Extortion Patent Style: Small Business in the Troll Crosshairs
|Written by Gene Quinn
Patent Attorney & Founder of IPWatchdog
Zies, Widerman & Malek
Follow Gene on Twitter @IPWatchdog
Posted: May 24, 2011 @ 2:00 pm
There is no doubting that being in the patent troll business is exceptionally lucrative. In 2010 PriceWaterhouseCoopers released the 2010 Patent Litigation Study, which gives a peek into just how lucrative it is to be a patent troll. Between 1995 and 2009 the overall median patent litigation damage award was $5.2 million, but between 2002-2009 there was a huge discrepancy between the average damage award for practicing entities versus non-practicing entities. The median award for non-practicing entities was $12.9 million, while the median award for practicing entities lagged far behind at $3.9 million. No wonder there is ever increasing activities by those the Federal Trade Commission refers to as “patent assertion entities,” which seems to be yet another sanitized name for patent troll.
According to a recent FTC Report, The Evolving IP Marketplace, the high damage awards for non-practicing entities has generated a lottery-ticket mentality that encourages entities to purchase patents solely for the purpose of asserting them against established products and services. But solving the problem is not at all easy.
One of the difficulties facing the industry with respect to how to handle the patent trolling problem is that it is exceptionally hard to define. This is due to the fact that not all non-practicing entities are properly characterized as a bad actor. Indeed, many non-practicing entities are the very type of inventor that the United States has always embraced — independent inventors, Universities, federal research laboratories and R&D companies. In fact, today Thomas Edison would be considered a patent troll by some, which is the height of absurdity. Dealing with the patent troll problem without catching up the good actors in the mix has prove to be near impossible. Thus, it is unlikely that government imposed solutions exist for the bad actors, which means those affected need to take matters into their own hands.
For the most part, the bad acting patent assertion entities purchase patents, and then license them. While there is nothing inherently wrong with this, the bad actors will assert patents that have nothing to do with what the accused infringer is doing. They are simply looking for money, on sometimes dubious patents and many times on patents that upon any amount of investigation would prove to be unrelated. Many small businesses I talk to mistakenly believe that they just need to talk to the patent troll and explain to them and then they will be left alone. Simply put, that isn’t going to happen. Likely every other bully in life they understand only two things: (1) you rolling over; or (2) you standing up and punching them in the nose saying you aren’t going to take it any more.
The bad actors will charge whatever amount of licensing fees can be extracted from operating companies already using and marketing the technology, and increasingly have turned their attention onto small businesses. They seek relatively small amounts for large numbers of companies. This model deviates from the historic patent troll model, which would target large corporations looking for a huge payday, but sometimes is a precursor to targeting large corporations. If they get a bunch of companies to roll over they generate revenue, and more importantly they set a licensing rate that will be useful in future litigations against the Mega-giants they really want to pursue.
More and more we are seeing dubious patents, with claims that are hardly relevant, being asserted against smaller and smaller businesses. Why? Because the cost of fighting a patent litigation can easily venture into the 7 figures and the amount of the licensing fee is relatively low so there is little or no incentive to fight. Small businesses just pay.
When a small business is faced with the decision to fight or pay a small fee, the temptation to pay the small fee is overwhelming. I see no other way to characterize these attempts other than to acknowledge what is really going on. Increasingly patent trolls are shaking down small businesses and the payments they force look far more like extortion than anything else. What is going on in some corners of the patent industry is far worse than the protection rackets. At least with the protection rackets you would pay for protection and the party extorting money wouldn’t let others push you around. In the patent troll racket there is no protection. Worse, those who cave and pay might as well be painting a bulls-eye on themselves. Nearly every product or service in the IT sector involves multiple technologies, and you have demonstrated the willingness to pay without a fight, meaning you are an easy target.
But wait, you say. My product or service doesn’t infringe on any patents, therefore, I have nothing to worry about. Think again my friend. What I have been seeing lately is the assertion, or threatened assertion, of patents that have little if anything to do with the products or services that the defendant is offering. In fact, filing a patent infringement complaint in federal court is exceptionally easy.
According to the Federal Rules of Civil Procedure all a patent owner has to do is assert the number and title of the patent and then vaguely say that one or more claims are believed to be infringed. This type of complaint almost certainly violates several Supreme Court cases requiring more rigorous complaints be filed, and some District Courts are agreeing with my analysis here, but the reality is that no due diligence is required to send a threatening cease and desist letter, and no real due diligence is required before a patent infringement complaint is filed. For better or for worse in the United States anyone can be sued for virtually any reason, and recovering your attorneys fees from even a malicious plaintiff is various degrees of impossible, meaning you have to pay to defend or you pay extortion to get out of the case.
