Patent trolling surges, but righteous cavalry on the way
The next battle in the troll wars is up to you, Reg reader
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."
So what's to be done?
Cheng described how Newegg first took the settlement route rather than fighting – but no more. "We could see what was coming down the pike, and we decided to take the stand that we have taken," he said.
"And that's what I think it takes – it basically takes people saying, 'This doesn't make any sense to me, and I'm not going to do what's expedient and what seems to cost a little bit less money in the short run.' Because in the long run it's bad for the companies that pay people off because they're going to get sued more. They will encourage more entities to become patent trolls."
Congressman DeFazio wants to make it riskier for trolls to
extort settlements sue for patent infringement – although he's not at all sure that the current "incredibly dysfunctional Congress," as he put it, will be receptive to the ideas that he and his small-but-growing coalition of troll-hunting legislators are putting forward.
DeFazio and his congressional cohort are developing a test that would be applied at the beginning of any patent litigation that would be used to determine if the plaintiff could pass a patent-troll smell test. If the test determined that the plaintiff was a troll – or, more delicately, a non-practicing entity, or NPE – DeFazio's bill would require that the plaintiff shall pay (and he twice emphasized the word "shall") the legal costs of the defendent if said defendent prevails in the legal action.
What's more, the NPE would be required to post a bond before litigation began. "These people are very good at morphing, creating shell companies," Defazio said. "They could easily declare bankruptcy but still litigate, drag it out, still try to extort money from you." A bond would prevent that sort of chicanery.
It's not just startups and small companies that have been attracted to DeFazio and his growing coalition of legislators. He has been approached by airlines that are being sued for their seat-selection charts, for example, and cities such as Portland in his home state, which is being sued for how they track vehicles in their transit systems.
According to DeFazio, it's time to engage in good ol' fashioned citizen pressure on legislators. He gave as an example his work on establishing a national standard for organic foods, which he said involved getting people to make phone calls, send postcards, speak up at town-hall meetings, and "bombard" their legislators with input on his organic-foods amendment to the US omnibus farm bill.
It worked. As he tells it, one legislator came up to him on the floor of the House and said, "DeFazio, I don't know what this goddamn organic stuff is, but if these people will stop bothering me, I'll vote for your amendment." As it turns out, his amendment was the only one that was opposed by the House leadership that year which passed and became law.
"I believe that we can get folks in every one of the 435 districts in Congress to approach their member of Congress and advocate for our bill or something like our bill," he said, "we'll get this done and solve the problem."
And so, dear US Reg reader, if you're alarmed at the damage patent trolling is doing to start-ups, innovation, or American business in general – or, for that matter, if you think DeFazio is way off-base – it's your move. ®
Not everyone is the CES audience was thoroughly sympathetic with the panel's majority opinion against patent trolling. One listener who identified himself as Andrew Bridges from the law firm of Fenwick & West took issue with the use of the pejorative term "trolls", and argued that focusing on "bad people" rather than the host of other problems in the patent and legal systems was an oversimplification.
DeFazio agreed with Bridges that the patent office is woefully underfunded and understaffed, has a 600,000-patent backlog, and that in March the America Invents Act may very well cause "a whole new flood" of patent applications. Realistically, though, Congress is in no mood to increase any government agency's budget, he said.
Newegg's Cheng was having none of Bridges' suggestion that the use of the word "trolls" was counterproductive. "If labeling them 'trolls' or calling them 'cancers' gets the job done," he said, "I'm all for it."