Beginning in 2011, a patent troll named Innovatio IP Ventures, LLP, began a massive shakedown campaign. Armed with some patents purchased from Broadcom, Innovatio sent thousands of letters targeting hotels and cafes that provide Wi-Fi for customers. The troll demanded as much as $2,500 per location. Router manufacturer Cisco stepped in to defend its customers and yesterday settled with Innovatio for just 3.2 cents a unit. The settlement counts as a victory. But we still need reform to stop the next abusive troll.
The Innovatio story illustrates just about everything wrong with today’s patent system. It is a classic patent troll whose entire business model is to buy patents and sue. Even worse, rather than sue manufacturers, Innovatio targeted end-users that had simply purchased off-the-shelf routers. Many of these end-users, like mom and pop coffee shops, lack the resources to defend against an expensive patent suit. As a result, the cost of litigation, and not the value of the patents, drives settlement – a hallmark of lawsuit abuse.
If that sounds bad, it gets worse. Many of the largest chip makers (such as Broadcom) retained licenses to Innovatio’s patents. So a café with a router containing a Wi-Fi chip from one of those companies was already protected by a license (this is known as patent exhaustion). Of course, Innovatio did not tell its targets that they might already be protected. Frankly, that is deceptive conduct.
And if that sounds bad, it gets worse still. All of Innovatio’s patents were subject to FRAND promises. These are important promises companies make to license patents—usually patents relating to industry standards like Wi-Fi or Bluetooth—on “Fair, Reasonable, And Non-Discriminatory” terms. A judge recently ruled that even if its patents were valid and infringed, Innovatio would, at most, be entitled to a FRAND royalty of 9.56 cents per device. Recall that Innovatio was demanding as much as $2,500 per location (like a café with a Wi-Fi router). To give you an idea of just how extortionate this demand was, Innovatio’s markup was the equivalent of charging $120,000 for a Big Mac.
When it began fighting back, Cisco took the unusual step of bringing civil RICO (fraud and racketeering) claims against Innovatio. The judge rejected those claims. We believe that Cisco did plead facts establishing a campaign of fraud (such as Innovatio sending demand letters to targets protected by a license and failing to disclose that some of its patents had expired). Fortunately, Cisco continued to fight until it secured a settlement much lower than the billions Innovatio claimed to be entitled to.
Without seeing the Cisco settlement, it is difficult to know if Innovatio will continue its campaign against businesses using non-Cisco routers. If Innovatio continues to breach its FRAND commitments by demanding thousands of dollars per location, we hope that the Federal Trade Commission or state attorneys general will consider taking action against it.
Unfortunately, Innovatio is just one part of a disturbing trend of trolls targeting end-users. Each of these trolls is imposing a massive tax on productive businesses (Cisco spent $13 million on legal fees in just this case). Copycat trolls, such as Innovative Wireless Solutions, LLC, are adopting the same tactic of sending letters to businesses that provide Wi-Fi. We urgently need reform from Congress and the courts to slow down the trolls, protect end-users, and defend innovation.