The battle against so-called patent trolls – companies that rely exclusively on bringing patent infringement lawsuits against companies to make money – is heating up. It’s a welcome development for a host of Triangle companies that complain of being burdened by frivolous lawsuits that are nonetheless expensive to fight.
The onslaught of lawsuits filed by companies that critics derisively call patent trolls amounts to “a silent tax on American business, which means it is a silent tax on American consumers,” said Chris Matton, general counsel of Raleigh telecommunications company Bandwidth.
“Our focus is on innovation, not on litigation,” Matton said. “Simply stated, it’s an unfortunate reality that patent trolls are something we confront.”
Last month, the White House announced a set of initiatives aimed at curbing patent trolls, which also have a less-derogatory name: non-practicing entities, or NPEs. And the U.S. Senate is considering a host of legislation that would make life more difficult for them; the House took the lead in December by passing a bill aimed squarely at NPEs that, among other things, would make the losing party in a patent lawsuit pay the winning side’s attorney’s fees.
Closer to home, North Carolina lawmakers are contemplating anti-NPE legislation of their own. Last week, a joint legislative committee discussed possibile measures the state could take.
“I’m optimistic there is an end in sight, or at least a solution that can tamp down the patent troll problem,” said Tim Wilson, senior intellectual property counsel at Cary-based business software giant SAS.
Information technology companies such as SAS and Red Hat are vocal supporters of such reform efforts. But some worry the pendulum could swing too far in the other direction.
Last week, a group of more than two dozen major corporations, trade associations and others sent a letter to Senate Judiciary Committee leaders urging them to tread carefully.
“We are concerned that some of the measures under consideration go far beyond what is necessary or desirable to combat abusive patent litigation, and, in fact, would do serious damage to the patent system,” the letter states.
Among the signees were the two major groups representing the drug industry – a mainstay of the Triangle economy – the Pharmaceutical Research and Manufacturers of America and the Biotechnology Industry Organization; two major employers in the Triangle, Caterpillar and GlaxoSmithKline; as well as the Association of American Universities and the Association of American Medical Colleges.
These organizations aren’t opposed to Congress taking steps to limit abuses of the patent system, however.
“We believe that an effective bill acceptable to patent holders is within reach,” the letter states.
New on the scene
NPEs own a portfolio of patents but don’t make any products or provide any services. Instead, their business model relies on pursuing patent infringement claims against other businesses and extracting cash from them.
Some NPEs have systematically acquired patent portfolios. Others have sold off their product lines to concentrate solely on exploiting their patent portfolio.
A White House report on NPEs acknowledged that there are some that “play a useful role in the innovation ecosystem” by playing matchmaker between inventors and companies that can turn those inventions into a product.
NPEs are relative newcomers on the corporate scene.
SAS was never sued by an NPE until a half-dozen years ago, said Wilson. Since then, however, it has faced 10 or so NPE lawsuits.
Opponents and critics contend NPEs make over-reaching claims, often using older patents to go after newer inventions that weren’t even imagined on the day the patents were granted.
Lynne Borchers, who heads the litigation department at Raleigh intellectual property law firm Myers Bigel Sibley and Sajovec, said she has performed in-depth analyses of more than a dozen lawsuits filed by NPEs against the firm’s clients.
“I can’t recall one that really had teeth to it,” she said.
The problem is magnified by the volume of patent infringement lawsuits NPEs file.
“This is a bigger problem than most people appreciate,” said SAS attorney Wilson. “There are literally thousands of patent infringement suits being filed every year” by NPEs.
Even startups can be targeted.
Venture capitalist Mitch Mumma of Durham’s Intersouth Partners, the Triangle’s oldest venture capital firm, said a few of the early-stage life science companies they have invested in have been “held up” by NPEs.
“It’s distracting and irritating,” Mumma said.
Non-technology companies aren’t immune, either. For example, NPEs have filed patent infringement cases against coffee shops for offering Wi-Fi and against small businesses for scanning and emailing documents.
A 2013 White House report found that patent infringement suits filed by NPEs had tripled in the past two years and accounted for 2,500 cases in 2012, or 62 percent of all patent cases filed.
“It’s a common ailment,” said Rob Tiller, assistant general counsel at Raleigh-based Red Hat. “Every technology company of any size and many small ones have been targeted ... by NPEs.”
“I can’t emphasize too strongly,” Tiller added, “that there is a lot of evidence that, ultimately, they are hindrances to innovation.”
The patent lawsuit numbers don’t include the cease-and-desist letters claiming patent infringement that NPEs are fond of sending. Some NPEs will send out thousands of these threatening letters in hopes of obtaining quick settlements from companies willing to pay up in order to make them go away.
Ira Blumberg, vice president of intellectual property at Lenovo, which is based in China but has a headquarters in Morrisville, draws a distinction between small and large NPEs.
The former are focused on nuisance suits, Blumberg said, while the latter “are in it for hundreds of millions of dollars.”
Technology companies are magnets for large NPEs given their heavy reliance on patents.
“There are hundreds of thousands of patents covering, say, a mobile phone, because there’s so much technology packed into that little box,” Blumberg said.
Costly to defend
Companies can run up huge costs defending patent suits. A 2011 survey by the American Intellectual Property Law Association found that defense costs ranged from $650,000 to $5 million, depending on the stakes involved.
SAS must not have been included in that survey.
A year ago the company’s general counsel, John Boswell, testified before a congressional subcommittee that SAS spent more than $8 million defending a single case.
In addition to attorney’s fees, those costs included accumulating documents that it had to turn over to the NPE – more than 10 million in all – in response to discovery requests.
“This $8 million and the millions more we are spending on other cases is money SAS no longer has to invest in people, facilities, research or product development,” Boswell said in his written testimony. “In short, the cost to us and to the economy as a whole is simply staggering.”
That case never even made it to trial. SAS won the case on summary judgment and also prevailed when the NPE that sued it, JuxtaComm, appealed the decision.
SAS’ Wilson noted that fighting these lawsuits also is a huge distraction.
“Our highly trained, highly skilled and talented engineers ... have to give up days of their time preparing for the disposition, talking to our lawyers, then having the deposition,” he said.
Ditto for SAS executives.
NPEs factor the high cost of patent litigation into their game plans.
“The cost of defending a lawsuit frequently exceeds the cost of settling with a patent troll, even if you are very confident you would defeat the troll in court,” said Bandwidth’s Matton.
Like many companies, Red Hat has settled some cases and gone to court in others.
“We would like to be idealists, but we have to be pragmatists,” said Tiller. “We certainly are prepared to vigorously oppose, in court, unfounded lawsuits, and we have done so.”
Last year, Red Hat and a corporate partner convinced a federal judge in Texas to dismiss a lawsuit filed by NPE Uniloc USA. The judge ruled Uniloc’s claim was based on “a mathematical formula that is unpatentable.”
But Red Hat also is mindful that software patents are highly complex and juries are unpredictable.
“The threat that there may be an uninformed, incorrect jury decision – made in good faith by jurors who aren’t trained in the area – gives leverage to NPEs,” Tiller said. “They know that it will cost several million dollars, in many cases, to defend these suits. All that uncertainty can drive defendants to try and settle on whatever terms they can get.”