Since 2008, IDrive has had patent trolls breathing down its neck, seeking settlements for patents they say the young company has infringed on.
IDrive, which produces an online-backup service, has spent more than $2 million on legal and settlement fees, as well as a year's worth of employee time defending itself, all for charges it says are entirely without merit.
The company joins thousands of other small businesses caught up in lawsuits claiming patent infringement from non-practicing entities (NPEs), often called patent trolls. For small businesses, it's generally easier and less expensive to make a settlement than to engage in an extended legal battle.
The High Court
That may all change by this coming summer, when the U.S. Supreme Court is expected to rule on two cases that have the potential to rebalance the scales in favor of small businesses. Until that time, it's best to be wary and protect yourself by doing due diligence on the patents surrounding your products and services. And if you're like a growing number of companies, you can choose to fight back.
Upon being served with a cease-and-desist letter for patent infringement, "your first response is this is ridiculous, this was such common sense, this was not patentable, and then the reality sinks in, and you have to fight this," says Raghu Kulkarni, founder and chief executive of IDrive.
Patent trolls usually acquire rights to unused or soon-to-expire patents with no motive of using the patent, other than to frighten business owners into settling out of court, rather than fighting a hopeless patent case. Often patent trolls set up shell companies whose only assets are the patents, which means they have no real revenues or assets. And, unlike you, they have no real business to run, other than harassing yours.
However, patent trolls should not be confused with patent owners who have legitimate patent infringement complaints. Many patent holders have real businesses connected with their patents, which gives them a monopoly on that intellectual property.
Patent Law Is Stacked Against You
Typically it's less expensive and less time-consuming to settle in a patent case than it is to fight it. Part of the reason, and what's up for review before SCOTUS in Octane Fitness v. Icon Health & Fitness, is that patent law was originally written to protect the patent holder, making it easier for the patent holder to prevail in court. In order for the patent infringer to win, the defendant must prove exceptional circumstances, namely that the patentee acted in bad faith and made baseless claims, which is hard to do. While the patent holder can be awarded "treble damages," or three times the damage claimed, the most the infringer can ever collect is attorney fees.
"It is not very easy for parties to recoup the cost of litigation in patent cases," says Brad Caldwell, a principal at Caldwell, Cassady & Curry, a law firm in Dallas. Due to the intellectual-property expertise judges have acquired in the eastern part of that state, many of the court cases originate there.
There were 3,400 legal defenses mounted by small businesses in 2011 for patent cases, a 32% increase over the prior year, according to research paper from 2012 by Boston University law professors James Bessen and Michael J. Meurer. That cost to small companies was about $11 billion in 2011, also a 32% increase over the prior year.
Worse still, the total median awards to trolls is now nearly twice as high as those to legitimate patent holders, whose median reward fell about 30% to $4 billion, according to a 2013 report by PriceWaterhouseCoopers.
Some companies have tried, with varying degrees of success, to invalidate the patent being used to collect settlement money. Others, like FindThe Best, founded by Kevin O'Connor four years ago, are fighting their cases by filing racketeering charges. (O'Connor, a co-founder of advertising platform DoubleClick, sold that company to Google for $3 billion in 2007, so he has the money to fight in court.)
Earlier this year, FindTheBest, a comparison engine that helps consumers find things such as the best deals on hotels or great recipes for particular food allergies, found itself served with a cease-and-desist letter for the technology it uses to create matches on searches.
Rather than settling, O'Connor and his current business partners have filed a federal Racketeering Influencing and Corrupt Organizations (RICO) against the NPE Lumen View Technology, essentially charging it with extortion and corrupt practices.
So far, FindTheBest has spent over $100,000 on its legal bills.
"Companies like ours don’t infringe on patents, that never should have been the issue, and now we have to spend huge amounts of money to defend ourselves," O'Connor says.
Generally speaking, lawyers say you should try fighting back now, or at least find a way to delay settling until the summer, when a favorable court decision, as well as pending legislation before Congress that would make trolls responsible for court costs, could work in your favor.
A Chilling Environment
Until the Supreme Court rules, however, the situation will continue to create a chilling environment for business owners.
Several years ago, Jordan Fantaay, founder and CEO of email productivity startup Fantoo, ran a business that created hardware for sports and fitness entertainment systems. It received a cease-and-desist letter from an NPE claiming infringement. Rather than settle, Fantaay decided to alter his system's hardware, which cost him more than six months of product-development time.
Now, Fantay, who operates Fantoo in England and the U.S., does careful due diligence around every piece of software the company uses, and he is constantly aware of his competitors and what technology they use
"It is frustrating, and it is such a waste of time that [trolls] are doing this, someone needs to legislate and bring things up to speed so this does not affect innovation," Fantaay says.