Why Companies Should Act To Protect Themselves From Patent Trolls
Robert Ten Eyck’s first response to the letter he received in December 2012 was: “You’ve got to be kidding.”
Ten Eyck, CEO and president of Newport-based Ten-E Packaging Services, which tests medical and pharmaceutical packaging, received the strange letter from a company with an odd name: BriPol.
BriPol asserted that Ten-E was infringing on a patent it owned that covered sending files from a scanner to an email account.
Ten Eyck ignored the letter. Then two months later, BriPol sent a follow-up letter, threatening legal action unless the company paid $1,000 for each of its computers connected to a scanner. “That would have cost me $30,000 to $40,000,” Ten Eyck recalls. That was money his small business couldn’t afford.
Instead of coughing up the money, Ten Eyck filed a complaint with the Minnesota attorney general. It turns out that Ten-E was among numerous U.S. businesses receiving letters from companies with names such as BriPol, AdzPro and JitNom. All were shell companies operated by Delaware-based MPHJ Technology Investments, which has no products of its own. Last year, triggered by complaints by business owners like Ten Eyck, Minnesota Attorney General Lori Swanson settled with MPHJ. The company agreed not to assert its patents against Minnesota businesses without prior approval. Swanson’s office believes that hundreds of Minnesota businesses received demand letters from MPHJ entities. MPHJ is the current poster child for “patent trolls”—a poster ogre, so to speak. The term “troll” has a certain colorful charm, as well as a double meaning: the ugly creature lurking in wait for unsuspecting innocents, and the fisherman trolling for a catch. The more neutral terms are “patent assertion entities,” “patent licensing entity” and “non-practicing entities.”
There’s some debate about what constitutes a troll, though the general agreement is that it’s an entity that owns patents that it doesn’t use to make products. “Their entire business structure is to sue out and enforce patents in order to get money,” says Mark Privratsky, partner with Minneapolis law firm Lindquist & Vennum and chair of its intellectual property department. “That’s their M.O.”
There’s also debate about how big a problem patent trolls have become. But a new study from PricewaterhouseCoopers asserts that trolls currently account for 67 percent of all new patent lawsuits, up from 28 percent five years ago. One of the more notable trolls is Innovatio IP Ventures, which has sued Cisco Systems, Motorola and other big names over Wi-Fi patents. Cisco settled with Innovatio IP earlier this year for $2.7 million. According to the White House, trolls cost U.S. businesses $29 billion in 2011, the most recent year it has measured.
State and federal governments have made dealing with trolls a top priority in recent years. Still, numerous businesses are being targeted, and as companies like Ten-E have discovered, just being smaller doesn’t protect you from a troll’s demands. How can you guard your business from potentially costly assaults?
“Trolls for the most part fall in the non-practicing entity terminology,” Privratsky says. “That means that they are simply an entity that has purchased patents or owns patents [where] they do not produce whatever the invention is represented by those patents.” That’s distinguished from a company such as 3M, which owns innumerable patents, but actually makes products.
MPHJ, of course, has produced nothing but trouble. However, it hasn’t been convicted of wrongdoing. Indeed, the line between trolls and organizations that are protecting valuable intellectual property does blur.
“Companies that you wouldn’t at first consider to be patent assertion entities in fact have a huge piece of their bottom line that’s attributable to licensing revenue from asserting their patents—IBM being the grand-daddy of them all,” notes Brad Pedersen, an attorney with the Minneapolis intellectual property law firm Patterson Thuente Pedersen. The firm has represented both patent assertion entities and patent assertion defendants.
Most of IBM’s patents are for technology and innovation for which IBM does not make products, Pedersen says. IP attorneys also note that even entities that don’t make anything have patents that would be considered “high value.”
Pedersen adds that “the size of the troll is probably less important than the tactics which are being used.” Among the “shady practices” Pedersen identifies is one that doesn’t involve filing patent lawsuits but where the entity simply sends demand letters. This has been MPHJ’s strategy. What’s more, “instead of sending the demand letters to the laser printer companies, they went out to the end users, to the customers,” he says. “The part of that which makes that abusive is [that] the amount of money they were asking for—$50 for every laser printer—was not enough to legitimately say, ‘It’s worthwhile to hire somebody to figure out whether or not the allegation is legitimate.’ ”
Can’t the government do something about problematic patent assertion entities like MPHJ? It has tried. Patent reform has been a goal of the Obama administration, and the U.S. Supreme Court has made nearly a dozen decisions in the past year addressing patent issues.
