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Patent trolling surges, but righteous cavalry on the way

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Patent trolling is a "cancer" that poses an "existential threat" to US business – especially startups – according to a panel of experts at last week's CES 2013. But there are plans in the works to fight back.

"There's a great quote from Scientific American," congressman Peter DeFazio told his audience at a CES 2013 panel. "They say, 'It is almost as though we have taken our collective creativity and placed it in a lockbox, where the main benefactors are lawyers and profiteers'."

DeFazio disagrees only slightly with Scientific American. "In fact," he says, "there is no 'almost' about it."

The Democrat from Oregon has introduced an anti-trolling bill in the House of Representatives entitled the SHIELD Act – a particularly contorted backronym for Saving High-tech Innovators from Egregious Legal Disputes. "In Congress," he said apologetically, "there are five thousand bills introduced ... so if you want to have a bill you come up with a catchy name."

In support of his anti-trolling argument, he cited a study by Boston University that determined patent trolling cost the US economy $29bn in direct payouts and outside legal fees in 2011.

And it's not just big companies that have to fight off trolls, DeFazio said. On the contrary, "Startups get put out of business and a lot of small and midsized firms are put at risk by patent trolls."

Industry analyst Ed Goodman, who manages research for the market-watching firm Engine Advocacy, says that for the 500 startups he follows, patent trolling slows growth and stifles innovation. "It's an enormous problem that hits startups the hardest," he said.

"You hear frequently about billion-dollar settlements between Google, or Apple, or HTC, or Samsung," Goodman said. "It's a much bigger cost to small companies that are just getting started when they have to pay two million dollars or spend two months defending themselves against a patent threat. What you really see is an existential threat."

Another panelist, Google's senior patent counsel Suzanne Michel – who left her position as the Federal Trade Commission's deputy director of policy planning in August 2011 to join Google – put numbers on the recent increase in patent trolling.

"In 2011 there were over 5,800 troll suits," she said. "That's four times more than 2005." She also noted that in 2007, troll suits accounted for 22 per cent of all patent litigation, and that by 2012 that number had increased to 61 per cent – a clear majority. "And that is staggering," she said, "and frankly somewhat scary."

She also emphasized that the $29bn figure DeFazio cited was merely the amount of money that changed hands between companies, trolls, and outside legal counsel. "But that's not the total cost of this problem," she said. "The indirect costs of the problem are actually greater."

Those indirect costs, Michel said, increase the aggregate annual cost of trolling to be $80bn per year, according to the Boston University study that DeFazio cited – a figure derived by adding the time wasted by engineers helping lawyers prepare for litigation, the time executive need to turn away from growing their businesses and focus on litgation, and the cost of in-house lawyers.

These figures, of course, beg the question of how to define what is and what isn't a patent-trolling lawsuit. Michel's definition is rather straightforward: a trolling suit is one in which the patent owner simply wants to "monetize", as she put it, their patent through a licensing fee or a settlement, with no technology transfer going on.

"There's a well-established business model in a lot of technological industries, a very innovative model," she said, "where you come up with a new idea, you patent it, you license it out to a company that will bring a new product to market. That's great for innovation. That's great for consumers. That's not at all what's going on here."

Patent trolls buy patents, then look around the market for companies that they can convince a jury have infringed upon that patent, she said. Needless to say, trolls construe their patents as broadly as possible in order to widen the snare into which they can trap their prey.

Newegg's chief legal officer Lee Cheng was blunt in his assessment of patent trolling. "It's protection money," he said. "To put it bluntly, it's extortion." Defining a troll for Cheng is simple. "I know a troll when I see one," he said. "I know a troll when they sue us."

Trolls, all panelists agreed, would prefer to frighten startups – and even established companies – into settlements rather than fight them in court where the outcome is uncertain even in the notoriously plaintiff-friendly Eastern District of Texas. Smaller companies without in-house legal staff often simply capitulate to what Cheng describes as extortion rather than engage is a costly legal battle.

One panelist, Home Automation Inc. (HAI) president Jay McLellan, told a patent-trolling story of woe and intrigue that led to his relatively small company having to shell out big bucks in a settlement. "In 2011, a company acquired a 17-year-old patent that was going to expire six months later," he recalled. "And they came after a bunch of big guys with this technology patent, and they came after a bunch of little guys – which is us."

McLellan said that he read the patent in question, and asked himself if a jury of laymen would be able to understand the convoluted patentese in which it was written and parse the meaning therein. He wasn't sure that they could or would.

"And all this happened at a critical juncture in our history," he said. "We happened to be in the due-diligence period of an acquisition. So what did we have to do? We had to settle. We just had to put it to bed."

VOXX International president and CEO Patrick Lavelle sympathized, especially in cases when a troll is well-armed with hundreds of patents.

"The cost of a typical patent suit for us is about two-and-a-half million dollars," he said. "So if they come to you with a $20 million claim on 200 patents, the cost of putting that information together, going to court, and fighting it – and then they turn around and offer a six or seven hundred-thousand dollar settlement – as a businessman you have no place to go. You gotta settle and move on."

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