It’s Time to Stand Up to Patent Trolls!

February 2015

By Scott Burt, Senior Vice President and Chief Intellectual Property Officer, Conversant Intellectual Property Management Inc., Canada

Adam Carolla, one of the most popular podcasters in the US, is sued by a patent troll. The story goes viral. Across the country, state Attorneys General are using consumer protection laws to guard their small businesses from predacious patent trolls. And here is something previously unthinkable: the President of the United States, in the 2014 State of the Union address, urged Congress to “pass a patent reform bill that allows our businesses to stay focused on innovation, not costly and needless litigation.”

The greatest long-term threat to the US patent system does not come from its professional opponents – those large businesses and their political allies who stand to profit from enfeebled patent rights. A deeper harm is caused by unscrupulous patent trolls who use extortionist “demand letters” to victimize small businesses. This practice, we believe, is wrecking public confidence in the US patent system – and by extension, profoundly weakening the long-standing bedrock belief in the great economic benefits conferred by patent-protected inventions.

Yet even as damage caused by demand letters spreads, most legitimate patent licensors, whose businesses depend upon continued legislative and public trust, stand idly by, doing little or nothing to address it. Well-insulated within the patent industry’s cozy professional bubble, we are, in effect, fiddling like a modern-day Nero while innovation’s Rome burns.

Far-reaching impact

Why the disconnect? Most people in the patent licensing industry understand that patent troll demand letters are a significant economic problem for the US small business community, costing millions of dollars in settlement fees and legal costs annually. What is not grasped is that phony demand letters are an even greater political problem for our industry and for the patent system as a whole. Let’s quickly review the problem.

Patent trolls, typically operating through shell companies, send form letters to dozens, hundreds, or even thousands of apparently random small businesses at a time, claiming with little or no evidence that they are “infringing” the troll’s patents. The senders demand so-called “licensing fees” ranging from USD1,000 to USD50,000 or more to avoid a patent infringement lawsuit that could cost these businesses far more to defend against in court – even if the business owner is innocent of any infringement.

Comprehensive data on the extent of the demand letter problem and its economic impact in the US is hard to come by or does not exist. But there is mounting anecdotal evidence that the deluge of demand letters is at the very least harming one of the nation’s most critical job creation sectors, small businesses and startup companies. The reported impact usually takes the form of hiring delays, reduced R&D spending, or a negative change in product or business strategy. One study reported that 70 percent of 200 venture capitalists surveyed had invested in startup companies that later received extortionist demand letters.

Simply looking at the aggregate economic impact of patent troll demand letters, however, misses their fundamental emotional impact – the intense popular rage that they generate. To understand that, put yourself in the place of a small business owner who is victimized by a patent troll.

Infographic credit: Conversant Intellectual Property Management Inc.

Settling is cheaper than fighting

Imagine receiving a certified letter from a shell company or obscure law office claiming that the WiFi routers you bought at an electronics store to install in your store or office are infringing one of the troll’s patents. No actual evidence of infringement is provided. No patent claims are cited. Nevertheless, the sender threatens to sue you in United States federal court for patent infringement unless you pay a USD5,000 license fee.

You have no way of knowing if the letter is legitimate, if its claim that you are infringing a patent is true, or even if the patent itself is valid. Your business lawyer does not know, either, because only patent attorneys are sufficiently skilled in reading the specialized legal language of patent claims. You learn that the patent attorney’s rates likely start at around USD500 per hour.

Nevertheless, you proceed and meet with a patent attorney. To your shock, he or she quickly reviews the demand letter and advises that the economically rational decision is to pay the toll claimed by the troll. Yes, you can ignore the letter or outright refuse to pay, but then you risk a ruinously expensive patent infringement lawsuit. You read about heroic business owners who have fought trolls, and won – but it cost them USD100,000 or more to do so.

Forget about trying to negotiate with the patent troll. Their demand letters often don’t include a phone number, just a post office box to which you are told to send a check. Even if they include a phone number, they won’t return your calls.

Bitterly, you bite the bullet and write a check for USD5,000 — funds earmarked for your business — plus hundreds more for the patent attorney. Inside, you seethe with anger at a patent system that apparently allows such outright extortion to be perpetrated.

