue or misleading advertising. (Bus. Prof. Code Sec. 17200.)

Existing law provides that one who willfully deceives another with intent to induce him to alter his position to his injury or risk, is liable for any damage which he thereby suffers. (Civ. Code Sec. 1709.)

This bill would render it unlawful for a person, in connection with the assertion of a United States patent, to engage in a pattern or practice of sending written communications that state or represent that the recipient is or may be infringing, or has or may have infringed, the patent and is liable or owes compensation to another, if specified conditions are met.

This bill would specify that it is unlawful for the sender of the written communication to make, in bad faith, any of the following statements or representations:

• that the sender has the right to license or enforce the patent at the time the communications are sent, if the sender is not a person with that right;

• that a civil action asserting a claim of infringement of the patent has been filed against either the recipient or against other persons;

• that legal action for infringement of the patent will be taken against the recipient;

• that the sender is the exclusive licensee of the patent asserted in the communications;

• that persons other than the recipient purchased a license for the patent asserted in the communications;

• that persons other than the recipient purchased a license, and the sender does not disclose that the license is unrelated to the alleged infringement or the patent asserted in the communications;

• that an investigation of the recipient’s alleged infringement has occurred; or

• that the sender, or an affiliate of the sender, previously filed a civil action asserting a claim of infringement of the patent based on the activity that is the subject of the written communication when the sender knew that the activity was held, in a final determination, not to infringe the patent.

This bill would specify that it is unlawful for the sender of the written communication to seek, in bad faith, compensation for any of the following:

• a patent claim that has been determined to be unenforceable or invalid against the recipient in a final determination;

• activity undertaken by the recipient after expiration of the patent asserted in the communication; or

• activity of the recipient that the sender knew was authorized, with respect to the patent claim that is the subject of the communication, by a person with the right to license the patent.

This bill would specify that it is unlawful for the sender of the written communication to fail, in bad faith, to include any of the following in the communication:

• the identity of the person asserting a right to license the patent to, or enforce the patent against, the recipient, including the identity of any parent entity and the ultimate parent entity of the person, unless that person is a public company and the name of the public company is identified;

• identification of at least one patent issued by the United States Patent and Trademark Office alleged to have been infringed;

• identification, to the extent reasonable under the circumstances, of at least one product, service, or other activity of the recipient that is alleged to infringe the identified patent;

• a description, to the extent reasonable under the circumstances, of how the product, service, or other activity of the recipient infringes an identified patent and patent claim; or

• a name and contact information for a person the recipient may contact about the assertions or claims relating to the patent contained in the communications.

This bill would provide that it is an affirmative defense that the sender of the written communication did not act in bad faith if the sender demonstrates that the statement, representation, or omission was a mistake made in good faith, as specified.

This bill would provide that a person who sends a communication in violation of its provisions may be enjoined in a court of competent jurisdiction and is liable for a civil penalty not to exceed two thousand five hundred dollars ($2,500) for each violation, as specified.

This bill would provide that, notwithstanding any other law, the Attorney General or an attorney acting on behalf of the state shall have the sole authority to enforce its provisions, and that it shall not be construed to create a private right of action.

This bill would also define the following terms:

• “final determination” means, with respect to the invalidity or unenforceability of a patent, that the invalidity or unenforceability has been determined by a court of the United States or the United States Patent and Trademark Office in a final decision that is unappealable or for which any opportunity for appeal is no longer available; and

• “recipient” means a person who purchases, rents, leases, or otherwise obtains a product or service in the commercial market that is not for resale in the commercial market and that is, or later becomes, the subject of a patent infringement allegation.

COMMENT

1. Stated need for the bill

The author writes:

Patents are essential to encouraging innovation, especially in the information technology and knowledge-based fields that drive much of California’s economy. The protections afforded by the federal patent system create an incentive to invest in research and innovation, which creates jobs and raises income.

At the same time, a number of states are seeking to address bad faith patent activities, such as the mailing of abusive demand letters. Patent assertion entities (PAEs) generally are holding or “shell” companies that don’t manufacture anything but hold a number of patents, typically purchased legally from bankrupt firms. They make their money by sending threatening letters to companies claiming they have been violating one or more of their (often vaguely defined) patents. The letters say that if the companies pay the license fees to use their patents, they won’t be sued. Often, PAEs target small- to medium-sized businesses that cannot afford to fight lengthy court battles, so they willingly pay the amount demanded to settle out of court. PAEs usually request unreasonable fees in light of the alleged infractions and often fail to give companies any details about what the patent in question actually covers or how they allegedly infringed upon it.

