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Entrepreneurs Need Patent Reform

This article is more than 8 years old.

In 2013, two obscure foreign companies, ArrivalStar and Melvino Technologies, filed 596 patent lawsuits, five times more than any other entity.

If you’re feeling charitable, you could categorize both ArrivalStar and Melvino as patent monetization entities. But most people call them “patent trolls” — companies that exist mainly to profit off of America’s broken patent system, which experts say only the U.S. Congress can fix.

When Congress returns this fall, among the laws awaiting its attention will be the Innovation Act —legislation that could end the mischievous patent lawsuits that many in the high-tech industry say are stifling American innovation and costing countless jobs.

The U.S. House of Representatives and U.S. Senate both passed versions of the bill in June, which lawmakers must now reconcile. The biotech industry, universities and trial lawyers fear the bill could harm them if it impedes the reasonable exploitation of valuable intellectual property. Others say it is needed to end flagrant abuse of the current patent system.

Take, for example, the case of Todd Moore. In 2008, Moore developed the White Noise app, which aimed to help millions of Americans sleep better. That success helped him establish TMSOFT, a company developing apps and games. Like many entrepreneurs, Moore is charismatic and likes to chat about his passions. He did just that on his podcast, Tech 411, after receiving demand letters from a company called Lodsys LLC. He called the firm “a patent troll”and was subsequently sued in 2013 by Lodsys for patent infringement.

A peculiarity of our patent system is that the legal onus of proof in any suit lies with the defendant, making it costly to fight a lawsuit, however frivolous. As a result, many startups face a choice of paying up or going bust. But Moore fought back.

With pro bono help from lawyer Dan Ravicher of the Public Patent Foundation, Moore contested and won the suit. Whereas Lodsys and firms like it can file a lawsuit for just $450, Moore’s legal bills would have been $190,000 if his lawyer had charged fees.

“It’s a model of extortion,”Moore says. “As long as you have a patent you can sue somebody and it’s cheaper to pay them off than to fight them. One of the things killing our economy is companies having to write checks to pay off patent trolls.”

Patent litigation is nothing new; companies have been sued ever since Samuel Hopkins received the first U.S. patent in 1790. Occasional blockbuster trials like Apple vs. Samsung make headlines, but most cases are far more obscure.

In 2012 there were 5,433 new patent litigation cases filed in U.S. courts. In 2013 that number rose to 6,083 before dipping somewhat to 5,010 in 2014. The Harvard Business Review has reported that the number of firms sued by patent trolls grew ninefold over the last decade, and that a majority of patent lawsuits are filed by trolls. The majority of cases never reach trial because most companies settle rather than deal with the headaches and costs of going to trial.

The Curious Case of Marshall, Texas

Republican Rep. Darrell Issa, who chairs a House subcommittee on intellectual property, wants the Innovation Act to include language preventing "unreasonable venue-shopping”— a reference to the Eastern District of Texas, often accused of siding with trolls who file their suits in what they view as a friendly court.

The city of Marshall, Texas, has a population of just 24,000, but 1,495 new patent litigation cases were filed there in 2013 alone, including the case against Moore’s company TMSOFT. Judge Rodney Gilstrap had 941 of those cases. Plaintiffs such as ArrivalStar, Melvino and Lodsys are attracted to Gilstrap’s courtroom for its speed: According to Law 360, he has accelerated the time to trial to less than 24 months, adding an urgency to cases in Marshall that simply doesn’t exist elsewhere.

Robert Yorio, a partner at Carr & Ferrell LLP, says the U.S. Supreme Court’s 2014 Octane Fitness decision has helped reduce the urgent need for patent reform by empowering courts to award lawyers’ fees to defendants winning frivolous suits. He says he has seen fewer frivolous lawsuits this year as a result.

However, the cautionary tale of Peter Braxton, a former Air Force pilot, shows that even when the court does award lawyers’ fees to defendants winning frivolous suits, the defendant can still effectively lose.

Braxton’s company, Jump Rope, was established in 2011 to give people a way to pay to get to the front of any line. Braxton was sued for infringement of Patent 7,313,539, which relates to “method and system for reserving future purchases of goods or services.” The case went to court, Braxton won, and the court even ordered the plaintiff to pay Braxton’s costs because it deemed the case “frivolous.” Nevertheless, the case was appealed, adding to Braxton’s legal bills and forcing him out of business.

"I won everything but I lost my life,” says Braxton, who has some simple advice for entrepreneurs in his position: "I should have settled out of court even though I was winning.”

"No startup can survive first contact with legal extortion,” he says.

Braxton believes "innovation will slow" within the next three to five years unless the system is fixed, because innovators cannot build companies in the face of meritless patent lawsuits.

Hopefully Congress will step in to help entrepreneurs and put an end to patent trolls.

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