Patent trolls feed off innovators

The small town of Marshall (population: less than 25 000) in the east Texas part of the Piney Woods forest — famous for wild-hog hunting — is the self-proclaimed “Pottery Capital of the World”. More recently, however, it has become best known for lawsuits brought by “patent trolls”, companies that apply for or buy up catch-all patents (often from companies forced to liquidate their assets), hunt down other companies with patents that may have a degree of crossover with theirs and then sue.

There are office blocks with hundreds of these firms registered in Marshall, home of the United States district court for the eastern district of Texas, which has a particularly favourable regime for patent trolls.

Previously, many personal injury litigation cases were brought in east Texas, but a reform of Texas tort law in 2003 put an end to that, leading to the boom in intellectual property (IP) litigation and the slogan bandied about by lawyers: “From PI to IP.”

One London company has had bitter experience of a run-in with patent trolls. Serverside Group, founded in 2003 by brothers Adam and Tom Elgar, pioneered payment cards that customers can personalise with their own photographs. It now supplies more than 200 banks in 27 countries, including Royal Bank of Scotland, Lloyds Banking Group, ING and Capital One.

Out of the blue, at midnight on Friday August 13 2010, Michael Campbell, the head of Serverside’s legal team, received an email from an American lawyer. “It said: ‘You’re being sued, let me help you.'” Campbell said his heart sank when he realised that the technology company was being sued in Marshall.

With more than 25 other companies, including Adidas, Nike, Mars and Hallmark, Serverside was being sued by Quark Images.

The plaintiff was a firm that had been incorporated the previous month in Longview, east Texas, as a “non-practising entity”, that is, one with no business activities or employees of its own. At the same time it acquired two patents from Jones Soda, a Seattle-based fizzy drinks company, which allows customers to personalise their bottles with photographs.

“It could have been lights off for us,” said Campbell.

About 95% of patent cases do not reach trial. Many are settled out of court even if they have little merit. But according to the American Intellectual Property Law Association, the median defence cost per defendant is $3-million for a typical mid-size patent case. For large cases in Texas, the figure is nearly $6-million.

Serverside reckoned that taking the Quark Images suit through to trial would have landed it with a legal bill of $2-million to $4-million. Moreover, many of its customers were included in the lawsuit and Serverside would have had to indemnify them for the legal costs involved in defending the suit. Court records disclose that Serverside and all the other defendants in the suit settled.

“In the east district of Texas, patent suits are usually tried by jury,” said Campbell. “The technicalities of patent suits are so complex that the risk of not being able to explain them satisfactorily to the jury adds to the general uncertainty of the litigation.”

Another source said: “East Texas does not have a particularly young or technologically sophisticated populace. Often simpler and more emotive legal techniques are used rather than digging into detail, which the jurors may not be entirely sympathetic towards.” Patent information firm PatentFreedom has identified more than 570 “non-practising entities” and 30 British companies were sued by these firms in the US in the first nine months of this year.

In October British technology firm Really Simple Systems was accused of patent infringements by Marshall-based Lodsys, which is also suing Finland’s Rovio, the maker of the Angry Birds app. Ten other app developers face legal action in east Texas, leading some app developers to withdraw their products from the American market.

John Paterson, the chief executive of Really Simple Systems, Europe’s largest provider of cloud-based customer relationship management systems, said he sent an email to Lodsys “telling them to get lost” and has not had a reply yet.

The US recently passed a patent reform Bill — the catchily named America Invents Act — which is expected to put a stop to the boom in multi-defendant lawsuits.

Charles Gorenstein, a partner at Birch, Stewart, Kolasch & Birch in Falls Church, Virginia, said: “There will no longer be suits joining many unrelated parties on the mere basis that they are accused of infringing the same patent. Before the new Act, suing 10 or 100 parties was hardly more difficult than suing one,” Gorenstein said. “Now it will be necessary to file and pay for numerous lawsuits, participate in and prepare submissions for proceedings in each, and so on. The cost will be greater.”

Others are more sceptical.

“Unfortunately, aside from the limits on multi-defendant lawsuits, there is nothing in the new law that will curb the patent-troll problem,” said Julie Samuels, a lawyer specialising in IP issues at the Electronic Frontier Foundation in San Francisco. “In fact, it’s even unclear if the multi-defendant provision will help,” she said. “I’ve already heard of some schemes the trolls are using to get around it. It’s really a shame that Washington DC’s one attempt in more than half a century to reform patent laws does nothing to address patent trolls, which are arguably one of the biggest threats to innovation in America today,” Samuels said.

High-tech companies are starting to form patent-buying consortiums to prevent patents falling into the hands of trolls. Big technology companies, including Hewlett-Packard, Ericsson and BlackBerry-maker Research in Motion, have banded together to form Allied Security Trust. Members pay a one-off initiation fee of $150 000 and a $200 000 annual fee. A similar organisation is RPX Corporation, which launched in San Francisco in 2008 and has spent more than $250-million acquiring about 1 500 patents.

However, smaller companies that cannot afford these fees remain at risk. —

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