Demand Letters and Mandatory Disclosures: First Amendment Concerns

In the recent calls to revise the patent system to address so-called “patent trolls” — an ill-defined term that effectively derails any discussion of patent policy based in reality — Congress is considering bills that would impose mandatory disclosures on all demand letters sent by patent owners. Although there is no definitive definition of what constitutes a “demand letter,” a classic, undisputed example is correspondence asserting that the recipient is infringing a patent and demanding payment of damages, a royalty, or both.

Assuming for the sake of argument that there is a definitively proven systemic problem with demand letters, the First Amendment’s limitations on Congress’s power to restrict speech should not be ignored.  This is especially the case when the speech is necessary for legally securing property rights in the courts. This brief essay will review the Supreme Court’s application of the First Amendment to mandated speech (compelled speech), which strongly suggests that Congress should tread very carefully in legislating in this area.

The First Amendment’s Prohibition on “Compelled Speech”

The First Amendment guarantees “freedom of speech,” which the Supreme Court has applied to protect both what one says and what one chooses not to say.  The important recognition of these two corollary rights began with the Supreme Court’s rejection of “compelled speech” in the 1943 case, West Virginia State Board of Education v. Barnette, which invalidated a state law requiring students to recite the Pledge of Allegiance and to salute the flag while doing so.  As the Court later explained in its 1977 decision in Wooley v. Maynard, “[t]he right to speak and the right to refrain from speaking are complementary components of the broader concept of individual freedom of mind.”  In sum, the First Amendment secures two necessarily interrelated and equally important rights — the right to speak and the right to not speak — because both reflect the complete freedom of thought and expression secured to individuals by the Constitution.

Since the Barnette decision, the First Amendment has solidly protected individuals from government-compelled expression, at least in the context of non-commercial speech. In these cases, the Court has applied the “strict scrutiny” standard of review for statutes or regulations compelling speech (requiring a compelling government interest achieved through the least restrictive means and with no alternative methods for achieving the compelling interest available).  Unsurprisingly, as a result of this strict scrutiny, the right not to speak has been firmly secured under the First Amendment.

When first faced with the question of compelled commercial speech, though, the Supreme Court took a different approach in its 1980 decision in Central Hudson Gas & Electric Corporation v. Public Service Commission.  In Central Hudson, the Court invalidated a ban on promotional advertising by utility companies when they mailed customers their utility bills, but it crafted a lower standard of review under the First Amendment for compelled commercial speech — what is known as “intermediate scrutiny.” In compelled commercial speech cases, the Court now applies a four-factor test: (1) is the speech protected under the First Amendment (false, misleading, or promoting illegal activities is unprotected), (2) does the government have a “substantial interest” justifying the compulsion of speech, (3) does the law directly advance this substantial interest, and (4) is the law any more extensive than necessary to achieve this substantial interest.

Five years later, the Supreme Court decided Zauderer v. Office of Disciplinary Counsel (1985), in which an attorney was sanctioned under an Ohio state law for advertising his services to potential clients.  The Zauderer Court struck down the state law, but it applied an even lower standard of review for situations in which the compelled commercial speech consists of “purely factual and uncontroversial information.” In these situations, the Zauderer Court applied the “rational basis” standard of review, holding that a commercial speakers’ First Amendment rights are respected when the “disclosure requirements are reasonably related to the State’s interest” in preventing consumer deception.

Demand Letters: Inextricably Mixed Non-Commercial and Commercial Speech

Although demand letters may appear to be a form of pure commercial speech, this is far from the actual truth. To be clear, a demand letter informs its recipient that it is infringing a property right secured under federal law.  While this has commercial implications, it is not the same thing as an advertisement in the marketplace, such as a sign in a storefront window or a banner ad on a website. Thus, for the same reason that the Supreme Court voided compelled speech requirements in the solicitation of charitable donations in Riley v. National Federation of Blind of North Carolina (1988), there are serious and substantial reasons for thinking that mandating certain speech requirements in demand letters may also be constitutionally suspect under the First Amendment. As the Riley Court explained in refusing to adopt a rational basis standard of review for what clearly looked like solicitations of a commercial nature, “the First Amendment guarantees ‘freedom of speech,’ a term necessarily comprising the decision of both what to say and what not to say.”

