Patent Trolls Threaten to Bankrupt Companies and Stifle Innovation

By LAURA LOREK
Founder of Silicon Hills News

BLh_g4vCQAAFsU5Without patent reform, Living Direct might have to file for bankruptcy, said Mark Baker, its general counsel.
The online retailer, founded in 2000 now has 60 employees, and faces multiple “patent troll” lawsuits which threaten to drain it of all of its cash, Baker told a seven-person panel Thursday morning meeting on patent reform at HomeAway’s headquarters in downtown Austin.
“As soon as we were listed as one of the fastest growing retailers in the country, we became the target of eight trolls,” he said.
And it’s not just Living Direct, the problem is endemic to online retailers, software companies and others in the technology industry.
Julie Huls, president of the Austin Technology Council, moderated the panel with Sen. John Cornyn (R-Texas), Johnathan Greenberg, general counsel of Freescale, Ross Buhrdorf, chief technology officer of HomeAway, Josh Baer, chief innovation officer of Return Path and co-founder of Capital Factory, Alan Schoenbaum, general counsel of Rackspace Hosting and Derek Willis, general counsel of Volusion.
Sen. Cornyn listened to stories of Texas technology companies struggling to deal with patent trolls, which are businesses that largely exist simply to extort payments from companies for meaningless patents.
“This is a threat not only to the innovation these businesses create but also to our prosperity and our economy,” Cornyn said.
One of the sectors of the economy that offers the most opportunities for growth is the technology industry and patent trolls threaten those companies ability to innovate, he said.
Patent trolls don’t create businesses, they destroy them by extorting money from companies that are creating innovative products and services and employing people.
Nothing is easy to pass in Congress these days, but if there’s something that would garner bi-partisan support, Cornyn said, he hopes it’s patent reform. He requested that the technology companies send their stories to his office to help with illustrating the need for patent reform.
Right now, the Patent Abuse Reduction Act of 2013 is currently pending. It seeks to reduce abuse in patent litigation while still protecting legitimate businesses that have patents on innovations they seek to protect.
“I’m very optimistic it’s going to pass,” said Schoenbaum, general counsel with Rackspace Hosting in San Antonio.
Patent trolls can go after just about anyone with a frivolous lawsuit, Schoenbaum said.
“Everyone in this room is probably infringing on a patent right now and they don’t know it,” he said.
Recently, Rackspace got hit with a patent infringement lawsuit from a patent troll seeking to enforce a patent on the ability to flip a smartphone, such as an iPhone or Android device, from horizontal to vertical. The company was called “Rotatable” and had just one asset, the patent.
“Ninety percent of our litigation costs is spent on patent trolls,” Schoenbaum said.
When he called the company to inquire about the lawsuit, they offered to settle the patent infringement case for $75,000, Schoenbaum said. The whole goal of patent trolls is to extract a little bit of money from a lot of people, he said.
Abusive patent litigation results, in part, from the threat of the cost of discovery in a lawsuit. That’s why companies often settle the frivolous claims to avoid the cost of litigation. But the Patent Abuse Reduction Act would make those bringing the lawsuit bear more of the cost of litigation.
The reform legislation would also adopt a “loser-pays” scheme in which parties that bring unjustified and unreasonable claims face the possibility, if they lose, of having to pay for the other side’s litigation costs.
Willis, general counsel of Volusion, said the company has 400 employees in Austin and 40,000 customers.
“With that growth, we’ve become a bigger target,” he said.
Patent trolls have sued Volusion three times in the last year, he said.
“It’s an incredible drain on our cash,” he said. “It’s an incredible distraction for our management team.”
Baer, chief innovation officer for Return Path and co-founder of Capital Factory, said that in dealing with small startup companies, they tend not to think about politics and lawsuits.
With a technology startup, Capital Factory gives them $20,000 in startup funding and they’ve got to decide whether to spend $10,000 on filing a patent.
“None of it makes any sense,” Baer said. “Really it’s just shutting everything down.”
Patents were started to spur innovation but with software stuff, it just doesn’t make any sense, Baer said.
In his role at Return Path, with 400 employees, Baer said the company has been hit with three patent troll lawsuits.
“We spend millions of dollars a year defending them,” he said.
During the panel discussion, Greenberg, senior vice president and general counsel of Freescale, recommended that startups and small businesses be exempt from patent lawsuits.
In remarks following the panel meeting, Sen. Cornyn said that’s currently not part of the patent reform legislation, but it’s something that should be considered.
Patent trolls are a threat because they “hurt consumers ultimately by denying them access to products and services that will make their lives easier,” Sen. Cornyn said.
The patent trolls don’t have a business other than going after litigation with businesses, said Buhrdorf, chief technology officer with HomeAway.
Patent trolls stifle innovation, he said.
“It’s stifling jobs,” he said.
HomeAway spends millions of dollars every year paying ransom to trolls or on defending baseless lawsuits, Buhrdorf said.
Freescale does derive a lot of revenue from licensing its patents and innovations to others, said Greenberg. So he cautioned Sen. Cornyn not to make true innovators pay for the sins of the patent trolls.
“The voice of the true innovators need to be heard,” he said.
“Just making it harder for anyone to enforce a patent, makes it harder for true innovators like Freescale and IBM,” Greenberg said.

In response to Mark Baker’s comments, this note was sent from Living Direct: “During a recent panel discussing the significant problem of patent trolling, our general counsel made comments that were not accurate and were overstated to make a point about the severity of this issue. Our business is strong and our finances are healthy. We strongly support Senator Cornyn’s efforts and look forward to working with him and Congress on this critical issue for American innovation.”

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