Hammond and Beckerman: How patent trolls are chewing into your wallet
In April, Dallas-based Neiman Marcus became the newest target of a growing industry designed to cripple companies with litigation on the basis of undisclosed patent infringements. IP Nav, also a Dallas-based “company,” sent a letter to Neiman’s claiming patent infringement on unrevealed “valuable patents in the field of automation of application programs.”
IP Nav is referred to as a nonpracticing entity or patent assertion entity. These so-called patent trolls do not create any products of their own but merely exist to litigate or extract large licensing fees against operating companies. Now a fixture in patent litigation, patent trolls have been a drag on our economy, costing us jobs and putting a tax on our most innovative products and services. Rackspace, a San Antonio-based company, has referred to IP Nav as “one of the most notorious patent trolls in America.”
According to one estimate, trolls have cost the U.S. economy half a trillion dollars in the last 20 years, with over $320 billion of that economic loss occurring in just the last four years. Accounting for just 19 percent of patent litigation in 2006, these trolls now claim a majority of all patent litigation in the United States, a clear illustration that this problem is only getting worse.
While Neiman’s has the resources to challenge the validity of the IP Nav patent, and has done so by filing a lawsuit in federal court, many of our nation’s innovators and startups do not. A majority of targeted companies have annual revenues of less than $10 million. The pervasiveness of trolls and growing legal expenses associated with them can cause real pain and even put companies, particularly the little guys, out of business entirely.
The patent system was created “to promote progress of science and the useful arts.” However, in the fast-moving Internet and software-driven economy, we are witnessing the opposite: Patents are slowing innovation and serving the interests of exploitative trolls. Software and Internet patents in particular, are often vague, overly broad, and overlapping, which is why they are the weapon of choice for trolls. It would be prohibitively expensive and practically impossible for an innovative company to determine whether it may be infringing any one of the 1 million active U.S. software patents.
For example, starting in 2007, patent troll Soverain sued several companies asserting that adding an item to an online “shopping cart” and then “checking out” infringes on its patented technology, and as the patent-holder it was entitled to get a cut from every online sale.
The granting of such bogus patents has fueled patent trolls and has led to absurd lawsuits. Patent trolls have few assets, other than the questionable patents; they sustain themselves through litigation and by sucking millions of dollars out of consumers’ pockets each year.
Unfortunately, all of this frivolous litigation adds up. According to a recent study from respected law academic Robin Feldman and others, trolls now account for 56 percent of all patent litigation. Boston University economists estimate that patent trolls cost the economy more than $29 billion a year in direct costs and a whopping $83 billion in indirect costs. Trolls are hitting us right in our wallets.
There is no simple fix, but there are encouraging signs that policymakers understand the magnitude of the problem and want to help. Sen. John Cornyn, R-Texas, has introduced the Patent Abuse Reduction Act, a key step forward in bringing patent litigation under control. It addresses some of the most egregious asymmetries head-on, requiring trolls to provide more specific information about the substance of their infringement assertions, to clearly identify themselves and co-owners, and to pay for unreasonable discovery, documentation required by the lawsuit, keeping legal costs down. We applaud Cornyn for his efforts in trying to bring the litigiously suppressed Texas business environment to Washington.
If policymakers want to send an unequivocal message to patent trolls, prompt action is needed now. Congress and the administration must act quickly to halt these bad actors from further burdening our economy, limiting consumer choice and having a negative impact on America’s future.