Only if you can picture yourself being victimized by such a demand letter can you truly grasp why they — and the abusive practices of patent trolls in general — have sparked such a wave of protest from the business community, the public, and elected officials.

US politicians are listening – and acting

The National Federation of Independent Businesses (NFIB) and many other retail business groups and trade associations have demanded that government acts. And Washington, D.C. is listening. Today, anti-patent sentiment is rampant and Congress seems determined to enact anti-troll legislation, having been besieged over the last couple of years by thousands of very angry Main Street constituents demanding action.

In December 2013, the House of Representatives easily passed the Innovation Act. This act targeted the use of shell companies, required more details about infringement allegations, and included a ‘loser pays’ provision. However, the Senate’s companion bill, the Patent Transparency and Improvements Act, stalled repeatedly and was withdrawn in mid-2014 owing to justifiable concerns that it would have severe unintended consequences on legitimate patent holders.

The enthusiasm for new laws curbing patent trolls has not waned. In June 2014, only two weeks after the Senate withdrew its bill, the House of Representatives launched another attempt. The House unveiled a draft demand letter bill that would clarify the power of the Federal Trade Commission (FTC) and state Attorneys General to regulate patent demand letters sent in bad faith.

A dozen US states, meanwhile, have already enacted laws to curb abusive patent demand letters, and 14 other states are actively considering legislation to do the same. In addition, the Attorneys General of several states have brought suit against trolls who send these letters using existing consumer protection laws against making false claims to extort money.

One of the most successful suits took place in New York, where in January 2014 state Attorney General Eric Schneiderman forced MPHJ Technologies, LLC, to sign a consent decree requiring it to repay all the money it received from businesses in the state. MPHJ, using various shell companies, had falsely claimed in demand letters it sent to businesses that it had analyzed each target company’s scanning systems and determined these to be in violation of its patents. In fact, MPHJ had merely sent form letters to hundreds of companies of a certain size and industry classification without investigating or uncovering any evidence whatsoever of infringement.

Examples like this demonstrate why so many ordinary citizens and small business owners are so furious – and with good reason. If they know US history, they will be wondering, “Where is the patent system of Thomas Edison? What happened to a patent system that helped transform a largely agrarian United States in the 19th century into the global leader of the Industrial Revolution, and in the 20th and 21st centuries, into the world’s most prosperous and economically powerful nation?”

As an industry and as professionals, we should forthrightly condemn the practices of bad actors that are victimizing the innocent– just as responsible members of other industries condemn the predatory practices of bad actors in their fields. Then we must do our part to root them out. Only by doing so can we revitalize and reaffirm the demonstrable truth that the American patent system plays a vitally important role in the innovative process and the economic strength we all enjoy.

But instead, many in our industry sit silently on their hands, fearful of getting embroiled in controversy or of giving opponents of the patent system more ammunition with which to criticize and attack it. Some licensors even continue to write publicly about “the so-called” patent troll problem, as if thousands of small business victims were somehow merely imagining it all. Denial should not be tolerated in our industry.

Stand up to the demand

At Conversant, we recently launched a “Stand Up to the Demand” campaign, designed to help small businesses identify and respond to extortionist patent demand letters. We are not doing this for business gain, as small businesses are not our partners or licensees. Rather, we launched this campaign because we hope it will help restore public trust in our industry and in our patent system as a national engine of economic progress and competitiveness.

The first phase of the campaign features a web site with an info graphic quiz that helps business owners distinguish a bad demand letter from a legitimate notice letter, and lets them view sample demand and notice letters as well as a video to learn how to recognize bogus patent claim and what to do about it. We invite the public to share their stories of how they are dealing with patent trolls. And we also link to other resources, such as the website, operated by the US Patent and Trademark Office (USPTO), that offers advice to small businesses that believe they have been the victims of abusive demand letters.

Former USPTO director David Kappos described the US patent system as “our country’s investment plan – a giant 401k through which we pay a little extra now for more great innovations in the future.” As a vital guarantor of our nation’s future, the patent system certainly warrants that description. Let’s not forfeit that future by allowing patent trolls to corrupt it today.

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