This sponsored post is produced by the Consumer Electronics Association.
From tiny app developers to major retailers, the response is often the same: You’re kidding me.
That was the reaction of both Lee Cheng and Todd Moore when they got letters saying their companies were violating patents.
Moore makes smartphone applications as founder of the three-person TMSoft LLC. His alleged violation was having a hyperlink connecting one Web page to another. Cheng, the chief legal officer and senior vice present for Newegg Inc., found his company sued for using an online shopping cart.
“It’s an obvious concept from the brick-and-mortar world. Who hasn’t used a shopping cart?” Cheng says. After Newegg spent time and money writing the code for its website selling electronics, Soverain Software LLC claimed to have a patent for the online shopping cart and wanted to be compensated. “Initially, I thought it was a joke,” he says.
Cheng and Moore both say they were targeted by “patent trolls” — companies (and the lawyers who represent them) that buy up vague patents and send out scads of demand letters asking for money in exchange for the privilege of not being sued. “It’s pure extortion,” says Cheng.
These patent assertion actions have proliferated because of loosely written patents, because the high costs of suits are born by the people being sued, and because modern technology means many devices like smartphones use thousands of separate patents. And as the practice has grown, it has set off congressional efforts to rein in the practice. It’s also sparked a multi-million dollar advertising campaign by the firms filing the lawsuits to defend their rights.
“Starting a business is hard enough without baseless lawsuits, so some startups have folded under the weight of frivolous lawsuits,” Moore says. “I feel like I’ve had to become a lawyer. It’s a huge waste of time. I just want to build things,” he adds.
Scam artists in action
“We’re preventing big companies from being able to steal [inventors’ ideas],” says Barry Leff, director of corporate communications for Dallas-based IPNav, the largest of what he calls “patent monetization” firms.
Now, his company doesn’t own any patents. It just represents companies who have patents that are being violated and used to have little recourse against behemoth firms. While patent trolls claim to be acting in the name of the small inventor, research shows that small companies and startups are the primary victims of bogus patent litigation. This makes sense — small companies are unlikely to have large legal resources, and are more apt to settle with trolls to avoid a lengthy and expensive court fight.
IPNav makes money only when cases are won. Leff says they turn away 90 percent of potential clients because they stick to cases where there’s a strong patent and actual infringement. He concedes other patent assertion entities and non-practicing entities are not so picky. “Companies that send out thousands of letters without looking whether a company is actually infringing are scam artists,” Leff says.
The problem for many companies, Cheng says, is that it’s cheaper to pay off those scam artists than to rack up big legal fees in court fighting them. Defending against a suit can cost between $2 million and $6 million.
Fighting the trolls head on
When Cheng got his first demand letter alleging an infringement, he decided to pay to settle the issue. Settlements in these types of patent cases generally involve paying a set license fee in exchange for not being sued by that particular company again. Soon, Cheng realized, paying up would just draw more opportunists looking to sue.
“We just said, ‘This is not right. It’s a disservice to our customers. It’s a disservice to our industry. Our business will not survive if we have to pay off every extortionist,’” Cheng says.
Although many large companies had paid Soverain over the shopping cart issue, Newegg took the battle to a federal appeals court, where it won. The legal fees added up to more than a settlement would have, Cheng says, but have served as a warning against similar suits. “Patent trolling is an enormous and growing drain on the U.S. economy,” Cheng says. “It’s causing us to have a competitive disadvantage against other countries.”
But patent owners’ groups argue that lawsuits to defend their rights are legitimate. The Innovation Alliance, which represents patent assertion entities, announced in November that it will spend millions in ads to fight against the “patent troll” narrative.
“They are attempting to seed public opinion in favor of any measure to combat the ‘patent trolls,’ irrespective of whether it would weaken patent rights for everyone, undermining the foundation of the patent system and ultimately the U.S. economy,” says Brian Pomper, executive director of the trade group.
While many other issues face stalemates in Washington, patent reform has drawn bipartisan support. In June 2013, President Obama announced a task force on the topic and the FTC is investigating PAEs. The White House says it would crack down on shell companies filing suits without their targets knowing who they really were, help educate product end users like consumers and mom-and-pop stores drawn into suits, and train patent examiners so they don’t allow overly broad patents.
House Judiciary Committee Chairman Bob Goodlatte (R-Va.) spearheaded the Innovation Act, which passed the House in December with bipartisan support. “The patent system was never intended to be a playground for litigation extortion and frivolous claims,” he sajd during a hearing on his legislation, noting suits have been filed over “basic ideas” like aggregating news articles, offering free Wi-Fi in a cafe and sending a photocopy via email. “Something is terribly wrong here,” he says.
The Innovation Act passed by the House:
- Requires the patent owner to do more research before filing suit. Some firms now send letters threatening to sue without checking whether the company is actually infringing the patent.
- Makes those who sue and lose pay the legal fees their targets’ have incurred.
- Puts companies that are connected to the litigant on the hook financially if they lose — so that shell companies can’t be used to duck responsibility.
- Prevents lawsuits that target both the manufacturer who allegedly infringes a patent and that company’s customers. In one recent case, both Cisco and Starbucks were sued over allegations that Cisco’s Wi-Fi equipment (used at coffee shops) infringed a patent.
CEA President and CEO Gary Shapiro says the bill helps innovative companies that create jobs. “The Innovation Act of 2013 contains smart and sensible provisions that will transform our patent system back into a mechanism to promote — not hinder — innovation,” Shapiro says. “Every day that the ‘patent troll’ issue is not addressed is another day that bad actors can abuse our patent system to extort money from legitimate companies.”
Moore and Cheng and others are glad to see legislation like Goodlatte’s moving toward a solution. Moore says, “Maybe then we can all get back to work.”
The Innovation Movement, sponsored by the Consumer Electronics Association, unites those who believe innovation is critical to American global leadership and economic growth. The Innovation Movement uses grassroots advocacy tools to support smart public policies, like patent litigation reform, that foster startups and innovation. To learn more about the Innovation Movement’s work fighting patent trolls, visit trollticker.com, follow on Twitter @imovement and like Innovation Movement on Facebook.
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