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Small Businesses Are Tasty Treats for Patent Trolls

Patent trolls hold patents, not to manufacture or design a product or process, but to profit through patent infringement claims. Patent litigation has exploded since 1995, doubling between 2004 and 2012, alone. Patent trolls bring a whopping 67 percent of those suits.

In mid-May of this year, legislation that would have curtailed troll activity died unexpectedly in the Senate, to the dismay of reform proponents. Industry groups have since scrambled to pull together self-help strategies, and in June, an interesting study by Catherine Tucker of MIT suggested some policy approaches that might reassemble a broad coalition of support for new reform efforts.

Why Small Innovative Businesses?

To be patentable, an invention must be particularly described in the patent application. The general standard is that someone familiar with the field should be able to make, use and understand it. Federal courts struggle with what this means, and the patents that provide the basis for patent troll suits are often broad and vaguely worded. The vaguer the description, the greater the potential for arguing infringement by a tech savvy innovative business, like those found in the software, media, telecom and financial sectors

These threats are also more serious for small businesses and entrepreneurs. Two reasons stand out:

  • Small businesses are less likely to have a litigation  budget, and so tend to settle claims of even dubious merit. Sadly, that in turn further depresses hiring, product development and marketing efforts.
  • Entrepreneurs are also likely to be seeking venture capital funding. Venture capitalists are easily put off by the prospect of patent infringement litigation. The Tucker study estimates that, over the last five years, nearly $22.711 billion in venture capital investment may have been lost because of litigation brought by the trolls.

The technologically innovative small business is easy an easy target, the perfect prey for a patent troll.

The Late Great Innovation Act of 2013

The proposal that died in the Senate this spring had six notable features.  It

  • Required disclosure of any and all entities having a financial interest in the patent, thus preventing trolls from hiding in a controlled group
  • Required the loser to pay court costs,
  • Protected end users of the allegedly infringing product from suit,
  • Required a detailed description of the infringement alleged,
  • Narrowed the scope of discovery, in an effort to limit costs, and
  • Permitted the target to challenge the validity of the patent as too vaguely worded.

The bill was opposed by universities, pharmaceutical and biotechnology companies, for fear that it would undermine valid patents. Universities and biotech companies, for instance, often hold a large number of patents without being actively engaged in designing or manufacturing a product or process. They legitimately must protect their intellectual property through litigation, but are hardly trolls because the patent infringement lawsuits are not a primary source of profit.

Some Short Term Self-Help

Even without patent reform, there are several steps small businesses can take to protect themselves from patent trolls.

  • The first is simply to be proactive in searching through the USPTO database.  Make sure that a product is not infringing before it goes to market.
  • The second is to insure. Some insurers are now offering intellectual property coverage to protect a business in the event of a lawsuit.
  • The third is to participate in a “license on transfer” (or LOT) network. This innovative approach calls for members to pool their patents. If the patent is ever sold to a non-member, (who may be a patent troll in disguise) it is immediately licensed to all other members, thus protecting them from an infringement suit.
  • Finally, it is important to talk to your business attorney before deciding to settle.  A vigorous defense may save you a lot of money, even in a settlement.  It is better to know your options and have a defensive strategy.

The Tucker Study

The Tucker study looked specifically at the impact of patent troll suits on the availability of venture capital.  It is remarkable for the way it identifies patent trolls.

Rather than focusing on the passive holding of patents or the role of lawsuits in a business model, (which may be difficult to divine in any case) her study focuses on the frequency of litigation.

All patent litigation is not bad. It is the tool of robust intellectual property defense and, up to certain limits, is associated with increased venture capital investment.  At a certain point, however, it becomes associated with decreased investment.  The first is constructive; the second is destructive to the business economy. She distinguishes between legitimate patent defense and patent troll activity on the basis of litigation frequency.  Patent trolls are frequent litigators, and her policy suggestions target only this group.

Her proposal that that the costs of litigation be shifted to the plaintiff is familiar from the Innovation Act of 2013.  She also suggests that the USPTO use patent criteria similar to those employed by the European Union and Japan, thus taking a further step to address the problem of vaguely worded patents and reduce the likelihood of litigation. These suggestions might be sufficient to bring universities and biotech and pharmaceutical companies, who legitimately need to defend their patents, back into the fold of patent reform supporters.

Today, however, patent trolls can continue to prey on small business. The lost business investment documented in the Tucker study, is just one measure of the drag this litigation places on the economy.  Entrepreneurs are left with self-help measures that may provide a measure of protection while advocating for reform legislation again in Congress. Reform measures that deal with cost shifting and specificity of description in the patent application may be the way to dispatch the patent trolls now barring the way for small business .

Nasir Pasha, Esq.

Post by:

Managing attorney and co-host of podcast Legally Sound | Smart Business

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