While California’s unfair competition law is broad, it does not appear to have been applied in the context of patent demand letters. Furthermore, as demand letters are pre-lawsuit communications that receive heightened protection under the First Amendment’s right to petition the courts and right to free speech, it is unclear whether the [Unfair Competition Law], which does not contain a scienter requirement, could withstand constitutional scrutiny when applied to demand letters. By contrast, SB 681 makes clear what practices are prohibited and, consistent with the Constitution, requires “bad faith” on the part of the sender.

SB 681 empowers the Attorney General to seek a civil penalty from any person or entity that sends bad faith demand letters to the end users of a product or service. This narrowly tailored bill prohibits specific misrepresentations (such as a false claim that legal action has been taken against the recipient), omissions (such as failing to identify the number of the allegedly infringed patent), and abusive practices (such as seeking compensation based on a patent previously found invalid) that patent trolls have used against unsophisticated persons and businesses.

2. Evidence of Problematic Behavior

This bill is premised on the proposition that non-producing patent holders who make money by licensing their patents (non-practicing entities) are harmful to the marketplace, and that some who engage in this business model carry out their activities in a manner that borders upon fraud. As noted above, these premises are highly contested among scholars and commentators. For example, one recent opinion piece in the Wall Street Journal states:

Patent-reform activists point out that the number of patent lawsuits has increased by about 60 [percent] since 2000, which they cite as evidence that there is a serious problem with the patent system. But does the uptick in lawsuits actually indicate such a problem?

In short, no. It might instead reflect a healthy, dynamic economy. Rapid technological advances have spurred more innovation and patents, and courts are now clarifying the nature and boundaries of intellectual property and contract rights. (Stephen Haber and Ross Levine, The Myth Of the Wicked Patent Troll (June 29, 2014) < http://www.wsj.com/articles/stephen-haber-and-ross-levine-the-myth-of-the-wicked-patent-troll-1404085391> [as of Apr. 16, 2015].)

A counterpoint piece in the Harvard Business Review illustrates the opposing position, stating:

But there is evidence of significant harm. The White House and the Congressional Research Service both cited many research studies suggesting that patent litigation harms innovation. And three new empirical studies provide strong confirmation that patent litigation is reducing venture capital investment in startups and is reducing R&D spending, especially in small firms.

. . .

The economic burden of today’s patent lawsuits is, in fact, historically unprecedented. Research shows that patent trolls cost defendant firms $29 billion per year in direct out-of-pocket costs; in aggregate, patent litigation destroys over $60 billion in firm wealth each year.

. . .

[A]cross a significant number of studies using different methodologies and performed by different researchers, a consistent picture is emerging about the effects of patent litigation: it costs innovators money; many innovators and venture capitalists report that it significantly impacts their businesses; innovators respond by investing less in [research and development] and venture capitalists respond by investing less in startups. (James Bessen, The Evidence Is In: Patent Trolls Do Hurt Innovation, Harvard Business Report (Nov. 2014) < https://hbr.org/2014/07/the-evidence-is-in-patent-trolls-do-hurt-innovation> [as of Apr. 16, 2015].)

Yet a third article takes a more nuanced view:

One common criticism of [non-practicing entities] (however that term is defined) is that they initiate patent infringement lawsuits seeking to enforce patents of dubious quality or with questionable infringement claims, and then settling for amounts far less than the defendants’ litigation costs. The story is that NPEs (non-practicing entities) take strategic advantage of the notoriously high cost of patent litigation, which requires several million dollars in attorneys’ fees to litigate through the close of discovery.

There is a little firm empirical evidence supporting this scenario of the combination of dubious patent assertions with low settlement demands. There is evidence that NPEs settle more quickly compared to other patent holders, which could indicate the possibility of nuisance settlements. But there is also evidence that the patents asserted by NPEs are similar to patents asserted by practicing entities. There is some evidence that the most litigious NPEs lose more often when the cases are taken to a final judgment, but like other types of complex civil litigation, the vast majority of patent cases settle before judgment. (David Schwartz and Jay Kesan, Analyzing the Role of NPEs in the Patent System < http://patentlyo.com/patent/2012/08/ analyzing-the-role-of-npes-in-the-patent-system.html> [as of Apr. 16, 2015].)

Some commentators suggest that the reason such diametrically opposed viewpoints on the issue of patent litigation abuse have emerged is because “patent litigators appear to be polarizing into a plaintiffs’ bar and a defense bar.” (Id.) Others suggest the debate is more about gaining a competitive advantage in the marketplace:

There is one basic reason behind the attacks on [patent] trolls: Big Money. Many patent-intensive products . . . are produced by big corporations that license many patents. . . . These corporations can make higher profits the less they pay to use patented technology they do not own, and higher profits still by paying nothing at all. . . . some corporations are looking to gain a competitive edge by changing the rules of the game. The strategy is to pass patent-reform legislation that weakens the negotiating position of patent holders. Corporations that pay large sums for patented technologies will point to lawsuits, trolls and anything else that will encourage lawmakers to pass such reforms. (Haber and Levine, The Myth Of the Wicked Patent Troll.)

