After years of exacting payments from American businesses, the easy paydays for patent trolls may be about to end. In December, the House of Representatives took action to prevent frivolous patent lawsuits. Now it’s up to the Senate to get on board and stop these trolls from sucking the lifeblood from our economy by leveling baseless charges against small businesses.
Patent trolls are entities whose business model consists of buying up patents and exacting payment from companies — mostly small businesses — that perform functions or sell goods that might violate those patents. Officially, the trolls are known as non-producing entities (NPEs) because they don’t actually make anything but rather latch onto companies that do produce goods and demand payment from them.
As President Barack Obama phrased it, these trolls “hijack” ideas and “extort” money. In 2012, patent trolls filed 62 percent of all patent lawsuits, but trolls don’t have to file claims to wreak havoc on businesses. Often the simple threat of a lawsuit is enough to scare businesses into forking over millions of dollars to settle out of court.
While patent trolls claim they’re defending small businesses and individual innovators against patent infringement by big businesses, it’s really the other way around. Trolls target small businesses specifically, knowing they will settle to avoid expensive lawsuits. In 2011, 90 percent of companies facing patent litigation were small to mid-sized businesses, with average annual revenues of $11 million. Big businesses can afford to defend themselves; small businesses can’t. And the costs of settling keep the small businesses from creating new jobs or developing innovative new products and services. This places a massive burden on our economy.
Fortunately, our legislators are stepping up to solve the problem. The Innovation Act passed the House in early December by a vote of 325-91. This rare showing of bipartisan support for passage and the support of the White House gives hope that in 2014 our nation’s businesses will hire more workers rather than more lawyers. Regardless of political affiliation, patriotic Americans recognize that something must be done to protect small businesses from the legalized extortion rackets run by trolls.
The Innovation Act makes it much harder for patent trolls to bring frivolous lawsuits, requiring that patent claims be specific about how defendants violated a patent. Under the bill, patent ownership must also be transparent, naming anyone who has financial interest. Unlike the current system, if the plaintiff loses, the Innovation Act would require that the troll pay the legal fees for the winning company. The bill also delays discovery until courts can address the legal questions, saving companies the time and money that go into fulfilling demands for records. And the bill protects end users, keeping trolls from going after small businesses that use a certain software, such as coffee shops offering Wi-Fi to their patrons.
The ball is now squarely in the Senate’s court. The House has passed a solid reform measure, and the Senate must follow that example. This is not the time to slow down, as some are suggesting. Patent trolls hurt our economy, stifle innovation and kill job growth. The system that’s currently in place makes it far too easy for unprincipled players to take advantage of innovators and entrepreneurs for easy profit. Reform can’t wait — the Senate must act quickly to fix the system and make it work for everyone.
It is past time for patent litigation reform. We have to protect small businesses — which are the backbone of our economy and the engine driving job growth — from frivolous attacks. Reform can’t wait for the next election cycle or the arrival of a new Congress: The time is now. Let’s keep the American dream alive for innovators.
Gary Shapiro is president and CEO of the Consumer Electronics Association, the U.S. trade association representing more than 2,000 consumer electronics companies, and author of the New York Times best-selling books “Ninja Innovation” and “The Comeback.”