Patent trolls drain businesses of billions of dollars a year. And if you have a website--any website--you are a potential target. Here's what you need to know if they come after your business.
Illustrations by John Burgoyne; photograph by Robyn Twomey
The latest battle in the patent wars unfolded last week, when eight companies, including Google, Facebook, and Zynga, filed an amicus brief in the case CLS Bank v. Alice Corp. arguing for the rejection of the latter's patent claims. Google and its peers contend that vaguely worded patents, like the one at issue in this case, open the door to patent trolls and pose a threat to innovation. But trolls don't target only Silicon Valley giants; in fact, the average target has only $10 million in revenue. Both the U.S. and the European Union have recently taken steps to reform the patent system for entrepreneurs, but many obstacles remain. This piece by Kris Frieswick from the upcoming February issue of Inc. examines how trolls have become a drain on small business--and how some entrepreneurs are fighting back.
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"I felt like I'd been mugged."
Chris Friedland is fed up with the patent system. In the past two years, he has been hit with 18 patent-infringement claims. Friedland's Chico, California'based company isn't the type you would think would bump up against a lot of high-tech innovations. He runs a basic e-commerce site, Build.com, which sells home improvement and plumbing supplies.
But in 2009, Friedland received a letter accusing Build.com of violating a patent for Web server technology. The claim struck Friedland as ridiculous. By his reading, the patent was so broad that it would affect anyone who had ever used the Internet. But when he consulted his lawyer, it became clear that this was no joke.
The letter came from a type of company known as a nonpracticing entity, which owns patents but never uses them to create anything. These companies make money solely by pursuing potential patent infringers and demanding license fees. This particular NPE (Friedland can't name names because of a nondisclosure agreement) had a compelling case, said Friedland's attorney. The infringement letter referenced several large companies that had already paid license fees for the patent. "We wrote a check and thought they'd go away," he says. "But then the trolls just rushed in."
Troll is a derogatory term for the most aggressive types of NPEs. Friedland isn't sure how word of the settlement leaked to Troll Town, but he says that after he paid the fee, he was inundated with infringement letters from trolls. The patents in question were amazingly broad: There was one for transferring data through a network, another for using images on a website, another for having a computer that connects to a database. "I mean, if you own the patent for connecting computers to a database, you should go after Facebook or Google, not some stupid plumbing company, right?" says Friedland. Many of the letters were threatening. "They say, 'Send us a check for $10,000 or we'll sue you,''" he says. "It's a shakedown. They know they don't have a leg to stand on. But they know you'll pay for a license instead of going to court."
In 2011, patent trolls cost U.S. companies more than $29 billion in legal fees and settlement costs, according to a study by the Boston University School of Law. The trolls target mostly small and medium-size businesses--companies with annual revenue of $10.8 million on average, according to the study. Nearly any company that uses basic technology or operates a website is a possible target. Trolls are litigation machines, the natural result of a patent system that has done a terrible job of evaluating and granting software patents--and a court system that hasn't done much better at examining them.
In some cases, trolls are forcing business owners to choose between paying employees and paying legal fees. Jim, the founder of a small Web services company who asked that his real name not be used, has been hit with six patent-infringement notices, including one involving a patent on sending notices via social media. He says the claims are bogus, but he can't afford to go to court or to pay the license fees the trolls are demanding. Instead, he says, "I may have to just drop the product line that they claim is infringing and lay people off." It's a decision that pains him, but Jim says the trolls have him over a barrel. "I want to fight," he says, "but I have 180 other employees to look after."
"The best business to be in right now is being a patent troll, and that sucks," says Eugene R. Quinn Jr., a patent attorney with Zies Widerman & Malek and founder of patent blog IPWatchdog. Unlike the companies they target, trolls can't be sued for patent infringement because they don't make anything. "They've got nothing to lose," says Quinn. "That's the problem."
Acacia Research and Intellectual Ventures, widely considered the two most successful patent trolls in the country, insist that their business model, far from harming innovation, actually helps inventors.
"In order to have any value to their patents, many patent holders have to partner with a company like Acacia," says Paul Ryan, CEO of the company, which made $184.7 million in 2011 in license fees and settlements. "We think we're providing a valuable service." Acacia frequently partners with inventors and splits the license fees. Ryan estimates that 70% of Acacia's patents come from small companies or individual inventors. "Once they realize that a patent assertion is being made by someone who doesn't have the money to pursue it, a lot of large companies delay until the inventor runs out of money," says Ryan. Most NPEs are unlike Acacia, however, in that they do not share revenue with inventors. They simply buy the patents outright, often from failing and bankrupt companies.
Software Patents, a Troll's Best Friend
Patents on computer software are universally acknowledged to be the most vague, poorly written, and difficult patents to decipher. Software patents, by one estimate, account for just 12% of all patents. But they make up 74% of the most litigated patents, according to a 2011 study published by The Georgetown Law Journal. (The majority of the plaintiffs? Nonpracticing entities.)
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