Patent Trolls Targeting Software Companies and Startups?

August 28, 2013

Starting tomorrow, August 29, 2013, Engine, a non-profit connecting startups and government (according to its website, "the voice of startups in government"), is kicking off Startup Across America Day. Forty-four members of Congress will meet with technology startups in their home states and districts in order to discuss policy issues that impact their businesses. Events will take place in Atlanta, Austin, Baltimore, Boulder, Cambridge, Chicago, Cincinnati, Dallas, Grand Rapids, Jeffersonville, Kansas City, Long Island, Memphis, Phoenix, and Seattle. The goal of this event is to establish "the first step in creating a lasting dialogue between Members and their startup communities; [to] allow Members to meet with job creators in their district; [to] discuss the importance of entrepreneurship and innovation to the American economy; and [to] embark on conversations about the policy issues that matter to these dynamic businesses." One subject that is certain to be discussed by both parties is "patent trolling," and it is an important issue in California because many startup companies, particularly those in the technology industry, rely heavily on patents. The issue has also become a hot topic in Washington.

Patent trolls are shell companies that exist solely for the purpose of asserting that they should be reimbursed because they hold patents that are being infringed upon, mostly by an electronic process or software, hence the reason California's technology industry is particularly concerned with the practice of patent trolling. Patent trolls essentially threaten to file lawsuits against alleged patent infringers, and their threats seem to be real: Between 2010 and 2001, the number of patent infringement lawsuits increased sharply, up by a third, compared to the previous decade. It is estimated that the practice of patent trolling has cost small and medium-sized companies an estimated $29 billion per year in litigation and/or settlement fees, and it is alleged that the practice has become more popular over the last few years because the Patent and Trademark Office (PTO) has been unable keep up with the demand for patents, issuing many that were too broad or poorly documented. For its part, the government is looking for ways to curb the practice. In June, President Obama issued five executive orders and seven legislative recommendations designed to protect innovators from frivolous litigation and to ensure the highest-quality patents in our system. In addition to the President's actions, several members of Congress introduced legislation aimed at changing the way patents are considered, awarded, and litigated.

While the battle against patent trolls gained significant momentum over the summer, a report issued by the Government Accountability Office last week may "put a spoke in the wheel." According to the report, the increased number of lawsuits in 2011 was most likely influenced by the anticipation of changes in the Leahy-Smith America Invents Act, which significantly changed our patent system, including limiting the number of defendants in a lawsuit, thus resulting in many plaintiffs breaking up one lawsuit against multiple defendants into several lawsuits. The report further concluded that companies that make products brought the majority of patent infringement lawsuits, while patent trolls only brought a fifth of lawsuits. However, as anti-troll groups point out, the GAO report also shows that patent trolls are very active in software cases, which accounted for 65 percent of defendants between 2007 and 2011.

The issue of patent trolling is sure to come up again, and regardless of the conclusions of the GAO report, lawsuits against startups are very common. For help understanding possible legal matters that may face startups and any other issue affecting startups in Sacramento and throughout the area, please contact us today.