Characterizing demand letters as purely commercial speech conflicts with the essential nature of the American patent system.  Patent rights are not commercial monopolies; to the contrary, the longstanding and unique American approach to promoting technological innovation has been to define and secure property rights in this innovation.  As such, a claim of patent infringement is at heart a legal claim, not a commercial claim. While protecting property, especially patented innovation that is being licensed or sold in the marketplace, has commercial implications, this does not mean that the legal act of securing this property right constitutes an act of commercial speech. Although the law has been heavily influenced by economic analysis in the last several decades, a lawsuit is not the same as a commercial transaction.

Similarly, a threat of a potential lawsuit is also not the same thing as engaging in a purely commercial transaction.  A demand letter, even if requesting payment of a royalty under a license agreement, is a critical first step to enforcing a property right.  Without the threat of a potential lawsuit, infringers would “hold out” and continue infringing, and thus patent owners would no longer have a right to the patented innovation. Thus, the essential nature of a property right in which the owner is secured the exclusive use of the protected asset is fundamentally inseparable from the commercial deployment of this asset in the marketplace — the former is what makes the latter possible. This is why strong and certain property rights are the cornerstone to vibrant economic growth and a flourishing society.

For these reasons, demand letters do not fit the Supreme Court’s definition of commercial speech in its compelled speech cases.  In Virginia State Board of Pharmacy v. Virginia Citizens Consumer Council, Inc. (1973), the Court defined commercial speech as “speech which does ‘no more than propose a commercial transaction.’” This clearly covers the core commercial speech example of an advertisement in the marketplace.

But as made clear in cases like Riley, Virginia State Board, and Bolger, speech often comprises both non-commercial and commercial elements. In such situations, the Court has refused to apply by rote its traditional “rational basis” test for commercial regulations, and, as evidenced in decisions like Riley, it has knowingly departed from this lax constitutional standard where there is a close constitutional question about a law compelling speech.

As the Riley Court explained, a mixture of both non-commercial and commercial elements in a communication should be treated by the courts for First Amendment review as non-commercial speech if these elements are “inextricably intertwined.”  A claim to legal protection of a property right against infringement with a concomitant demand for damages or a license is speech that has both non-commercial and commercial elements that are “inextricably intertwined.” In fact, in its 1983 decision in Bolger v. Youngs Drug Products Corp., the Supreme Court held that referring to a product sold in the marketplace does not necessarily make a communication a form of “commercial speech.” Even more relevant in thinking about the constitutional limitations in mandating disclosure requirements in demand letters is that the Bolger also held that an economic motivation for sending a communication does not by itself define it as a form of “commercial speech.”

The Court’s compelled speech cases raise serious First Amendment concerns about legislating mandatory disclosures in demand letters. As communications serving the core function of securing property rights that are being infringed in the marketplace, demand letters certainly have non-commercial and commercial speech elements that are “inextricably intertwined.”

Stymying the Function of Property Rights in Innovation

In addition to the fundamental constitutional concern, there are strong policy concerns about adopting this type of systemic revision to the patent system. As property rights, patents can be freely conveyed or licensed in the marketplace. This essential feature of securing property rights in innovation is what has made it possible for the American patent system to successfully promote innovation relative to other alternative systems for promoting and commercializing innovation.  The significance of freely alienable and enforceable patent rights, whether in historical context or in today’s innovation economy, is that this is an essential legal mechanism to bring innovation from the lab or garage to the marketplace — and into people’s everyday lives, such as smartphones, tablets, and personalized medicine.

Mandating disclosures in demand letters carries serious risk in disrupting the operation of this complex innovation market.  As reported by the Heritage Foundation, shifting burdens merely waters down patent rights.  The economic reality is that our patent system is essential to maintaining the virtuous cycle of investment and development that drives innovation forward.  Overbroad legislative measures revising the patent system raise the very real danger of producing unintended consequences that can derail that system.