Patent trolling has gone mainstream.
Last year, small companies began receiving threatening letters from firms with inscrutable names, such as AdzPro LLC, AllLed LLC and GosNel LLC. The senders claimed to own a patent that covered the concept of scanning a document and then sending it by e-mail —something almost every firm does. Recipients of the letters were encouraged to license the patent, and forestall a patent infringement suit, for a fee of $1,000 per employee. Otherwise, the businesses were warned, "there can be serious consequences for infringement."
This "patent trolling" business model has become popular in recent years. In the past, trolls, also known as "patent assertion entities" (PAEs), were mostly viewed as a problem for the software industry. Not anymore. Patent trolls now threaten a variety of targets: city governments, hotels, banks and many other entities that happen to use software as a routine part of their business.
On Tuesday, the Obama administration unveiled a package of reforms designed to rein in this abuse of the patent system. While some of the proposals address long-standing concerns of technology companies, others focus on protecting "main street" businesses.
"A majority of PAE suits are brought against non-tech companies," says Colleen Chien, whose work is cited extensively in a white paper that accompanied the administration's legislative proposals. The report includes a chart, based on Chien's research, showing that troll litigation has soared in the last two years:
That explosion of litigation has produced grass-roots support for patent reform. For example, one advocate, Rep Peter DeFazio (D-Ore.), became interested in the issue after talking to the CEO of a small firm in his district, who told him that the firm's growth had been stunted by the costs of defending against patent lawsuits.
To deal with trolls' propensity to target small businesses, the administration wants new legislation that will "protect off-the-shelf use by consumers and businesses" from frivolous patent litigation. In other words, customers who bought a scanner or wireless networking gear would be protected from liability for using the product as the manufacturer intended.
Another common problem with patent trolls is their propensity for secrecy. Trolls often create numerous shell companies to obscure who is really behind their lawsuits.
"The most basic problem when I look at a patent is that I don't know who owns it," says Mike Meurer, a law professor at Boston University. "When I get a demand letter from somebody, the right assumption is that these guys must own some patents. Are they going to tell me which patents they own? They don't have to."
The White House wants to address that problem by requiring patent holders to disclose more information about the real ownership of patents. The administration also wants to create a public registry of demand letters to help track the extent of troll activity and allow defendants to pool resources to defend themselves.
The reforms were pitched as a solution to the patent troll problem, but Meurer says many of the proposals would also have broader implications for the patent system. Greater transparency, for example, will make the system work better for everyone, he says, not just those who are targeted by trolls. The White House also wants to tighten the rules for patents that use "functional claims." These vague, broad patents are popular with trolls but have also been sought by other firms.
The administration's patent reform agenda "reflects recognition that there are systemic problems with the patent system," Meurer says. "Trolls have appeared because they're the best at exploiting systemic problems."