‘Patent Trolls’ Exploit Weaknesses In America’s Patent System

Congress is searching for ways to prevent not-so-legitimate patent holders from collecting billions in settlements from vulnerable companies.
By @FrederickReese |
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    In recent days, the term “patent troll” has creeped into the nation’s lexicon. Sens. Patrick Leahy D-Vt.) and Mike Lee (R-Utah) of the Senate Judiciary Committee have penned an op-ed at Politico calling for reforms to the 2011 Leahy-Smith America Invents Act towards the elimination of fraudulent patent infringement claims — so-called “patent trolling.”

    “Rather than incentivizing the creation of the next-generation iPhone or a lifesaving drug, they are misusing patents by suing unsuspecting consumers and extorting settlements,” wrote Leahy and Lee. “In some cases, patent abusers who maintain that a Wi-Fi router infringes on their patents have sued hotels or small coffee shops that bought the routers, instead of the routers’ manufacturers. If the patent holder has a legitimate claim, it is against the company that makes the router, not the small business that bought it, yet retailers are being targeted in a pressure quest for easy settlements.”

    The senators are not alone in their complaints about “patent trolling.” In Nebraska, for example, State Attorney General Jon Bruning (R) has presented arguments detailing the practice as being in violation of the state’s unfair corruption law last week.


    Legal stealing

    In a letter to Farney Daniels LLP, who represents a number of companies in several Nebraska “patent trolling” cases, Bruning wrote,

    The protection of Nebraska consumers and businesses from baseless harassment, particularly that which bears the potential for costly and destructive litigation, is a top priority of this office. We view as especially egregious threats which serve to advance no valid legal purpose of the legitimate protection of productive intellectual property, but, rather, seek only to extract quick settlements from those otherwise committed to building their businesses and providing positive value to society. We will use every means at our disposal to prevent such conduct and deter its future occurrence.

    In response to Bruning’s letter, Farney Daniels added the attorney general as a defendant in an Activision suit against a Nebraska bank on the basis that Bruning presented a threat against Activision’s constitutional rights, including the right to counsel of its choice.

    Bruning publicly has stated that he has no grievance with Activision and that his statement was not aimed at the company. Instead, Bruning was going after MPHJ Technologies, another Farney Daniels client who sued the buyers of office equipment with functions such as direct scan-to-email on the basis that MPHJ owned the patent to that technology. MPHJ allegedly did so under shell companies with names such as AdzPro, GosNel and JitNom, which according to Mac Rust, a MPHJ lawyer who spoke to an unrevealed source, as published by Ars Technica, are spread across the nation to mitigate the need to argue every MPHJ case in Delaware, the company’s incorporating state.

    MPHJ — who in no way helped developed the technology — purchased the patent from the technology developer, Project Paperless. Anonymously and through their lawyers, the principals behind MPHJ bring suit against companies that use scanners and copiers with a “scan-to-email” function, demanding a $900 to $1,200 “licensing fee” per worker at the targeted office to avoid an infringement suit.

    Nebraska is not the only state to catch on to MPHJ’s scheme. In Vermont, Attorney General William Sorrell filed suit against MPHJ and Minnesota’s Attorney General Lori Swanson forced a $50,000 civil penalty from MPHJ and a return of all “licensing fees” gathered from Minnesotan businesses.

    For the most part, MPHJ’s scheme revolves around the legal but ethically challenged threat of suing an end-user for unauthorized use of a patented technology. “The very nature of Farney Daniel’s wide patent solicitation campaign depends on filing suits rarely, if ever,” Bruning argued. “Lawsuits risk the invalidity of the patent, which would collapse the entire scheme. Rather, Farney Daniels has a strong incentive not to sue, and if they do sue, not to serve summons or otherwise prosecute the case fully, always giving it the option of dismissing a complaint.”

    In suing the end-user — who is not aware of the patent infringement — and not the manufacturer — who actually infringed the patent but who is in a better position to fight and possibly invalidate the patent — the company can blackmail an endless number of targets. In practical terms, anyone who owns a home printer with a “scan-to-email” function — which covers almost the whole of the mid-range to upper-range printer market — could be targeted, although MPHJ has limited its scope to employers of ten employees or more.


    The big business of patent litigation

    In recent years, “trolling” has become big business. In 2011, over 5,000 businesses have been targeted in “patent troll” lawsuits, costing over $29 billion out-of-pocket, with another $80 billion in indirect costs.

    “A patent troll uses patents as legal weapons, instead of actually creating any new products or coming up with new ideas,” wrote the Electronic Frontier Foundation. “Instead, trolls are in the business of litigation (or even just threatening litigation). They often buy up patents cheaply from companies down on their luck who are looking to monetize what resources they have left, such as patents. Unfortunately, the Patent Office has a habit of issuing patents for ideas that are neither new nor revolutionary, and these patents can be very broad, covering everyday or common sense types of computing – things that should never have been patented in the first place. Armed with these overbroad and vague patents, the troll will then send out threatening letters to those they argue infringe their patent(s).”

    Software and the Internet have been especially prone to “trolling,” due to ambiguous nature several different pieces of code can produce similar results, resulting in a perceived patent-infringement. Many of the infringements involve “business method patents,” or low-quality patents covering vaguely-worded “old ways” of doing a business function — such as promoting a discount or applying for a job online — that is now done via the Internet. Due to the vagueness of the claim, there is a real risk that the infringement claim may be approved, so many companies accept the lesser loss of a “settlement” over legal costs and possible damages.

    For example, Erik Lieberman of the Food Marketing Institute told NPR about a case in which a troll accused J.C. Penney, Foot Locker, American Eagle Outfitters, Macy’s and other stores of using JPEG files in their emails and on their websites. The troll seeks infringement damages from all business users of JPEG — an industry standard for displaying photos online.

    It is estimated by the Internet Association that the total damage of “patent trolling” to the American economy has exceeded half a trillion dollars in the last twenty years, with more than half of this — $320 billion — lost in the last four years alone.


    Corralling the “trolls”

    Congress and the president are pushing for legislation that would mandate that patent ownership is clear, valid and regularly updated — particularly in cases before the U.S. Patent and Trademark Office — and that would protect end-buyers from litigation for buying an “off-the-shelf” patent-infringing product. Bills have also been introduced that would make legal fees the responsibility of the suing patent-holder if they lose their infringement cases and force the PTO to improve the quality of software patents.

    Ultimately, Washington wants to avoid the kind of headache that faced Carbonite. A shell company called Oasis Research attempted to sue Carbonite for $20 million in damages. Oasis Research is a locked, empty office, and 90 percent of its net profit goes to Intellectual Ventures, who pays Chris Crawford 17.5 percent for being the patents’ registrant.

    While there is a real need for such protections, there is the possibility that such legislation could be misused and misconstrued. Any legislation that can punish a service manufacturer for delivering licensed or protected goods can be used, for example, to block Bittorrent sites or viewer-content sites, such as YouTube.

    In all of this, what is needed is a consumer-forward approach that will first and principally protect the consumer and society at large. American inventors must be free to create, American businesses must be free to operate and American consumers must be free to buy without the fear of blackmail or frivolous litigation if this country is to grow.

    “The result of this misuse of the patent system is a drag on our economy,” wrote Leahy and Lee. “It also tarnishes the image of legitimate patent holders. This is not the patent system provided for in our Constitution.”

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