Don’t get Paul Heirendt started on the subject of so-called patent trolls.
Heirendt has been involved in tech startups in Missouri for more than 20 years. But recently, he says, he’s seen a new challenge emerge: A spate of threats from companies claiming infringement on their patents.
“It’s just a shakedown,” he said.
Sen. Claire McCaskill of Missouri is less subtle.
“These people are pond scum,” she told The Star. “Bottom feeders.”
Critics such as Heirendt and McCaskill say these companies are making a living on litigation that stifles innovation and hurts small businesses.
McCaskill has introduced federal legislation, and Missouri Gov. Jay Nixon on Tuesday signed into law a state measure against bad-faith patent claims.
But defenders of the practice say there’s nothing inherently wrong with acquiring a patent and enforcing the rights that come with it. By doing so, they say, such companies create markets where innovators can make money on inventions by selling their patents to outfits with more resources to legally enforce them.
That, in theory, frees smaller companies to do more innovating.
“We represent patent owners who may or may not have the expertise or the capital or the skill set to enforce their entrenched patents,” said Marvin Key, the CEO of Acacia Research Group.
Many developers don’t have the expertise or financial reserves to bring their new technologies to market, he said, or to force larger firms with the resources to compensate them for their breakthroughs.
Key said his firm puts its technical and legal know-how, combined with the capital needed to muster a credible fight, to work on behalf of patent owners. Often by suing, or threatening to sue, Acacia forces patent users to settle on licensing terms with patent owners.
“They can’t outlast us, and they can’t stretch us out,” Key said. “They have to take us seriously.”
He said large high-tech firms have succeeded in painting such efforts with the same brush used to depict what he called illegitimate shakedown artists who harass businesses despite having little legal standing.
Indeed, “patent assertion entities” attract little love. That’s why they’re known derisively and more commonly as patent trolls. (The term refers to trolls in fairy tales who live under a bridge and exact a toll on those who try to cross.)
They “don’t actually produce anything themselves,” President Barack Obama has said. Instead, they live on a business model “to essentially leverage and hijack somebody else’s idea and see if they can extort some money out of them.”
Their tactics are simple and legal. Generally, they buy the rights to patents but don’t use them as the basis for products. Instead, they extract payments from other companies by threatening to sue or actually suing for patent infringement.
It’s sometimes faster and cheaper for companies to settle, and in many cases they do, agreeing to pay a licensing fee even if they believe the claim has no merit.
Tech giants such as Apple, Google and Yahoo have faced such lawsuits for years. But observers say a new trend has developed targeting smaller companies. Heirendt said he’s received four threatening letters in recent years and has already settled one even though he believes the claims were bogus.
“When they go after startups, they do so because they know (those fledgling companies) don’t have the type of money needed to defend themselves,” he said.
A report issued last year by the White House found that it isn’t just tech companies that are targeted, but also the users of the technology. One alleged patent troll sent 8,000 letters to coffee shops, hotels and retailers seeking compensation for offering Wi-Fi to their customers.
In another high-profile case scheduled to go to trial this September, a man who insists he helped invent the podcast back in the 1990s — and has a patent — is suing three podcastsers, along with Fox, CBS and NBC, saying they owe him money.
A study by Boston University found that litigation instigated by patent assertion entities is rapidly expanding. Researchers estimated that in 2011, more than 2,100 companies were forced to mount 5,842 defenses in lawsuits from these companies, up from 1,401 in 2005.
McCaskill, a Democrat, is sponsoring legislation targeting the demand letters companies send out claiming infringement. It would allow the Federal Trade Commission to define what constitutes a “deceptive demand letter” and bring charges against the companies that send them.
“There needs to be a deterrent,” she said, “and the law currently doesn’t do an adequate job of prohibiting this kind of abuse.”
Missouri lawmakers also took up the matter this year and passed legislation nearly unanimously. The bill Nixon signed bars letters and emails that claim in bad faith a patent has been infringed, and allows those being targeted to sue.
“This was a simple fix for lawmakers to tackle to help small businesses,” said Jay Atkins, general counsel for the Missouri Chamber of Commerce and Industry. “It was low-hanging fruit. Clearly this is an expense that a legitimate company shouldn’t have to bear.”
But while patent trolls have become a popular political target, they have defenders.
“I view patent trolls as an efficient response to market conditions,” said Ross Levine, a professor of business at the University of California, Berkeley, and a senior fellow at the Milken Institute.
Someone who invents something may not have the time or the expertise to enforce the patents. So they sell those patents to companies — the so-called patent trolls — to do it for them.
Levine said big tech companies such as Apple support laws curtailing patent trolls because many of their products, such as the iPhone, contain thousands of patented components. Many of those patents belong to somebody other than Apple. The company could make more money if it didn’t have to negotiate for the right to use these patents.
Most of the proposed changes in patent law being pushed by lawmakers, Levine said, would shift power out of the courts and into governmental regulatory bodies subject to lobbying. That’s a dangerous move, he said, especially without evidence that the current system has hindered innovation and entrepreneurship.
“Over the last three years in your life, has the availability of Wi-Fi in coffee shops gone up or down?” he asked, pointing to the oft-cited example of patent trolls threatening coffee shops and other establishments. “Wi-Fi is everywhere, and it is free.”
But what constitutes a patent troll is typically in the eye of the beholder, and any overhaul designed to make patent trolling more difficult is also going to make it harder for many conventional patent holders.
“We want to stop patent trolls,” said Brett Trout, an Iowa-based patent attorney. “The problem is defining what a patent troll is.”
If the goal is to thwart malicious patent trolling, Trout said, one option would be to force those who pursue bogus claims to shoulder litigation costs. He pointed to a decision by the U.S. Supreme Court in February that allowed judges to impose fees on the losers in patent litigation.
“If a patent troll loses a lawsuit and is forced to pay, that could discourage future lawsuits from being threatened,” Trout said.
Heirendt, however, worries that small startups won’t be able to survive the litigation long enough for legal fees to matter.
“You have to disclose these demand letters to potential investors and vendors, and that can make it impossible to do business,” he said. “You go belly up before you ever get some of the legal fees back.”
Federal legislation targeting patent trolls passed the U.S. House in December but stalled when it became clear it had no chance of passage in the Senate. A coalition of opponents — universities, pharmaceutical and medical companies, and trial attorneys — argued that the new law would make it hard for them to defend their intellectual property.
McCaskill, however, remains optimistic that a compromise can be struck.
“If we do this right and draft (legislation) narrowly enough,” she said, “I’m bullish that we can get this done.”
The Star’s Scott Canon contributed to this article.
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