U.S. President Barack Obama and Brandon Fried are worried about the same problem.
“This has been a frustrating experience for me personally,” Fried, executive director of the U.S. Airforwarders Association, says. “Over a five-year period, in fits and starts, I’ve had members come to me, usually completely panicked.”
In the past five years, 20 freight forwarders have reported problems with non-practicing entities (NPEs) to Fried, who writes a monthly column for Air Cargo World. That accounts for about 5 percent of Airforwarder Association members.
But what are NPEs? Depending on whom you ask, they are either monsters, using the system for their own gain or just doing their job.
Sometimes, these companies are called “patent assertion entities.” Much of the time, the most eye-popping of the names emerges in conversation – “patent trolls.”
These companies, whatever they are known as, hold multiple patents in the U.S. Patent and Trademark Office. They do not use the patents to manufacture products; rather, they assert them by contacting and sometimes suing companies that they feel use their patents without permission.
These NPEs have primarily focused on technology companies, but some have been suing freight forwarders for presumably violating a patent on track and trace software.
The U.S. government is scrambling to find a way to curb what they call patent trolls. Even Obama has taken notice of NPEs.
What has become known as the patent troll phenomenon takes place almost exclusively in the U.S. because of the country’s patent system. But nobody seems to agree on what this phenomenon is – or if it even exists.
A freight forwarder’s first contact with a NPE is a letter from a lawyer, informing the forwarder that it is violating a patent owned by the company the lawyer represents, Fried says.
For the forwarder to hire a lawyer to investigate if there is patent violation, it usually costs about US$150,000. That’s when Fried receives a phone call from the forwarder.
“[The forwarder says,] ‘I don’t think we’re violating the claim. It’s just something we’ve always done on our website, and our lawyers think we have a good case, but it’s going to cost us $150,000,’” he says.
The forwarder then settles with the NPE rather than pay a lawyer to fight the lawsuit. Fried says the settlement is usually US$30,000, which gives the forwarder the right to use the patent but forces it to not disclose information about the case.
“I have this situation where the member will say to me, ‘I can’t talk to you anymore about it. I can only tell it was one of the worst things we’ve ever gone through, and they extorted the money from us,’” Fried says.
He says he has tried to convince members not to settle – to fight the lawsuit – but with no success.
“You’re faced with a huge legal bill or an offer to settle at one-fifth, and they have to make a business decision,” Fried says. “Usually the business decision is to go with the settlement because they don’t want to lose or pay the legal defense bills.”
Just like the company it’s suing, a NPE also doesn’t want to end up in court, Robert Fletcher, president of Intellectual Property Insurance Services Corporation, says.
“Many times, a troll is much more interested in getting into a lawsuit and getting a relatively modest – and I say modest might be $2-or-3-or-400,000 payment – and moving onto the next victim as opposed to litigating all the way to a decision,” Fletcher says.
One NPE that has sued freight forwarders and airlines is ArrivalStar. The company got its beginnings when a Florida man named Martin Kelly Jones registered patents in 1993 for “an advance notification system and method” that “notifies passengers of the impending arrival of a transportation vehicle, for example, a school bus, at a particular vehicle stop.”
Jones eventually founded ArrivalStar, which is registered in Luxembourg.
Anthony Dowell is a patent attorney in Indianapolis who has represented ArrivalStar since 2008. He says he is one of multiple attorneys who represent the company.
“We investigate companies on the Internet and find if they’re infringing any of ArrivalStar’s 34 U.S. patents. If the information looks like a company’s infringing, we send them a letter alerting them to our concerns and in most cases, we then have a dialogue about whether there is in fact infringement,” Dowell says. “Most of the lawsuits we file end up happening because someone doesn’t answer our letter.”
He describes what happens after ArrivalStar sends a letter to the company in question.
“Usually, we’re able to work something out, and sometimes companies say they’re doing something on the Internet that they’re not actually doing, and we’re able to clear that up and say, ‘OK, you’re not infringing and sorry we bothered you,’” Dowell says. “Others, we’re typically able to work out some sort of licensing arrangement.”
About a fourth of the companies Dowell contacts on behalf of ArrivalStar end up in a lawsuit, most of the time because they don’t respond to letters or calls. He says most companies end up settling.
Air Cargo World’s attempts to speak with freight forwarders sued by ArrivalStar were unsuccessful.
Stopping ‘a boogeyman’
In the 1990s, a lawyer at Intel Corporation invented the term “patent troll,” and the name stuck.