Given the significant disagreement over whether abusive patent lawsuits are, indeed, a problem, the Committee may wish to study this issue in more depth before weighing curative legislation.

3. Existing Legal Remedies

According to the California Chamber of Commerce, this bill “seeks to prohibit . . . abusive conduct by prohibiting a person from engaging in a pattern or practice of sending [patent infringement] communications in bad faith.” In general, it renders unlawful certain statements when made in bad faith, such as claims that the sender has a right to enforce a patent when he or she does not, as well as efforts to seek compensation for patent claims that have been determined to be unenforceable or invalid. This sort of conduct may already be prohibited by the State of California’s robust consumer protection laws.

California’s Unfair Competition Law (UCL), as an example, renders an individual liable for any unlawful, unfair or fraudulent business act or practice and any unfair, deceptive, untrue or misleading advertising. (Bus. Prof. Code Sec. 17200.) In describing the unfair competition law's broad scope, the Supreme Court explained “it does not proscribe specific practices. Rather . . . it defines unfair competition to include any unlawful, unfair or fraudulent business act or practice. Its coverage is sweeping, embracing anything that can properly be called a business practice and that at the same time is forbidden by law.” (Cel-Tech Communications, Inc. v. Los Angeles Cellular Telephone Co. (1999) 20 Cal.4th 163, 180 (internal quotation marks and citations omitted).) Importantly, the UCL’s “statutory language referring to any unlawful, unfair or fraudulent practice makes clear that a practice may be deemed unfair even if not specifically proscribed by some other law.” (Id.) “[T]he Legislature . . . intended by this sweeping language to permit tribunals to enjoin on-going wrongful business conduct in whatever context such activity might occur. Indeed, . . . the section was intentionally framed in its broad, sweeping language, precisely to enable judicial tribunals to deal with the innumerable new schemes which the fertility of man’s invention would contrive.” (Id.) On its face, the UCL would appear to already capture the sort of dishonest business practice this bill intends to prohibit. (See Patent Trust v. Microsoft Corp. (2007, SD Cal) 525 F.Supp.2d 1200 (upholding defendant’s fraudulent act or practice UCL counterclaim against patent assertion entity).) Similarly, to the extent a non-practicing entity’s more egregious “bad faith” communications constitute willful efforts to deceive others with an intent to induce them to alter their position to their detriment, California’s civil fraud statute may already provide adequate relief. (See Civ. Code Sec. 1709.)

4. Impact to Existing Remedies

As noted in Comment 3, California’s existing consumer protection laws may already provide relief to individuals and businesses harmed by “bad faith” patent assertions and demands. While intended to provide additional relief to aggrieved parties, this bill may actually harm the ability of individuals to bring claims against those who assert patent claims in bad faith.

As a threshold matter, it should be noted that while this bill prohibits a detailed and extensive set of practices, the bill’s provisions may only be enforced by a very limited group of attorneys acting on behalf of the state, including the attorney general. The Innovation Alliance, writing in support, states that this bill “would allow enforcement by the state attorney general only. This will ensure the law is fairly enforced against abusers, and not be used as a weapon by private parties to penalize legitimate patent owners for asserting their rights.” Section 3273.7(b) of the bill states “notwithstanding any other law, the Attorney General or an attorney acting on behalf of the state shall have the sole authority to enforce this title. This title shall not be construed to create a private right of action.” This restriction on enforceability significantly undercuts the bill’s remedial aims. Depending on funding, staffing levels, and other enforcement priorities, the attorney general and designated attorneys acting on behalf of the state may be unwilling or unable to prosecute offenders and enforce the practices prohibited by this bill.

More importantly, by explicitly prohibiting these specific patent assertion related acts, this bill might actually deprive California residents of certain remedies available to them under existing law, particularly claims based on violations of the Unfair Competition Law (UCL). The Supreme Court has held that:

[a]lthough the unfair competition law's scope is sweeping, it is not unlimited. Courts may not simply impose their own notions of the day as to what is fair or unfair. Specific legislation may limit the judiciary's power to declare conduct unfair. If the Legislature has permitted certain conduct or considered a situation and concluded no action should lie, courts may not override that determination. When specific legislation provides a safe harbor, plaintiffs may not use the general unfair competition law to assault that harbor. (Cel-Tech Communications, Inc. v. Los Angeles Cellular Telephone Co. (1999) 20 Cal.4th 163, 182 (internal quotation marks and citations omitted).)

