Todd Moore, CEO of TMSoft, a mobile app developer based in Virginia, never imagined that he could be accused of patent infringement simply for a hyperlink.
But he was.
In 2011, his company received a letter saying that White Noise, an app it developed to help people sleep, infringed on patents of a company named Lodsys.
Lodsys sued TMSoft and other app developers as well in 2013. But it also offered to settle in exchange for $3,500 deposited in an overseas bank account, and with no publicity. Otherwise, TMSoft was looking at legal fees of nearly $200,000, and that’s before even setting foot in a courtroom.
Firms like Lodsys are known as “patent trolls” – people or companies that threaten to sue over vague claims of patent infringement to pressure businesses to settle financially rather than challenge the claims.
A 2013 White House report found that patent troll lawsuits rose over the previous two years “from 29 percent of all infringement suits to 62 percent. . . . Estimates suggest that (patent trolls) may have threatened over 100,000 companies with patent infringement” in 2012 alone.
The technology industry has lobbied hard for changes that would restrict the ability of patent trolls to challenge claims in hopes of reaping financial reward.
The trolls’ tactic appears to have been successful. Businesses paid $29 billion in 2011 to settle claims, a 400 percent increase since 2005, according to the White House report.
Rep. Robert Goodlatte, R-Va., chairman of the House Judiciary Committee, is pushing a bipartisan bill with 20 co-sponsors to protect intellectual property rights. The Innovation Act “contains common sense reforms and makes the patent litigation process more transparent,” he said in a statement.
Goodlatte’s bill seeks to protect innovations from patent trolls by raising the bar on the filing of patent lawsuits. It would require plaintiffs to disclose more information, such as proof of the patent’s validity, early during litigation and clear evidence of a patent’s true owner.
“Many complain about gridlock in Washington,” the Computer and Communications Industry Association, a tech advocacy group, said in a statement praising Goodlatte’s legislation. “This bill would make it less profitable for patent trolls to sue and set up speed bumps for those unfairly targeting everyone from legitimate U.S. companies to those buying an item like a printer from a store.”
At a recent congressional hearing, Kathryn Underwood, president and CEO of Ledyard National Bank, a community bank in New Hampshire, said that it received a demand letter – a formal demand for payment – in 2011 claiming the bank’s ATM infringed on a patent. The bank was offered a relatively low settlement offer to avoid litigation.
Despite knowing that the claim was very vague, Ledyard chose to settle to avoid a time-consuming and risky legal process.
“Our lawyers advised us that defending ourselves on a patent litigation could be very costly, in excess of a million dollars,” Underwood told the intellectual property panel of the House Judiciary Committee. “Sadly, this is exactly the calculation that the patent troll counted on us making.”
But higher education institutions and small business firms are among those that suspect the Goodlatte bill needs some tweaking to ensure that it doesn’t end up harming some of the very people it hopes to protect.
Among other provisions, the bill would require losing parties in patent litigation to pay the winning party’s attorneys fees.
The fee-shifting rule would “deter universities and smaller enterprises from enforcing their hard-earned intellectual-property rights” because they fear litigation could cost significant time and money, Robert Brown, the president of Boston University, and James Clements, the president of Clemson University, wrote in a Wall Street Journal op-ed column last week.
“That intimidation would make it very difficult for independent innovators and small businesspersons to go up against a large competitor,” said Louis Foreman, CEO of Edison Nation, a Charlotte, N.C., company that helps entrepreneurs produce and market their ideas.
Edison Nation and dozens of other companies, including several big players in pharmaceuticals, biotechnology, finance, education and other fields, sent a letter to Congress recently citing several Supreme Court rulings as well as other laws and regulations that they contend negate the need for more patent protections.
Foreman said he prefers the Strong Patents Act by Sen. Chris Coons, D-Del., because it is “a more surgical approach that solely focuses on demand letters without creating the collateral damage to independent inventors.”
“The current bill just goes way beyond what is necessary,” said Wayne Roper, president of SCBIO, a life science industry member organization based in Greenville, S.C., and who signed the joint letter. “In order to deal with abusive practices by a minority of bad actors, it erects barriers for all the legitimate patent owners who must defend their own businesses against patent infringement.”
Roper said the Innovation Act, which intends to help innovators, might actually reduce incentives for innovation.
“I do think there remains a significant problem with patent trolls and with overbroad patents,” said Mark Lemley, a professor at Stanford Law School and director of the Stanford Program in Law, Science and Technology. “But we want to preserve balance in the system, and we’ve made enough changes already that we might want to wait and see how effective these existing changes (are) before we make a new one.”
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