Intel, Apple, Google and other technology companies were being sued by NPEs for their different gadgets. So they formed an organization to lobby the government for patent reform called the Coalition for Patent Fairness, “which by Washington standards, the name usually means the opposite of what it says,” Christopher Gallagher says, chuckling.
“They came up with this public relations gimmick called ‘patent trolls’ as a way of creating a boogeyman that had to be stopped,” says Gallagher, an intellectual property attorney at Gallagher, Callahan & Gartrell in New Hampshire. “What we’re really talking about is abusive litigation, so anytime you have a court system that’s open to everyone – and we actually prefer it that way – you’re going to have people who will abuse it on both sides.”
Gallagher says NPEs came into being because infringers in the tech industry ignored them.
Fletcher of Intellectual Property Insurance says another contributing factor is the ease of obtaining a patent with the Patent and Trademark Office.
Intellectual Property Insurance is an insurance company whose services include protection from NPEs.
The America Invents Act, which went into effect in 2011 and 2012, was designed to deal with NPEs. The Coalition for Patent Fairness lobbied for the law, but the group wants more.
NPEs have also sued transit agencies, cities and even the U.S. Postal Service.
“These lawsuits have cost public entities hundreds of thousands of dollars – and possibly millions – often without testing the validity of the claims or the patents in question,” Rep. Daniel Lipinski of Illinois wrote in his 81-page report on NPEs in June.
Also in June, Obama announced several executive orders “to protect innovators from frivolous litigation” by NPEs, according to The New York Times.
The next month, Fried sent out an email to Airforwarders Association members with the heading “Has Your Company Been the Target of a Patent Troll?”
Playing the numbers game
A record volume of new patent infringement cases was filed in 2012, according to RPX Corporation’s 2012 Non-Practicing Entity Activity Report. Cases filed in 2012 were up 40 percent from 2011, the provider of patent risk management services reported.
Dowell says he has licensed more than 300 companies with ArrivalStar and has brought around 100 lawsuits since 2008.
These numbers sound alarming, and opponents of patent trolls use figures such as these in their arguments.
But it is difficult to draw conclusions from just the numbers, Gallagher says.
The America Invents Act now requires reporting one lawsuit per company, whereas before the law, 50 companies could be on a single lawsuit.
In addition, the law “created numerous new administrative proceedings for invalidating patents at the Patent and Trademark Office, which created additional incentives to file lawsuits in certain contexts,” Adam Mossoff, a law professor at George Mason University, wrote in an Aug. 12 blog post on the university law school’s website.
So the combination of these new administrative proceedings and the prohibition of having multiple defendants on a single lawsuit has led to more lawsuits being filed, wrote Mossoff, also co-director of academic programs and senior scholar at the university’s Center for the Protection of Intellectual Property.
That means figures such as RPX’s 40 percent increase or Dowell’s 100 lawsuits don’t tell the whole story.
The America Invents Act, the very law championed by the Coalition for Patent Fairness, has muddied the numbers and created the impression that patent infringement cases have increased, when in fact, trends are difficult to establish.
“It’s so expertly orchestrated and profoundly complicated,” Gallagher says.
The U.S. Government Accountability Office said something similar, pointing to the America Invents Act as a culprit for the escalation in patent infringement cases.
In an August report, the GOA, which investigates matters related to public funds, said though the number of patent infringement lawsuits increased from 2010 to 2011, companies that make products brought most of the lawsuits.
NPEs brought only a fifth.
Defining patent troll
The problems really creep up when trying to define what is a patent troll. After all, asserting a patent is not illegal.
“You have companies who are legitimately providing liquidity to the innovation process,” Gallagher says. “That’s good, but some of them then act in an abusive fashion.”
Fried says with the freight forwarders who contact him, he doesn’t know whether there is an actual violation of the patent.
“I also understand and am sympathetic towards companies that are wronged and need to vigorously defend their patents,” he says. “I get that.”
The term patent troll stirs up considerable debate.
“I would say it’s a PR term that’s used by companies that are infringing patents and don’t want to pay the inventors the rightful amount for using the technology that’s patented. There’s a lot of gray area on what a patent troll is,” Dowell says.
After all, he points out, universities do research and file patents, but they don’t make products.
“My client Martin Kelly Jones had a company in the ‘90s that failed, was unable to get financing. And he was left with just a lot of patents and today – what’s the point of calling him a patent troll?” Dowell says, speaking faster. “He invested time and energy and effort in getting patents and should be rewarded for that.”
