How to Neuter Patent Trolls

Making losers pay winners’ legal costs in patent lawsuits would help small businesses Photograph by Piotr Powietrzynski/Getty Images

Has your business received a letter saying you owe royalties to a company you’ve never heard of because you use a scanner to copy documents and attach them to e-mail? That’s an example of a new trend in patent enforcement: patent holders demanding royalties from unsuspecting businesses for using intellectual property that protects commonly used products like office equipment, Ars Technica reports.

In recent years, companies that own patents but don’t make any products—known as non-practicing entities, or NPEs—have been accelerating their legal efforts. Their targets are paying up rather than fighting, even when the plaintiffs’ claims are weak, because of the high cost of defending against patent litigation.

While big company settlements such as those by BlackBerry (BBRY) and Olympus (7733) attract the most media attention, the majority of NPEs’ targets are companies with $10 million or less in sales, research shows (PDF). The patent holders focus on small companies that generally don’t have in-house patent attorneys and deep pockets to fight back.

Two congressmen have proposed making some of these litigants pay the other sides’ legal costs if they bring losing patent-infringement suits. Representatives Jason Chaffetz, a Utah Republican, and Peter DeFazio, an Oregon Democrat, introduced H.R. 845, the Saving High-Tech Innovators from Egregious Legal Disputes (Shield) Act in February. The bill would apply to NPEs that are not academic institutions, technology transfer organizations, or inventors.

Unfortunately, as commentators have pointed out here and here, the Shield Act would create as many problems as it would solve if it became law. The bill unfairly singles out NPEs as the only losing plaintiffs in patent-infringement suits that would have to pay defendants’ legal costs. Moreover, it focuses on NPEs when not all NPEs are patent trolls, and some practicing entities are bigger offenders. What we really need is a system in which the loser in a patent lawsuit pays the winner’s legal cost, as Barry Leff of IPNav, which assists businesses in licensing their intellectual property, has explained (PDF).

Something needs to be done to combat the rise in demands by NPEs for royalties to avoid patent-infringement lawsuits. While some are enforcing legitimate intellectual-property rights, others are simply shaking down companies for settlement fees based on dubious claims. The success of many NPEs depends on the willingness of those challenged to settle. When their cases go to court, NPEs win merit judgments only about 10 percent of the time, research shows (PDF).

Small companies often settle rather than fight. Fending off a patent-infringement lawsuit takes money and time, both of which are often lacking at small businesses. Plaintiffs shrewdly demand far less than the cost of a legal defense, putting the economic argument clearly in favor of settlement.

Of course, small companies need a solution that doesn’t keep patent holders from suing to enforce legitimate infringement claims. Many small high-tech companies depend on licensing as a business model. NPEs play a central role in ensuring the effective functioning of markets for technology and in keeping large companies from strategically infringing small companies’ patents.

Making losers pay winners’ legal costs in patent lawsuits would help small businesses. Companies would be less likely to settle when infringement claims are dubious if they knew they could recoup their legal costs. And the plaintiffs would have a harder time getting attorneys to represent them on contingency if losers had to pay winners’ legal fees. As a result, patent trolls would be less likely to pursue challenges that might extract settlements but would fail in court.

At the same time, companies that have valid claims would continue to pursue them, and companies that clearly infringed on valid patents would still be willing to settle rather than lose and have to pay their opponents’ legal costs on top of license fees.

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