Tech, Financial Firms Fight Growing Number Of Lawsuits Filed By 'Trolls'

Krish Gupta, deputy general counsel for EMC Corp. in Hopkinton, said PAEs are costing companies big money in settlement fees or legal defense costs.

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They’ve filed 30 lawsuits against EMC Corp. since 2005, forcing the Hopkinton-based data storage giant to spend at least $1 million per month on legal fees for each of the past several years.

And they’ve never — not once — prevailed against EMC in court.

They are patent assertion entities (PAEs), companies that buy and enforce patents for products they didn’t create. Their many detractors call them patent trolls and accuse them of relying on the high cost of litigation to force defendants into settling frivolous cases.

“This is really a form of extortion,” said Krish Gupta, EMC’s deputy general counsel.

Although PAEs prevailed in just 24 percent of court cases since 1995, the number of lawsuits they have filed has skyrocketed from 1,429 in 2006 to 5,842 in 2011, according to a Boston University (BU) study, conducted in 2012. Meanwhile, defendants in PAE lawsuits spent $29 billion on legal and licensing fees in 2011, the study found.

Technology giants like EMC are infrequent victims, as nearly two-thirds of unique patent infringement defendants have been companies making less than $100 million annually, according to data from RPX Corp., a San Francisco-based provider of patent risk management services.

Smaller companies are the prime target for PAEs since they have less money to fight frivolous litigation in court and would, therefore, be more likely to settle, said Jennifer Furey, the director of intellectual property law and commercial litigation at Goulston & Storrs in Boston.

Software and financial services patents typically cover ideas or algorithms, said Cambridge attorney Bill Seymour, and therefore have to be written in more complex language.

The abstract language often makes it difficult for judges to accurately interpret the intent of software patents, Seymour said, making them a favorite target of PAEs.

Andy Singleton, CEO of Assembla, a Needham-based provider of workspaces for distributed software development teams, said constant litigation over software patents has the potential to act like a nuclear bomb on the economy.

“As soon as one of these lawsuits comes up, everybody stops what they’re doing and takes the money they were going to spend developing software and spends it on lawyers,” said Singleton, who said the continuous threat of litigation has eroded profit margins at software companies across the region.

Attorney General Martha Coakley, a candidate for governor, visited Boston technology startup LevelUp recently to express concern about the frivolous patent lawsuits she said small companies face. They serve “as an anchor on our start-up companies and our innovation economy as a whole,” said Coakley, whose office is exploring legal remedies.

Why PAEs Are Called In

But to Southborough resident Jack Barron — who filed one of the three suits against LevelUp — the courts are the only way he can make money off his financial services communication device, which allows companies to see what customers are buying by accessing their credit or debit card transactions, to then market related products.

“The constitution ensured that inventions belong to the person, not the public,” said Barron.

Though Barron held onto his own patent, he said he can understand why other inventors would turn to PAEs to enforce and monetize them.

“Inventors often don’t have the energy to protect themselves,” Barron said.
While small technology companies in Massachusetts are often under duress from PAEs, Seymour said other growing Bay State sectors — notably biotech — face far fewer challenges from PAEs, since life sciences companies can demonstrate for the courts the products covered by patents.

Hans Sauer, deputy general counsel for the Biotechnology Industry Organization trade group, said he almost never hears complaints about PAEs going after member companies.
“It’s a sectoral problem that doesn’t hit as hard with biotech,” Sauer said.

Companies Fight Back

Heavy-hitters in the software and financial services industries have teamed up to back federal legislation aimed at curbing the influence of PAEs. The Innovation Act was by introduced Oct. 23 by Rep. Bob Goodlatte, R-Va., and was approved by the House Judiciary Committee 33-5 on Nov. 20.

The bill will now go to the full U.S. House of Representatives for a vote. (Update: the House approved the Innovation Act Dec. 5 325 to 91, meaning the bill will now go to the Senate for consideration).

Patent litigation is one of the most expensive forms of legal action, said Seymour, of Lando & Anastasi, a Cambridge patent and intellectual property law firm. Patent lawyers must have both engineering and legal expertise, putting the going rate for an experienced attorney at $1,000 per hour.

“Just by being sued, you’re already in trouble,” Seymour said.

The recent spike in patent litigation means it now takes about two-and-a-half years for a suit filed by a PAE to reach trial, according to a PricewaterhouseCoopers study. During that time, the PAEs force defendants to rack up huge bills by requesting thousands of source records and design documents, Gupta, of EMC, said.

But the plaintiffs typically set up limited liability corporations, or LLCs, solely for litigating patents, meaning defendants are unable to go after the records of the true backers of the PAE during discovery, the information-disclosure phase that precedes court action. Discovery, therefore, costs PAEs virtually nothing, Gupta said, since they’re forced to turn over so few records during that phase.

Facing $3 million to $10 million in legal fees to fight a patent infringement case to the finish, many defendants opt to accept a high-five or six-figure settlement offer, Gupta said, even if they don’t think the allegations are credible.

“Even if you win, you will lose a lot more money,” Sauer said.

The chance to make a quick buck has led to the formation of more PAEs.

“When people make money, more people follow,” Furey said.

But Are The Actions Valid?

Many defendants have no way to assess the validity of a PAE lawsuit. That’s because the complaint only has to name the patent and the product that allegedly infringes on it and can be as short as three pages, Furey said.

Plaintiffs don’t have to provide information about the nature of the infringement or the aspect of the product that infringes, Seymour said.

More specific infringement allegations are one of the major changes required under the Innovation Act. The act would also force the losing party in a patent case to pay all attorneys’ fees unless the plaintiff can prove its filing was justified, Seymour said.

Other key provisions of the legislation would suspend discovery until a judge interprets the claims in a patent trade group — which is expected to reduce litigation costs — and require the disclosure of all parties with a financial interest in a patent suit so a victorious defendant can collect legal fees and countersue for damages.

“The Innovation Act will do its job if it’s passed,” Seymour said.

But some parts of the original act proved contentious, notably provisions that would have made it easier to get rid of low-quality software patents, which are frequently asserted by PAEs during lawsuits. Currently, only a small number of financial patents are subject to additional scrutiny under the covered business method program, which often covers financial software. Boston Scientific Corp. of Natick was one of several dozen larger companies to sign a letter in September opposing expansion of the program, arguing that it would discourage investment in many important fields.

Pushback worked, and provisions expanding the software patent review process were scrapped Nov. 20 in favor of directing the Government Accountability Office to further study the issue.

Industries not affected by PAE litigation also worry the act might tip the scales too far in the other direction, allowing patent infringers to enact systematic barriers to enforcement.

“In trying to filter out patent trolls, you will also filter out people that need access to the courts,” Sauer said.

Much of his ire was directed toward the fee shifting provisions, which he said could make it risky for small companies to attempt to enforce legitimate patents.

“It will be like running in sand where you’re burning energy and not making a lot of progress,” he said.

But Gupta insisted small companies aren’t wishing to assert their patents against everyone. Instead, he said, startups are focused on patenting additional items to fuel further expansion.

“The data suggests there is need for reform,” he said.