Patent trolls collect "nuisance fees" and political enemies

WASHINGTON – Mason Cos. of Chippewa Falls, Wis., sells shoes, women's clothing and general merchandise on the Internet and through mail-order catalogs. It does not produce or market computers or their components.

Yet six times in the past three years the 100-year-old business has been sued for infringing on software patents. Each time, the company felt no choice but to pay a licensing fee to avoid litigation costing 10 times as much to adjudicate.

"It's a shakedown," Mason's general counsel Tim Scobie said.

Mason is one of thousands of U.S. businesses targeted each year by patent trolls, companies that invent nothing but buy patents from companies and individuals that do. Critics say the trolls then file multiple suits in hopes of collecting licensing fees from people and businesses too poor or too busy to fight them in court.

"You end up with companies that aren't making anything, trying to extract a nuisance fee," explained Tom Cotter, a patent expert at the University of Minnesota Law School.

Cotter said the number of "patent assertion entities" and "non-practicing entities" — the formal names for trolls — has increased dramatically in the past few years. The growth stems from an explosion of patents for minute bits of information technology and broadly applicable business methods.

For example, a single smartphone may contain thousands of patented parts, or a single patented business method could be applied to thousands of different circumstances.

Companies that buy and enforce patents generally reject the label of trolls. They say they have a legitimate business and provide a necessary way for small companies or individuals to receive payment for their intellectual property.

A spokeswoman for Intellectual Ventures, one of the country's biggest non-practicing entities, declined to be interviewed. But a blog entry by the company's founder, Peter Detkin, summed up the philosophy: "The owner of the [intellectual property] is irrelevant; the fact of the [intellectual property] is what matters."

A recent survey by RPX Corp., a patent risk management firm, showed that patent trolls filed 62 percent of all patent infringement claims in 2012, up from 19 percent in 2006. The cost of legal fees and settlements from patent troll suits grew from $5.3 billion in 2008 to $10.9 billion in 2012.

The issue has reached such proportions that the White House declared war on patent trolls. Earlier this month, President Obama outlined legislative and regulatory fixes for a situation he said is hurting America's high-tech innovation and putting the country at a competitive disadvantage in the global economy.

Patent assertion entities, said the president, "leverage and hijack somebody else's idea and see if they can extort some money out of them."

Mass filings of infringement suits for a single patent are an expensive, time-consuming distraction to businesses and people who must defend themselves, said Dan McDonald, a patent attorney with the Minneapolis firm of Merchant & Gould, who just published a book on patent trolls.

"The main impact," he said, "is that companies have to spend money on lawyers instead of research and development."

But McDonald said companies sometimes must push back. He recently persuaded a small Minnesota medical device maker to challenge the validity of patents cited in three troll suits.

St. Paul-based 3M has interests on both sides of the issue. 3M needs to enforce the patents it receives to protect a $1.5 billion annual research and development effort, said Kevin Rhodes, the company's vice president for intellectual property. But 3M also has been a target of patent infringement claims by companies that don't develop or make products.

"We're not labeling anyone," Rhodes said last week as he moved around Capitol Hill talking to members of Congress about patent issues. But "there are some unfortunate practices that have developed."

While 3M worries that proposed legislation could make it harder for inventors to protect their intellectual property, the company has offered sample language for a law that would make it easier to see when shell companies buy up old patents and sue. Also, 3M has crafted language for a law that would make it easier to sanction those bringing frivolous patent suits.

The House and Senate seem poised to act, as they did two years ago when they agreed to the America Invents Act, the first comprehensive patent reform in more than 50 years.

"Patent trolls are a clear drag on innovation," Sen. Amy Klobuchar said. "This is not just some made-up anecdotal problem."

The Minnesota Democrat expects to examine the issue as part of a larger patent hearing she will hold as chair of the Senate Judiciary Committee's Anti-Trust Subcommittee.

Rep. Erik Paulsen, a Republican representing Minnesota's Third Congressional District, believes the House and Senate will come quickly to a bipartisan agreement.

"There is abuse that's going on," he said of patent trolls. "The challenge is to target the abusers in an effective way without casting too wide a net."

The way patent laws work, anyone who makes, sells or uses a legally patented device, technology or idea without paying a licensing fee breaks the law, the U's Cotter said. This fact has led patent assertion entities and non-practicing entities deep into the supply and demand chain.

"They blanket the country with suits on the hunch that some people will pay," Mike Lafeber of Minneapolis law firm Briggs and Morgan said. "They have stepped over a line."

A decade ago, "patent owners rarely if ever sued consumers," Cotter noted. "Today they might go after a coffee shop for using wireless technology."

Or they might go after an online seller like Mason Cos. for using software it had no role in developing or selling. What started more than a century ago as a shoemaking company is being coerced into paying licensing fees merely "for selling stuff on the Internet," Scobie said.

"It's not Oracle calling us up saying we're using their spreadsheet," he explained. "It's law firms that bought a bunch of patents at a fire sale."

Paying off those people is a "gut-wrenching ordeal," Scobie said. But it is also an inevitable business decision.

"We are a small organization in a small town," he said. "If it's going to cost us $25,000 for a license fee or it's going to cost us $250,000 to fight, don't even bother asking me."

Jim Spencer • 202-383-6123