When the known “patent troll” company Lodsys sued Todd Moore over a hyperlink in the app his three-person start-up had created, the US-based software developer thought it had to be a mistake.
Like many other small business owners accused of patent infringement, Mr Moore was soon immersed in a frustrating fight. But instead of simply paying the several thousand dollars Lodsys asked for, he found a pro bono lawyer to take on the lawsuit.
Although it meant time away from improving the app, which plays relaxing sounds to lull people to sleep, Mr Moore decided to try his luck against the system — and the lawsuit was dismissed. More often, however, companies and innovators end up paying the “troll toll” in settlements and legal fees.
“I’ve met lots of other founders and CEOs that have been targeted,” Mr Moore says. “It’s frustrating every time you hear another story because it’s a serious problem that isn’t going away. I’m hoping the system will change and put an end to this unethical behaviour.”
Litigation brought by “patent assertion entities” or “non-practising entities” made up about two-thirds of all patent cases brought in the US in 2015. These companies buy up expiring or otherwise ubiquitous patents — such as databases or shopping carts on ecommerce sites — and use them as leverage to sue small businesses, putting a severe strain on the defendants.
As Geoff Lane of the Application Developers Alliance, which supports legislation in the US to counter trolls, puts it: “It’s just this constant struggle for these small guys to figure out who is legitimately enforcing their patents and who is just trying to shake them down for a quick thousand bucks.”
The damage patent trolls can cause extends beyond the legal sphere, says Professor James Bessen, economist at the Boston University School of Law. Studies suggest that it has decreased venture capital investment in start-ups and reduced the amount companies spend on research and development.
A body of research now exists that shows patent troll litigation “is putting significant costs on innovators and innovation more generally”, he says. For instance, a paper by Catherine Tucker at the Massachusetts Institute of Technology found that “VC investment would have likely been $21.772bn higher over the course of five years but for litigation brought by frequent litigators”.
It is not a problem confined to the US. Patent trolls are setting up shop around the world. Christian Paul, a Munich-based partner at the law firm Jones Day, says that Germany is popular with trolls, “given the comparatively low cost of litigation and a tendency of courts to be rather patentee-friendly”.
Meanwhile, in the UK, there are “some real disincentives for that sort of opportunistic behaviour”, notes Prof Bessen. That comes down to two major reasons, he says.
First, there are fewer software patents in the UK than in the US, and second, the loser-pays legal regime helps deter trolls from filing frivolous lawsuits.
Still, Europe should expect more patent troll litigation when the long-anticipated Unified Patent Court begins work in 2017.
It will “likely increase patent troll litigation in Europe and, in particular, in the early phase once the UPC has become operational,” says Mr Paul. “The main reason is that a judgment from the UPC will not be limited to the territory of one single country, but rather cover the territory of all participating member states,” he adds. “This significantly increases the business risk when an injunction should be issued.”
Add to that new procedural rules, multinational panels of judges from different jurisdictions and a lack of substantive case law, and patent trolls “could try to exploit the resulting inherent uncertainty to more readily obtain a settlement”, he says.
The UPC’s impact may well be felt globally, Mr Paul adds, as the court’s remit will extend to any company that sells its products in the participating member states in Europe. US and Asian companies could find themselves defendants in the new system once it comes into effect.
Finding ways to end the practice is difficult. Mr Paul suggests adopting the UK loser-pays model and encouraging courts to deny injunctions to patent trolls, limiting their remedies to monetary damages only.
In the US, however, comprehensive patent reform bills in both the House and the Senate have stalled.
Some observers are hopeful that a narrower bill to limit where lawsuits can be filed may be pushed through this year.
According to Lex Machina, a company that provides legal analytics, 43.7 per cent of all US patent cases in 2015 were filed in the Eastern District of Texas, which is seen as particularly favourable to patent plaintiffs.
“[In the absence of] legislative reform, companies need to accept that patents are not a theoretical threat, but rather realistic business risks,” Mr Paul says. “A diligent freedom-to-operate analysis and monitoring the patent register should be standard practice in today’s markets.”