This bill’s limited remedies provision may be interpreted as providing just this sort of legislative safe harbor. By restricting enforcement authority to the attorney general and designated attorneys acting on behalf of the state, a reviewing court may be inclined to dismiss private party UCL claims based on activities that also fall within the scope of this bill. As the Court has observed, “[a] plaintiff may . . . not plead around an absolute bar to relief simply by recasting the cause of action as one for unfair competition.” (Id.) Explicitly barring plaintiffs from maintaining a private right of action in this bill may render similar UCL claims as attempts to “plead around” this bill’s remedies limitations, thus eliminating causes of action that may be available under existing law.

5. Federal Preemption

The United States Constitution grants exclusive authority to Congress for the regulation of patents and copyrights. Article I, Section 8 states that Congress shall have the power “to promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries.” Patents are issued pursuant to the federal Patent Act by the U.S. Patent and Trademark Office, and the adjudication of patents is handled exclusively in the federal courts. The constitutional grant of exclusive authority over patents to Congress may ultimately preempt California laws designed to protect individuals and businesses from bad faith patent claims and demands.

The U.S. Supreme Court has held that the federal patent system:

is one in which uniform federal standards are carefully used to promote invention while at the same time preserving free competition. Obviously a State could not, consistently with the Supremacy Clause of the Constitution, extend the life of a patent beyond its expiration date or give a patent on an article which lacked the level of invention required for federal patents. To do either would run counter to the policy of Congress of granting patents only to true inventions, and then only for a limited time. Just as a State cannot encroach upon the federal patent laws directly, it cannot, under some other law, such as that forbidding unfair competition, give protection of a kind that clashes with the objectives of the federal patent laws. (Sears, Roebuck & Co. v. Stiffel Co. (1964) 376 U.S. 225, 230-231.)

While the Supreme Court has upheld certain state laws that touch upon patents (see e.g. Kewanee v. Bicron (1974) 416 U.S. 470, 492 (holding that patent law does not preempt trade secret law)), the reach of federal preemption in this area of law is unclear. Scholars have noted that whether or not patent assertion activities – such as the sending of demand letters – are “legal uses of federally created patent rights or . . . abusive business practices” is “[a] heated debate” and “test[s] a very fine line between a patent holder’s right to exclude others from infringing its patents and a state’s consumer protection obligation.” (David Johnson, Facing Down the Trolls: States Stumble on the Bridge to Patent-Assertion Regulation, 71 Wash & Lee L. Rev. 2023, 2025-2027.)

This bill seeks to protect California consumers by prohibiting patent assertions and claims made in “bad faith.” However, in so doing, California’s standard for measuring “bad faith” patent claims may conflict with federal patent law’s protection of a patent holder’s good faith assertions. (See C.R. Bard v. M3 Sys. (Fed. Cir. 1998) 157 F.3d 1340, 1369 (“The law recognizes a presumption that the assertion of a duly granted patent is made in good faith; this presumption is overcome only by affirmative evidence of bad faith.”).) Particularly where this bill requires those who assert patent claims to include specific information in their written communications, federal law may preempt California’s ability to prohibit certain patent assertions and claims.

6. Potential Chilling Effect on Patent Assertions

While this bill is intended to protect California businesses and individuals from bad faith patent assertions and claims, certain elements of the bill may, in operation, harm legitimate patent holders and discourage them from asserting their rights. First, the requirement that patent holders identify in their written assertions the identification of an infringed upon patent, the identification of an infringing product or service, and a description of how that product or service infringes upon the patent, may be impossible without first going through limited discovery. Especially with technological processes and electronic circuitry, a patent holder might not have enough information at the claim assertion stage to provide this information and avoid a counterclaim of acting in “bad faith.” Second, the possibility of enforcement of this bill’s provisions by the Attorney General or others may be used by some entities to intimidate patent holders, particularly individuals and small businesses, from protecting their rights by asserting claims to patented products, technologies, and industrial methods. Finally, the inclusion of an affirmative defense of “good faith” may be perceived as shifting the burden away from those bringing claims under this bill to prove “bad faith,” toward the patent holder having to demonstrate that his or her claim was made in “good faith.”

Support: California Bankers Association; California Chamber of Commerce; Innovation Alliance; Qualcomm, Inc.; Silicon Valley Leadership Group

Opposition: None Known

HISTORY

Source: Author

Related Pending Legislation: AJR 9 (Chang) would make specified findings regarding patents and patent litigation, and would urge the President and the Congress of the United States to craft a balanced and workable approach to reduce incentives for and minimize abusive and frivolous patent litigation while ensuring that legitimate patent enforcement rights are protected and maintained.

Prior Legislation: None Known

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