Patent trolls demand ‘infringement’ fees

Jerry Tarrant, co-founder and chief operating officer of MyWebGrocer in Winooski, Vt., says he has spent more than $100,000 in attorney's fees fending off letters from companies claiming MyWebGrocer was infringing on their patents. "That doesn't include the time we've had to spend in-house trying to understand what their claim is," Tarrant said.

The letters have come from what's known as patent trolls — more formally designated in a White House report as "patent assertion entities."

These entities scour the legal landscape for vaguely worded, broadly defined patents, often buying them from bankrupt companies or small inventors. They set up shell companies whose only asset is a single patent. Then the letter-writing begins.

MyWebGrocer provides websites and online marketing services for major grocery chains, including Kroger, ShopRite and Albertsons, employing around 200 people at its Winooski headquarters.

The letters, often densely worded documents full of legalese, boil down to a simple demand: You are infringing on our patent. We will give you a license for a certain fee. If you don't pay, we'll sue you — implying that it will cost a lot more to defend that lawsuit than the troll is demanding.

Until recently, patent trolls have operated mostly under the radar. But the level they've reached has drawn the attention of Congress, the White House, the Federal Trade Commission and the U.S. Supreme Court. The court agreed to take two cases that could make it easier for troll victims to recover legal fees. Congress is considering seven bills on the issue.

Vermont leads the nation in taking on patent trolls, passing the first law intended to put some legal obstacles in their way by giving targeted businesses the right to counter-sue.

Vermont Attorney General Bill Sorrell also filed the first lawsuit in the nation against an alleged troll that attempted to shake down small- and medium-size businesses across the state, Sorrell says. MPHJ Technology Inves! tments sent out at least 75 letters to businesses and non-profits in Vermont, claiming they were infringing its patent every time they scanned a document and attached it to an e-mail, among other claims, Sorrell said. "We've delivered a big message to patent trolls: If you come into Vermont, you'll have a fight on your hands," Sorrell said.

Bryan Farney of the Farney Daniels law firm, which is representing MPHJ, said in an e-mail: "Non-practicing entities, sometimes pejoratively referred to as 'trolls,' serve a valuable role in the nation's innovation economy. ... Individuals and companies of all sizes buy and sell patents to get a proper return on their research and development activities. The use of a letter to a business that may be infringing on a patent, prior to seeking a license agreement or bringing suit, is sometimes misconstrued or misunderstood. However, this practice is usually required by the federal courts to comply with patent law, and sometimes provides evidence that no infringement exists."

Michael Beckerman, president and chief executive officer of The Internet Association, a coalition of companies that includes Facebook, Google and Amazon.com — all targets of trolls — says trolls adjust the amount they demand for a license to the size of the business they are approaching. "I call it extortion," Beckerman said. "The amount is less than what it would cost to defend themselves in court. They can do the math."

The cost of defending a patent suit through trial is easily more than $1 million, attorney Peter Kunin of Downs Rachlin Martin in Burlington, Vt., said.

A report released in June by the White House asserts that suits brought by patent trolls have tripled in the last two years, rising from 29% of all infringement suits to 62%.

James Bessen, an economist and lecturer at the Boston University School of Law, put the cost of patent trolls to the U.S. economy in 2011 at $29 billion. The number has been criticized as being inflated, but Bessen says it'! s based o! n a survey of companies that have had to fight off trolls. "Right now, patent trolls are squelching innovation," Bessen said. "The more R&D you perform, the more likely you are to be sued. A company like Apple, they're clobbered." Bessen said Apple had 44 lawsuits filed against it by patent trolls last year.

In Congress, House Judiciary Committee Chairman Bob Good-latte, R-Va., was first out of the gate with legislation aimed at trolls with the Innovation Act. Key provisions include heightened pleading standards and provisions for transparency.

Sen. Patrick Leahy, D-Vt., is working on Senate legislation, and is cautiously optimistic that a fractious Congress will be able to come together on the patent troll issue, despite the recent government shutdown.

"I want innovation; I want people who invent something to be able to gain legitimate benefit from the invention," Leahy said, "but I don't believe in somebody who's bought a bunch of paper sitting in an office and using it for blackmail."

Dan D'Ambrosio also reports for the Burlington (Vt.) Free Press.