It is unrealistic to look to the government or to the courts for a solution to the patent troll problem. Indeed, in a recent report the Federal Trade Commission observed:
Attempts to address concerns about the detrimental effects of PAE activity on innovation and competition must be undertaken with sensitivity to the roles played by a patentee’s ability to enforce and transfer its rights. The patentee’s ability to allege patent infringement even against independent creators of the patented technology and enter ex post patent transactions is an important feature of the patent system’s incentives to innovate.
The need for caution when trying to address the effects of those who seek only to license is certainly legitimate because whatever rules and laws are adopted with apply to everyone, good actor and bad actor alike. Upsetting the delicate balance that defines the patent owner’s rights to make it more difficult for bad actors would undoubtedly have a negative impact on innovation through lower incentives. The innovation we want most requires enormous capital investment, and the only way to get that investment is to demonstrate a competitive advantage, which is why overwhelmingly investors want patents. While investors are not patent experts or patent attorneys, they do well understand what an erosion of rights looks like, so ought not be talking about weakening patent rights to address the patent troll problem.
Those who are facing an assertion of rights by those with dubious patents or patents that simply don’t cover what they are doing need to make a choice. Either you suck up and pay the extortion or you don’t. The temptation to pay is real and understandable when faced with the prospect of moving forward to fight the battle alone, but you don’t have to fight alone. If you are facing a cease and desist letter the likelihood is that many others in your shoes are facing the same thing. A good example of this is the recent Lodsys assertion against Apple App developers. See Apple to Patent Troll: Back Off App Developers.
Luckily for the Apple App developers it seems as if Apple is standing up to take the heat, offering at least some protection, but in many situations where patent trolls are going after small businesses there is no Knight in Shining Armour going to ride in and save the day. In some cases I have heard from small businesses getting sued alongside of big businesses that they believe that they are really safe and have nothing to worry about it because the big business will fight the battle for them. That type of thinking strikes me as nearly delusionally naive. There is an odd symbiosis between the legal departments of many large companies and patent trolls. I have been told that good working relationships, even friendships, are pursued so that when they get sued again it will be easier to work out a deal. I’m not sure how a small business tying their horse to that carriage is a good strategy.
There are things that can be done to fight off a renegade patent troll, such as: (1) filing a request for reexamination; or (2) filing a Declaratory Judgment Action in a jurisdiction that is likely going to be more favorable to defendant’s than the Eastern District of Texas, which is where the patent troll will eventually sue you. If you get sued you probably want to consider a variety of intentional tort cross-complaints because the patent troll is trying to intentionally interfere with your business for no good reason. There are also numerous defenses that can be employed if you get sued that can turn up the heat on the patent troll, such as patent misuse, but the real goal is to try and not get sued, or if you get sued to get sued in a District Court that is either even-handed or more likely to be pro-defendant. Of course, this is not free, which is why many small businesses resort to painting the red bulls-eye on themselves and pay.
In my opinion it is it becoming increasingly critical within the IT sector for small businesses to form alliances or industry organizations. If one is getting pursued it is only a matter of time before others will get pursued, so it would make sense for an alliance of like businesses to collectively work together. This is particularly necessary since the business model of the patent troll, as a non-practicing entity, means they have absolutely nothing to lose.
Let’s face it, the patent troll business model exceptionally attractive — little or no risk, potentially huge rewards. That being the case it is acutely naive to believe the patent troll problem will go away and won’t affect you. If you are a small business in the IT sector it is only a matter of time. Unless and until a unified industry strategy can take the fight to patent trolls and force them to spend money they will always be the hunter and those engaged in business will always be the hunted.
About the Author
Gene Quinn is a US Patent Attorney, law professor and the founder of IPWatchdog.com. He is also a principal lecturer in the top patent bar review course in the nation, which helps aspiring patent attorneys and patent agents prepare themselves to pass the patent bar exam. Gene started the widely popular intellectual property website IPWatchdog.com in 1999, and since that time the site has had many millions of unique visitors. Gene has been quoted in the Wall Street Journal, the New York Times, the LA Times, USA Today, CNN Money, NPR and various other newspapers and magazines worldwide. He represents individuals, small businesses and start-up corporations. As an electrical engineer with a computer engineering focus his specialty is electronic and computer devices, Internet applications, software and business methods.