Gallagher says there are few ways to deal with companies who use “our democratically established systems” in an abusive way.
“When you start talking about denying a certain class of people, most of whom perform a very useful function – when you start talking about applying our rule of law selectively that way, that’s pretty dangerous,” he says. “We just want to find a way to get at the bullies. Now when you have a bully, that’s generally a fact-specific situation. Somebody has to know all the facts to know who’s abusing it and who’s a legitimate patent holder asserting a legitimate right for legitimate reasons, and that’s why those decisions are left to the courts.”
Patents are only enforceable because of the ability to sue, so Gallagher says cutting off access from the court system kills the patent’s effectiveness.
“There are companies that are out there that have some really shaky patents,” Dowell says. “But it’s a big gray area, and I think it’s a big PR campaign for some companies that just don’t investigate whether they might be infringing a patent before they come out with a product or system, and then when they do, they’re all upset that someone’s already patented it, and start screaming and waving their arms about the fact that this patent owner is a patent troll. So I don’t think it advances the conversation any to use names like that.”
How to stop a troll
Fried says he wants legislation to stop NPEs on behalf of his freight forwarder members.
“Until we see legislation that’s going to curtail this, this practice is going to continue,” he says.
Fried also advises that before purchasing any software, a forwarder should make sure all the technology behind it is licensed and that the software vendor has obtained all the license agreements.
Dowell says the U.S. is taking positive measures to curb activity by patent trolls, including expediting procedures to review the validity of patents.
“I think everyone benefits in knowing any patents that are out there being asserted are valid,” he says. “The beauty of it from a plaintiff’s standpoint, who I represent, is send the patent through that procedure, whether it’s the reexamination or the new expedited review of patents, and it comes out, it’s like having a gold-plated patent. It makes it even stronger. There’s positives to these reforms on both sides.”
Some people think the government’s attempts to address NPEs are futile.
“With all due respect, they are ineffectual and will be ineffectual,” Fletcher says. “You have the executive branch trying to get involved in the judicial branch. Everybody has under the Constitution the right to have an invention and get a patent on it. There’s no question about it, and patents basically carry with them a presumption of validity, and the presumption of validity is available in a court of law. The action for enforcement is brought in a court of law, and for the executive branch to come in and say, ‘Well, we don’t like the way that system is working. We’re going to do something about it’ really is a little bit out of place.”
Fletcher says having better examination of patents in the Patent and Trademark Office would be more effective.
The Government Accountability Office recommended in its report that the Patent and Trademark Office should “consider examining trends in patent infringement litigation and consider linking this information to internal patent examination data to improve patent quality and examination.”
Gallagher says freight forwarders could deal with patent trolls by reporting them to the U.S. Federal Trade Commission and having insurance.
“The way to defeat patent trolls, like any bully, is to take them on,” he says.
Intellectual Property Insurance protects clients against NPEs. Fletcher says only 1 to 2 percent of its clients have had problems with NPEs.
“Our business has benefited tremendously by trolls because now people think in terms of the real possibility of being sued for patent infringement,” he says. “Five years ago, six years ago, the attitude was much different with respect to the fear of being sued for patent infringement – much different. People were not cognizant of that possibility and had a low level of concern. It wasn’t really important to them. Now that whole scenario has changed.”
Fletcher says the patents that are the subject of NPE actions will expire in about a decade.
When one of his company’s clients gets a letter from a NPE, Intellectual Property Insurance responds with a letter asking for more details and letting the company know that the client is insured. About 40 percent of cases settle at that stage, Fletcher says.
“Trolls like to stay away from anyone who has the reputation of fighting the patent,” he says. “We represent something a troll doesn’t want to see.”
If there is a follow-up response from the NPE, Intellectual Property Insurance will work with the client to find an attorney.
About 90 percent of cases settle before the halfway mark.
The issue, or non-issue, of NPEs is a puzzling subject. The origins of NPEs, the numbers regarding them and even identifying a company as an NPE or a troll are all mystifying.
But many of the voices – the government, attorneys, experts, freight forwarders and NPEs – seem to agree on one point: There are companies out there who may be taking advantage of the system with their patents.
“That’s the price we pay for having court access available to anyone,” Gallagher says, “even nasty people and even litigation abusers.”
Deducing which companies fall under this category is the tricky part.