In April, the high court determined that judges could impose attorney fees for both sides on the losers in patent litigation if the loser’s claims were deemed baseless. The winner in the case was a Minnesota company, Brooklyn Park-based Octane Fitness. It was threatened with a patent infringement suit over its elliptical workout equipment.
In 2011, Congress passed the Leahy-Smith America Invents Act, which Pedersen says “represents the biggest reform of the U.S. patent system since 1836.” This wide-ranging act accomplished numerous things, but one of its chief goals was to trim back the patent abuse that has allowed the trolls to flourish. Pedersen cites as an example additional funding for the U.S. Patent Office so that it has sufficient resources to examine the validity of a patent.
According to Tim Bianchi, an attorney with the Minneapolis IP law firm Schwegman Lundberg & Woessner, the America Invents Act allows even smaller companies to test the validity of a patent in the Patent Office through inter partes reviews, covered business method reviews and post-grant reviews. These challenges are more streamlined than previous methods of testing patents, Bianchi says. His colleague Steve Lund- berg says that these procedures in the America Invents Act “have really reduced the effectiveness of trolls being able to enforce their patents.”
Still, the America Invents Act didn’t deal with the issue of what Lundberg calls the “black hats” that abuse the patent system. The problem remains over how to separate the trolls from the sheep.
The U.S. House of Representatives this year passed anti-troll legislation that Obama supported, and which would, among other things, prevent businesses from being sued for merely using a product that allegedly infringes a patent rather than developing the product themselves. But similar legislation died in the Senate, in large part due to the clout of bio-pharmaceutical lobbyists who argued that the bill could cripple industry innovation.
So businesses still might have to be prepared for more patent assertion entities. There are cheap ways for small companies to defend themselves against troll actions these days, Lundberg says. What’s more, he adds “the odds of being sued as a small business are very low. Most of these troll actions are being brought against very large corporations.” Even “the probability of a small company getting a letter from a troll is extremely low,” Lundberg says.
Clearly, though, it does happen, as Ten-E Packaging and hundreds of others can tell you. So how can businesses with shallow pockets defend against patent infringement entities that are going after just about everyone?
Pedersen suggests that if your company offers a specific product or service, you might be able to purchase intellectual property insurance, which can help you cover the attorney’s fees for defending a patent infringement action. Say you run a $2 million company whose product incorporates Bluetooth chips for wireless communication—part of the product, but not the main feature. The chip patent owner might have a very legitimate claim. In this case, insurance can help your firm cover legal fees.
On the other hand, if you receive an MPHJ-like letter demanding $100 to $1,000 to use a standard piece of office equipment and you don’t know who the plaintiff is, Pedersen advises people to contact the attorney general’s office. You also can contact the local Better Business Bureau, where no attorney is needed. But if the letter is demanding much bigger sums, “you are going to have to get patent counsel involved,” Pedersen says. From that point on, the defense strategy is in the hands of your attorney.
In some cases, what Privratsky calls a “wait-and-see strategy” makes sense. When one of his clients received a demand letter from a troll, the company decided to “sit back and see if the troll [was] going to make good on its threats in the letter.” Meanwhile, Privratsky looked at similar cases nationwide.
“We were seeing that there were no lawsuits being filed anywhere. So we knew that there was a lot of smoke being blown in those letters,” he says.
The better part of valor
But there are some times when it’s easier and cheaper to simply settle. Privratsky tells the story of ArrivalStar, a Luxembourg company that owns 34 patents for alerting people via communication devices when a vehicle might arrive. ArrivalStar doesn’t actually produce any transportation alert systems—but it has sued numerous public transit companies for infringing on the patents. It also has sued transportation companies, including FedEx, which chose to settle rather than fight.
