‘Patent trolls’: will they pounce on your company?

Ray Felts of crowdsource patent-research company Article One Partners shines a spotlight, along with mHIMSS and your editors, on the plague of what he terms ‘patent trolls’ attacking early-stage companies. Trolls are defined as non-practicing entities (NPEs) that don’t actually create or market products. Rather they buy up patents for licensing purposes and to collect related fees, but their real business is, in Mr. Felts’ words, holding up startups for settlements:

“The patent troll threatens to sue for significant royalties. The financial threat, business distraction and cost of defending the company disposes the startup to a lower settlement. Faced with possible ruin, the venture-backed company agrees to a tidy settlement of $20,000. If they instead choose to engage in a legal battle, the settlement threshold goes up, forcing them back to the initially intended amount. In the end, the startup takes the path of least resistance, and the NPE makes it up on volume.”

It also builds the war chest of the NPE to go after bigger fish, if they choose. (See related article below for example).

According to Mr. Felts, last year NPE litigation cost tech companies $29 billion, up more than 400% from 2005. For instance, Lodsys, a patent troll, has settled with 150 iOS app developers to date.

However there is hope for small companies. Knowledge is power, and he cites the Electronic Frontier Foundation (EFF) as a resource; a must read for any developer is its original work on how the US patent system is broken–failing in its basic premises with bad patents (e.g. overbroad) that have the paradoxical effect of stifling innovation. University of California Berkeley also has a controversial project on developing a Defensive Patent License to defend members from trolls. Finally, you can obtain patent liability (defense) as well as enforcement insurance (an overview by another law firm here); though not cheap, developers, angels and VCs could consider it a cost of doing business.

In Editor Donna’s view, these holdups by what one can charitably call bottom-feeders must stop, and the US patent system restored to a functional state. What do our readers think? Is a patent troll watching your business now?Venture Beat and reprinted in MedCityNews

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