Why Patent Trolls are More Likely to Sue Your Business

If you think patent trolls only hit businesses that are very technical and very rich, you're very wrong. They prey on small companies, and you could be next.
February 06, 2014

In 2011, business owners bedeviled by a distracting and expensive tide of patent-infringement lawsuits successfully lobbied for passage of the America Invents Act. This federal legislation was supposed to discourage so-called patent assertion entities—or patent trolls, as they're widely known—who generate profits by gaining rights to sometimes vaguely written patents and then suing other businesses for allegedly infringing on them.

Due to a flaw in the way the law was written, however, it didn’t quite work that way. “The trend of patent troll lawsuits increased dramatically in 2011 and 2012,” says William Schultz, a partner at the Merchant & Gould law firm in Minneapolis who specializes in patent litigation.

A Very Real Threat

Indeed, according to a White House report, even more business owners were being sued as lawsuits by patent assertion entities actually tripled during those two years. And the proportion of all infringement lawsuits filed by trolls increased from 29 percent, when the problem was deemed bad enough to warrant passage of the America Invents Act, to 62 percent. The White House quoted estimates that 100,000 companies may have been threatened with patent infringement during the preceding year.

Even worse, the White House warned that small businesses were increasingly being targeted. And patent infringement lawsuits were also naming as defendants more companies whose businesses would seem to be far afield from patents. In 2011, Innovatio IP Ventures brought a lawsuit against thousands of coffee shops, hotels and other businesses that had set up Wi-Fi networks for customers.

One Company's Story

Frank Verrill, president of Advanced Image Direct, in Fullerton, California, was called out by a so-called patent troll. In December 2013, he received a letter notifying him that his company was being sued for patent infringement. The complaint alleged that by printing bar codes on envelopes carrying recipients’ addresses and identifying the mailer, he had infringed on its patent for affixing data to mail.

Verrill explains that the patent was unrealistically vague and broad. “Does that mean mail carriers and U.S. mail recipients are next in their scheme?” Verrill asks. “This particular suit could possibly affect every American who receives mail, whether directly or indirectly.”

After some of his own investigation, Verrill found that the filer of the patent was an attorney at the law firm that filed the lawsuit rather than another mailing company. It appeared to be a classic patent troll case of a company suing a large number of companies on the basis of a vague patent and hoping some would settle rather than fight.

He’s already been damaged, however, Verrill says because the lawsuit is available on the Internet, where prospective customers can see it, and because his attention has been diverted form running his company. “The discovery process has been costly and a waste of time,” Verrill adds.

Retailers, the Next Target

Many more business owners like Verrill may have similar experiences if the growth in patent troll litigation isn’t curbed. “Patent troll lawsuits have an impact on all businesses,” Schultz says. “Retailers are becoming a more common low-tech target.” Such lawsuits can do particularly severe financial harm when a business owner is attempting to sell the business, he also notes.

The recent flood of patent litigation has prompted several moves to dam it. For instance, the Federal Trade Commission began investigating patent trolls last year, looking for false or deceptive claims made in demanding letters. Schultz says such deception could include demanding a business to pay to license a patent when the troll does not actually own the patent or makes false threats of litigation.

Trolls Are In Congress's Hands

The House of Representatives acted in December, passing by a wide bipartisan margin a new bill that will attempt to ease the problem worsened by the 2011 law. Major features would keep patent holders from hiding behind shell companies and in some cases make anyone filing frivolous lawsuits accountable for defendants’ legal fees. Now the Senate is working on its version.

Critics say that the new bill still isn’t what’s needed. The Innovation Alliance, a lobbying group for patent holders, says it may go overboard in protecting small businesses and retailers from legitimate infringement claims. Others complain that the Senate version of the bill doesn’t have the “loser pays” feature that would require unsuccessful infringement complainants to pay defendants’ legal bills.

Most observers expect a second patent reform bill to be passed in 2014. Given the result of the last attempt, whether it will really stem the tide of patent troll lawsuits or usher in a second wave won’t be known until that has happened. Meanwhile, however, more business owners all the time open the mail to find that a patent troll has, indeed, ruined their day.

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