Increasing Scrutiny on Patent Trolls: Companies and Government Push Back

Increasing Scrutiny on Patent Trolls: Companies and Government Push Back

Soverain Software LLC tried to stake out a $34 million claim against online retailer Newegg Inc., for alleged ownership of common online retail shopping features. Newegg pushed back, ultimately prevailing, but Soverain, a so-called “patent troll,” already had extracted tens of millions in settlements from a long list of retailers: Amazon.com, Gap, Nordstrom, Macy’s, Home Depot, Radio Shack and Kohl’s. The settlement with Amazon.com alone was $40 million.

Suits by “patent trolls” or, more politely, “patent assertion entities” (PAE) are widely criticized as stifling innovation, diminishing profits and inhibiting job creation. A PAE’s business model is driven by purchasing and defending patent rights, rather than developing a product. PAEs notoriously sue for patent infringement, capitalizing on the relatively low cost of initiating a case, and forcing settlements because companies cannot justify crippling defense costs. By some accounts, business is booming for PAEs. In an editorial published recently in The Washington Times, Gary Shapiro, president of the Consumer Electronics Association, said “academics estimate that businesses paid out $29 billion to trolls in 2011, double the amount paid in 2009.”

Lawmakers are paying attention. The House is considering the Saving High-Tech Innovators from Egregious Legal Disputes (SHIELD) Act, revised from an earlier version, and reintroduced February 27, 2013, by Reps. Peter DeFazio (D-Ore.) and Jason Chaffetz (R-Utah). The proposed law would impose reforms to curb suits by patent trolls. A linchpin of the legislation is the “loser pays” concept, which proponents argue would dampen enthusiasm for a lawsuit by the prospect of having to foot the bill if the plaintiff does not prevail. On the agency side, the Federal Trade Commission is said to be considering a so-called 6(b) investigation into whether PAEs are stifling competition. That would allow the FTC to use its subpoena powers to collect information about PAEs otherwise unavailable to third parties.

“Patents promise their holders the right to exclude, but unlike trademarks, there is no ‘use it or lose it’ policy. The increased attention lawmakers are giving this issue is a promising step forward in the preservation of patent rights,” said Janine D. Geraigery, a patent attorney with Epstein Drangel LLP in New York.

While settlements driven by cost concerns may remain the rule, companies like Newegg are fighting back.

“We at Newegg have decided not to settle with patent trolls. When a sham of a company called Soverain Software sued us, we fought back and won. It wasn’t easy or cheap, but it was the right thing to do for our customers and as a good corporate citizen,” said Newegg Chief Legal Officer Lee Cheng. Similar sentiments were evidenced in a recent post by Alan Schoenbaum, Senior Vice President, General Counsel and Secretary for Rackspace, the San Antonio, Texas-based IT hosting company.

“Today we drove a stake into the ground in our dogged fight against patent trolls―we sued one of the most notorious patent trolls in America,” Schoenbaum wrote April 4, 2013, in The Rackspace Blog! & Newsroom, filed in Cloud Industry Insights. Schoenbaum was referring to a suit filed by Rackspace in federal court in San Antonio, Texas, against a PAE called Parallel Iron, LLC and IP Navigation Group, LLC (IP Nav), in response to infringement litigation initiated by Parallel Iron. Among other things, Rackspace alleges that Parallel Iron breached a mutual forbearance agreement previously reached between the parties.

“We aren’t going to take it,” Schoenbaum declared. “We have sued IP Nav and Parallel Iron in federal court in San Antonio, Texas, where our headquarters is located. … We are asking the court to award Rackspace damages for breach of contract, and to enter a declaratory judgment that Rackspace does not infringe Parallel Iron’s patents.”

Susan A. Winchurch is an attorney and freelance writer based in Scotch Plains, NJ and Annapolis, MD. Her legal experience includes structuring, negotiating, and drafting commercial transactions and contracts, including commercial real estate transactions (with particular emphasis on retail and office leasing and development), vendor contracts, consulting agreements, confidentiality agreements, technology agreements, marketing and advertising contracts, corporate governance, and entity formation. She has practiced both as in-house counsel and in law firms. She was general counsel of Ritz Camera Centers, Inc., a national retail chain, and supervised that company’s legal function during its Chapter 11 bankruptcy proceedings in 2009-2010. Susan earned her bachelor’s degree from Loyola College in Baltimore, Maryland in 1985 and her law degree from the University of Maryland School of Law in 1996, where she was an Articles Editor on the Maryland Law Review. Prior to entering the practice of law, Susan was a legal editor and journalist, working for a number of specialty legal publications, including Mealey’s Litigation Reports on Insurer Insolvency and Reinsurance.

Disclaimer: The views and opinions expressed in this article are those of the individual sources referenced and do not reflect the views, opinions or policies of the organizations the sources represent.