In the battle to beat back aggressive patent trolls, startups just notched a rare win on their belts. Factual, a Los Angeles-based company that's building a global database of location information, recently made public that it successfully fought a patent infringement lawsuit waged by Locata LBS LLC. "Even if they'd offered to settle for a dollar, it would have been a dollar too much," Factual founder and CEO Gil Elbaz, who spent nearly $1 million fighting the suit, wrote in a recent Medium post.
Locata is what's called a non-practicing entity (NPE), or a company that has acquired a number of patents but doesn't actually use them to create anything. NPEs make a business out of targeting other companies--usually small- and middle-sized firms--accusing them of patent infringement, and then demanding licensing fees. They usually win because the companies they prey upon typically can't afford to pay for the legal fight required to make them go away.
In a phone conversation with Elbaz, he said Factual's trouble began in late 2013. When the nine-year-old company--which licenses location data to companies like Facebook and Groupon--first received the Locata complaint, he figured it was the cost of doing business these days. "You expect to have to deal with the annoyance of these thugs probably in the same way at one time people thought in New York they would have to deal with the mafia," he says. (He was also mildly, if not mistakenly, flattered: "It's a sign we're on the map and we're becoming an important company.")
But he quickly realized attempting to fight them off would become a huge distraction, one his investors didn't want him to get derailed by. His investors--which include Andreessen Horowitz, Index Ventures, and Upfront Ventures, among others--urged Elbaz to settle and his attorney warned it could cost his company up to $2 million to fight back. Rather than focusing on building better products and servicing customers, he would have to attend to a mountain of paperwork and legalese. "I realized I was going to have to become an expert on all of this stuff," he says. Ultimately, though, he convinced his investors it was worth it, and got their support.
At the crux of the case was a vaguely worded assertion: Locata claimed that Factual's data business infringed upon (and incited its customers to infringe upon) the patented process of "triggering an event in a roving apparatus." Such a claim could apply to hundreds, if not thousands, of different companies. In fact, Locata had also gone after eBay, PayPal, Yellow Pages, and United Sample. Then there was the more vital question: Does that process that even deserve a patent?
Factual's fight back was two-pronged: It went after Locata in court and also in the United States Patent and Trademark Office. In December, Factual won with the USPTO, which invalidated 12 out of 24 claims in the original patent. Then in February, the Central District Court of California subsequently dismissed the case. A request for comment from Locata was unreturned prior to this article publishing.
Factual was in a better position that many to push back. With $60 million in venture backing, the company had the capital to fight the suit, which amounted to around $1 million. But there were other costs: It took 28 months and accounted for hundreds of hours of its executives' time. To compensate for legal fees, Elbaz sacrificed making five or six new hires.
It turns out, more than 80 percent of patent infringement targets are small and medium sized companies. Policy changes to protect small businesses from this aren't coming any time soon. The Innovation Act and the PATENT Act--two bills in the House and Senate that are designed to reform the patent system--have passed through their relevant committees and are awaiting a vote on the floor. However, says Gene Quinn, a patent attorney and founder of the website IPWatchdog.com, there's little momentum behind them. "Patent reform is really dead," he says.
At best, Quinn hopes legislation will be passed that would give the Federal Trade Commission new power to go after the patent trolls who ambush small businesses with letters demanding them to fork over fees for alleged infringement. "They're very good at going after fraud," says Quinn. Every time a company chooses to settle instead of fight, they still spend thousands of dollars and, in the end, help perpetuate the problem. "I'm hoping," says Elbaz, "that sharing my story will start a dialogue and inspire a few more people to fight."