March 14, 2013 | By Daniel Nazer and Julie Samuels

Patent Trolls on the Hot Seat

Today Congress heard overwhelming evidence about how patent trolls—companies that assert patents as a business model instead of creating products—are abusing the system to stifle innovation. At a hearing before the House Judiciary Subcommittee on Courts, Intellectual Property and the Internet, witness after witness testified about patent trolls who use the threat of ruinous defense costs to pressure companies into paying settlements on vague and overbroad patents. The Subcommittee also heard testimony about the disturbing trend of patent trolls targeting end-users—such as cafes providing Wi-Fi or businesses using standard office technology like scanners and email.

Janet Dhillon from J.C. Penney (which has the terrible misfortune of being located in the patent-troll-friendly Eastern District of Texas) explained that in the last four years her company has been hit with over two dozen patent lawsuits—all from patent trolls. It has been sued by trolls for such basic things as displaying catalog images and having drop down menus on its website. Before the rise of the patent troll, they had no patent litigation at all. That makes sense. After all, it is a clothing retailer, not a technology company.

Mark Chandler explained that Cisco spends $50 million every year on legal fees patent cases with nearly all of that budget going toward fighting trolls. He also told the Subcommittee about the patent troll Innovatio which has targeted more than 13,000 small businesses—such as cafes and hotels—for providing WiFi. Yes, that's right. For providing Wi-Fi.

John Boswell from SAS emphasized that, because shell company patent trolls don’t make any products and don’t have any witnesses, they face minimal litigation costs. At the same time, the troll can use the litigation process to impose enormous discovery costs on defendants to pressure settlement. Boswell did not hold back, calling patent trolls “business terrorists.”

Pro-patent troll witness Graham Gerst of Global IP Law Group gamely tried to defend the business model, arguing that it helps fund innovation. This ignores the fact than that less than 2 percent of the costs imposed by patent trolls flows to inventors. The reality is that trolls cause massive damage for almost no gain. Thankfully, despite Gerst's best efforts, the Subcommittee seemed convinced that patent trolls are a serious problem.

EFF submitted our own written comments in advance of today's hearing. In those comments, we told Congress what we've said many times before: the patent system is broken, and that patent trolls are a symptom. We explained that the patent troll problem is a software patent problem:

Software patents are an attractive tool for patent trolls because they are notoriously difficult to interpret—giving unscrupulous patent owners the ability to claim that their patent covers a wide range of technology.
This escalation of patent troll litigation has been very costly. The research shows that “NPE lawsuits are associated with half a trillion dollars of lost wealth to defendants from 1990 through 2010. During the last four years the lost wealth has averaged over $80 billion per year."1

We also encouraged members of Congress to support the SHIELD Act, important legislation that would make life harder for patent trolls and easier for targets of those trolls who want to fight back. But it's not just EFF's support. As we said in our comments:

We have seen an overwhelming public response in support of the SHIELD Act and patent reform more generally. More than 12,000 people contacted their members of Congress through EFF’s website to support the Act. In addition, a coalition of entrepreneurs, investors, and innovators—including investor Mark Cuban and Reddit co-founder Alexis Ohanian—joined EFF and Engine Advocacy in sending an open letter to the House Committee on the Judiciary explaining that patent trolls are chilling innovation, which in turn stifles job growth in the expanding tech sector. 

Finally, while we applaud the House Judiciary Committee for taking up the matter of patent trolls, we are disappointed by the lack of testimony from software engineers or smaller start-up companies. Of course, it is those individuals and small companies who often suffer the most debilitating harm from patent trolls. We'd also remind those in Congress what happened last time they forgot to "Bring in the Nerds"—we saw the spectacular defeat of the Stop Online Piracy Act.

Today's hearing was another example of the growing momentum for patent reform. Last month, President Obama called for reform to topple trolls. At EFF, we have proposed a number of reforms at Defend Innovation. Please check them out and give us your thoughts. We also urge you to support the SHIELD Act by contacting your representatives through our action alert.

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