Last year, Privratsky found himself defending an online sporting goods retailer “allegedly violating ArrivalStar’s patent,” he says. “And when we do the analysis, it takes a lot of money to get all the patents and make a decision about whether these things have been infringed by your client.”
Privratsky notes that some of the biggest companies in the world, with much deeper pockets than the client he was representing, just decided to settle their lawsuit. The settlement demand was “very reasonable,” he adds. “It was not so preposterous that my client was going to go under. And it was much cheaper than any sort of a fight for my client to pay me to do,” he says.
Despite governmental efforts, businesses of all sizes shouldn’t expect patent trolls to go away anytime soon. But as Bob Ten Eyck can tell you, there are signs that the ugliest of these creatures might be forced to back off, at least a little bit.
Gene Rebeck is TCB’s northern Minnesota correspondent.
What’s Up in Intellectual Property?
So-called patent trolls will continue to rank as one of the top issues in intellectual property law. But it’s far from the only issue that’s dominant in 2014. Here are other salient issues that will keep IP attorneys and their clients busy:
Patents for business methods? Alice Corp. v. CLS Bank International involves a huge patent issue, with numerous ramifications for all kinds of businesses. Australia-based Alice Corp. owns several patents on electronic methods and computer programs for financial-trading systems that help in closing financial transactions by avoiding settlement risk (very simply, the risk that one party won’t hold up its side of the deal).
Alice Corp. claimed that CLS Bank, a global financial services company with offices in New York, had infringed on its risk settlement technology. CLS countered that Alice had “patented” an abstract idea or process, not a specific product. U.S. patent law asserts that abstract ideas can’t be patented. On June 19, the U.S. Supreme Court found in favor of CLS.
“The decision confirmed a trend that we’ve seen about whether computerized business methods can be the proper subject of patents,” says Brad Pedersen, an attorney with the Minneapolis IP law firm Patterson Thuente Pedersen. “The Supreme Court didn’t say flat-out no, but the test is one that is going to be harder to meet than in the past.”
Will Schultz, partner with Minneapolis law firm Merchant & Gould, notes that Alice v. CLS was one of several Supreme Court decisions that are “signifying the importance of intellectual property protection in business.”
3-D printing. Schultz describes this fast-evolving technology as “on the forefront of a large intellectual property issue” in the next few years. Businesses will need to find ways to protect their IP in a world where individuals can take a company’s design for a product and “print” it out for their own use. Minnesota’s keystone medical technology industry also will have to keep watch on capabilities “that are advancing [by] leaps and bounds in respect to printing bone and stem cells—things we wouldn’t have thought possible 10 years ago,” Schultz notes.
Sharing patents with the public. Tesla, an electric car company, announced in June that it would make most of its technology patents available to those who want to develop related innovations. It opens up new possibilities for businesses to work together—and new pitfalls in terms of IP. Tesla, Schultz says, “didn’t necessarily have the infrastructure it needed to [operate] on a larger scale.”
Case in point: It’s been a challenge to make charging stations more widely available. There are high costs when “one company does all of the infrastructure throughout the entire world,” Schultz notes, so why not cooperate with other businesses in order to develop innovations? But when that happens, the thorny question remains: Who owns what innovation?
Minnesota Company’s Win in U.S. Supreme Court May Aid Patent Troll Fight
When businesses are threatened by patent trolls, their owners and top executives are justifiably worried about getting caught in expensive legal battles.
A U.S. Supreme Court ruling in April that favored a Minnesota company offers some legal protection to businesses concerned about the financial impact of fighting over patent disputes in court.
Icon Health & Fitness, a large exercise equipment manufacturer based in Utah, accused Brooklyn Park-based Octane Fitness of violating a patent. Octane Fitness prevailed in the court system after running up legal bills of $1.3 million, and Octane sought reimbursement for the fees.
In February, the U.S. Supreme Court had a spirited legal and semantics debate over the standard that should be used in requiring losers to pick up the tab for legal fees on both sides of patent litigation.
Ultimately, in late April, the U.S. Supreme Court ruled in favor of Octane. As a result of that decision, it’s now easier for winners in patent disputes to get reimbursement for their legal fees from losers. That reality might discourage some patent trolls from taking actions that would result in risky and expensive litigation for them.