How patent trolls stifle innovation at Chicago tech companies

Kate Rosow Chrisman

File 34458

Similar to a troll charging fees to cross a bridge he didn’t build, patent trolls, also known as patent assertion entities or non-practicing entities, charge for technologies that opponents say aren’t really theirs.

Don’t let the word troll fool you. This is a big business. For Chicago-based companies in the technology and start-up world targeted by these trolls, new legislation might help. 

Trolls seek money from companies using technology that infringes on patents they’ve acquired (through mergers and acquisitions or defunct companies) or on a vague technology they’ve invented. Proponents of patent reform say this is not the same as a legitimate claim of patent infringement. For those who’ve been affected by patent trolls, they claim the trolls file vague patents or buy patents that they have no intention of manufacturing or using. In essence, these companies' sole purpose is to make money off of others without building a product.

A local case

The Champaign-Urbana Mass Transit District has dealt with more than it’s fair share of patent trolls (it’s featured in this video). While a bus company might not seem like a particularly lucrative target, the company’s use of technology – location tracking and video cameras – was enough to lure two companies out of the woodwork and hit them with patent infringement lawsuits. 

For the Champaign-Urbana bus system, the company managing the front-end of their bus tracking system – which allows passengers to see how long it will be until a bus comes to them – was shuttered after attacks by the patent troll ArrivalStar. Two years later, Karl Gnadt, managing director for the organization, received a similar claim from the same company. Although that did not end in litigation – Gnadt politely reminded the company of the previous settlement agreement – it was a huge waste of time. This ended up costly taxpayers money according to Gnadt, since the bus system had to hire staff to manage the front-end internally. ArrivalStar, registered in Luxemburg, has filed suits against other bus systems, but the national transit association has started fighting back.

The bus system was hit a third time by a company saying that they needed to use their video technology – many buses employ mobile video technology onboard – and only their product. Gnadt knows of several other companies that received the same letter.

Stifling innovation

Claims from patent trolls are on the rise, according to the Computer & Communications Industry Association’s (CCIA) patent counsel Matt Levy. As many as 58 percent of all patent cases involve trolls, according to the organization Patent Progress. Patent trolls have garnered attention from local Chicago businesses to Congress and the White House. The issue stems around what is patentable (proponents say patents now can be incredibly vague) and how claims of infringement are resolved.

Tech companies, startups and innovators are particularly vulnerable to these attacks, say experts. Even companies that aren’t strictly technology-based but use some component on their website or in their store can be victims. Chicago-based attorney David Donoghue has seen companies sued for using shopping cart functionality on their website or parametric searching (the ability to choose a set of characteristics as the basis of a search). Going after the user of a technology instead of the company that makes the Internet widget confuses the issue more.

Frivolous lawsuits and litigation can stifle innovation and shutter legitimate businesses – a serious concern for anyone in the start-up and technology business. While patents are essential to protecting intellectual property, some are so vague they don’t help anyone, according to Levy. “If you take it too far, you end up with people who are just making money like it’s a casino. Patents become lottery tickets for some [patent trolls],” said Levy.

What to do

One of the problems with patent lawsuits is that the initial letter claiming infringement can be extremely vague, say lawyers. Often without much more than a parent number, defendants are not clear on what they’ve allegedly infringed on until litigation. Patent trolls bank on the fact that many businesses don’t have the time or resources to take the case to court and offer a settlement just below litigation costs. Those costs can range into the millions of dollars.

The company being sued is at a major disadvantage, according to Levy. To get the case dismissed, companies need to spend a great deal of money upfront. This provides a strong incentive to settle quickly, which many of these patent trolls count on. Many of these cases are filled in Texas and Delaware instead of the hometown of the defendant or troll. Beyond racking up frequent flier miles, trolls choose these locations for their favorable outcomes.

While the vast majority of all litigation cases end in settlement, this is especially true for patent trolls, according to Donoghue. Often, the cost of settlement is just below the cost of litigation and can stipulate a non-disclosure agreement, meaning companies can’t warn others about their experiences. Even if they could, companies often keep quiet instead of letting other patent trolls know you’ve paid out, which lawyers say could invite further claims.

The progress

The current legal system not only failed Champaign-Urbana Mass Transit District but others, too. “The law enables [patent trolls] to be predators. In our country that should not stand,” said Gnadt. Legislation currently under consideration will help, according to Donoghue, Levy and Gnadt. “There’s little or nothing on the table that will actually stop this, but there are things they can do to reduce the scope of it,” said Donoghue.

The Innovation Act passed by the House in December would ensure that more information is disclosed in the initial letter and detail the real party of interest (many of the patent trolls are shell companies, obscuring the interested party). 

Gnadt has some words of advice for others facing a similar situation: “Don’t settle. Don’t give in. Fight back and stand up for your rights… Unfortunately that’s going to cost money.”

In the end, the issue comes down to the philosophy behind patents. Levy posed the following question: “Do you think that patents are just another class of assets like a building or stock that you can monetize or is it something else with a purpose? We think patents should spur innovation.”

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Len Bland
If you are Microsoft, IBM, or Google, getting rid of all the rights of individual innovators is a goal that will reduce your cost of doing business. If you are an entrepreneur who lacks the capital to enforce your patents versus large infringers (I am working with one now), a patent assertion firm may be the only option. I believe we lose our innovation edge in the U.S. as we weaken our outstanding patent system.
Stelios Valavanis
I think the bill also requires trolls to state the exact case of infringement. They can't just believe there's infringement. I'd also say we award patents too easily, process patents in particular. I think they need to be reflective of the effort and older patents they ride on. The idea of patents is to encourage people to invent, not stumble across a lottery ticket.

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