The "War" on Patent Trolls is Heating Up

October 14, 2013

The issue of patent assertion entities, or patent trolls, continues to be a hot one in the startup community. The Ninth Circuit Court of Appeals defines a patent assertion entity as "a small company [that] enforces patent rights against accused infringers in an attempt to collect licensing fees, but does not manufacture products or supply services based upon the patents in question." Several weeks ago, on August 28, we discussed a report issued by the Government Accountability Office (GAO), which raised questions about whether patent trolling is really a big problem for startups and small businesses and whether patent trolls are truly the cause of an increase in patent infringement litigation. The report seemed to conclude that other material factors were to blame for the increase in patent infringement litigation. Despite the conclusion of the GAO report, many in the startup community have declared "war" on patent trolls and now the Federal Trade Commission (FTC) has entered the fray.

Two weeks ago, the FTC, whose principal mission is to promote consumer protection and eliminate and prevent anti-competitive business practices, announced that it will use its subpoena power to begin a formal investigation into patent trolls, by seeking information from approximately 25 companies that buy and sell patents, and 15 other companies that manufacture devices and write software and applications. The commission unanimously approved the effort with a vote of 4-0. According to FTC chairwoman, Edith Ramirez, "[p]atents are key to innovation and competition, so it's important for us to get a better understanding of how the companies operate." The FTC will delve into the companies' financial operations, including how much they earn from patent lawsuits and licensing and how the profits are disbursed to investors. The FTC hopes that the subpoenas will allow its regulators to explore the secret workings of troll operations. If the FTC uncovers illegal or questionable practices, it may choose to use its antitrust and anti-competition regulatory powers to pursue the patent assertion entities. We will have to wait and see what the investigation reveals.

In the meantime, if your startup or small business is faced with a patent infringement lawsuit or threatened by a patent troll, there are several things you can do: First, review the lawsuit or demand letter as soon as possible to determine if it has merit. If it does not, do not settle. Patent trolls simply want your money and if you indicate that you are willing to settle, they will hunt you down. For example, two weeks ago, Martha Stewart Living Omnipedia filed suit against a patent troll that claimed the Martha Stewart Weddings iPad app infringes its patents. The troll sent Omnipedia several letters demanding $5,000 for each of the four apps to license the patents. Instead of paying up, Stewart's media empire sued for a declaratory judgment that it was not infringing and that the troll's patents are invalid. Instead of settling for $20,000, Stewart has decided to fight the demand, with a suit that is sure to be more costly, but could possibly save future app developers from similar demands.

The second thing you should do if your startup is faced with a demand letter or lawsuit is to research the company behind the demand and then ask questions. Call the patent troll's lawyer and pepper them with questions about the lawsuit, the patent, the parties involved, and the alleged infringement. Finally, try to find other companies that were sent demand letters or sued by the same troll; it is better to fight the battle with several allies than by yourself.

The Law Office of Kristina M. Reed is highly experienced in all phases of business law, from startup to profitability, and we can help guide your young company through the scary tactics used by patent trolls. Patent trolling remains a hot topic in the startup community and within the halls and agencies of our government. What the FTC and other agencies decide to do about the practice remains to be seen. In the meantime, if you have questions about your California business or startup, please contact us.