In Battle Against Patent Abuse, Vermont Is Troll Hunting

Sep 30, 2013

Patent abuse by a shadowy alphabet soup of shell corporations has cost the U.S. economy billions of dollars. Rich Tarrant, Jr., founder of MyWebGrocer, says it has cost Vermont jobs.

At a panel discussion about patent abuse Monday, Tarrant joined Assistant Attorney General Bridget Asay and a number of  business people and patent abuse experts to talk about the problem and what Vermont and the federal government can do to stop it.

Rep. Peter Welch was originally scheduled to present as well, but had to give his presentation remotely via video conference from Washington, where he is working to avoid the looming government shutdown.

But while Welch's colleagues are in heated opposition over subjects like the Affordable Care Act, he said patent abuse "has a bi-partisan profile that's very different" than those issues.

Patent abusers, also known as "patent trolls," are generally shell corporations that offer no real product or service and whose only assets are the patents they use to threaten legal action against both start-ups and established companies.

"We've had multiple patent troll attacks," said Tarrant. "I would say about six or seven, over the last four years."

Tarrant said some of those attacks were on companies working with MyWebGrocer on long-term projects that would have caused the Winooski-based company to hire new project teams. Good-paying jobs, he said, that "never materialized," because the partner companies were forced to back out.

James Bessen, co-author of Patent Failure: How Judges, Bureaucrats, and Lawyers Put Innovators at Risk and lecturer at Boston University, presented at the event. He said the problems the patent system is seeing now date back to the 1990s, when high-growth Internet and computer technology companies filed for thousands of patents that now seem over-broad and outdated.

Over the years, some of these patents have ended up in the hands of patent trolls, who buy them up from down-on-their-luck companies in need of extra cash. The patent trolls then threaten companies that are innovating in online or mobile markets, bringing an added risk to the already high-risk world of high-tech startups.

Bessen said the problem with patent abuse is that it is contrary to the very purpose of patents. Instead of protecting innovative companies and allowing them to recover their research and development costs, it's making innovation costly.

"This is acting as a tax on R&D," he said.

A lawsuit (PDF) filed in May by the state of Vermont against one alleged patent troll, MPJH Technology Investments, lays out what might happen next.

MPHJ, according to the lawsuit, allegedly sent out letters to multiple Vermont companies claiming that they were using technology that allows employees to scan documents on the office scanner and have the digital files emailed to them. MPHJ claimed in the letters that it had a patent for "Distributed Computer Architecture And Process For Document Management" and three similar patents.

MPHJ, in the letters, claimed the Vermont companies were using that technology without having paid a licensing fee too the patent-holder. The suit says MPHJ then threatened legal action against the companies if they did not pay a licensing fee of $1,000 per employee.

This is where patent trolls score, Bessen said. Even if the companies being threatened by patent trolls are not in violation of the patent or if the patent is too broad to be enforceable, a legal defense in such a case is often too costly to pursue. Victims simply comply and pay the licensing fee because it is cheaper than taking the case to court.

Michael Beckerman, President and CEO of The Internet Association, a D.C.-based lobbying organization focused on internet-related issues, also came to the Champlain College event. He said the problem with the current regulatory structure around patents is that patent trolls have nothing to lose. They can set up a shell corporation whose only asset is the patent it holds. Then, if a legitimate company wins a patent lawsuit against the shell corporation and sues to recover its legal fees, the shell corporation can file for bankruptcy and the winner gets nothing.

"They can't lose," Beckerman said of the patent trolls. 

In Vermont this year, that's starting to turn around. New legislation passed in the spring allows Vermont companies threatened by patent trolls to sue them first if they think claims of patent violation are made "in bad faith."

In May, Assistant Attorney General Bridget Asay filed suit against MPHJ under Vermont's Consumer Protection Act. The state is seeking a permanent injunction to stop MPHJ and all of its shell corporations from threatening Vermont businesses with law suits. The case also seeks civil penalties of up to $10,000 for each violation of the Consumer Protection Act and reimbursement of the state's legal fees.

Rep. Welch called this year's legislation another case of Vermont leading the way on important issues. But Peter Kunin, an attorney at Downs Rachlin Martin, said state laws don't fix the problem.

"The problem with the Vermont statute is that there's only so much that can be done by the states," he said. The solution must come from the source of the problem: the federal patent system.

As the clock winds down on government shutdown, lawmakers in Washington aren't thinking a lot about patent reform this week. But Welch says there is a lot of common ground in favor of reform.

Sen. Patrick Leahy, who is chairman of the Senate Judiciary committee that oversees patent-related legislation, is currently working on a bill with Sen. Mike Lee (R - Utah) to address what they called "America's patent problem" in a recent Politico op-ed.

The solutions are varied. Some hinge on reducing the imbalance of up-front costs in patent troll cases where currently legitimate companies must spend a lot of time and money with a patent lawyer preparing their defense while the trolls have very little invested in a given case.

"We want to make sure that the trolls have some risk," Beckerman said.

Others say reform must target the fundamental problem: the federal patent system. Reviews of the patents' validity after they've been granted, known as "post-grant review" is one popular submission. James Bessen and other experts say  if the government can take over-broad patents out of the mix, much of the problem will go away.